Notes
to Financial Statements
March
31, 2022 and 2021
| 1. | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES |
Nature
of Business
Fresh
Vine Wine, Inc. (the Company), a Nevada corporation, is a premium wine brand built to complement consumers’ healthy and active
lifestyles. The Company provides a competitively priced premium product that is blended to deliver several important benefits, such as
low-cal, low-sugar, low-carb. The Company’s wines are also gluten-free and keto and vegan friendly.
The Company’s revenue is comprised primarily of wholesale and
direct to consumer (DTC) sales, and representation and distribution services. Wholesale revenue is generated through sales to distributors
located in states throughout the United States of America. DTC revenue is generated from individuals purchasing wine directly from the
Company through club membership and the Company’s website. Representation and distribution service revenue is generated from related
parties by providing such related parties with access to new markets and distribution channels. Service revenues are expected to suspend
at the end of the current calendar quarter to allow the company’s lean team to prioritize on the growth and expansion of the Fresh
Vine Wine brand.
Basis
of Presentation
The
Company’s financial statements have been prepared and are presented in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). The financial statements include, in the opinion of management, all adjustments, consisting of
normal and recurring items, necessary for the fair presentation of the financial statements. In certain instances, amounts reported in
prior period financial statements have been reclassified to conform to the current financial statement presentation.
Corporate
Conversion
On
December 8, 2021, in relation to preparing for its initial public offering (“IPO”), Fresh Grapes, LLC filed a certificate
of conversion, whereby Fresh Grapes, LLC effected a corporate conversion from a Texas limited liability company to a Nevada corporation
and changed its name to Fresh Vine Wine, Inc. Pursuant to the corporate conversion, units of membership interest in the limited liability
company were converted into shares of common stock of the corporation at a conversion ratio of 6.1934 units for one share of common stock.
As a result of the corporate conversion, accumulated deficit was reduced to zero on the date of the corporate conversion, and the corresponding
amount was recorded to additional paid-in capital. The corporate conversion was approved by members holding a majority of the outstanding
units, and in connection with such conversion, the Company filed a certificate of incorporation and adopted bylaws. Pursuant to the Company’s
certificate of incorporation, the Company is authorized to issue up to 100,000,000 shares of common stock $0.001 par value per share
and 25,000,000 shares of preferred stock $0.001 par value per share. The Company determined that the corporate conversion is equivalent
to a change in the Company’s capital structure. As such, all references in the audited financial statements to the number of shares
and per-share amounts of member units are now presented as common stock and have been retroactively restated to reflect this conversion.
Initial
Public Offering
On
December 17, 2021, the Company completed its IPO whereby it sold 2,200,000 shares of common stock at a public offering price of $10 per
share. The aggregate net proceeds received by the Company from the offering were approximately $19.2 million, net of underwriting discounts
and commissions of approximately $1.8 million and offering expenses of approximately $1.1 million. Upon the closing of the IPO, 12,200,013
shares of common stock were outstanding. The shares began trading on December 14, 2021 on The New York Stock Exchange under the symbol
“VINE”.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Liquidity, Going Concern, and Management Plan
Although the Company’s revenue generated during the first quarter
of 2022 represents a 43% increase over its revenues generated in the fourth quarter of 2021, in addition to paying initial public offering
fees and settling pre- initial public offering net outstanding related party debt in the fourth quarter of 2021, the Company’s operating
expenses have significantly exceeded its revenues over these quarters. The Company has incurred increased expenses to purchase inventory
in advance of retail placement and in efforts to mitigate supply chain risks, invest in sales and marketing activities and increase our
company staffing and infrastructure to position us for future growth. The Company is looking forward to inclusion in the fall retail resets
for both large and national chains.
We currently hold no debt and will require and seek debt or equity
financing in the near term to sustain our existing operations. If adequate financing is not available, we may be forced to curtail our
near-term growth priorities, take measures to severely reduce our expenses and business operations, or discontinue them completely. Such
financing may be dilutive.
At our current pace of incurring expenses, and without receipt of additional
financing, we project that our existing cash will be sufficient to fund our current operations into the fourth quarter of 2022, after
which additional financing will be needed to continue to satisfy our obligations. As a result, we may defer certain investments in additional
inventory, curtail its sales and marketing efforts and staffing, and take other measures to reduce our expenses and business operations
as the Company works to obtain debt or equity financing to help support short-term working capital needs, as it has no debt on its balance
sheet. These measures may negatively impact the success of our near-term or longer-term growth objectives and prospects.
Additional financing may not be available to us on terms favorable
to us or at all. If additional financing is available, it may be highly dilutive to our existing shareholders and may otherwise include
burdensome or onerous terms. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively
impact our ability to fund our operations, to generate revenues, grow our business and otherwise execute our business plan, leading to
the reduction or suspension of our operations and ultimately potentially forcing us to cease operations altogether. Should this occur,
the value of any investment in our securities could be adversely affected.
These factors call into question our ability to continue
as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
Accounting
Estimates
Management
uses estimates and assumptions in preparing these financial statements in accordance with U.S. GAAP. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include allowance
for doubtful accounts, allowance for inventory obsolescence, the useful lives of intangible assets, equity-based compensation for employees
and non-employees, and the valuation of deferred tax assets.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Cash
The
Company maintains its accounts at two financial institutions. At times throughout the year the Company’s cash balances may exceed
amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk.
Accounts
Receivable
Accounts receivable consists of amounts owed to the Company for sales
of the Company’s products on credit and are reported at net realizable value. Credit terms are extended to customers in the normal
course of business. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company estimates
allowances for future returns and doubtful accounts based upon historical experience and its evaluation of the current status of receivables.
Accounts considered uncollectible are written off against the allowance. As of March 31, 2022 and December 31, 2021, there was no allowance
for doubtful accounts.
