Notes to Financial Statements
(Unaudited)
1. MANAGEMENT’S
STATEMENT
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 and Puerto Rico. 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
by providing third party wine producers with access to new markets and distribution channels.
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.
Certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
These financial statements should be read in conjunction with the Company’s financial Statements and notes thereto for the fiscal year
ended December 31, 2021, included in the Company’s Annual Report on Form 10-K.
Corporate
Conversion
On December
8, 2021, in preparation 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 NYSE American stock exchange under the symbol
“VINE”.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
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, equity-based compensation for employees and non-employees, and the valuation
of deferred tax assets.
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.
Liquidity, Going Concern, and Management Plan
Although
the Company’s revenue generated during the three months ended June 30, 2022 represents a 10% and 57% increase over its revenues
generated in the first quarter of 2022 and the fourth quarter of 2021, respectively, in addition to paying IPO fees and settling pre-IPO
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 purchased additional inventory in efforts to mitigate supply chain risks and incurred
additional expenses in order to invest in sales and marketing activities and increase staffing and infrastructure to position the Company
for future growth. The Company is looking forward to inclusion in the fall retail resets for both large and national chains.
The
Company currently holds no debt and will seek debt or equity financing in the near term to sustain existing operations. If adequate financing
is not available, the Company may be forced to curtail near-term growth priorities, take measures to severely reduce our expenses and
business operations, or discontinue them completely. Such financing may be dilutive. At the current pace of incurring expenses and without
receipt of additional financing, the Company projects that the existing cash balance will be sufficient to fund current operations into
the first quarter of 2023, after which additional financing will be needed to satisfy obligations.
Additional
financing may not be available on favorable terms or at all. If additional financing is available, it may be highly dilutive to existing
shareholders and may otherwise include burdensome or onerous terms. The Company’s inability to raise additional working capital
in a timely manner would negatively impact the ability to fund operations, generate revenues, grow the business and otherwise execute
the Company’s business plan, leading to the reduction or suspension of operations and ultimately potentially ceasing operations
altogether. Should this occur, the value of any investment in the Company’s securities could be adversely affected.
These factors
call into question the Company’s 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.
In an effort
to preserve capital, the Company’s leadership team has already deferred certain investments in additional inventory, curtailed
its sales and marketing efforts and staffing, and taken other measures to reduce expenses and business operations. Collectively, these
cost reduction efforts have reduced the Company’s cash requirements by more than $6.3 million for the balance of calendar year
2022, preserving capital for our highest priority expenses and investments and providing additional runway for the growth strategy to
gain traction in market.
In
parallel, the Company continues to execute its growth strategy, opening up new distributor and retail relationships, expanding to new
geographic markets, and introducing new product extensions. The Company believes that these efforts will further accelerate top-line
growth in ways that will only improve liquidity measures as the Company converts receivables to cash.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
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.
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.
2.
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.
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.
The
following table presents the percentages of total revenue disaggregated by sales channels for the three and six month periods ended June
30, 2022 and 2021:
| |
Three
months ended | | |
Six
months ended | |
| |
June
30,
2022 | | |
June
30,
2021 | | |
June
30,
2022 | | |
June
30,
2021 | |
Wholesale | |
| 64.5 | % | |
| 40.8 | % | |
| 61.0 | % | |
| 42.1 | % |
Direct to consumer | |
| 21.1 | % | |
| 59.2 | % | |
| 23.8 | % | |
| 57.9 | % |
Related party service | |
| 14.4 | % | |
| 0.0 | % | |
| 15.3 | % | |
| 0.0 | % |
Total
revenue | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % | |
| 100.0 | % |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
3.
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 presents a reconciliation between basic and diluted net loss per
share for the three and six month periods ending:
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, 2022 | | |
June
30, 2021 | | |
June
30, 2022 | | |
June
30, 2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net
loss attributable to Fresh Vine Wine shareholders | |
$ | (4,458,890 | ) | |
$ | (5,240,648 | ) | |
$ | (8,845,133 | ) | |
$ | (6,563,589 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Basic – weighted
shares outstanding | |
| 12,534,045 | | |
| 8,881,794 | | |
| 12,417,763 | | |
| 7,999,400 | |
Dilutive
effect from shares authorized | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted
– weighted shares outstanding | |
| 12,534,045 | | |
| 8,881,794 | | |
| 12,417,763 | | |
| 7,999,400 | |
| |
| | | |
| | | |
| | | |
| | |
Basic
loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.36 | ) | |
$ | (0.59 | ) | |
$ | (0.71 | )) | |
$ | (0.82 | ) |
Diluted
loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.36 | ) | |
$ | (0.59 | ) | |
$ | (0.71 | )) | |
$ | (0.82 | ) |
For
the three and six months ended June 30, 2022, 1,888,336 shares were excluded from the calculation of diluted weighted average shares
outstanding as the inclusion of these shares would have an anti-dilutive effect.
