ITEM
1. BUSINESS.
Overview
We
are a premier producer of low carb, low calorie, premium wines in the United States. Founded in 2019, Fresh Vine Wine brings an
innovative “better-for-you” solution to the wine market. Offering bold, crisp, and creamy wines that embody health, warmth,
and a deeper connection to wellness and an active lifestyle, we offer a unique and innovative collection of today’s most popular
varietals. We currently sell seven proprietary varietals: Cabernet Sauvignon, Pinot Noir, Chardonnay, Sauvignon Blanc, Rosé, Sparkling
Rosé, and a limited Reserve Napa Cabernet Sauvignon. All varietals are produced and bottled in Napa, California.
Our
wines are exclusively focused on the affordable luxury segment, the fastest growing segment of the wine market according to IWSR, addressing
the largest wine drinking segment in the $340 billion world-wide wine market, in which United States consumers spent $53 billion
in 2020 for wine produced in the U.S., with an additional $16 billion spent on imported wines in the U.S. Importantly, our
wines stand out in the luxury wine market because they address the preferences of our target demographic of consumers with moderate to
affluent income and with a desire to pursue a healthy and active lifestyles for a low-calorie, low-carb, gluten-free product, while
concurrently delivering the quality and taste profile of a premium wine brand. This allows us to position our wines in the rapidly emerging
“better for you” segment that seeks to appeal to consumers’ emphasis on a healthy lifestyle. While we believe our product
offerings have mass appeal among all consumers of affordable luxury wines, we have positioned the Fresh Vine Wine brand as a complement
to the healthy and active lifestyles of younger generation wine consumers.
Our
core wine offerings are priced strategically to appeal to mass markets and sell at a list price between $15 and $25 per bottle — price
points that support a premium product strategy, appeal to mass markets, and allow us to offer significant value across all consumer distribution
channels. Given the Fresh Vine Wine brand’s celebrity backing, “better-for-you” appeal, and overall product quality,
we believe that it presents today’s consumers with a unique value proposition within this price category. We have partnered
with celebrities Nina Dobrev and Julianne Hough to promote our wines and our brand. Additionally, Fresh Vine Wine is one of very few
products available at this price point that includes a renowned Napa Valley winemaker, Jamey Whetstone.
We
conducted an international search to find an accomplished winemaker who shared the Fresh Vine Wine vision and have entered into an agreement
with Mr. Whetstone, an established, award-winning winemaker from Napa Valley, to develop our wines. Consulting with the Fresh Vine
Wine brand compliments Mr. Whetstone’s lifestyle as an active surfer, skier, and all-around outdoorsman. His passion
for winemaking is mirrored by his passion for adventure, and he too wanted to create a better-for-you wine that customers can be
proud to bring to the table for any occasion. We believe it is unique for a high-profile winemaker like Mr. Whetstone to attach
his name and reputation to a brand in the better-for-you wine segment, and we believe that Mr. Whetstone’s association
with our brand increases consumer awareness and speaks to the quality of our varietals.
As
a testament to this quality, in September 2022 we announced that The Tasting Panel Magazine and The Somm Journal, two highly regarded
wine publications, had awarded Fresh Vine Wine’s California Cabernet Sauvignon, 2020 Vintage, a 92 Rating (out of 100). This is
the second of our varietals to receive a 92 Rating during 2022, with our Limited Reserve Napa Cabernet Sauvignon receiving a Rating of
92 from James Suckling, regarded as one of the world’s most influential wine critics, in July. Also, in July 2022, our 2020
California Pinot Noir and California 2021 Rosé varietals were awarded Bronze Medals by TEXSOM. In 2022, Fresh Vine Wine varietals
were recognized by various industry authorities with a total of 16 separate awards.
Our wines are distributed across the
United States and Puerto Rico through wholesale, retail, and direct-to-consumer (DTC) channels. We are able to conduct
wholesale distribution of our wines in all 50 states and Puerto Rico, and we are licensed to sell through DTC channels in 43 states.
As of December 31, 2022, we hold active relationships with wholesale distributors in 48 states, unchanged from September 30, 2022,
and currently have additional states in which licensing is pending. We are actively working with leading distributors, including
Southern Glazer’s Wine & Spirits (SGWS), Johnson Brothers, and Republic National Distributing Company (RNDC), to
expand our presence across the contiguous United States.