The
Company periodically factors outstanding accounts receivable, with full recourse, at a percentage of face value. See Note 10 for further
discussion of this arrangement.
Inventories
Inventories
primarily include bottled wine which is carried at the lower of cost (calculated using the first-in-first-out (“FIFO”)
method) or net realizable value.
The Company reduces the carrying value of inventories that are obsolete
or for which market conditions indicate cost will not be recovered to estimated net realizable value. The Company’s estimate of
net realizable value is based on analysis and assumptions including, but not limited to, historical experience, future demand and market
requirements. Reductions to the carrying value of inventories are recorded in cost of revenues. As of March 31, 2022 and December
31, 2021 there was no allowance for inventory obsolescence.
Intangible
Assets
The
Company assesses for impairment intangible assets with finite useful lives which are amortized on a systematic basis over their estimated
useful lives. The amortization period and amortization method for an intangible asset with a finite useful life reflects the pattern
in which the assets’ future economic benefits are expected to be consumed. Where the pattern cannot be reliably determined, the straight-line
method is used. The amortization period and method is reviewed at least at each financial year-end. Amortization of intangible assets
with fixed determinable lives is recorded on a straight-line basis over 10 years for trademarks.
Deferred
Offering Costs
Deferred
offering costs primarily consist of legal, accounting, SEC filing fees, and any other fees relating to the Company’s initial public
offering. The deferred offering costs were capitalized as incurred and were offset against proceeds from the sale of shares of common
stock at the closing of the Company’s IPO.
Revenue
Recognition
The
Company’s total revenue reflects the sale of wine domestically in the U.S. to wholesale distributors or DTC and related party service
revenues. Under ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when
control of the promised good is transferred to the customer in an amount that reflects the consideration for which the Company is expected
to be entitled to receive in exchange for those products. Each contract includes a single performance obligation to transfer control
of the product to the customer. Control is transferred when the product is either shipped or delivered, depending on the shipping terms,
at which point the Company recognizes the transaction price for the product as revenue. The Company has elected to account for shipping
and handling as a fulfillment activity, with amounts billed to customers for shipping and handling included in total revenue.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Revenue
Recognition (continued)
The
Company also generates revenue through membership in its wine club. Wine club members pay a monthly fee, which varies depending on level
of membership, and are entitled to receive quarterly shipments of wine, free shipping, and discounts on other wine and merchandise purchased.
The Company recognizes revenue for the monthly membership dues when product is delivered. Any membership dues received before product
is delivered is recorded as deferred revenue on the Company’s balance sheet.
The Company has determined that related party service revenue should
be recognized over the period of time it provides such services. ASC 606 also notes that when another party is involved in providing goods
or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to
provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods or services to be provided
by the other party (that is, the entity is an agent). The Company does not bear responsibility for inventory losses and does not
have pricing determination; therefore, the Company would be considered the agent and revenue should be recognized as net sales. Service
revenues are expected to suspend at the end of the current calendar quarter to allow the Company’s lean team to prioritize the growth
and expansion of the Fresh Vine Wine brand.
Products
are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require
payment within 30-60 days of delivery or shipment, as dictated by the terms of each agreement. The Company has elected the practical
expedient to not account for significant financing components as its payment terms are less than one year, and the Company determines
the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing
defects, which are not material.
Disaggregated
Revenue Information
The
following table presents the percentages of total revenue disaggregated by sales channels for the three month periods ended March 31,
2022 and 2021:
| |
Three months ended | |
| |
March 31, | |
| |
2022 | | |
2021 | |
Wholesale | |
| 57.1 | % | |
| 46.2 | % |
Direct to consumer | |
| 26.7 | % | |
| 53.8 | % |
Related party service | |
| 16.2 | % | |
| 0.0 | % |
Total revenue | |
| 100.0 | % | |
| 100.0 | % |
Contract
Balances
When
the Company receives pre-orders or payment from a customer prior to transferring the product under the terms of a contract, the Company
records deferred revenue, which represents a contract liability. The Company will record deferred revenue when cash is collected from
customers prior to the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance
obligation is met. When the Company does not receive payment from a customer prior to or at the transfer of the product under the terms
of a contract, the Company records accounts receivable, which represents a contract asset.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Contract
Balances (continued)
The
following table reflects the changes in the contract liability balance during the year ended December 31, 2021 and the three month period
ended March 31, 2022:
| |
December 31, 2020 | | |
December 31, 2021 | | |
March 31, 2022 | |
Outstanding at beginning of period | |
$ | - | | |
$ | - | | |
$ | 13,750 | |
| |
| | | |
| | | |
| | |
Increase (decrease) attributable to: | |
| | | |
| | | |
| | |
Upfront payments | |
| - | | |
| 257,492 | | |
| 57,315 | |
Revenue recognized | |
| - | | |
| (243,742 | ) | |
| (13,750 | ) |
| |
| | | |
| | | |
| | |
Outstanding at end of period | |
$ | - | | |
$ | 13,750 | | |
$ | 57,315 | |
Fair
Value of Financial Instruments
The
Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (FASB) fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| ● | Level
1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement
date. |
| ● | Level
2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly,
for substantially the full term of the asset or liability. |
| ● | Level
3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
The
level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant
to the fair value measurement in its entirety.
The carrying values of cash, accounts receivable, accounts payable,
deferred revenue and other financial working capital items approximate fair value at March 31, 2022 and December 31, 2021, due to the
short maturity nature of these items.
Income
Taxes
The Company recognizes uncertain tax positions in accordance with ASC
740 on the basis of evaluating whether it is more likely than not that the tax positions will be sustained upon examination by tax authorities.