4.
INVENTORIES
Inventories
primarily include bottled wine which is carried at the lower of cost (calculated using the average cost method) or net realizable
value. Inventories consist of the following at:
| |
June
30,
2022 | | |
December 31,
2021 | |
Inventory – finished goods | |
$ | 3,761,605 | | |
$ | 137,647 | |
Inventory –
merchandise | |
| 8,142 | | |
| 21,413 | |
Total | |
$ | 3,769,747 | | |
$ | 159,060 | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
5.
PREPAID EXPENSES AND OTHER ASSETS
Prepaid
expenses and other assets consist of the following at:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepaid marketing expenses - current | |
$ | 313,000 | | |
$ | 313,000 | |
Prepaid marketing expenses – long-term | |
| 834,667 | | |
| 991,167 | |
Prepaid insurance | |
| 442,944 | | |
| - | |
Prepaid license and fees | |
| - | | |
| 3,395 | |
Inventory deposits | |
| 719,748 | | |
| 758,280 | |
Other prepaid expenses | |
| 36,854 | | |
| 76,312 | |
Total | |
$ | 2,347,213 | | |
$ | 2,142,154 | |
6.
ACCRUED COMPENSATION
During the
period ended June 30, 2022 the Company made certain leadership changes to better align with the Company’s operating goals, including
advertising and marketing plans, as well as cash preservation initiatives.
As of June 30, 2022 accrued compensation primarily related to unpaid amounts related to the following transitions.
On
June 8, 2022, the Chief Executive Officer’s employment with the Company ended. This
individual continues to serve as a member of the Company’s Board of Directors. Effective
June 13, 2022, the Company’s Board of Directors appointed Rick Nechio, the Company’s
current President, to serve as interim Chief Executive Officer.
Effective
June 24, 2022, the Chief Financial Officer of the Company resigned. Effective June 30, 2022, Elliot Savoie, the Company’s current
Head of Corporate Development and Ventures, will serve as interim Chief Financial Officer while the Company conducts its search
for a permanent replacement.
7.
ACCRUED EXPENSES
Accrued
expenses consist of the following at:
| |
June 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Sponsorship agreements | |
$ | 277,677 | | |
$ | 80,000 | |
Accrued credit card charges | |
| 155,026 | | |
| 39,563 | |
Other accrued expenses | |
| 173,000 | | |
| 93,303 | |
Total | |
$ | 605,703 | | |
$ | 212,866 | |
The sponsorship
agreements relate to marketing contracts 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 $265,000 per agreement. The total expense relating to these
agreements for the three and six month periods ended June 30, 2022 was $184,720 and $366,158, respectively. The total expense relating
to these agreements for the three and six month periods ended June 30, 2021 was $150,700 and $192,000, respectively.
Accrued
credit card charges primarily consist of warehouse, shipping and other operating costs paid via Company credit card as a tool for managing
cashflow.
8.
STOCKHOLDERS’ EQUITY
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.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
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 in which 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 NYSE American stock exchange
under the symbol “VINE”.
9.
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.
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 June 30, 2022 and 2021,
respectively. Total equity-based compensation expense recognized related to these units was $0 and $4,902,802 for the three month periods
ended June 30, 2022 and 2021, respectively.
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. Total equity-based compensation expense recognized related
to these units was $78,250 and $156,500 for the three and six month periods ended June 30, 2022, respectively. Total equity-based compensation
expense recognized related to these units was $78,250 and $104,333 for the three and six month periods ended June 30, 2021, respectively.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
As
of June 30, 2022, there was $1,147,667 of unrecognized equity-based compensation expense recorded in prepaid expenses and other assets.
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 June 30, 2022 is as follows:
| |
Advertising
and Marketing
Expense | |
2022 | |
$ | 156,500 | |
2023 | |
| 313,000 | |
2024 | |
| 313,000 | |
2025 | |
| 313,000 | |
2026 | |
| 52,167 | |
| |
$ | 1,147,667 | |
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.
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. Restricted stock units represent the right to receive one share of common stock from the Company upon vesting.
