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 $10.00 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. Shares of the
Company’s common stock 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 contingent liabilities, 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 nine months
ended September 30, 2022 represents a 136% increase over the nine month period in the prior year, in addition to paying IPO fees
and settling pre-IPO net outstanding related party debt in the fourth quarter of 2021, historically the Company’s operating expenses
have significantly exceeded its revenues. Since the Company’s IPO, significant cash outflows were required to ensure the Company
has sufficient inventory to support forecasted demand as well as to mitigate supply chain risks. The Company has 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 currently holds no debt and intends to 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 raise substantial doubt about 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 budgeted
cash requirements by more than $6.3 million for the second half of 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 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 nine month periods ended September 30, 2022 and 2021:
| |
Three months ended | | |
Nine months ended | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September 30,
2022 | | |
September 30,
2021 | |
Wholesale | |
| 61.8 | % | |
| 55.8 | % | |
| 61.1 | % | |
| 49.2 | % |
Direct to consumer | |
| 38.2 | % | |
| 44.2 | % | |
| 26.9 | % | |
| 50.8 | % |
Related party service | |
| 0.0 | % | |
| 0.0 | % | |
| 12.0 | % | |
| 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 nine month periods ending:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30,
2022 | | |
September 30,
2021 | | |
September 30,
2022 | | |
September 30,
2021 | |
Numerator: | |
| | |
| | |
| | |
| |
Net loss attributable to Fresh Vine Wine shareholders | |
$ | (2,560,040 | ) | |
$ | (1,531,046 | ) | |
$ | (11,405,173 | ) | |
$ | (8,094,635 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Basic – weighted shares outstanding | |
| 12,732,244 | | |
| 9,113,254 | | |
| 12,524,132 | | |
| 8,375,766 | |
Dilutive effect from shares authorized | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted – weighted shares outstanding | |
| 12,732,244 | | |
| 9,113,254 | | |
| 12,524,132 | | |
| 8,375,766 | |
| |
| | | |
| | | |
| | | |
| | |
Basic loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.20 | ) | |
$ | (0.17 | ) | |
$ | (0.91 | ) | |
$ | (0.97 | ) |
Diluted loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.20 | ) | |
$ | (0.17 | ) | |
$ | (0.91 | ) | |
$ | (0.97 | ) |
For the three and nine months ended September 30, 2022, 1,691,562 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:
| |
September 30, 2022 | | |
December 31, 2021 | |
Inventory – finished goods | |
$ | 3,916,569 | | |
$ | 137,647 | |
Inventory – merchandise | |
| 14,077 | | |
| 21,413 | |
Total | |
$ | 3,930,646 | | |
$ | 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:
| |
September 30, 2022 | | |
December 31, 2021 | |
Prepaid marketing expenses – current | |
$ | 313,000 | | |
$ | 313,000 | |
Prepaid marketing expenses – long-term | |
| 756,417 | | |
| 991,167 | |
Prepaid insurance | |
| 199,194 | | |
| - | |
Prepaid license and fees | |
| - | | |
| 3,395 | |
Inventory deposits | |
| 661,153 | | |
| 758,280 | |
Other prepaid expenses | |
| 116,413 | | |
| 76,312 | |
Total | |
$ | 2,046,177 | | |
$ | 2,142,154 | |
6. ACCRUED COMPENSATION
During the three month 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 September 30, 2022 accrued compensation primarily related to unpaid amounts related to the following
Chief Executive Officer transition.
On June 8, 2022, the Chief Executive Officer’s employment with
the Company ended. This individual continued to serve as a member of the Company’s Board of Directors as of September 30, 2022.
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. From June 30, 2022 through August 31, 2022, Elliot Savoie, the Company’s current Head of Corporate Development and Ventures,
served as interim Chief Financial Officer. On August 23, 2022, the Company engaged James Spellmire as a contractor to serve in an accounting
and finance role and, effective August 31, 2022, the Company’s Board of Directors appointed Mr. Spellmire to serve as Chief Financial
Officer and Secretary of the Company.