For those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit
that is more than 50 percent likely to be realized upon ultimate settlement. The Company recognizes interest and/or penalties related
to uncertain tax positions in income tax expense. There were no uncertain tax positions as of March 31, 2022 and December 31, 2021, and
as such, no interest or penalties were recorded to income tax expense. As of March 31, 2022 and December 31, 2021, the Company has no
unrecognized tax benefits. There are no unrecognized tax benefits included on the balance sheet that would, if recognized, impact the
effective tax rate. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12
months.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Prior
to the conversion, the Company was a limited liability company and therefore was a disregarded legal entity for income tax purposes.
Accordingly, no benefit for income taxes was recorded prior to the conversion.
Income
Taxes (continued)
For
years before 2019, the Company is not subject to U.S. federal or state income tax examinations. The Company’s policy is to recognize
interest and penalties related to uncertain tax positions as a component of general and administrative expenses.
Equity-Based
Compensation
The
Company measures equity-based compensation cost at the grant date based on the fair value of the award and recognizes the compensation
expense over the requisite service period, which is generally the vesting period. The Company recognizes any forfeitures as they occur.
As of March 31, 2022, there was $1,225,917 of unrecognized equity-based compensation expense recorded in prepaid expenses and other assets.
The Company measures equity-based compensation when the service inception
date precedes the grant date based on the fair value of the award as an accrual of equity-based compensation and adjusts the cost to fair
value at each reporting date prior to the grant date. In the period in which the grant occurs, the cumulative compensation cost is adjusted
to the fair value at the date of the grant. As of March 31, 2022 and December 31, 2021, there no accrued equity-based compensation.
Effective
December 9, 2021, the Company adopted an equity incentive plan which allows for the granting of incentive and non-qualified stock options,
restricted and unrestricted stock and stock units, stock appreciation rights, performance units and other stock-based awards to current
and prospective employees and directors of, and consultants and advisors to, the Company.
See
Note 7 for further discussion of equity-based compensation incurred in 2022 and 2021.
Advertising
The
Company expenses the costs of advertising as incurred. Advertising expense for the three month periods ended March 31, 2022 and 2021
was approximately $578,000 and $190,000, respectively.
Application
of New or Revised Accounting Standards
Pursuant
to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), a company constituting an “emerging growth company”
is, among other things, entitled to rely upon certain reduced reporting requirements and is eligible to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies.
The
Company is an emerging growth company and has elected to use this extended transition period for complying with new or revised accounting
standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is
no longer an emerging growth company or (ii) affirmatively and irrevocable opts out of the extended transition period provide in the
JOBS Act.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), to increase transparency and comparability between organizations
by recording assets and liabilities on the balance sheet relating to both operating and finance leases with terms longer than 12 months,
and disclosing key information about the lease terms. Topic 842, Leases, supersedes Topic 840. This
guidance will be effective for the Company beginning with the year ended December 31, 2022, with early adoption permitted. The
Company does not currently have any leases that require disclosure under Topic 842.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Recently
Issued Accounting Pronouncements (continued)
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments, and also issued subsequent amendments to the initial guidance, collectively, ASC 326, to replace the
incurred loss impairment methodology in current U.S. GAAP with a methodology that requires the reflection of expected credit losses and
will also require consideration of a broader range of reasonable and supportable information to determine credit loss estimates. For
many entities with financial instruments, the standard will require the use of a forward-looking expected loss model rather than the
incurred loss model for recognizing credit losses, which may result in the earlier recognition of credit losses on financial instruments.
This guidance will be effective for the Company beginning with the year December 31, 2023, with early adoption permitted.
Net
Loss per Share
Basic
net loss per share is determined by dividing net loss attributable to shareholders by the weighted-average shares outstanding during
the period. Diluted EPS reflects potential dilution and is computed by dividing net loss by the weighted average number of common shares
outstanding during the period increased by the numbers of additional common shares that would have been outstanding if all potential
common shares had been issued and were dilutive. However, potentially dilutive securities are excluded from the computation of diluted
EPS to the extent that their effect is anti-dilutive. The following table shows the components of diluted shares for the three month
periods ending:
| |
March 31, 2022 | | |
March 31, 2021 | |
Weighted average shares outstanding – basic | |
| 12,299,417 | | |
| 7,099,339 | |
Dilutive effect of shares authorized | |
| - | | |
| - | |
Shares used in computing net loss per share – diluted | |
| 12,299,417 | | |
| 7,099,339 | |
At March 31, 2022, 2,531,794 shares have been excluded from the calculation
of diluted weighted average shares outstanding as the inclusion of these shares would have an anti-dilutive effect.
Mezzanine
Equity
Due
to the contingently redeemable nature of Class F partner investor units issued in March 2021, the Company classified these units as temporary
equity in the mezzanine section of the balance sheet prior to its conversion to a C-Corporation. These units were recorded at their initial
carrying value, which equaled fair value as determined as of the issue date in March 2021. Upon the Company’s conversion from a
limited liability company to a C-Corporation in December 2021, these units were redeemed and converted to 1,938,534 shares of common
stock.
