ITEM 1. BUSINESS.
Overview
We are a producer of low carb, low calorie premium
wines in the United States. Founded in 2019, our wines have rapidly gained visibility, credibility, and a loyal national customer
base. We craft and bottle all of our wines in Napa Valley, which makes us a premier premium option in the rapidly growing “better
for you” category of wines. Offering bold, crisp, and creamy wines that embody health, warmth, and a deeper connection to wellness
and an active lifestyle, we offer a unique and innovative collection of today’s most popular varietals. Our varietals currently
include our Cabernet Sauvignon, Chardonnay, Pinot Noir, and Rosé, as well as a limited Reserve Napa Cabernet Sauvignon. We intend
to further expand our portfolio of product offerings in the future. Our wines are strategically priced between $15 and $22 per bottle — price
points that support a premium product strategy, appeal to mass markets, and allow us to offer significant value across all consumer distribution
channels. Nina Dobrev and Julianne Hough are two of our co-founders.
Our wines are exclusively focused on the affordable
luxury segment, the fastest growing segment of the wine market according to IWSR, addressing the largest wine drinking segment in the
$340 billion world-wide wine market, in which United States consumers spent $53 billion in 2020 for wine produced in the
U.S., with an additional $16 billion spent on imported wines in the U.S. Importantly, our wines stand out in the luxury wine
market because they address our target demographic customer base’s preference for a low-calorie, low-carb, gluten-free product,
while concurrently delivering the quality and taste profile of a premium wine brand. This allows us to position our wines in the rapidly
emerging “better for you” segment that seeks to appeal to consumers’ emphasis on a healthy lifestyle. While we believe
our product offerings have mass appeal among all consumers of affordable luxury wines, we have positioned the Fresh Vine Wine brand as
a complement to the healthy and active lifestyles of younger generation wine consumers.
We do not own or operate any vineyards. Instead
of cultivating our own grapes, we currently use Fior di Sole, a third-party supplier, to source bulk juice made from grapes. This allows
us to leverage our supplier’s broad network of vendor relationships and purchasing power to negotiate favorable cost structures.
Because our supplier procures product inputs on our behalf, including bulk juice, we do not currently engage directly with grape growers
(“growers”) or bulk distributors of juice (“bulk distributors”). As a result, we have limited front-end supply
chain visibility. This is a strategy by design that we believe provides us with access to diversified growers and bulk distributors, which
reduces our reliance upon any single vendor and mitigates our exposure to droughts, wildfires, spoilage, contamination and other supply
side risks common to the wine industry.
Our supplier procures grapes and/or juice for
our existing varietals from California. This juice is then stored in bulk in Napa until time of production, at which point it is made
available for blending and bottling processes at our Napa Valley production and bottling facility. This is significant in that both blending
and bottling must occur within Napa to be considered a Napa wine — a distinctive product attribute that adds significant
value to our brand in the eyes of consumers. However, wine produced by the Company will only be labelled with a Napa Valley appellation
of origin if it is produced from grapes grown in the Napa Valley American Viticultural Area (AVA). The labels for the Company’s
existing wines identify California as the appellation of origin.
Our sales channels include wholesale, retail,
and our direct-to-consumer (DTC) ecommerce channels. We are able to conduct wholesale distribution of our wine in all 50 states and Puerto
Rico and licensed to sell through the DTC channel in 42 states. Our wholesale distribution network includes approximately 20 distributors,
including distribution agreements with Southern Glazer’s Wine and Spirits, Johnson Brothers, and Republic National Distributing
Company (RNDC), which are widely considered to be the world’s preeminent distributors of beverage alcohol. We have placed our wines
directly in-stores of major retailers including: Hy-Vee, Food Lion, Lund’s & Byerly’s, Total Wine, 7-11, and Walgreens,
among others.
Our direct to consumer (DTC) channel enables us
to sell wine directly to the consumer at full retail prices, currently ranging from approximately $15-$22 per bottle. Although these prices
are consistent with our suggested retail prices (SRPs), we incur two mark-ups of approximately 30% each for our distributor and retail
partners when selling wine through our wholesale distribution channel, therefore directly reducing our revenue and margins. Because the
DTC channel provides significantly higher margins than sales generated through wholesale distributors, we intend to further invest in
DTC capabilities to ensure it remains an integral part of our business. We also believe continued investment in DTC technologies and capabilities
are critical to maintaining an intimate relationship with our customers, which is becoming increasingly digital. While revenue generated
from the sale of wine to United States consumers has been growing at mid-single digit compound annual growth rates over the last
several years, revenue from United States wine sales in the lucrative DTC sales channel grew over 27% by volume in 2020, its
largest increase ever. Within the United States DTC sales channel, shipments of wine priced under $30 per bottle grew by 41.6% in
2020, and approximately $3.7 billion of revenue was generated by the overall DTC market in the United States.
In addition, we are now selling through alternative
DTC sales platforms, such as ecommerce marketplaces, product aggregators and virtual distributors, all of which have experienced significant
recent growth, as well as sales through home delivery services. IWSR reports an 80% increase in the value of ecommerce alcohol sales overall
in 2020 as compared to 2019, and aggregators and virtual distributors, have such as Drizly, Go Puff, and Wine.com, have reported 350%
and 115%, respectively, in 2020 as compared to 2019.
Our Strengths
Differentiated Product Offerings — Premium, Napa
Valley Wines within the “Better For You” Segment
We offer wines that are differentiated from those
sold by other wine producers operating within the better-for-you segment of the affordable luxury category based on our premium quality,
our association with an award winning winemaker and our Napa Valley based production.
| ● | Premium Wines. Premium wines are differentiated from other varietals based on
consumers’ perception and expectation that they are of exceptional quality. We have developed a proprietary winemaking process
that produces superior quality and taste in the affordable luxury wine category based on consumer preferences data, direct consumer
feedback and careful market research. Importantly, our current wines stand out in the luxury wine market because they address
consumers’ growing preference for a less-calorie, less-carb, less sugar and gluten-free option, while concurrently delivering
the quality and taste profile of a premium wine brand. |
| ● | Award-Winning
Winemaker. We conducted an international search to find an accomplished winemaker who shared the Fresh Vine Wine
vision and have entered into an agreement with Jamey Whetstone, an established, award winning winemaker from Napa Valley, to develop
our wines. Consulting with the Fresh Vine Wine brand compliments Mr. Whetstone’s lifestyle as an active surfer, skier, and
all-around outdoorsman. His passion for winemaking is mirrored by his passion for adventure, and he too wanted to create a better-for-you
wine that customers can be proud to bring to the table for any occasion. We believe it is unique for a high-profile winemaker like Mr. Whetstone
to attach his name and reputation to a brand in the better-for-you wine segment, and we believe that Mr. Whetstone’s association
with our brand increases consumer awareness and speaks to the quality of our varietals. |
| ● | Produced and Bottled in Napa Valley. Importantly, we are able to market our wines as being
produced and bottled in Napa Valley, California. We believe that this designation impacts consumption decisions of many wine
drinkers, as Napa Valley-produced wines are considered by many to be a sign of superior quality. However, wine produced by the
Company will only be labelled with a Napa Valley appellation of origin if it is produced from grapes grown in the Napa Valley
American Viticultural Area (AVA). The labels for the Company’s existing wines identify California as the appellation of
origin. Currently, this only applies to our Reserve wine. |
Capital-Efficient and Scalable Operational Structure
We have strategically structured our organization
and operations to minimize our capital investment requirements while maintaining flexibility to rapidly scale our production capabilities
to meet consumer demands. We do this by utilizing our internal capabilities while leveraging a network of reputable third-party providers
with industry experience and expertise that we use to perform various functions falling outside our internal core competencies.
Production and Bottling on an Alternating Proprietorship
Basis
We contract with Fior di Sole, an industry leading
packaging innovation and wine production company based in Napa Valley, California, to serve as a “host winery” and to
occupy a portion of its production and warehouse facility and utilize its production equipment on an alternating proprietorship basis.
Under this arrangement, we use capacity at Fior di Sole’s production facility at times mutually convenient to us and Fior di Sole
to produce and bottle our wines for an initial set-up fee and a recurring monthly fee. Fior di Sole is responsible for keeping its production
equipment in good operating order. When the alternating Premises is operated by or used on behalf of our Company, it is operated pursuant
to our federal basic permit and California winegrower’s license. Under the agreement, we are solely responsible for managing and
conducting our own winemaking activities and we make all production decisions relating to our wines. However, we may request use of Fior
di Sole’s personnel to perform crush, fermentation, blending, cellar, warehousing, barrel topping and/or bottling services for additional
fees. This arrangement has allowed us to commence our operations and build the Fresh Vine Wine brand without having to incur the considerable
overhead costs involved with the purchase or full time lease of a production facility. The term of the agreement commenced in July 2019,
had an initial term of one year and automatically renews for additional one-year terms unless either party provides 90 days written notice
to the other of its intent to terminate at the end of the then current term. Either party may terminate the agreement upon 30 days written
notice if the other party is in violation of any law or regulation that renders it impossible to perform its obligations under the agreement
for a period of greater than 30 days, makes an assignment for the benefit of creditors or files for bankruptcy protection, or is in material
breach of its obligations under the agreement and such failure to perform is not cured within 30 days of written notice from the other
party. We believe we have sufficient capacity under our current agreement or with alternative suppliers to increase production to meet
increased consumers’ demand for our wines.