Our
DTC channel enables us to sell wine directly to the consumer at full retail prices. Although these prices are consistent with our suggested
retail prices (SRPs), we incur two mark-ups of approximately 30% each for our distributor and retail partners when selling wine
through our wholesale distribution channel, therefore directly reducing our revenue and margins. Because the DTC channel provides significantly
higher margins than sales generated through wholesale distributors, we intend to further invest in DTC capabilities to ensure it remains
an integral part of our business. We also believe continued investment in DTC technologies and capabilities are critical to maintaining
an intimate relationship with our customers, which is becoming increasingly digital. In addition, we also sell through alternative DTC
sales platforms, such as ecommerce marketplaces, product aggregators and virtual distributors, all of which have experienced significant
recent growth, as well as sales through home delivery services.
We
do not own or operate any vineyards. Instead of cultivating our own grapes, we currently use Fior di Sole, a third-party supplier,
to source grapes with the help of our winemaker. This allows us to leverage our supplier’s broad network of vendor relationships
and purchasing power to negotiate favorable cost structures. Because our supplier procures product inputs on our behalf, including bulk
juice, we do not currently engage directly with grape growers (“growers”) or bulk distributors of juice (“bulk distributors”).
As a result, we have limited front-end supply chain visibility. This is a strategy by design that we believe provides us with access
to diversified growers and large distributors, which reduces our reliance upon any single vendor and mitigates our exposure to droughts,
wildfires, spoilage, contamination and other supply side risks common to the wine industry.
Our
supplier procures grapes and/or juice for our existing varietals from California. This juice is then stored in Napa until time of production,
at which point it is made available for blending and bottling processes at our Napa Valley production and bottling facility. This is
significant in that both blending and bottling must occur within Napa to be considered produced and bottled in Napa — a
distinctive product attribute that adds significant production value to our brand in the eyes of consumers. However, wine produced by
the Company will only be labelled with a Napa Valley appellation of origin if it is produced from grapes grown in the Napa Valley American
Viticultural Area (AVA). The labels for the Company’s core wines identify California as the appellation of origin.
Our
asset-light operating model allows us to utilize third-party assets, including land and production facilities. This approach
helps us mitigate many of the risks associated with agribusiness, such as isolated droughts or fires. Because we source product inputs
from multiple geographically dispersed vendors, we reduce reliance on any one vendor and benefit from broad availability/optionality
of product inputs. This is particularly important as a California-based wine producer where droughts or fires can have an extremely
detrimental impact to a company’s supply chain if not diversified.
Our Strengths
Differentiated
Product Offerings — Premium, Napa Valley Wines within the “Better-For-You” Segment
We
offer wines that are differentiated from those sold by other wine producers operating within the better-for-you segment of the affordable
luxury category based on our premium quality, our association with an award-winning winemaker and our Napa Valley based state of
the art production.
| ● | Premium
Wines. Premium wines are differentiated from other varietals based on consumers’
perception and expectation that they are of exceptional quality. We have developed a proprietary
winemaking process that produces superior quality and taste in the affordable luxury wine
category based on consumer preferences data, direct consumer feedback and careful market
research. Importantly, our current wines stand out in the luxury wine market because they
address consumers’ growing preference for a less-calorie, less-carb, less sugar and
gluten-free option, while concurrently delivering the quality and taste profile of a
premium wine brand. |
| ● | Award-Winning Winemaker. We
conducted an international search to find an accomplished winemaker who shared the Fresh
Vine Wine vision and have entered into an agreement with Jamey Whetstone, an established,
award winning winemaker from Napa Valley, to develop our wines. Consulting with the Fresh
Vine Wine brand compliments Mr. Whetstone’s lifestyle as an active surfer, skier,
and all-around outdoorsman. His passion for winemaking is mirrored by his passion for
adventure, and he too wanted to create a better-for-you wine that customers can be proud
to bring to the table for any occasion. We believe it is unique for a high-profile winemaker
like Mr. Whetstone to attach his name and reputation to a brand in the better-for-you wine
segment, and we believe that Mr. Whetstone’s association with our brand increases
consumer awareness and speaks to the quality of our varietals. |
| ● | Produced
and Bottled in Napa Valley. Importantly, we are able to market
our wines as being produced and bottled in Napa Valley, California. We believe that this
designation impacts consumption decisions of many wine drinkers, as Napa Valley-produced wines
are considered by many to be a sign of superior production quality. However, wine produced
by the Company will only be labelled with a Napa Valley appellation of origin if it is produced
from grapes grown in the Napa Valley American Viticultural Area (AVA). The labels for the
Company’s existing wines identify California as the appellation of origin. Currently,
this only applies to our Reserve wine. |
Capital-Efficient and
Scalable Operational Structure
We
have strategically structured our organization and operations to minimize our capital investment requirements while maintaining flexibility
to rapidly scale our production capabilities to meet consumer demands. We do this by utilizing our internal capabilities while leveraging
a network of reputable third-party providers with industry experience and expertise that we use to perform various functions falling
outside our internal core competencies.