Inventories
consist of the following at:
| |
March 31, 2022 | | |
December 31, 2021 | |
Inventory – finished goods | |
$ | 759,534 | | |
$ | 137,647 | |
Inventory – merchandise | |
| 26,114 | | |
| 21,413 | |
Total | |
$ | 785,648 | | |
$ | 159,060 | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
3. | PREPAID
EXPENSES AND OTHER ASSETS |
Prepaid
expenses and other assets consist of the following at:
| |
March 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Prepaid license and fees | |
$ | - | | |
$ | 3,395 | |
Prepaid marketing expenses – current | |
| 313,000 | | |
| 313,000 | |
Prepaid marketing expenses – long-term | |
| 912,917 | | |
| 991,167 | |
Prepaid insurance | |
| 686,694 | | |
| - | |
Inventory deposits | |
| 1,390,144 | | |
| 758,280 | |
Other prepaid expenses | |
| 251,501 | | |
| 76,313 | |
Total | |
$ | 3,554,256 | | |
$ | 2,142,155 | |
Intangible
assets subject to amortization consist of the following at:
| |
Useful Life | |
March 31, 2022 | | |
December 31,
2021 | |
Trademarks | |
10 Years | |
$ | 4,788 | | |
$ | 4,788 | |
Accumulated amortization | |
| |
| (918 | ) | |
| (798 | ) |
Intangible assets – net | |
| |
$ | 3,870 | | |
$ | 3,990 | |
Amortization
expense for intangibles for the three month periods ended March 31, 2022 and 2021 was $120 and $113, respectively.
The
estimated amortization expense for the periods subsequent to March 31, 2022 is as follows:
| |
Trademarks | |
2022 | |
$ | 359 | |
2023 | |
| 479 | |
2024 | |
| 479 | |
2025 | |
| 479 | |
2026 | |
| 479 | |
After 2026 | |
| 1,595 | |
| |
$ | 3,870 | |
Deferred
revenue represents amounts received prior to period-end but earned in the following period. Deferred revenue consists of the following
at:
| |
March 31, 2022 | | |
December 31, 2021 | |
Orders not yet shipped | |
$ | 41,809 | | |
$ | 4,099 | |
Direct to consumer prepayments | |
| 15,506 | | |
| 9,651 | |
Deferred revenue | |
$ | 57,315 | | |
$ | 13,750 | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
The
Company had one class of member units through March 2021. Prior to March 2021, the Company had 105 member units issued and outstanding
as of December 31, 2020. There was no limitation on the number of Units that may be issued by the Company. Units had no par value. Each
member had one vote for each unit owned.
During
March 2021, the Company amended its operating agreement to create three classes of units, designated as Class F, Class W and Class P.
The Company authorized 1,263,501 of Class F Units, 200,388 Class W Units and 50,000 Class P Units. Each Class F Member had the right
of first refusal to purchase their pro rata share of all additional units that the Company may issue from time to time. Each Class F
member was entitled to distributions, subject to authorization of certain members, with the first 50% being allocated to pay off a member
loan, if applicable, and the remaining 50% in proportion to their percentage interests. Thereafter, distributions would be allocated
to Class F, Class W, and vested Class P members in proportion to their respective pro rata ownership interests. In conjunction with the
amendment, the Company converted its original member units to Class F and Class W units. As of March 1, 2021, 95 original member units
were converted to 950,000 Class F units and 10 original member units were converted to 100,000 Class W units.
Class
W and Class P units were non-voting units. Further, Class P units were not entitled to distributions until certain hurdle provisions
as set by Board of Managers at the time of the award would be met and the units were fully vested. Any issued units vest 25% after one
year with the remaining 75% vesting monthly over an additional three-year period.
Corporate
Conversion
On
December 8, 2021, in connection with its IPO, Fresh Grapes, LLC filed a certificate of conversion, whereby Fresh Grapes, LLC effected
a corporate conversion from a Texas limited liability company to a Nevada corporation and changed its name to Fresh Vine Wine, Inc. Pursuant
to the conversion, units of membership interest in the limited liability company were converted into shares of common stock of the corporation
at a conversion ratio of 6.1934 units for one share of common stock. The Company had 1,614,615 member units issued and outstanding as
of December 8, 2021. After giving effect to the corporate conversion, all outstanding Class F member units were converted to 8,758,915
shares of common stock, and all outstanding Class W member units were converted to 1,241,098 shares of common stock. The number of common
shares outstanding as of such date was 10,000,013. As a result of the corporate conversion, accumulated deficit was reduced to zero on
the date of the corporate conversion, and the corresponding amount was recorded to additional paid-in capital. The corporate conversion
was approved by members holding a majority of the outstanding units, and in connection with such conversion, the Company filed a certificate
of incorporation and adopted bylaws. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue
up to 100,000,000 shares of common stock $0.001 par value per share and 25,000,000 shares of preferred stock $0.001 par value per share.
All references in the audited financial statements to the number of shares and per-share amounts of common stock have been retroactively
restated to reflect this conversion.
Initial
Public Offering
On
December 17, 2021, the Company completed its IPO whereby it sold 2,200,000 shares of common stock at a public offering price of $10 per
share. The aggregate net proceeds received by the Company from the offering were approximately $19.2 million, net of underwriting discounts
and commissions of approximately $1.8 million and offering expenses of approximately $1.1 million. Upon the closing of the IPO, 12,200,013
shares of common stock were outstanding. The shares began trading on December 14, 2021 on The New York Stock Exchange under the symbol
“VINE”.
7. | EQUITY-BASED
COMPENSATION |
In
March 2021, the Company authorized 140,300 Class F member units in exchange for consulting services related to securing celebrity members
and ambassadors of the Company and executed license agreements with the celebrity members, both of which occurred in March 2021. The
estimated value of the award at the service inception date in March 2021 was $701,500. The service inception date preceded the grant
date as the award had not been mutually agreed to and, therefore, was revalued at fair value as of June 30, 2021. In September 2021,
the award was agreed to and the grant date was established. Therefore, the units were granted and the accrued equity-based compensation
was reclassified to Class F Member’s Equity on the Company’s balance sheet at the grant date fair value of $4,902,802. Total
equity-based compensation expense recognized related to these units was $0 and $701,500 for the three month periods ended March 31, 2022
and 2021, respectively.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
7. | EQUITY-BASED
COMPENSATION (continued) |
In March 2021, the Company issued 313,000 Class
F partner investor units in exchange for various advertising and marketing services over a 5 year period with an estimated value of $1,565,000
to be amortized over 5 years. In addition to the 313,000 Class F partner investor units issued in March 2021, the agreement included
a put option if a threshold of $5,000,000 in earnings before interest, taxes, depreciation, and amortization (EBITDA) in either fiscal
year 2022 or 2023 were not met in which the member would have the option to withdraw from the Company which would trigger the mandatory
sale of the member’s entire membership interest back to the Company. As these units were contingently redeemable, they were presented
as “Mezzanine Equity” on the Company’s balance sheet until December 8, 2021 when the Company converted from a limited
liability company to a C-Corporation. Upon conversion and amendment of the Company’s operating agreement, the units previously
recorded under “Mezzanine Equity” were converted to shares of common stock which no longer have the put option. Total equity-based
compensation expense recognized related to these units was $78,250 and $78,250 for the three month periods ended March 31, 2022 and 2021,
respectively.