Fior di Sole also provides us with bulk juice and
blends, finishes, bottles, stops, labels and packages our wine, which reduces our internal overhead expenses and allows us to benefit
from that company’s increased purchasing power. Fior di Sole provides these services on a purchase order basis, which purchase orders
are subject to the parties’ mutual agreement and governed by a Custom Winemaking and Bottling Agreement. This agreement outlines
the schedule for placing orders, the responsibility and schedule for delivery of production materials, procedures for establishing the
wine bottling date and delivery date. We are required to remit 20% of the amount due for wine produced, bottled and packaged pursuant
to this agreement upon our submission of a purchase order. The payment advance is used by Fior Di Sole to reserve or procure materials
on our behalf with additional vendors for bottles, boxes, corks, labels, juice, and other inputs. We, or our winemaker on our behalf,
oversees the production at the winery approves all components and aspects of the production process. The balance of the amount due for
wine produced, bottled and packaged (the remaining 80%) is due following our quality review and acceptance of the finished product.
The ability and willingness of Fior di Sole to supply
and provide services to us pursuant to purchase orders delivered under the Custom Winemaking and Bottling Agreement may be affected by
competing orders placed by other companies, the demands of those companies or other factors. If Fior di Sole becomes unable or unwilling
to supply and provide services to us, we believe we can obtain comparable supplies and services from alternative suppliers. However, there
can be no assurance that alternative suppliers will be available when required on terms that are acceptable to us, or at all, or that
alternative suppliers will allocate sufficient capacity to us in order to meet our requirements.
Licensing, Tax and Regulatory Compliance
We have contracted with a third-party to manage
our regulatory licensing and compliance activities. We and maintain licenses that enable us to distribute our wine to all 50 states, and
to sell direct-to-consumer from our e-commerce website in 42 states. We currently utilize software tools available to the industry and
work with our license compliance service provider to navigate and manage the complex state-by-state tax and other regulations that apply
to our operations in the beverage alcohol industry. This has enabled us to expand our operations and grow our revenue while reducing the
administrative burden of tax compliance, reporting and product registration.
Through selective recruiting and hiring, we have
also built these capabilities internally; we increasingly perform these activities in-house. This allows us to operate with greater control
and responsiveness over regulatory licensing and compliance requirements, ensuring that our brand and each of its underlying varietals
is properly licensed across state and federal levels.
We believe that leveraging our network of supply
chain and compliance partners, consultants and service providers enables us to avoid potential costly and lengthy delays on nearly every
aspect of our business, from grapes to packaging materials, and will accelerate our return on capital due to our limited need to procure
expensive equipment, real estate, and other capital intensive resources. We believe we are well-positioned to add to or adjust the composition
of our provider network as required to serve the needs of our business.
Sales and Marketing Strategy
We believe we bring a unique sales and marketing
approach that will increase the visibility of our brand and product offerings to our target consumers.
Multi-Channel Marketing Approach
Today’s consumers interact with brands through
many channels, from traditional media to social media and other digital channels, and through various in-person and online purchasing
methods. In order to build the visibility of our brand and create a grassroots consumer following to support our DTC distribution channel,
we have employed a strategic multichannel marketing approach that we believe allows us to engage with our target consumers on their terms
to expand and deepen their recognition of our brand. In addition to other mass market promotional activities, our marketing strategy also
utilizes modern techniques, efficiency measures, and channels not commonly seen in the wine industry, including a combination of social
media lifestyle and wine influencer activities, through which brand ambassadors or “influencers” may conduct promotional activities
through the Company’s or their own social media channels including, but not limited to, Twitter, Facebook, Instagram, Snapchat,
YouTube and Pinterest, among others.
Celebrity-based Affinity
Recent years have seen a rise in the creation
of celebrity owned and/or endorsed alcoholic beverage brands, which utilizes fans’ affinity towards celebrities to promote their
product offerings ad drive sales. We are positioned to take advantage of this trend based on the popularity of Nina Dobrev and Julianne
Hough, two of our co-founders, each of whom served on our board of directors prior to our initial public offering.
In March 2021, we entered into five-year license
agreements with Ms. Dobrev and Ms. Hough, who have a collective following of approximately 30 million people on their Instagram social
media platforms alone, pursuant to which they actively promote our business and varietals of wine. Under these license agreements, each
has also granted us a license to use her pre-approved name, likeness, image, and other indicia of identity, as well as certain content
published by her on her social media or other channels, on and in conjunction with the sale and related pre-approved advertising and promotion
of our varietals of wine and marketing materials. Ms. Dobrev and Ms. Hough have agreed, subject to certain exceptions, not to grant any
similar license or render services of any sort on behalf of or in connection with any party in the wine category anywhere in the world
during the term of her agreement, other than with respect to Company. The license agreements are scheduled to expire in March 2026. However,
the license agreements to provide that each of Ms. Dobrev and Ms. Hough will have the right to terminate her agreement if as of the end
of calendar year 2023, we have not achieved at least $5.0 million in EBITDA in either fiscal 2022 or fiscal 2023. See “Certain Relationships
and Related Party Transactions — License Agreements with Nina Dobrev and Julianne Hough.”
We also enjoy support from several other celebrity
influencers who have supported our brand without any agreement or obligation to do so. Together with celebrity brand ambassadors, our
marketing efforts have produced highly visible content, including multiple billboards on the Sunset Strip in Los Angeles, promotions in
connection with the opening of Resort World Casino in Las Vegas, product placements in major sports venues and coverage in various print
and television media.
Professional Sports Sponsorships
We have entered into sponsorship agreements with
professional sports organizations and venues spanning all four major United States professional sports leagues, which support our
commitment and outreach to consumers focused on active and healthy lifestyles, including agreements with the following organizations and/or
their affiliates:
| ● | Washington Capitals (NHL) and Washington Wizards (NBA) |
| ● | Washington Commanders (NFL) |
| ● | Los Angeles Chargers (NFL) |
These sponsorship arrangements generally provide
us with advertising placements at the stadiums and arenas during sporting and concert events, as well as specified media and other advertising
and promotional benefits, in exchange for our payment of annual sponsorship fees, including at the following venues:
| ● | Capital One Arena in Washington DC (home to the Washington
Capitals, Washington Wizards and Georgetown University basketball teams) |
| ● | Tropicana Field in Tampa, Florida (home of the Tampa Bay
Rays) |
| ● | A1 Lang Stadium (home of the Tampa Bay Rowdies, a USLC men’s
professional soccer team) |
| ● | Charlotte Sports Park (the Tampa Bay Rays Spring Training
facility) |
| ● | FedEx Field in the Washington, DC metropolitan area (home
of the Washington Commanders) |
| ● | SoFi Stadium in Inglewood, California, (in connection with
Los Angeles Chargers home games |
Although in-venue sponsorship opportunities were
limited during 2020 and 2021 due to the COVID-19 pandemic, we believe these sponsorships will increase our brand awareness and demand
for our wines going forward by reaching mass in-person audiences attending sporting events. In addition, several of our sponsor venues
include our wines in their stadium concession offerings; however they are not required to do so under the terms of our sponsorship agreements.
As part of our strategic marketing efforts, we intend to pursue additional sponsorship opportunities with other sports organizations and
venues.
Labelling and Innovative Packaging Initiatives
We believe wine labelling can have a big impact
on consumers’ purchasing practices. We conduct market research to validate the consistency of our wine labels with our brand narrative.
Packaging also continues to be a key driver of brand perception, and we are exploring “active lifestyle packaging” alternatives
to traditional bottling that provides an opportunity for our customers to enjoy Fresh Vine Wines in non-traditional settings now and for
future years, including bottles with screw-off caps, aluminium cans, and smaller size bottles and cans that can be taken on-the-go and
are ideal for in-store point of purchase sales.