7. ACCRUED EXPENSES
Accrued expenses consist of the following at:
| |
September 30, 2022 | | |
December 31, 2021 | |
Sponsorship agreements | |
$ | 156,839 | | |
$ | 80,000 | |
Accrued credit card charges | |
| 85,328 | | |
| 39,563 | |
Other accrued expenses | |
| 142,841 | | |
| 93,303 | |
Total | |
$ | 385,008 | | |
$ | 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 range from $103,000 to $216,000 per agreement. The total expense relating
to these agreements for the three and nine month periods ended September 30, 2022 was ($142,000) and $224,000, respectively. During the
third quarter of 2022, in accordance with the Company’s cash preservation initiatives, the Company terminated one of its marketing
contracts, resulting in the reversal of $316,000 of expenses, in an effort to control its marketing expenses.
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.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
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 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. Shares of the
Company’s common stock 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 for the three month periods ended September 30, 2022 and 2021. Total equity-based compensation expense recognized related to these
units was $0 and $4,902,802 for the nine month periods ended September 30, 2022 and 2021, respectively.
In March 2021, the Company issued 313,000 Class F member 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 $234,750 for the three and nine month periods
ended September 30, 2022, respectively. Total equity-based compensation expense recognized related to these units was $78,250 and $182,583
for the three and nine month periods ended September 30, 2021, respectively.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
As of September 30, 2022, there was $1,069,417 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 member units, now common stock, described in the preceding paragraph for the periods subsequent to September 30,
2022 is as follows:
| |
Advertising and Marketing Expense | |
2022 | |
$ | 78,250 | |
2023 | |
| 313,000 | |
2024 | |
| 313,000 | |
2025 | |
| 313,000 | |
2026 | |
| 52,167 | |
| |
$ | 1,069,417 | |
Warrants
On December 17, 2021, in connection with the Company’s IPO, the
Company granted to the underwriters warrants to purchase up to 110,000 shares of common stock at $12.00 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 had 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 $0 and $1,658,485 for the three and nine month period ended September 30, 2022. During
the second quarter of 2022, these awards were fully vested and the shares of common stock underlying the awards had been delivered.
During the second quarter of 2022 the Company granted 47,800 restricted
stock units to employees of the Company, all of which vested and were delivered in the second quarter of 2022. Total equity-based compensation
expense related to these restricted stock units and shares was $0 and $213,380 for the three and nine month periods ended September 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 $0 and $285,530 for the three month and nine month periods ended September 30, 2022.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Restricted stock unit activity as of and during
the nine-month period ended September 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 September 30, 2022 | |
| - | | |
| - | |
Shares of Restricted Stock
During the nine-month period ended September 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 scheduled to vest 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 the grant of these shares of restricted stock was $2,303 and $12,442 for the three and nine month periods ended September 30,
2022, respectively. The total unrecognized equity-based compensation expense is $15,346 relating to the grant of these 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 and 66,666 unvested restricted stock awards were forfeited.
Total equity-based compensation expense related to these restricted stock units was $0 and $110,602 for the three and nine month periods
ended September 30, 2022, respectively.
Restricted stock activity as of and during the
nine-month period ended September 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 | |
| (66,666 | ) | |
| - | |
Outstanding at September 30, 2022 | |
| 6,666 | | |
| 1.17 | |
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 nine 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 nine month period ended September 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 and all options were subsequently forfeited. Total equity-based compensation expense related to the vested stock options
was $0 and $173,242 for the three and nine month periods ended September 30, 2022, respectively.
Effective September 1, 2022, the Company entered
into an Employment Transition and Consulting Agreement with the previous interim Chief Financial Officer. Pursuant to the Transition Agreement
and Consulting Agreement, the Company granted a stock option to purchase 69,892 shares of the Company’s common stock at a per share
exercise price equal to $3.04 (the fair market value of the Company’s common stock on the date of grant). The stock option will
vest with respect to 3,584 shares on the last calendar day of September, October and November of 2022, and the balance of the stock option
will vest in monthly installments as nearly equal as possible (approximately 6,571 shares each) on the last calendar day of each month
from December 2022 through August 2023.