Production
and Bottling on an Alternating Proprietorship Basis
We
contract with Fior di Sole, an industry leading packaging innovation and wine production company based in Napa Valley, California,
to serve as a “host winery” and to occupy a portion of its production and warehouse facility and utilize its production equipment
on an alternating proprietorship basis. Under this arrangement, we use capacity at Fior di Sole’s production facility at times
mutually convenient to us and Fior di Sole to produce and bottle our wines for an initial set-up fee and a recurring monthly fee.
Fior di Sole is responsible for keeping its production equipment in good operating order. When the alternating Premises is operated by
or used on behalf of our Company, it is operated pursuant to our federal basic permit and California winegrower’s license. Under
the agreement, we are solely responsible for managing and conducting our own winemaking activities and we make all production decisions
relating to our wines. However, we may request the use of Fior di Sole’s personnel to perform crush, fermentation, blending, cellar,
warehousing, barrel topping and/or bottling services for additional fees. This arrangement has allowed us to commence our operations
and build the Fresh Vine Wine brand without having to incur the considerable overhead costs involved with the purchase or full-time lease
of a production facility. The term of the agreement commenced in July 2019, had an initial term of one year and automatically renews
for additional one-year terms unless either party provides 90 days written notice to the other of its intent to terminate at
the end of the then current term. Either party may terminate the agreement upon 30 days written notice if the other party is in
violation of any law or regulation that renders it impossible to perform its obligations under the agreement for a period of greater
than 30 days, makes an assignment for the benefit of creditors or files for bankruptcy protection, or is in material breach of its
obligations under the agreement and such failure to perform is not cured within 30 days of written notice from the other party.
We believe we have sufficient capacity under our current agreement or with alternative suppliers to increase production to meet increased
consumers’ demand for our wines.
Fior
di Sole also provides us with capacity juice and blends, finishes, bottles, stops, labels and packages our wine, which reduces our internal
overhead expenses and allows us to benefit from that company’s increased purchasing power. Fior di Sole provides these services
on a purchase order basis, which purchase orders are subject to the parties’ mutual agreement and governed by a Custom Winemaking
and Bottling Agreement. This agreement outlines the schedule for placing orders, the responsibility and schedule for delivery of production
materials, procedures for establishing the wine bottling date and delivery date. We are required to remit 20% of the amount due for wine
produced, bottled and packaged pursuant to this agreement upon our submission of a purchase order. The payment advance is used by Fior
Di Sole to reserve or procure materials on our behalf with additional vendors for bottles, boxes, corks, labels, juice, and other inputs.
We, or our winemaker on our behalf, oversees the production at the winery approves all components and aspects of the production process.
The balance of the amount due for wine produced, bottled and packaged (the remaining 80%) is due following our quality review and acceptance
of the finished product.
The
ability and willingness of Fior di Sole to supply and provide services to us pursuant to purchase orders delivered under the Custom Winemaking
and Bottling Agreement may be affected by competing orders placed by other companies, the demands of those companies or other factors.
If Fior di Sole becomes unable or unwilling to supply and provide services to us, we believe we can obtain comparable supplies and services
from alternative suppliers. However, there can be no assurance that alternative suppliers will be available when required on terms that
are acceptable to us, or at all, or that alternative suppliers will allocate sufficient capacity to us in order to meet our requirements.
Licensing,
Tax and Regulatory Compliance
We
have contracted with a third-party to manage our regulatory licensing and compliance activities. We maintain licenses that enable
us to distribute our wine to all 50 states, and to sell direct-to-consumer from our e-commerce website in 48 states. We currently
utilize software tools available to the industry and work with our license compliance service provider to navigate and manage the complex
state-by-state tax and other regulations that apply to our operations in the beverage alcohol industry. This has enabled us to expand
our operations and grow our revenue while reducing the administrative burden of tax compliance, reporting and product registration.
Through
selective recruiting and hiring, we have also built these capabilities internally; we increasingly perform these activities in-house.
This allows us to operate with greater control and responsiveness over regulatory licensing and compliance requirements, ensuring that
our brand and each of its underlying varietals is properly licensed across state and federal levels.