The
estimated expense for various marketing and advertising services in exchange for Class F partner investor units, now common stock, described
in the preceding paragraph for the periods subsequent to March 31, 2022 is as follows:
| |
Advertising and
Marketing
Expense | |
2022 | |
$ | 234,750 | |
2023 | |
| 313,000 | |
2024 | |
| 313,000 | |
2025 | |
| 313,000 | |
2026 | |
| 52,167 | |
| |
$ | 1,225,917 | |
In
August 2021, the Company entered into an employment agreement to hire a Chief Executive Officer. As part of this agreement, the Company
issued 10,927 additional Class F member units valued at approximately $382,000. The terms of the employment agreement also call for 67,224
additional restricted stock unit awards subject to the successful consummation of the Company’s IPO achieving certain market capitalization
milestones ranging from $225M to $300M, of which 33,612 is subject to a secondary public offering. The Company successfully completed
its IPO on December 17, 2021 but did not reach the target market capitalization milestones per the agreement. Since the performance condition
of successfully consummating an IPO has been met, but the market condition of meeting market capitalization milestones has not been met,
the probability that the market condition will be met has been factored into the fair value of the award. A securities offering such
as an IPO is not considered probable to occur until it’s consummated. A secondary public offering has not been contemplated as
of the date these financial statements were available to be issued. Under ASC 710 and ASC 718, compensation costs for awards containing
performance conditions should only be recorded when considered to be probable to occur; therefore, no equity-based compensation cost
was recorded in relation to the award that contains the secondary public offering condition for the three month period year ended March
31, 2022.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
7. | EQUITY-BASED
COMPENSATION (continued) |
In
November 2021, the Company executed founder option agreements with four Class F members. The terms of the agreements grant each founder
the right and option to purchase common stock up to 25% of the total shares in the Founders’ Option Pool upon the consummation
of the Company’s IPO. The Founder’s Option Pool is a pool of shares reserved for founding members of the Company and will
be comprised of 15% of the total shares of common stock outstanding immediately prior to the initial closing of the IPO. The options
will vest in 20% installments. Each installment will vest upon the closing price of common stock reaching certain milestones ranging
from 200% to 600% of the IPO price. If the vesting condition is not achieved within three years of the grant date, the options will forfeit.
The options have not reached any of the vesting milestones required and as such, the probability of reaching each milestone has been
factored into the original fair value to be recognized over the three-year vesting period. As of March 31, 2022, $6,504 of equity-based
compensation expense has been recognized relating to these stock options. The total unrecognized equity-based compensation expense was
$70,565 as of March 31, 2022.
The
Company also granted to the underwriter a 45-day option to purchase up to 330,000 additional shares of common stock at $9.20 per share.
As of March 31, 2022, these options had expired as none of the options were exercised.
As
of March 31, 2022, the underwriter options and founders’ options to purchase common shares of the Company outstanding were as follows:
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
Number of | | |
Average
Exercise | | |
Remaining
Contractual | |
| |
Options | | |
Price | | |
Term (Years) | |
Outstanding at December 31, 2021 | |
| 1,830,000 | | |
$ | 9.86 | | |
| 8.18 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (330,000 | ) | |
| - | | |
| - | |
Outstanding at March 31, 2022 | |
| 1,500,000 | | |
$ | 10.00 | | |
| 9.96 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | |
| - | | |
$ | - | | |
| - | |
Warrants
On
December 17, 2021, in connection with the Company’s IPO, the Company granted to the underwriter warrants to purchase up to 110,000
shares of common stock at $12 per share. These warrants vest one year from the date of issuance and are exercisable for four years after
the vesting date.
As
of March 31, 2022, the underwriter warrants to purchase common shares of the Company outstanding were as follows:
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
Number of | | |
Average
Exercise | | |
Remaining
Contractual | |
| |
Warrants | | |
Price | | |
Term (Years) | |
Outstanding at December 31, 2021 | |
| 110,000 | | |
$ | 12.00 | | |
| 4.96 | |
Granted | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | |
Outstanding at March 31, 2022 | |
| 110,000 | | |
$ | 12.00 | | |
| 4.72 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | |
| - | | |
$ | - | | |
| - | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
7. | EQUITY-BASED
COMPENSATION (continued) |
There
was no net impact recognized by the Company in the accompanying statements as the warrants and stock options issued to the underwriter
were equity-based awards issued for services rendered by the underwriter for the IPO that was offset by the Company recognizing the fair
value as direct incremental costs associated with the IPO by reducing paid-in capital for the same amount.
Restricted
Stock Units
On December 17, 2021, the Company granted 125,926 and 251,851 restricted
stock units to its Chief Financial Officer and Chief Operating Officer, respectively. These restricted stock units have a vesting period
of 180 days after the date of the final prospectus. On February 24, 2022, the Company entered into a separation agreement with the former
Chief Operating Officer. Among other things, the Company agreed to provide the former COO with cash and expense reimbursements totaling
$175,000 and an amendment of the COO’s Restricted Stock Agreement to accelerate the vesting of the 251,851 restricted stock units.