These restricted stock units have a vesting period of 180 days after the date of the final IPO prospectus. On February 24, 2022, the
Company entered into a separation agreement with the former Chief Operating Officer (COO). 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. Total equity-based compensation expense related to both of these restricted stock unit awards
was $297,591 and $1,658,485 for the three and six month period ended June 30, 2022. As of June 30, 2022, these awards were fully vested
and the shares of common stock underlying the awards had been delivered.
During
the period ended June 30, 2022 the Company granted 47,800 restricted stock units to employees of the Company all of which vested and
were delivered in the period. Total equity-based compensation expense related to these restricted stock units and shares was $158,768
and $213,380 for the three and six month periods ended June 30, 2022.
On
March 2, 2022, the Company granted 70,000 restricted stock units to members of the Company’s Board of Directors that fully vested
on June 18, 2022. Total equity-based compensation expense related to these restricted stock units was $208,841 and $285,530 for the three
month and six month periods ended June 30, 2022.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
Restricted
stock unit activity as of and during the period ended June 30, 2022 was as follows:
| |
Number
of RSUs | | |
Weighted
Average
Remaining
Contractual
Term
(Years) | |
Outstanding at December 31, 2021 | |
| 377,777 | | |
| 0.45 | |
Granted | |
| 117,800 | | |
| 0.33 | |
Vested or released | |
| (495,577 | ) | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding at June 30, 2022 | |
| - | | |
| - | |
Shares
of Restricted Stock
During the
period ended June 30, 2022, the Company granted 10,000 shares of restricted stock to an employee upon commencement of employment in May
2022, of which 3,334 shares vested immediately with the remaining 6,666 shares vesting in two equal installments in May 2023 and May
2024. Restricted stock consists of shares of common stock that are subject to transfer and forfeiture restrictions that lapse upon vesting.
Total equity-based compensation expense related to these shares of restricted stock was $10,139 for the three and six month periods ended
June 30, 2022. The total unrecognized equity-based compensation expense is $17,649 relating to the shares of restricted stock.
On
March 30, 2022, the Company hired a new Chief Financial Officer. Pursuant to the employment agreement, the Company granted 100,000 shares
of restricted stock. The restricted stock vests in three equal installments with the first third vesting immediately on the grant date
of March 30, 2022, and the remaining tranches were scheduled to vest on the one year and two year anniversaries of the grant date subject
to continued employment with the Company through the applicable vesting date. Effective June 24, 2022, this employee resigned from the
Company. Pursuant to the employees Separation Agreement with the Company, the unvested restricted stock will immediately vest in full
if a change in control occurs within 90 days from separation. Absent a change in control during such 90 day period, the unvested awards
will be forfeited. As a change in control is unlikely to occur during the 90 day period the Company has not recognized equity-based compensation
expense for the unvested awards. Total equity-based compensation expense related to these restricted stock units was $0 and $110,602
for the three and six month periods ended June 30, 2022, respectively.
Restricted
stock activity as of and during the period ended June 30, 2022 was as follows:
| |
Number
of Shares of Restricted Stock | | |
Weighted
Average Remaining Contractual Term (Years) | |
Outstanding at December 31, 2021 | |
| - | | |
| - | |
Granted | |
| 110,000 | | |
| 1.00 | |
Vested or released | |
| (36,668 | ) | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding at June 30, 2022 | |
| 73,332 | | |
| 0.32 | |
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
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 Chief Executive Officer’s 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. On June 8,
2022, the Chief Executive Officer’s employment with the Company ended resulting in the forfeiture of the entire award, which remained
unvested at the time. Total equity-based compensation expense previously recognized for these stock options of approximately $63,000
was reversed in the three month period ended June 30, 2022.
On
March 30, 2022, in addition to the restricted stock granted to the Company’s new Chief Financial Officer, the Company granted the
Chief Financial Officer an 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 were scheduled to vest on the one year and two year anniversaries of the grant date subject to continued employment with the
Company through the applicable vesting date. The options are exercisable for 10 years from the grant date or, if earlier, ninety (90)
days following termination of employment. Effective June 24, 2022, this employee resigned from the Company. Pursuant to the employee’s
Separation Agreement with the Company, the unvested stock options will immediately become exercisable in full if a change in control
occurs within 90 days from separation. Absent a change in control during such 90 day period, the unvested awards will be forfeited. As
a change in control is unlikely to occur during the 90 day period, the Company has not recognized equity-based compensation expense for
the unvested awards. Total equity-based compensation expense related to the vested stock options was $0 and $173,242 for the three and
six month periods ended June 30, 2022, respectively.