Food and Beverage Industry Experience
Our executive team operates with a focus on human
capital management with a firm belief that quality people, with proven track records can produce quality results. Our leadership team
is made up of five multi-disciplinary executives with a proven track record of successfully launching, growing, and operating companies
of all sizes and across industries. Supporting this leadership team are deeply skilled individuals in key disciplines.
| ● | As a former Anheuser-Busch InBev executive, Rick Nechio, our President and
one of our co-founders, brings a twenty-two year track record in the adult beverage industry and is a pioneer in the better-for-you wine
category. Mr. Nechio’s vision for Fresh Vine Wine has been to offer unprecedented commitment to quality within our category
of wines, and he has been key in the development of our brand and our sales and marketing strategies to date. |
|
● |
Our Chief Operating Officer, Janelle Anderson, has more than 15 years of experience in the Consumer Products & Goods (CPG) industry, where she worked specifically within the food and beverage space as a marketing executive. With a specific focus on shopper marketing, Ms. Anderson’s experience have played a critical role in influencing our customer messaging and marketing strategies. |
Consulting Agreement with Whetstone Consulting
On June 12, 2019, we entered into a consulting
agreement with Whetstone Consulting, through which our winemaker, Jamey Whetstone, does business, which agreement was subsequently amended
on May 15, 2020 and amended and restated on March 16, 2021. As amended and restated, the agreement provides the Company with
ownership and intellectual property protections for Inventions (as defined therein) conceived, made or reduced to practice by Whetstone
Consulting that relate to the services provided to the Company. In addition, Whetstone Consulting has agreed, for a period of one year
following termination of the agreement, not to directly or indirectly engage or invest in, be employed by, lend credit to, receive compensation
from or render services or advice to any person engaged in a Competing Business located within a twelve-mile radius of a specified Napa,
California address. For such purposes, a “Competing Business” means any business relating to the development, manufacture,
marketing and distribution of any product that competes with any low calorie and/or low sulphite wine products sold or substantially under
development by the Company during the one-year restricted period. The agreement does not restrict the acquisition, operation, management,
consulting, or other commercial activity by Whetstone Consulting, directly or indirectly in or with a winery, brewery, spirits, or other
alcoholic beverage industry business not concerning “low calorie” or “low sulphite” products or services. The
agreement also contains non-solicitation restrictions applicable to clients, customers, suppliers, licensors, and employees for a period
of one year follow the agreement’s termination, subject to certain exceptions.
As partial compensation for Whetstone Consulting’s
services to us under the original agreement, we issued Whetstone Consulting 100,000 units representing membership interests in Fresh
Grapes, LLC, which represent 619,343 shares on a post-LLC Conversion basis. In addition, under the amended and restated agreement, we
pay Whetstone Consulting $5,000 per month. Such monthly compensation will be offset by any distributions made to Whetstone Consulting
on account of its equity interest in the Company, of which there have been none to date.
The amended and restated agreement had an initial one-year term which
expired March 16, 2022, and renews automatically for successive one-year periods unless either party provides advance notice of non-renewal
to the other. Whetstone Consulting may terminate the agreement at any time by giving us written notice at least 30 days prior to
the termination date. We may terminate the agreement at any time. If we terminate the agreement for “Cause,” as such term
is defined in the agreement, Whetstone Consulting is obligated to transfer back to us all of the equity interests in our Company that
he received under the original agreement.
Related party services
In October 2021, we entered into a service agreement
with a related party in the wine industry to provide representation and distribution services. Under this agreement, we receive a management
fee of $50,000 per month plus a tiered fee ranging between $5.00 and $6.50 per case of the related party’s product sold. The term
of the agreement is one year and will automatically renew for additional one-year periods until terminated by either party with thirty
days prior written notice.
Our Strategy for Growth
We expect to deliver meaningful increases in stockholder
value by executing the following strategies to gain brand and product visibility and increase sales and market share:
| ● | Continuing to establish brand visibility, awareness and credibility
through mass and micro marketing tactics and association with other strong brands, including sports organizations, celebrities, influencers
and top tier winemakers, among others. These will range from organic to paid media. |
| ● | Continuing to build grass roots demand through high visibility
sales and marketing activities that promote high margin DTC and home delivery sales channels, including continued investment in DTC technologies
and capabilities that are critical to maintaining an intimate relationship with consumers. |
| ● | Expanding our U.S.-based wholesale and retail distribution
network by leveraging our product and brand differentiation, the emerging better-for-you category and to provide distribution partners
with a differentiated value proposition. |
| ● | Pursuing distribution of our wines internationally. |
| ● | Embracing disruptive technologies and customer trends, and
exploring and expanding partnerships with other organizations investing in customer-centric technologies, such as home delivery, third
party wine clubs and evolving alternative DTC purchasing methods, such as ecommerce marketplaces, product aggregators and virtual distributors. |
| ● | Expanding and strengthening key supply chain relationships,
including with current and juice suppliers, bottlers, materials suppliers, and dry goods suppliers, to establish a diversified portfolio
of partners across all areas of our supply chain and to maintain effective capital management. |
| ● | Continuing to add to the Fresh Vine Wine product portfolio
by developing new varietals that fit within the better-for-you category and are consistent with our existing brand. |
| ● | Continuing to invest in packaging innovation, including “active
lifestyle packaging” alternatives to traditional bottling that provides an opportunity for our customers to enjoy Fresh Vine Wines
in non-traditional settings. |
| ● | Capitalizing on upward price mobility — While
many other wine companies are experiencing downward price pressure to enter the coveted under $30 category, our wines currently sell
for suggested retail prices ranging from $15 to $22 per bottle. |
| ● | Increasing our on-premises sales effort. COVID-19 severely
limited on-premise sales across the industry. We believe as restrictions loosen, there is significant opportunity to capture market share
and available shelf space. |
| ● | Developing additional wine brands by replicating the strategies
used to build the Fresh Vine Wine brand via business service line agreements. |
With over 500,000 licensed retail accounts (according
to Neilson) in the United States, there remains ample opportunity to continue broadening distribution of our wines as well as increasing
the volume of wine sold to existing accounts.
Competition
The wine industry and alcohol markets generally
are intensely competitive. Our wines compete domestically and internationally with other premium or higher quality wines produced in Europe,
South America, South Africa, Australia and New Zealand, as well as North America. Our wines compete on the basis of quality, price, brand
recognition and distribution capability. The ultimate consumer has many choices of products from both domestic and international producers.
Our wines may be considered to compete with all alcoholic and non-alcoholic beverages.
At any given time, there are more than 400,000 wine
choices available to consumers, differing with one another based on vintage, variety or blend, location and other factors. Accordingly,
we experience competition from nearly every segment of the wine industry. Additionally, some of our competitors have greater financial,
technical, marketing and other resources, offer a wider range of products, and have greater name recognition, which may give them greater
negotiating leverage with distributors and allow them to offer their products in more locations and/or on better terms than us. Nevertheless,
we believe that our brand offerings, scalable infrastructure and relationships with the one of the largest domestic distributors will
allow us to continue growing our business.
IT Systems
We rely on various IT systems, owned by us and third
parties, to effectively manage our sales and marketing, accounting, financial, legal and compliance functions. Our website is hosted by
a third party, and we rely on third-party vendors for regulatory compliance for order processing, shipments and e-commerce functionality.
We believe these systems are scalable to support our growth plans. We recognize the value of enhancing and extending the uses of information
technology in our business.
Regulatory Matters
Regulatory framework
We, along with our contract growers, producers,
manufacturers, distributors, retail accounts and ingredients and packaging suppliers, are subject to extensive regulation in the United States
by federal, state and local government authorities with respect to registration, production processes, product attributes, packaging,
labelling, storage and distribution of wine and other products we make.
We are also subject to state and local tax requirements
in all states where our wine is sold. We monitor the requirements of relevant jurisdictions to maintain compliance with all tax liability
and reporting matters. In California, we are subject to a number of governmental authorities, and are also subject to city and county
building, land use, licensing and other codes and regulations.
Alcohol-related regulation
We are subject to extensive regulation in the
United States by federal, state and local laws regulating the production, distribution and sale of consumable food items, and specifically
alcoholic beverages, including by the TTB and the FDA. The TTB is primarily responsible for overseeing alcohol production records
supporting tax obligations, issuing wine labelling guidelines, including grape source and bottle fill requirements, as well as reviewing
and issuing certificates of label approval, which are required for the sale of wine through interstate commerce. We carefully monitor
compliance with TTB rules and regulations, as well the state law of each state in which we sell our wines. In California, where most of
our wines are made, we are subject to alcohol-related licensing and regulations by many authorities, including the ABC. ABC agents
and representatives investigate applications for licenses to sell alcoholic beverages, report on the moral character and fitness of alcohol
license applicants and the suitability of premises where sales are to be conducted and enforce California alcoholic beverages laws. We
are subject to municipal authorities with respect to aspects of our operations, including the terms of our use permits. These regulations
may limit the production of wine and control the sale of wine, among other elements.
Employee and occupational safety regulation
We are subject to certain state and federal employee
safety and employment practices regulations, including regulations issued pursuant to the U.S. Occupational Safety and Health Act
(“OSHA”), and regulations governing prohibited workplace discriminatory practices and conditions, including those regulations
relating to COVID-19 virus transmission mitigation practices. These regulations require us to comply with manufacturing safety standards,
including protecting our employees from accidents, providing our employees with a safe and non-hostile work environment and being an equal
opportunity employer. In California, we are also subject to employment and safety regulations issued by state and local authorities.