Due to the modification of the terms of this award, the fair value was remeasured as of the modification date and an incremental $994,000
in equity-based compensation expense was recognized for the three month period ended March 31, 2022. Total equity-based compensation expense
related to both of these restricted stock unit awards was approximately $1.4 million for the three month period ended March 31, 2022.
The total unrecognized equity-based compensation expense was approximately $298,000.
On January 18, 2022, the Company granted 16,000 restricted stock units
to an employee of the Company that vest 210 days after the date of the final prospectus for the IPO. The employee must remain continuously
employed by the Company through the periods in order for the units to vest. Total equity-based compensation expense related to these restricted
stock units was approximately $37,000 for the three month period ended March 31, 2022. As of March 31, 2022, the total unrecognized equity-based
compensation expense was approximately $53,000.
On March 2, 2022, the Company granted 70,000 restricted stock units
to members of the Company’s Board of Directors that vest on June 18, 2022. Board members must continue to serve on the Company’s
board through the vesting period in order for the units to vest. Total equity-based compensation expense related to these restricted stock
units was approximately $77,000 for the three month period ended March 31, 2022. As of March 31, 2022, the total unrecognized equity-based
compensation expense was approximately $209,000.
On March 2, 2022, the Company granted 16,200 restricted stock units
to an employee of the Company that vest on June 18, 2022. The employee must remain continuously employed by the Company through the periods
in order for the units to vest. Total equity-based compensation expense related to these restricted stock units was approximately $18,000
for the three month period ended March 31, 2022. As of March 31, 2022, the total unrecognized equity-based compensation expense was approximately
$48,000.
On March 30, 2022, the Company hired a new Chief Financial Officer.
Pursuant to the employment agreement, the Company granted 100,000 restricted stock units. These restricted stock units vest in three equal
installments with the first third vesting immediately on the grant date of March 30, 2022, and the remaining tranches will vest on the
one year and two year anniversaries of the grant date. Total equity-based compensation expense related to these restricted stock units
was approximately $111,000 for the three month period ended March 31, 2022. As of March 31, 2022, the total unrecognized equity-based
compensation expense was approximately $219,000.
As
of March 31, 2022, the restricted stock units of the Company outstanding were as follows:
| |
| | |
Weighted Average | |
| |
| | |
Remaining | |
| |
Number of | | |
Contractual | |
| |
RSUs | | |
Term (Years) | |
Outstanding at December 31, 2021 | |
| 377,777 | | |
| 0.45 | |
Granted | |
| 202,200 | | |
| 0.66 | |
Vested | |
| (285,184 | ) | |
| | |
Forfeited | |
| - | | |
| | |
Outstanding at March 31, 2022 | |
| 294,793 | | |
| 0.50 | |
Stock
Options
On
March 11, 2022, the Company granted the option to purchase 427,001 shares of common stock at $3.47 per share to its Chief Executive Officer,
pursuant to the employment agreement with the Company. The shares vest in three equal installments on the six month, one year, and two
year anniversaries of the grant date and are exercisable for 10 years from the grant date. Total equity-based compensation expense related
to these stock options was approximately $42,000 for the three month period ended March 31, 2022. The total unrecognized equity-based
compensation expense was approximately $1.1 million.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Stock
Options (continued)
On
March 30, 2022, in addition to the restricted stock units granted to the Company’s new Chief Financial Officer, the Company also
granted the option to purchase 200,000 shares of common stock at $3.30 per share, pursuant to the employment agreement. The shares vest
in three equal installments. The first third vested immediately on the grant date of March 30, 2022, and the remaining tranches will
vest on the one year and two year anniversaries of the grant date and are exercisable for 10 years from the grant date. Total equity-based
compensation expense related to these stock options was approximately $173,000 for the three month period ended March 31, 2022. The total
unrecognized equity-based compensation expense was approximately $344,000.
As
of March 31, 2033, the options to purchase common shares of the Company outstanding were as follows:
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
Number of | | |
Average
Exercise | | |
Remaining
Contractual | |
| |
Options | | |
Price | | |
Term (Years) | |
Outstanding at December 31, 2021 | |
| - | | |
$ | - | | |
| - | |
Granted | |
| 627,001 | | |
| 3.42 | | |
| 9.97 | |
Exercised | |
| - | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | | |
| - | |
Outstanding at March 31, 2022 | |
| 627,001 | | |
$ | 3.42 | | |
| 9.97 | |
| |
| | | |
| | | |
| | |
Exercisable at March 31, 2022 | |
| 66,667 | | |
$ | 3.30 | | |
| 10.00 | |
The
Company uses the Black-Scholes option-pricing model to estimate the fair value of equity-based awards. The inputs for the Black-Scholes
valuation model require management’s significant assumptions. Prior to the Company’s IPO, the price per share of common stock
was determined by the Company’s board based on recent prices of common stock sold in private offerings. Subsequent to the IPO,
the price per share of common stock is determined by using the closing market price on the New York Stock Exchange on the grant date.
The risk-free interest rates, ranging from 0.02% to 1.64%, are based on the rate for U.S. Treasury securities at the date of grant with
maturity dates approximately equal to the expected life at the grant date. The expected term for employee and nonemployee awards ranged
from 3 to 10 years based on industry data, vesting period, contractual period, among other factors. The expected volatility was estimated
at 75% based on historical volatility information of peer companies that are publicly available in combination with the Company’s
calculated volatility since being publicly traded. The Company does not expect to pay dividends. For awards with a performance condition,
stock compensation is recognized over the requisite service period if it is probably that the performance condition will be satisfied.