Stock
option activity as of and during the period ended June 30, 2022 was as follows:
|
|
Number
of
Options |
|
|
Weighted
Average
Exercise Price |
|
Outstanding at December 31, 2021 |
|
|
- |
|
|
|
- |
|
Granted |
|
|
632,001 |
|
|
|
3.41 |
|
Exercised |
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
(427,001 |
) |
|
|
3.47 |
|
Outstanding at June 30, 2022 |
|
|
205,000 |
|
|
|
3.29 |
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2022 |
|
|
68,334 |
|
|
|
3.29 |
|
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 of the awards 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 probable that the performance condition will be satisfied.
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
10.
INCOME TAXES
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. The Company has federal and state net operating loss carryforwards with a full valuation allowance against
the deferred tax assets as of June 30, 2022. No income tax expense or benefit was recorded for the three and six month periods ended
June 30, 2022 due to the Company’s net loss position.
11.
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 a minimum 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 and six month periods ended June 30,
2022, and 2021, 100% of the Company’s inventory purchases were from this supplier.
The
Company also engages with other suppliers as needed 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 two customers that operate in several markets. For the three
and six month periods ended June 30, 2022, approximately 60% of the Company’s wholesale revenue came from these two customers.
As of June 30, 2022 and December 31, 2021, these customers accounted for approximately 69% of accounts receivable.
12.
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 agreement each year for an initial term of five years. 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 $120,000 and $140,000 for the three and six month periods ended June 30, 2022. The
net expense was $150,000 and $200,000 for the three and six month periods ended June 30, 2021.
The estimated
expense for the periods ending December 31 subsequent to June 30, 2022 is as follows:
| |
Advertising
and
Marketing
Expense | |
2022 | |
$ | 240,000 | |
2023 | |
| 480,000 | |
2024 | |
| 480,000 | |
2025 | |
| 480,000 | |
2026 | |
| 80,000 | |
| |
$ | 1,760,000 | |
Sponsorship
Agreements
The estimated
expense for the sponsorship agreements as described in Note 7 for the periods ending December 31 subsequent to June 30, 2022 is as follows:
|
|
Advertising
and
Marketing Expense |
|
2022 |
|
$ |
392,442 |
|
2023 |
|
|
490,232 |
|
2024 |
|
|
160,147 |
|
|
|
$ |
1,042,821 |
|
FRESH
VINE WINE, INC.
Notes
to Financial Statements
(Unaudited)
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. As of June 30, 2022 and December 31, 2021, the Company had pledged
$0 and $146,314 of customer accounts which is recorded as receivables with recourse and had secured borrowings of $0 and $171,069, respectively.
Total interest expense recorded in association with the secured loan was $1,213 and $17,462 for the three and six month periods ended
June 30, 2022.
13.
TRANSACTIONS WITH RELATED PARTIES
In
October 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 January 2022.
In addition
to the agreements discussed in Note 12, the Company had an arrangement with Rabbit Hole Equity, LLC (RHE)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 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 a manager and significant member of Nechio
and Novak, LLC, which was a significant shareholder of the Company at June 30, 2022. Damian Novak is a significant 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.
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. As of June 15, 2022 the original agreement was terminated. Prior to termination,
the Company provided access to new markets and retail and wholesale customers to the related party. In exchange for these services, the
Company received a management fee of $50,000 per month plus a tiered fee ranging between $5.00 and $6.50 per case of the
products sold. For the three and six month periods ended June 30, 2022, the Company recognized $146,340 and $297,224 in service
revenue related to this agreement.
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 one-year
renewals unless written notice to terminate the contract is given by either party. For the three and six month period ended June 30,
2022, the Company recognized $75,000 and $150,000, respectively, in total expense related to this agreement.
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.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Amounts due
to related parties were as follows as of June 30, 2022 and December 31, 2021:
| |
2022 | | |
2021 | |
Rabbit Hole Equity, LLC | |
$ | 111,545 | | |
$ | 111,545 | |
Appellation Brands, LLC | |
| 198,119 | | |
| 88,727 | |
| |
$ | 309,664 | | |
$ | 200,272 | |
Amounts due
from related parties were as follows as of June 30, 3022 and December 31, 2021:
|
|
2022 |
|
|
2021 |
|
Damian Novak |
|
$ |
328,759 |
|
|
$ |
325,346 |
|
Due from employees |
|
|
195,186 |
|
|
|
- |
|
TC Healthcare, LLC |
|
|
5,177 |
|
|
|
5,177 |
|
Kratos Advisory, LLC |
|
|
45,477 |
|
|
|
45,477 |
|
|
|
$ |
574,599 |
|
|
$ |
376,000 |
|
The $328,759 due from Damian Novak was repaid
in full in July 2022.