Environmental regulation
As a result of our wine production activities,
we and certain third parties with which we work are subject to federal, state and local environmental laws and regulations. Federal regulations
govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment, handling and storage and disposal
of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely
state-level analogues to federal regulations and authorities intended to perform the similar purposes. In California, we are also subject
to state-specific rules, such as those contained in the California Environmental Quality Act, California Air Resources Act, Porter-Cologne
Water Quality Control Act, California Water Code sections 13300-13999 and Title 23 of the California Administrative Code and various
sections of the Health and Safety Code. We are subject to local environmental regulations that address a number of elements of our wine
production process, including air quality, the handling of hazardous waste, recycling, water use and discharge, emissions and traffic
impacts.
Labelling regulation
Many of our wines are identified by their appellation
of origin, which are among the most highly regarded wine growing regions in the world. An appellation may be present on a wine label only
if it meets the requirements of applicable state and federal regulations that seek to ensure the consistency and quality of wines from
a specific terroir. These appellations designate the specific geographic origin of most or all (depending on the appellation) of the wine’s
grapes, and can be a political subdivision (e.g., a country, state or county) or a designated viticultural area. The rules for vineyard
designation are similar. Although we expect that most of our labels will maintain the same appellation of origin from year to year, we
may choose to change the appellation of one or more of our wines from time to time to take advantage of high-quality grapes in other areas
or to change the profile of a wine.
Privacy and security regulation
We collect personal information from individuals.
Accordingly, we are subject to several data privacy and security related regulations, including but not limited to: U.S. state privacy,
security and breach notification laws; the GDPR; and other European privacy laws as well as privacy laws being adopted in other regions
around the world. In addition, the FTC and many state attorneys general are interpreting existing federal and state consumer protection
laws to impose evolving standards for the online collection, use, dissemination and security of information about individuals. Certain
states have also adopted robust data privacy and security laws and regulations. For example, the CCPA, which took effect in 2020, imposes
obligations and restrictions on businesses regarding their collection, use, and sharing of personal information and provides new and enhanced
data privacy rights to California residents, such as affording them the right to access and delete their personal information and to opt
out of certain sharing of personal information. In response to the data privacy laws and regulations discussed above and those in other
countries in which we do business, we have implemented several technological safeguards, processes, contractual third-parties provisions,
and employee trainings to help ensure that we handle information about our employees and customers in a compliant manner. We maintain
a global privacy policy and related procedures, and train our workforce to understand and comply with applicable privacy laws.
Intellectual Property
We strive to protect the reputation of our wine
brand. We establish, protect and defend our intellectual property in a number of ways, including through employee and third-party nondisclosure
agreements, copyright laws, domestic and foreign trademark protections, intellectual property licenses and social media and information
security policies for employees. We have been granted three (3) trademark registrations in the United States for FRESH VINE®,
FRESH VINE (Stylized)®, and our FV Logo®, and numerous trademark registrations in other countries for the
FRESH VINE mark, and we have filed, and expect to continue to file, trademark applications seeking to protect any newly-developed wine
brands. We have also been granted a copyright registration in the first version of our website located at www.freshvine.com. Information
contained on or accessible through our website is not incorporated by reference in or otherwise a part of this report. As a copyright
exists in a work of art once it is fixed in tangible medium, we intend to continue to file copyright applications to protect newly-developed
works of art that are important to our business.
We also rely on, and carefully protect, proprietary
knowledge and expertise, including the sources of certain supplies, formulations, production processes, innovation regarding product development
and other trade secrets necessary to maintain and enhance our competitive position.
Seasonality
There is a degree of seasonality in the growing
cycles, procurement and transportation of grapes. The wine industry in general tends to experience seasonal fluctuations in revenue and
net income, with lower sales and net income during the quarter spanning January through March and higher sales and net income during the
quarter spanning from October through December due to the usual timing of seasonal holiday buying. As our operations expand, we expect
that we will be impacted by the seasonality experienced in the wine industry generally.
Employees
As of March 31, 2022, we had approximately 16 full-time
employees. All of our employees are employed in the United States. None of our employees are represented by a labor union or covered by
a collective bargaining agreement. We consider our relationship with our employees to be good.
ITEM 1A. RISK FACTORS.
Our business involves a number of challenges and
risks. In addition to the other information in this report, you should consider carefully the following risk factors in evaluating us
and our business. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we
currently deem immaterial may also affect our business, financial condition, operating results, or prospects. In assessing these risks,
you should also refer to the other information contained in this report, including our financial statements and related notes.
Risks related to our company and our business
We have a limited operating history and have generated limited
revenue to date.
Our company was recently founded, and to date we
have engaged primarily in finalizing our business plan and establishing the corporation and other formalities necessary to begin operations.
Accordingly, we have a very limited operating history on which to base an evaluation of our business and prospects. Our prospects must
be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development,
particularly companies in new and evolving markets such as ours. The risks include, but are not limited to, an evolving business model
and the management of growth and product development. To address these risks, we must, among other things, implement and successfully
execute our business strategy and other business systems, respond to competitive developments, and attract, retain and motivate qualified
personnel. We cannot assure you that we will be successful in addressing the risks we may encounter, and our failure to do so could have
a material adverse effect on our business, prospects, financial condition and results of operations.
We have generated very limited revenues to date, including revenues
of $1,700,207 and $217,074 during fiscal 2021 and fiscal 2020, respectively. No revenue was generated for the fiscal year ended December 31,
2019. We have incurred net losses of $9.97 million, $1.29 million and $0.43 million during fiscal 2021, 2020 and 2019, respectively.
We had an accumulated deficit of $617,351 and total stockholders’ equity of $17.1 million at December 31, 2021. We may never
generate material revenues or achieve profitability.
We have not generated profits from operations to date. The success
and longevity of our company will depend on our ability to generate profits from future operations or obtain sufficient capital through
financing transactions to meet our business obligations.
The report of our independent registered public
accounting firm on our financial statements for the fiscal years ended December 31, 2020 and 2019, included in the prospectus
for our initial public offering, included an explanatory paragraph indicating that there is substantial doubt as to our ability to continue
as a going concern for twelve months from the financial statement issuance date, citing a net loss and net cash used in operations
of $1.3 million and $0.2 million, respectively, for the year ended December 31, 2020, and a stockholders’ deficit
and working capital deficit of $1.5 million and $1.5 million, respectively, as of December 31, 2020. This report was dated
August 31, 2021 and did not take into account the net proceeds of approximately $19.2 million (after deducting underwriting discounts
and commissions and estimated offering expenses) that we received in our December 2021 initial public offering. Our ability to continue
as a going concern will be determined by our ability to generate sufficient cash flow to sustain our operations and/or raise additional
capital in the form of debt or equity financing.
Since completing our initial public offering and
receiving net proceeds of approximately $19.2 million, our auditors have declared that we now have sufficient capital to continue business
operations without a need for additional capital. As a result, we no longer have a ‘going concern’ and have received necessary
funding to sustain operations in pursuit our its various growth strategies.
We need to hire additional personnel.
Our future success depends on our ability to identify,
attract, hire, train, retain and motivate highly skilled executive and technical personnel. We intend to hire or engage as contractors
a significant number of these personnel during the next year. Competition for qualified personnel is intense, particularly in the wine
industry in which there exists a limited number of qualified individuals with expertise in launching, managing and expanding wine brands.
If we fail to successfully attract, assimilate and retain a sufficient number of qualified personnel, our business could suffer.
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:
| ● | an actual or perceived failure to maintain high-quality,
safety, ethical, social and environmental standards for all of our operations and activities; |
| ● | an actual or perceived failure to address concerns relating
to the quality, safety or integrity of our wines and the hospitality we offer to our guests at our potential future tasting rooms; |
| ● | our environmental impact, including our use of agricultural
materials, packaging, water and energy use, and waste management; or |
| ● | an actual or perceived failure by us to promote the responsible
consumption of alcohol. |
If we do not produce wines that are well-regarded
by the relatively small wine critic community, the wine market will quickly become aware and our reputation, wine brand, business and
financial results of our operations could be materially and adversely affected. In addition, if our wine receives negative publicity or
consumer reaction, whether as a result of our wines or wines of other producers, our wines in the same vintage could be adversely affected.
Unfavorable publicity, whether accurate or not, related to our industry, us, our winery brands, marketing, personnel, operations, business
performance or prospects could also unfavorably affect our corporate reputation, company value, ability to attract high-quality talent
or the performance of our business.
Any contamination or other quality control issue
could have an adverse effect on sales of the impacted wine or our broader portfolio of wines. If any of our wines become unsafe or unfit
for consumption, cause injury or are otherwise improperly packaged or labelled, we may have to engage in a product recall and/or be subject
to liability and incur additional costs. A widespread recall, multiple recalls, or a significant product liability judgment against us
could cause our wines to be unavailable for a period of time, depressing demand and our brand equity. Even if a product liability claim
is unsuccessful or is not fully pursued, any resulting negative publicity could adversely affect our reputation with existing and potential
customers and accounts, as well as our corporate and individual winery brands image in such a way that current and future sales could
be diminished. In addition, should a competitor experience a recall or contamination event, we could face decreased consumer confidence
by association as a producer of similar products.