Components of the provision for income taxes for the three month period
ended March 31, 2022 and the year ended December 31, 2021 were as follows:
|
|
March 31,
2022 |
|
|
December 31,
2021 |
|
Current |
|
$ |
- |
|
|
$ |
- |
|
Deferred |
|
|
- |
|
|
|
- |
|
Total |
|
$ |
- |
|
|
$ |
- |
|
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
| 8. | INCOME
TAXES (continued) |
Following the conversion of Fresh Grapes, LLC to Fresh Vine Wine, Inc.
on December 7, 2021, Fresh Vine Wine, Inc. will begin filing federal and state returns where required. No income tax benefit was recorded
for the three month period ended March 31, 2022 due to net losses and recognition of a valuation allowance. The following table represents
a reconciliation of the tax expense computed at the statutory federal rate and the Company’s tax expense for the three months ended
March 31, 2022 and the year ended December 31, 2021:
|
|
March 31,
2022 |
|
|
|
|
|
December 31,
2021 |
|
Tax expense (benefit) at statutory rate |
|
$ |
(885,000 |
) |
|
|
21.0 |
% |
|
$ |
(2,093,000 |
) |
State income tax expense (benefit), net of federal tax effect |
|
|
(98,000 |
) |
|
|
2.3 |
% |
|
|
(14,000 |
) |
Change in valuation allowance on deferred tax assets |
|
|
983,000 |
|
|
|
(23.4 |
%) |
|
|
519,000 |
|
Conversion from LLC to C Corporation |
|
|
|
|
|
|
|
|
|
|
1,588,000 |
|
Income tax expense (benefit) |
|
$ |
- |
|
|
|
0.0 |
% |
|
$ |
- |
|
Deferred
income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company’s deferred tax assets relate primarily to its net operating
loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,” the Company recorded
a valuation allowance to fully offset the net deferred tax asset, because it is more likely than not that the Company will not realize
future benefits associated with these deferred tax assets at December 31, 2021. The tax effects of temporary differences and carryforwards
that give rise to significant portions of the deferred tax assets are as follows:
| |
March 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | |
| |
| |
| | |
| |
Accrual to cash | |
$ | 100,000 | | |
$ | 234,000 | |
Deferred revenue | |
| 13,000 | | |
| 3,000 | |
Stock based compensation | |
| 194,000 | | |
| 45,000 | |
Net operating losses | |
| 1,195,000 | | |
| 237,000 | |
Valuation allowance | |
| (1,502,000 | ) | |
| (519,000 | ) |
| |
| | | |
| | |
Net deferred tax assets: | |
$ | - | | |
$ | - | |
At March 31, 2022, the Company had federal and state net operating
loss carryforwards of approximately $5.1 million and $1.5 million, respectively. The net operating loss carryforwards have no expiration.
9. | SUPPLIER
AND CUSTOMER CONCENTRATION |
The
Company has an agreement with an unrelated party for various wine making activities, including production, bottling, labeling, and packaging.
The Company purchases finished goods through blanket sales orders that require a 20% deposit. In addition to the purchases of finished
goods, the Company pays certain storage, administrative fees and taxes related to the purchased goods. There is no specified term of
the agreement but continues as additional blanket sales orders are issued. For the three month period ended March 31, 2022, 100% of the
Company’s inventory purchases were from this supplier.
The
Company also engages with other suppliers for the purchase of a select varietal of wine to be offered in limited quantities. There are
no formal agreements due to the infrequency of activity with these suppliers.
A significant portion of the Company’s wholesale revenue comes
from a single customer that operates in several markets. For the three month period ended March 31, 2022, 50% of the Company’s wholesale
revenue came from this customer. At March 31, 2022, this customer accounted for 56% of accounts receivable.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
10. | COMMITMENTS
AND CONTINGENCIES |
During March 2021, the Company entered into two license agreements
with the Class F partner investors for marketing and advertising services. The agreements require ongoing payments of $300,000 per year
for the final four years of the agreement’s initial five year term. Additionally, the agreements require the Company to reimburse
out of pocket expenses related to promotion of the Company’s products. In November 2021, the agreements were amended to include
partners investor options to terminate the agreements if a $5 million EBITDA threshold is not met in either 2022 or 2023. The agreement
was also amended, among other provisions, to begin monthly payments effective as of the date of the IPO in December 2021. The net expense
relating to the agreements was $20,000 for the three month period ended March 31, 2022.
The
estimated expense for the periods subsequent to March 31, 2022 is as follows:
| |
Advertising and
Marketing
Expense | |
2022 | |
$ | 360,000 | |
2023 | |
| 480,000 | |
2024 | |
| 480,000 | |
2025 | |
| 480,000 | |
2026 | |
| 80,000 | |
| |
$ | 1,880,000 | |
Sponsorship
Agreements
During
2020, the Company entered into multiple sponsorship agreements with unrelated parties within the sports and entertainment industry. The
terms of the agreements range from two to four years with annual payments ranging from $100,000 to $250,000 per agreement. Due to the
Covid-19 pandemic, many of these agreements were postponed or renegotiated to reduce payments until in-person fan attendance at the stadiums
returns to normal. The total expense relating to these agreements for the three month periods ended March 31, 2022 and 2021 was $192,138
and $41,250, respectively.