Stock option activity as of and during the nine-month
period ended September 30, 2022 was as follows:
| |
Number of Options | | |
Weighted Average Exercise Price | |
Outstanding at December 31, 2021 | |
| - | | |
| - | |
Granted | |
| 701,893 | | |
| 3.37 | |
Exercised | |
| - | | |
| - | |
Forfeited | |
| (627,001 | ) | |
| 3.42 | |
Outstanding at September 30, 2022 | |
| 74,892 | | |
| 3.02 | |
| |
| | | |
| | |
Exercisable at September 30, 2022 | |
| 5,251 | | |
| 2.96 | |
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 NYSE American 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 September 30, 2022. No income tax expense or benefit was recorded for the three and nine month periods ended September 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 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 nine month periods ended September 30, 2022, and 2021, substantially all 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 national distributor customers that operate in several markets. For the three and nine month periods ended September
30, 2022, approximately 70% of the Company’s wholesale revenue came from these two customers. As of September 30, 2022 and
December 31, 2021, these customers accounted for approximately 53% of accounts receivable.
12. COMMITMENTS AND CONTINGENCIES
During March 2021, the Company entered into two license agreements
with Class F members 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 member 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 $260,000 for
the three and nine month periods ended September 30, 2022. The net expense was $150,000 and $350,000 for the three and nine month periods
ended September 30, 2021.
The estimated expense for the periods ending December 31 subsequent
to September 30, 2022 is as follows:
| |
Advertising and Marketing Expense | |
2022 | |
$ | 120,000 | |
2023 | |
| 480,000 | |
2024 | |
| 480,000 | |
2025 | |
| 480,000 | |
2026 | |
| 80,000 | |
| |
$ | 1,640,000 | |
Sponsorship Agreements
The estimated
expense for the sponsorship agreements as described in Note 7 for the periods ending December 31 subsequent to September 30, 2022 is as
follows:
| |
Advertising and Marketing Expense | |
2022 | |
$ | 129,915 | |
2023 | |
| 423,926 | |
2024 | |
| 160,147 | |
| |
$ | 713,988 | |
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 September
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
$2,218 and $19,680 for the three and nine month periods ended September 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, prior to the Company’s
IPO, 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 owned by Damian Novak, who is the Executive Chairman of the Company and a manager and significant member
of Nechio and Novak, LLC, which was the majority shareholder of the Company prior to the Company’s IPO. 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 significant shareholder of the Company at September 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 in the wine industry due to common ownership, 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 nine month periods
ended September 30, 2022, the Company recognized $0 and $297,224 in service revenue related to this agreement. In September 2022,
the Company entered into a new distribution agreement with Appellation Brands, LLC, to purchase approximately $195,000 of wine inventory
and sell directly to our customers. Sales associated with a the new agreement are recorded within wholesale revenue beginning September
1, 2022. Total sales for the three and nine months ended September 30, 2022 associated with the new agreement was $15,185.
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 nine month period ended September 30, 2022, the Company recognized $75,000 and $225,000, 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 September 30, 2022 and December 31, 2021:
|
|
2022 |
|
|
2021 |
|
Rabbit Hole Equity, LLC |
|
$ |
111,545 |
|
|
$ |
111,545 |
|
Appellation Brands, LLC |
|
|
- |
|
|
|
88,727 |
|
|
|
$ |
111,545 |
|
|
$ |
200,272 |
|
Amounts due from related parties were as follows
as of September 30, 3022 and December 31, 2021:
|
|
2022 |
|
|
2021 |
|
Damian Novak |
|
$ |
- |
|
|
$ |
325,346 |
|
Due from employees |
|
|
162,163 |
|
|
|
- |
|
TC Healthcare, LLC |
|
|
- |
|
|
|
5,177 |
|
Kratos Advisory, LLC |
|
|
45,477 |
|
|
|
45,477 |
|
|
|
$ |
207,640 |
|
|
$ |
376,000 |
|