Additionally, third parties may sell wines or inferior
brands that imitate our wine brand or that are counterfeit versions of our labels, and customers could be duped into thinking that these
imitation labels are our authentic wines. For example, there could be instances of potential counterfeiting. A negative consumer experience
with such a wine could cause them to refrain from purchasing our brands in the future and damage our brand integrity. Any failure to maintain
the actual or perceived quality of our wines could materially and adversely affect our business, results of operations and financial results.
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 rely heavily on celebrities and sports organizations to endorse
our wines and market our brand.
The success of our business is heavily dependent
on positive image and public popularity of, and affinity towards, celebrity spokespersons. Nina Dobrev and Julianne Hough, two of our
founders, currently serve as ambassadors of our company who actively endorse our wines on their sizable social media and other outlets
and are considered by many to be the face of our brand. Customers may be drawn to our products because of their involvement in our Company
as celebrities. We also have sponsorship arrangements with teams and/or venues associated with the National Football League, National
Hockey League, National Basketball Association and Major League Baseball.
We have entered into license agreements with Ms.
Dobrev and Ms. Hough, pursuant to which each 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. The license agreements are scheduled to expire in March 2026. However, the
license agreements provide that each of Ms. Dobrev and Ms. Hough will have the right to terminate her agreement if as of the end of calendar
year 2023, we have not achieved at least $5.0 million in EBITDA in either fiscal 2022 or fiscal 2023. See “Certain Relationships
and Related Party Transactions — License Agreements with Nina Dobrev and Julianne Hough.” If we are unable to renew our license
arrangements with Ms. Dobrev and Ms. Hough upon the expiration of these agreements in March 2026, or if Ms. Dobrev and Ms. Hough
are entitled to and elect to terminate the license agreements after 2023, the rights and licenses granted to us will be revoked and we
will be required to cease the marketing and sale of products that feature their name, likeness, image, and other indicia of identity.
In such event, we would be required to refocus our marketing and brand promotion efforts, which may adversely affect our business and
results of operations.
In addition, there is no assurance that our celebrity-based
brand promotion and marketing activities will be well-received by consumers and result in the levels of product sales that we anticipate.
Under extreme situations, our marketing efforts through celebrity endorsement may have a material adverse effect on our brand image. For
example, any damage to the reputations of our celebrity founders or any negative or controversial publicities that our celebrities are
involved in, either directly or indirectly, may result in the public’s negative perception of our brands and thus adversely affect
our reputation and the marketability and sales of our products. It is possible for negative posts or comments about our Company or our
celebrity spokespersons to be shared quickly and disseminated widely due to the continued growing use of social and digital media, possibly
resulting in “cancellation.” Celebrities’ reputation and favorability in the eyes of the public could also decrease
for a number of other reasons, including, without limitation, participation in media endeavours that are unsuccessful, diminished recognition
with the public due to decreased participation in the media landscape or shifting tastes of the public, failure to generate engagement
on new social media platforms at the levels they have enjoyed on existing platforms, and an inability to access to social media platforms
due to violations of terms of use or otherwise.
If the positive image and public popularity of our
celebrity spokespersons wanes or the public’s affinity towards the sports organizations that we sponsor decreases, regardless of
the reason, it would have a material adverse impact on one of our primary marketing activities and could result in decreased demand for
our wines, which would have a material adverse effect on our business, operational results and financial results, and require us to seek
additional resources to rebuild our reputation, competitive position and winery brand strength.
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 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.
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.
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, the increased growth and popularity of the retail e-commerce environment
across the consumer product goods market, which has 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, is highly
likely 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; |
| ● | a general decline in the consumption of alcoholic beverage
products in on-premise establishments, such as those that may result from smoking bans and stricter laws relating to driving while under
the influence of alcohol and changes in public health policies, including those implemented to address the COVID-19 pandemic; |
| ● | a generational or demographic shift in consumer preferences
away from wines to other alcoholic beverages; |
| ● | increased activity of anti-alcohol groups; |
| ● | concern about the health consequences of consuming alcoholic
beverage products; and |
| ● | increased federal, state, provincial, and foreign excise,
or other taxes on beverage alcohol products and increased restrictions on beverage alcohol advertising and marketing. |
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.
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 that we have not yet experienced or contemplated, or for which we are
not adequately prepared. These risks and challenges could negatively affect our sales in these channels and our profitability.
To date, we have been successful in generating and
expanding revenue from sales of wine through our direct-to-consumer e-commerce website. During the quarter ended December 31, 2021, we
generated revenue of $240,670 from direct-to-consumer sales, which represents a $1,018 decrease in direct-to-consumer revenue generate
during the quarter ended September 30, 2021, a $13,139 increase in direct-to-consumer revenue generated during the quarter ended June
30, 2021 and a $176,138 increase in direct-to-consumer revenue generated during the quarter ended March 31, 2021. A portion of our
operating strategy is to continue to expand our sales of wine through this direct-to-consumer channel. 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.
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.
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. An 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.
The COVID-19 pandemic has affected our customers, our suppliers
and our business operations, and the duration and extent to which this and any future global health pandemics will impact our business,
results of operations and financial results in future periods remains uncertain.
The COVID-19 pandemic is having widespread, rapidly
evolving and unpredictable impacts on global society, economies, financial markets and business practices. Federal, state and foreign
governments have implemented measures to contain the virus, including social distancing, travel restrictions, border closures, limitations
on public gatherings, work from home requirements and closure of non-essential businesses. While we continue to closely monitor the situation
and may adjust our current policies as more information and public health guidance become available, such precautionary measures, or any
similar precautionary measures we are required or deem advisable to take in the future could negatively affect our business, results of
operations and financial results. Our business may suffer should there be supply disruption due to restrictions on the ability of employees
or our suppliers to travel and work, or if government or public health officials limit the travel of individuals impacting our ability
to source materials. These events may impair our ability to make, bottle and ship our wines, our distributors’ ability to distribute
our wines or our ability to obtain the grapes needed to produce our wines. Our operations may become less efficient or otherwise be negatively
impacted if critical employees are unable to work or if a significant percentage of the workforce is unable to work.
Risks related to our business
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 significantly 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 expect to 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 exists in a work of art once it is fixed in tangible medium, we intend to continue to file copyright applications to
protect newly-developed works of art that are important to our business.
We cannot be sure that any trademark office or copyright
office will issue trademark registrations under any of our trademark applications, or copyright registrations under any of our copyright
applications. Third parties may oppose the registration of our trademark applications, contest our trademark rights or copyrights, and
petition to cancel our registered trademarks. We cannot assure you that we will be successful in defending our trademarks or copyrights
in actions brought by third parties. There is also a risk that we could fail to timely maintain or renew our trademark registrations or
otherwise protect our trademark rights or copyrights, which could result in the loss of those trademark rights (including in connection
with failure to maintain consistent use of these trademarks). If we fail to maintain our trademarks or a third party successfully challenges
our trademarks or copyrights, we could be forced to rebrand our wineries, wines and other products, which could result in a loss of winery
brand recognition and could require us to devote additional resources to the development and marketing of new wine brands.
Notwithstanding any trademark registrations or copyright
registrations held by us, a third party could bring a lawsuit or other claim alleging that we have infringed that third party’s
trademark rights or copyrights. Any such claims, with or without merit, could require significant resources to defend, could damage the
reputation of our wine brands, could result in the payment of compensation (whether as a damages award or settlement) to such third parties,
and could require us to stop using our wine brands or otherwise agree to an undertaking to limit that use. In addition, our actions to
monitor and enforce trademark rights or copyrights against third parties may not prevent counterfeit products or products bearing confusingly
similar trademarks from entering the marketplace, which could divert sales from us, tarnish our reputation or reduce the demand for our
products or the prices at which we sell those products. Any enforcement litigation brought by us, whether or not successful, could require
significant costs and resources, and divert the attention of management, which could negatively affect our business, results of operations
and financial results. Third parties may also acquire and register domain names that are confusingly similar to or otherwise damaging
to the reputation of our trademarks, and we may not be able to prevent or cancel any such domain name registrations.
In addition to registered intellectual property
rights such as trademark registrations and copyright registrations, we rely on non-registered proprietary information, such as trade secrets,
confidential information and know-how, including in connection with the crafting of our low calorie, low-carb, premium tasting wines.
In order to protect our proprietary information, we rely in part on agreements with our employees, independent contractors and other third
parties that place restrictions on the use and disclosure of this intellectual property. These agreements may be breached, or this intellectual
property, including trade secrets, may otherwise be disclosed or become known to our competitors, which could cause us to lose any competitive
advantage resulting from this intellectual property. To the extent that our employees, independent contractors or other third parties
with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related
or resulting know-how and inventions. The loss of trade secret protection could make it easier for third parties to compete with our products.