The
estimated expense for the sponsorship agreements as described above for the periods subsequent to March 31, 2022 is as follows:
| |
Advertising and
Marketing
Expense | |
2022 | |
$ | 591,752 | |
2023 | |
| 387,232 | |
2024 | |
| 54,057 | |
| |
$ | 1,033,041 | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
Accounts
Receivable Financing
In September 2021, the Company entered into an agreement with an unrelated
party to pledge eligible accounts receivable for a cash advance at a percentage of the outstanding amount, with the remaining balance
due upon collection from the customer. The agreement has an initial term of one year which will automatically renew for successive one
year terms unless the Company provides a notice of termination at least 60 days prior to the termination date. The receivables are pledged
with full recourse, which means the Company bears the risk of nonpayment and, therefore, does not meet the definition of a factoring arrangement
under ASC 310-10-05-6. The amounts advanced to the Company are classified as a secured loan on the Company’s balance sheet and any
fees computed on the outstanding amounts are treated as interest expense on the Company’s statement of operations. The Company had
pledged approximately $243,000 of customer accounts which is recorded as receivables with recourse, and has secured borrowings of $16,231
as of March 31, 2022. The remaining balance due to the Company for collected factored accounts, net of calculated interest and fees, is
approximately $59,000 as of March 31, 2022. Total interest expense recorded in association with the secured loan was $15,500 for the three
month period ended March 31, 2022.
11. | TRANSACTIONS
WITH RELATED PARTIES |
In September 2021, the Company issued a promissory note to a Class
F member in exchange for $216,000. The term of the note is the later of 2 months from the date of the note or upon successful consummation
of the IPO. The annual interest rate on the note is the maximum legal amount allowed under the applicable usury laws minus 1%, which is
7% at December 31, 2021. The Company repaid all of the principal balance plus accrued interest of $9,125 in December 2021.
In October 2021, the Company issued an additional promissory note to
a Class F member in exchange for $216,000. The term of the note is the later of 2 months from the date of the note or upon successful
consummation of the IPO. The annual interest rate on the note is the maximum legal amount allowed under the applicable usury laws minus
1%, which is 7% at December 31, 2021. The Company repaid all of the principal balance plus accrued interest of $9,125 in January 2022.
In
addition to the agreements discussed in Note 10, the Company had an arrangement with Rabbit Hole Equity, LLC (RHE), a related party due
to common ownership, under which RHE provided development, administrative and financial services to the Company. RHE is solely owned
by the majority member of Nechio and Novak, LLC, which is the majority shareholder of the Company. Under the agreement, the Company will
pay or reimburse RHE, as applicable, for any expenses it, or third parties acting on its behalf, incurs for the Company. For any selling,
general and administrative activities performed by RHE or RHE employees, RHE, as applicable, charged back the employee salaries and wages,
rent and related utilities. Beginning in December 2021, the Company now incurs employee salary and wage expenses, rent, and utilities
directly.
In
addition to the expenses paid by RHE to be reimbursed by the Company, several other related parties have incurred expenses or advanced
cash to be reimbursed by the Company. Damian Novak is the Executive Chairman of the Company and majority member of Nechio and Novak,
LLC, which is a majority shareholder of the Company. Damian Novak is also the majority member of Kratos Advisory, LLC, Appellation Brands,
LLC, TC Healthcare, LLC and is the sole member of Rabbit Hole Equity DTP, LLC. The Company will pay or reimburse, as applicable, for
any expenses the related parties incur while acting on behalf of the Company.
Additionally,
the Company records receivables related to any expenses incurred on behalf of or cash advances to related entities.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
March
31, 2022 and 2021
11. | TRANSACTIONS
WITH RELATED PARTIES (continued) |
In October 2021, the Company entered into a service agreement with
Appellation Brands, LLC, a related party due to common ownership in the wine industry, to provide representation and distribution services.
The Company provides access to new markets and retail and wholesale customers to the related party. In exchange for these services, the
Company receives a management fee of $50,000 per month plus a tiered fee ranging between $5.00 and $6.50 per case of the products sold.
For the three month period ended March 31, 2022, the Company had recognized $150,884 in service revenue related to this agreement and
subsequently owes Appellation Brands, LLC $61,999 for product revenues collected on behalf of Appellation Brands, LLC during the first
quarter of 2022.
In
January 2022, the Company entered into a consulting agreement with FELCS, LLC, an entity owned by Damian Novak to provide consulting
and advisory services to the Company in exchange for $25,000 per month. The agreement expires in December 2022, subject to automatic
on-year renewals unless written notice to terminate the contract is given by either party. For the three month period ended March 31,
2022, the Company had recognized $75,000 in total expense related to this agreement.
Amounts due to related parties were as follows as
of March 31, 2022 and December 31, 2021:
| |
2022 | | |
2021 | |
Rabbit Hole Equity, LLC | |
$ | 111,545 | | |
$ | 111,545 | |
Appellation Brands, LLC | |
| 61,999 | | |
| 88,727 | |
| |
$ | 173,544 | | |
$ | 200,272 | |
Amounts due from related parties were as follows as of March 31, 3022
and December 31, 2021:
| |
2022 | | |
2021 | |
Damian Novak | |
$ | 328,759 | | |
$ | 325,346 | |
Appellation Brands, LLC | |
$ | 303,959 | | |
$ | 153,075 | |
TC Healthcare, LLC | |
| 5,177 | | |
| 5,177 | |
Kratos Advisory, LLC | |
| 45,477 | | |
| 45,477 | |
| |
$ | 683,372 | | |
$ | 529,075 | |
In April 2022, the Company amended its agreement with Whetstone Consulting
to include additional bonus commissions ranging from $5,000 to $100,000 subject to specific distribution milestones. The agreement has
an initial term of one year and automatically renews for successive one year periods unless terminated by either party with advance notice.
On May 13, 2022, Appellation Brands, LLC delivered
notice of its intention to terminate its agreement with the Company pursuant to which the Company has provided representation and distribution
services. The Company and Appellation Brands, LLC are in discussions regarding the terms and conditions of such termination, including
payment for amounts owed to the Company from Appellation Brand, LLC for services performed prior to such termination.