In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade
secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of
our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm
our business, financial condition, results of operations and competitive position.
We may not be fully insured against catastrophic perils, including
catastrophic loss or inaccessibility of wineries, production facilities and/or distribution systems resulting from fire, wildfire, flood,
wind events, earthquake and other perils, which may cause us to experience a material financial loss.
Although we currently store the bulk of our wine
inventory at our third-party warehouse in California, which is prone to seismic activity, wildfires and floods, among other perils. If
any of these facilities were to experience a catastrophic loss in the future, it could disrupt our operations, delay production, shipments
and our recognition of revenue, and result in potentially significant expenses to repair or replace the facility. If such a disruption
were to occur, we could breach agreements, our reputation could be harmed and our business and operating results could be materially and
adversely affected. Although we carry insurance to cover property and inventory damage and business interruption, these coverages are
subject to deductibles and self-insurance obligations, as well as caps on coverage that could be below the value of losses we could incur
in certain catastrophic perils. Furthermore, claims for recovery against our insurance policies can be time-consuming, and may result
in significant delays between when we incur damages and when we receive payment under our insurance policies. If one or more significant
catastrophic events occurred damaging our own or third-party assets and/or services, we could suffer a major financial loss and our business,
results of operations and financial condition could be materially and adversely affected.
Furthermore, increased incidence or severity of
natural disasters has adversely impacted our ability to obtain adequate property damage, inventory and business interruption insurance
at financially viable rates, if at all. For example, we have observed certain insurers ceasing to offer certain inventory protection policies,
and we have supplemented our insurance coverage recently by purchasing policies at higher premiums. If these trends continue and our insurance
coverage is adversely affected, and to the extent we elect to increase our self-insurance obligations, we may be at greater risk that
similar future events will cause significant financial losses and materially and adversely affect our business, results of operations
and financial results.
From time to time, we may become subject to litigation specifically
directed at the alcoholic beverage industry, as well as litigation arising in the ordinary course of business.
Companies operating in the alcoholic beverage industry
may, from time to time, be exposed to class action or other private or governmental litigation and claims relating to product liability,
alcohol marketing, advertising or distribution practices, alcohol abuse problems or other health consequences arising from the excessive
consumption of or other misuse of alcohol, including underage drinking. Various groups have, from time to time, publicly expressed concern
over problems related to harmful use of alcohol, including drinking and driving, underage drinking and health consequences from the misuse
of alcohol. These campaigns could result in an increased risk of litigation against the Company and our industry. Lawsuits have been brought
against beverage alcohol companies alleging problems related to alcohol abuse, negative health consequences from drinking, problems from
alleged marketing or sales practices and underage drinking. While these lawsuits have been largely unsuccessful in the past, others may
succeed in the future.
From time to time, we may also be party to other
litigation in the ordinary course of our operations, including in connection with commercial disputes, enforcement or other regulatory
actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory authorities, or, securities-related
class action lawsuits, particularly following any significant decline in the price of our securities. Any such litigation or other actions
may be expensive to defend and result in damages, penalties or fines as well as reputational damage to our company and our winery brands
and may impact the ability of management to focus on other business matters. Furthermore, any adverse judgments may result in an increase
in future insurance premiums, and any judgments for which we are not fully insured may result in a significant financial loss and may
materially and adversely affect our business, results of operations and financial results.
A failure of one or more of our key IT systems, networks, processes,
associated sites or service providers could have a material adverse impact on business operations, and if the failure is prolonged, our
financial condition.
We rely on IT systems, networks, and services, including
internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software and technical
applications and platforms, some of which are managed, hosted, provided and used by third parties or their vendors, to assist us in the
management of our business. The various uses of these IT systems, networks and services include, but are not limited to: hosting our internal
network and communication systems; supply and demand planning; production; shipping wines to customers; hosting our winery websites and
marketing products to consumers; collecting and storing customer, consumer, employee, stockholder, and other data; processing transactions;
summarizing and reporting results of operations; hosting, processing and sharing confidential and proprietary research, business plans
and financial information; complying with regulatory, legal or tax requirements; providing data security; and handling other processes
necessary to manage our business.
Increased IT security threats and more sophisticated
cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of
service attacks, phishing, social engineering, hacking and other types of attacks pose a potential risk to the security of our IT systems,
networks and services, as well as the confidentiality, availability, and integrity of our data, and we have in the past, and may in the
future, experience cyberattacks and other unauthorized access attempts to our IT systems. Because the techniques used to obtain unauthorized
access are constantly changing and often are not recognized until launched against a target, we or our vendors may be unable to anticipate
these techniques or implement sufficient preventative or remedial measures. If we are unable to efficiently and effectively maintain and
upgrade our system safeguards, we may incur unexpected costs and certain of our systems may become more vulnerable to unauthorized access.
In the event of a ransomware or other cyber-attack, the integrity and safety of our data could be at risk or we may incur unforeseen costs
impacting our financial position. If the IT systems, networks or service providers we rely upon fail to function properly, or if we suffer
a loss or disclosure of business or other sensitive information due to any number of causes ranging from catastrophic events, power outages,
security breaches, unauthorized use or usage errors by employees, vendors or other third parties and other security issues, we may be
subject to legal claims and proceedings, liability under laws that protect the privacy and security of personal information (also known
as personal data), litigation, governmental investigations and proceedings and regulatory penalties, and we may suffer interruptions in
our ability to manage our operations and reputational, competitive or business harm, which may adversely affect our business, results
of operations and financial results. In addition, such events could result in unauthorized disclosure of material confidential information,
and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to
our employees, stockholders, customers, suppliers, consumers or others. In any of these events, we could also be required to spend significant
financial and other resources to remedy the damage caused by a security breach or technological failure and the reputational damage resulting
therefrom, to pay for investigations, forensic analyses, legal advice, public relations advice or other services, or to repair or replace
networks and IT systems. As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our
IT systems and networks remotely, which may further increase our vulnerability to cybercrimes and cyberattacks and increase the stress
on our technology infrastructure and systems. Even though we maintain cyber risk insurance, this insurance may not be sufficient to cover
all of our losses from any future breaches or failures of our IT systems, networks and services.
Our failure to adequately maintain and protect personal information
of our customers or our employees in compliance with evolving legal requirements could have a material adverse effect on our business.
We collect, use, store, disclose or transfer (collectively,
“process”) personal information, including from employees and customers, in connection with the operation of our business.
A wide variety of local and international laws as well as regulations and industry guidelines apply to the privacy and collecting, storing,
use, processing, disclosure and protection of personal information and may be inconsistent among countries or conflict with other rules.
Data protection and privacy laws and regulations are changing, subject to differing interpretations and being tested in courts and may
result in increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions.
A variety of data protection legislation apply in
the United States at both the federal and state level, including new laws that may impact our operations. For example, the State
of California has enacted the California Consumer Privacy Act of 2018 (“CCPA”), which generally requires companies
that collect, use, share and otherwise process “personal information” (which is broadly defined) of California residents to
make disclosures about their data collection, use, and sharing practices, allows consumers to opt-out of certain data sharing with third
parties or the sale of personal information, allows consumers to exercise certain rights with respect to any personal information collected
and provides a new cause of action for data breaches. In addition, a new privacy law, the California Privacy Rights Act (“CPRA”),
which significantly modifies the CCPA, was recently approved by ballot initiative during the November 3, 2020 general election. There
remains significant uncertainty regarding the timing and implementation of the CPRA, which may require us to incur additional expenditures
to ensure compliance. Additionally, the Federal Trade Commission, and many state attorneys general are interpreting federal and state
consumer protection laws to impose standards for the online collection, use, dissemination, and security of data. The burdens imposed
by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require us to modify our data processing
practices and policies and to incur additional expenditures in order to comply.
Foreign laws and regulations relating to privacy,
data protection, information security and consumer protection often are more restrictive than those in the United States. The European
Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection
and consumer protection than the United States. In May 2018 the European Union’s new regulation governing data practices
and privacy called the General Data Protection Regulation, or GDPR, became effective and substantially replaced the data protection laws
of the individual European Union member states. The law requires companies to meet more stringent requirements regarding the handling
of personal data of individuals in the EU than were required under predecessor EU requirements. In the United Kingdom, a Data Protection
Bill that substantially implements the GDPR also became law in May 2018. The GDPR and other similar regulations require companies
to give specific types of notice and in some cases seek consent from consumers and other data subjects before collecting or using their
data for certain purposes, including some marketing activities. Outside of the European Union, many countries have laws, regulations,
or other requirements relating to privacy, data protection, information security, and consumer protection, and new countries are adopting
such legislation or other obligations with increasing frequency. Many of these laws may require consent from consumers for the use of
data for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized approach to
these laws and regulations globally. Consequently, we would increase our risk of non-compliance with applicable foreign data protection
laws by expanding internationally. We may need to change and limit the way we use personal information in operating our business and may
have difficulty maintaining a single operating model that is compliant. In addition, various federal, state and foreign legislative and
regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised
rules or guidance regarding privacy, data protection, information security and consumer protection.
Compliance with these and any other applicable privacy
and data protection laws and regulations is a rigorous and time-intensive process, and we may be required to put in place additional mechanisms
ensuring compliance with the new privacy and data protection laws and regulations. Our actual or alleged failure to comply with any applicable
privacy and data protection laws and regulations, industry standards or contractual obligations, or to protect such information and data
that we process, could result in litigation, regulatory investigations, and enforcement actions against us, including fines, orders, public
censure, claims for damages by employees, customers and other affected individuals, public statements against us by consumer advocacy
groups, damage to our reputation and competitive position and loss of goodwill (both in relation to existing customers and prospective
customers) any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Additionally, if third parties that we work with, such as vendors or developers, violate applicable laws or our policies, such violations
may also place personal information at risk and have an adverse effect on our business. Even the perception of privacy concerns, whether
or not valid, may harm our reputation, subject us to regulatory scrutiny and investigations, and inhibit adoption of our wines by existing
and potential customers.
Risks related to regulation
As a producer of alcoholic beverages, we are regularly the subject
of regulatory reviews, proceedings and audits by governmental entities, any of which could result in an adverse ruling or conclusion,
and which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are subject to extensive regulation in the
United States by federal, state and local laws regulating the production, distribution and sale of consumable food items, and specifically
alcoholic beverages, including by the Alcohol and Tobacco Tax and Trade Bureau (the “TTB”) and the Food and Drug Administration
(the “FDA”). These and other regulatory agencies impose a number of product safety, labelling and other requirements on our
operations and sales. In California, where all of our wines are made, we are subject to alcohol-related licensing and regulations by many
authorities, including the Department of Alcohol Beverage Control (the “ABC”), which investigates applications for licenses
to sell alcoholic beverages, reports on the moral character and fitness of alcohol license applicants and the suitability of premises
where sales are to be conducted. We are also subject to regulatory compliance requirements in all states in which we sell our wines. Any
governmental litigation, fines or restrictions on our operations resulting from the enforcement of these existing regulations or any new
legislation or regulations could have a material adverse effect on our business, results of operations and financial results. Any government
intervention challenging the production, marketing, promotion, distribution or sale of beverage alcohol or specific brands could affect
our ability to sell our wines. Because litigation and other legal proceedings can be costly to defend, even actions that are ultimately
decided in our favor could have a negative impact on our business, results of operations or financial results. Adverse developments in
major lawsuits concerning these or other matters could result in management distraction and have a material adverse effect on our business.
Changes to the interpretation or approach to enforcement of regulations may require changes to our business practices or the business
practices of our suppliers, distributors or customers. The penalties associated with any violations or infractions may vary in severity,
and could result in a significant impediment to our business operations, and could cause us to have to suspend sales of our wines in a
jurisdiction for a period of time.
New and changing environmental requirements, and new market pressures
related to climate change, could materially and adversely affect our business, results of operations and financial results.
There has been significant public discussion related
to concerns that carbon dioxide and other greenhouse gases in the atmosphere have an adverse impact on global temperatures, weather patterns
and the frequency and severity of extreme weather and natural disasters. Federal regulations govern, among other things, air emissions,
wastewater and stormwater discharges, and the treatment, handling and storage and disposal of materials and wastes. State environmental
regulations and authorities intended to address and oversee environmental issues are largely state-level analogues to federal regulations
and authorities intended to perform the similar purposes. We are subject to local environmental regulations that address a number of elements
of our wine production process, including air quality, the handing of hazardous waste, recycling, water use and discharge, emissions and
traffic impacts. Compliance with these and other environmental regulation requires significant resources. Continued regulatory and market
trends towards sustainability may require or incentivize us to make changes to our current business operations. We may experience future
increases in the costs associated with environmental regulatory compliance, including fees, licenses and the cost of capital improvements
to meet environmental regulatory requirements. Although we don’t cultivate our own grapes, increased costs associated with environmental
regulatory compliance may impact grape growers, which may increase out costs to purchase bulk juice.
Changes in foreign and domestic laws and government regulations
to which we are currently subject, including changes to the method or approach of enforcement of these government rules and regulations,
may increase our costs or limit our ability to sell our wines into certain markets, which could materially and adversely affect our business,
results of operations and financial condition.
Government laws and regulations may result in
increased production and sales costs, including an increase on the applicable tax in various state, federal and foreign jurisdictions
in which we do business. The amount of wine that we can sell directly to consumers outside of California is regulated, and in certain
states we are not allowed to sell wines directly to consumers at all. Changes in these laws and regulations that tighten current rules
could have an adverse impact on sales or increase costs to produce, market, package or sell wine. Changes in regulation that require significant
additional source data for registration and sale, in the labelling or warning requirements, or limitations on the permissibility of any
component, condition or ingredient, in the places in which our wines can be legally sold could inhibit sales of affected products in those
markets.
The wine industry is subject to extensive regulation
by a number of foreign and domestic agencies, state liquor authorities and local authorities. These regulations and laws dictate such
matters as licensing requirements, land use, production methods, trade and pricing practices, permitted distribution channels, permitted
and required labelling, advertising, sequestration of classes of wine and relations with wholesalers and retailers. Any expansion of our
existing facilities may be limited by present and future zoning ordinances, use permit terms, environmental restrictions and other legal
requirements. In addition, new or updated regulations, requirements or licenses, particularly changes that impact our ability to sell
DTC and/or retain accounts in California, or new or increased excise taxes, income taxes, property and sales taxes or international tariffs,
could affect our financial condition or results of operations. From time to time, states consider proposals to increase state alcohol
excise taxes. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our
business, financial condition and results of operations.
Risks related to our common stock
Our current executive management has limited direct experience
in satisfying public company reporting requirements and we must implement additional finance and accounting systems, procedures and controls
in order to satisfy such requirements, which will increase our costs and divert management’s time and attention.
As a public company, we will incur significant legal,
accounting and other expenses that we did not incur as a private company, including costs associated with our public company reporting
requirements and corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, as well as
new rules implemented by the SEC and the NYSE American. Our current executive management has little to no experience in complying with
such requirements and rules.
As an example of reporting requirements, we are
evaluating our internal control systems in order to allow management to report on our internal control over financing reporting, as required
by Section 404 of the Sarbanes-Oxley Act of 2002. As a company with limited capital and human resources, we anticipate
that more of management’s time and attention will be diverted from our business to ensure compliance with these regulatory requirements
than would be the case with a company that has established controls and procedures. This diversion of management’s time and attention
may have a material adverse effect on our business, financial condition and results of operations.
We are eligible to be treated as an emerging growth company,
and we cannot be certain that the reduced disclosure requirements applicable to emerging growth companies will not make our shares less
attractive to investors.
We are an emerging growth company, as defined in
the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies that are not emerging growth companies, including, among others, (1) not
being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure
obligations regarding executive compensation in our periodic reports and proxy statements, (3) exemptions from the requirements of
holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously
approved and (4) the requirement to present only two years of audited financial statements and only two years of related
“Management’s discussion and analysis of financial condition and results of operations” in this report. We could be
an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if
the market value of our common stock held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter in
any fiscal year before that time or if we have total annual gross revenues of $1.07 billion or more during any fiscal year before
that time, in which case we would no longer be an emerging growth company as of the fiscal year end, or if we issue more than $1.0 billion
in non-convertible debt during any three-year period before that time we would cease to be an emerging growth company immediately. We
cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors
find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price
may be more volatile.
Under the JOBS Act, emerging growth companies can
also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We 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 and intend to continue such election 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.
As a result of being a public company, we are obligated to develop
and maintain proper and effective internal control over financial reporting and any failure to maintain the adequacy of these internal
controls may negatively impact investor confidence in our company and, as a result, the value of our common stock.
We are required pursuant to Section 404 of
the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial
reporting. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control
over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness
of our internal control over financial reporting in our first annual report required to be filed with the Securities and Exchange Commission
(the “SEC”) following the date we are no longer an emerging growth company. Any failure to maintain effective internal control
over financial reporting could severely inhibit our ability to accurately report our financial condition or results of operations. If
we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting
firm determines we have a material weakness in our internal control over financial reporting, we could lose investor confidence in the
accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions
or investigations by the NYSE American, the SEC or other regulatory authorities and our access to the capital markets could be restricted.
In this report, our management concluded that our
disclosure controls and procedures and our internal control over financial reporting were not effective as of December 31, 2021 due to
the existence of material weaknesses, including those related to accounting for related party transactions, the lack of segregation of
duties, a lack of regular and timely review of accounts receivable subledgers and improper accounting for equity-based compensation. See
Item 9A – Controls and Procedures. Although we intend to engage in activities aimed at remediating these material weaknesses, our
remediation activities may not be successful and our management may continue to conclude that our disclosure controls and procedures and
our internal control over financial reporting are not effective in future periods.
Based on its ownership, Nechio & Novak, LLC has significant
influence over us, including over decisions that require the approval of stockholders, which could limit your ability to influence the
outcome of matters submitted to stockholders for a vote.
Nechio & Novak, LLC, which is an entity
controlled by two of our directors, Damian Novak and Rick Nechio, controls approximately 42.95% of the voting power of our common stock.
As a result, Nechio & Novak, LLC has the ability to strongly influence or effectively exercise control over all corporate actions
requiring stockholder approval, including the election and removal of directors and the size of our board of directors, any amendment
of our articles of incorporation or bylaws, or the approval of any merger or other significant corporate transaction, including a sale
of substantially all of our assets.
Additionally, Nechio & Novak, LLC’s
interests may not align with the interests of our other stockholders. Nechio & Novak, LLC, and Messrs. Novak and Nechio, are
in the business of making investments in companies and may acquire and hold interests in businesses that compete directly or indirectly
with us. For example, Messrs. Nechio and Novak have teamed up with Danica Patrick, among others, to produce and sell Danica Rosé,
a premium French rosé wine, that is not part of our company. They may also pursue acquisition opportunities that may be complementary
to our business, and, as a result, those acquisition opportunities may not be available to us.
Nechio & Novak, LLC, together with our officers
and directors and their related parties, collectively control over 43% of our outstanding common stock as of the date of this report and
as a result are able to exercise control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders
may vote.
Provisions of our corporate governance documents could make an
acquisition of our Company more difficult and may prevent attempts by our stockholders to replace or remove our current management, even
if beneficial to our stockholders.
In addition to Nechio & Novak, LLC’s
beneficial ownership of a controlling percentage of our common stock, our articles of incorporation and bylaws and the Nevada Revised
Statutes contain provisions that could make it more difficult for a third party to acquire us, even if doing so might be beneficial to
our stockholders. These provisions include:
| ● | advance notice requirements for stockholder proposals and
director nominations; |
| ● | the ability of our board of directors to issue new series
of, and designate the terms of, preferred stock, without stockholder approval, which could be used to, among other things, institute
a rights plan that would have the effect of significantly diluting the stock ownership of a potential hostile acquirer, likely preventing
acquisitions that have not been approved by our board of directors; and |
| ● | limitations on the ability of stockholders to call special
meetings and to take action by written consent. |
Because our board of directors is responsible for
appointing the members of our management team, these provisions could in turn affect any attempt to replace current members of our management
team. As a result, you may lose your ability to sell your stock for a price in excess of the prevailing market price due to these protective
measures, and efforts by stockholders to change the direction or management of the Company may be unsuccessful. See “Description
of capital stock.”
Your percentage ownership in us may be diluted by future issuances
of capital stock, which could reduce your influence over matters on which stockholders vote.
Pursuant to our articles of incorporation and bylaws,
our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued
shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock.
Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the
case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that
preferred stock.
An active, liquid trading market for our common stock may not
develop, which may limit your ability to sell your shares.
Prior to our December 2021 initial public offering,
there was no public market for our common stock. Although we list shares of our common stock on the NYSE American under the symbol “VINE,”
an active trading market for our shares may not develop or be sustained going forward. A public trading market having the desirable characteristics
of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent
upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and
liquid trading market to develop and continue would likely have a material adverse effect on the value of our common stock. The market
price of our common stock may decline, and you may not be able to sell your shares of our common stock at or above the price you paid
for them, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares
and may impair our ability to acquire other companies or technologies by using our shares as consideration.
As a public company, we are subject to additional laws, regulations
and stock exchange listing standards, which will additional costs on us and may strain our resources and divert our management’s
attention.
Prior to our December 2021 initial public offering,
we operated on a private basis. As a public reporting company, we are now subject to the reporting requirements of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,
the listing requirements of the NYSE American and other applicable securities laws and regulations. Compliance with these laws and regulations
will increase our legal and financial compliance costs and make some activities more difficult, time-consuming or costly. We also expect
that being a public company and being subject to new rules and regulations will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. However,
the incremental costs that we incur as a result of becoming a public company could exceed our estimate. These factors may therefore strain
our resources, divert management’s attention and affect our ability to attract and retain qualified members of our board of directors.
A significant portion of our total outstanding shares are restricted
from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop
significantly, even if our business is performing well.
Sales of a substantial number of shares of our common
stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of
shares intend to sell shares, could reduce the market price of our common stock. Of the 12,451,864 shares of our common stock outstanding
on the date of this report, approximately 10.0 million are held by our pre-IPO stockholders and subject to a 180-day lock-up period provided
under agreements executed in connection with our initial public offering. These shares will, however, be able to be resold after the expiration
of the lock-up agreement in June 2022. As restrictions on resale end, the market price of our stock could decline if the holders of currently
restricted shares sell them or are perceived by the market as intending to sell them.
Since we have no current plans to pay regular cash dividends
on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which
you paid for it.
We do not anticipate paying any regular cash dividends
on our common stock in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion
of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual
restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is, and may be,
limited by covenants of existing and any future outstanding indebtedness we or our subsidiaries incur. Therefore, any return on investment
in our common stock is solely dependent upon the appreciation of the price of our common stock on the open market, which may not occur.
See Item 5. “Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
- Dividends” for more detail.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not
meet their expectations, our share price and trading volume could decline.
The trading market for our shares will be influenced
by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these
analysts. Securities and industry analysts do not currently, and may never, publish research on our Company. If no securities or industry
analysts commence coverage of our Company, the trading price of our shares would likely be negatively impacted. In the event securities
or industry analysts initiated coverage, and one or more of these analysts cease coverage of our Company or fail to publish reports on
us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations,
our share price could decline.
General risks
Our operating results and share price may be volatile, and the
market price of our common stock may drop below the price you pay.
Our quarterly operating results are likely to fluctuate
in the future as a publicly traded company. In addition, securities markets worldwide have experienced, and are likely to continue to
experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions,
could subject the market price of our shares to wide price fluctuations regardless of our operating performance. You may not be able to
resell your shares at or above the price that you paid or pay for them or at all. Our operating results and the trading price of our shares
may fluctuate in response to various factors, including:
| ● | market conditions in the broader stock market; |
| ● | actual or anticipated fluctuations in our quarterly financial
and operating results; |
| ● | introduction of new wines by us or our competitors; |
| ● | issuance of new or changed securities analysts’ reports
or recommendations; |
| ● | results of operations that vary from expectations of securities
analysis and investors; |
| ● | guidance, if any, that we provide to the public, any changes
in this guidance or our failure to meet this guidance; |
| ● | strategic actions by us or our competitors; |
| ● | announcement by us, our competitors or our vendors of significant
contracts or acquisitions; |
| ● | sales, or anticipated sales, of large blocks of our stock; |
| ● | additions or departures of key personnel; |
| ● | regulatory, legal or political developments; |
| ● | public response to press releases or other public announcements
by us or third parties, including our filings with the SEC; |
| ● | litigation and governmental investigations; |
| ● | changing economic conditions; |
| ● | changes in accounting principles; |
| ● | default under agreements governing our indebtedness; |
| ● | exchange rate fluctuations; and |
| ● | other events or factors, including those from natural disasters,
war, actors of terrorism or responses to these events. |
These and other factors, many of which are beyond
our control, may cause our operating results and the market price and demand for our shares to fluctuate substantially. While we believe
that operating results for any particular quarter are not necessarily a meaningful indication of future results, fluctuations in our quarterly
operating results could limit or prevent investors from readily selling their shares and may otherwise negatively affect the market price
and liquidity of our shares. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have
sometimes instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought
a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention
of our management from our business, which could significantly harm our profitability and reputation.
We may require additional debt and equity capital to pursue our
business objectives and respond to business opportunities, challenges or unforeseen circumstances. If such capital is not available to
us, our business, financial condition and results of operations may be materially and adversely affected.
We may require additional capital to pursue our
business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to increase our marketing
expenditures to improve our wine brand awareness, build and maintain our product inventory, develop new wines, enhance our operating infrastructure
and acquire complementary businesses. Accordingly, we may need to engage in equity or debt financings to secure additional funds. However,
additional funds may not be available when we need them on terms that are acceptable to us or at all. Moreover, any debt financing that
we secure in the future could involve restrictive covenants, which may make it more difficult for us to obtain additional capital and
to pursue business opportunities. Volatility in the credit markets may also have an adverse effect on our ability to obtain debt financing.
If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders
of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may
be forced to obtain financing on undesirable terms or our ability to continue to pursue our business objectives and to respond to business
opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, financial condition and results
of operations could be materially and adversely affected.