We
believe that leveraging our network of supply chain and compliance partners, consultants and service providers enables us to avoid potential
costly and lengthy delays on nearly every aspect of our business, from grapes to packaging materials, and will accelerate our return
on capital due to our limited need to procure expensive equipment, real estate, and other capital-intensive resources. We believe we
are well-positioned to
Sales
and Marketing Strategy
We
believe we bring a unique sales and marketing approach that will increase the visibility of our brand and product offerings to our target
consumers.
Omni-Channel Marketing
Approach
Today’s
consumers interact with brands through many channels, from traditional media to social media and other digital channels, and through
various in-person and online purchasing methods. In order to build the visibility of our brand and create a grassroots consumer
following to support our DTC distribution channel, we have employed a strategic omnichannel marketing approach that we believe allows
us to engage with our target consumers on their terms to expand and deepen their recognition of our brand. In addition to other mass
market promotional activities, our marketing strategy also utilizes modern techniques, efficiency measures, and channels not commonly
seen in the wine industry, including a combination of social media lifestyle and wine influencer activities, through which brand ambassadors
or “influencers” may conduct promotional activities through the Company’s or their own social media channels including,
but not limited to, Twitter, Facebook, Instagram, Snapchat, YouTube and Pinterest, among others.
Celebrity-based Affinity
Recent years
have seen a rise in the creation of celebrity owned and/or endorsed alcoholic beverage brands, which utilize fans’ affinity towards
celebrities to promote their product offerings and drive sales. We are positioned to take advantage of this trend based on the popularity
of Nina Dobrev and Julianne Hough, two of our co-founders, each of whom served on our board of directors prior to our initial public
offering.
In
March 2021, we entered into five-year license agreements with Ms. Dobrev and Ms. Hough, who have a collective following of
approximately 31 million people on their Instagram social media platforms alone, pursuant to which they actively promote our business
and varietals of wine. Under these license agreements, each has also granted us a license to use her pre-approved name, likeness,
image, and other indicia of identity, as well as certain content published by her on her social media or other channels, on and in conjunction
with the sale and related pre-approved advertising and promotion of our varietals of wine and marketing materials. Ms. Dobrev and
Ms. Hough have agreed, subject to certain exceptions, not to grant any similar license or render services of any sort on behalf of or
in connection with any party in the wine category anywhere in the world during the term of her agreement, other than with respect to
Company. The license agreements are scheduled to expire in March 2026. However, the license agreements to provide that each of Ms.
Dobrev and Ms. Hough will have the right to terminate her agreement if as of the end of calendar year 2023, we have not achieved at least
$5.0 million in EBITDA in either fiscal 2022 or fiscal 2023. See “Certain Relationships and Related Party Transactions — License
Agreements with Nina Dobrev and Julianne Hough.”
We
also enjoy support from several other celebrity influencers who have supported our brand without any agreement or obligation to do so.
Together with celebrity brand ambassadors, our marketing efforts have produced highly visible content, including multiple billboards
on the Sunset Strip in Los Angeles, promotions in connection with the opening of Resort World Casino in Las Vegas, product placements
in major sports venues and coverage in various print and television media.
Professional
Sports Sponsorships
We
have previously entered into sponsorship agreements with professional sports organizations and venues spanning all four major United States
professional sports leagues, which support our commitment and outreach to consumers focused on active and healthy lifestyles, including
agreements with the following organizations and/or their affiliates:
| ● | Washington
Capitals (NHL) and Washington Wizards (NBA) |
| ● | Washington
Commanders (NFL) |
| ● | Los
Angeles Chargers (NFL) |
These
sponsorship arrangements generally provide us with advertising placements at the stadiums and arenas during sporting and concert events,
as well as specified media and other advertising and promotional benefits, in exchange for our payment of annual sponsorship fees.
We
completed our sponsorship agreement with the Los Angeles Chargers in the fourth quarter of 2022, intend to reduce or cancel the remaining
sponsorships and do not anticipate pursuing new professional sports sponsorships as part of our marketing and brand awareness initiatives
going forward since our brand has reached national retail distribution.
Labelling
and Innovative Packaging Initiatives
We
believe wine labelling can have a big impact on consumers’ purchasing practices. We conduct market research to validate the consistency
of our wine labels with our brand narrative. Packaging also continues to be a key driver of brand perception, and we are exploring “active
lifestyle packaging” alternatives to traditional bottling that provides an opportunity for our customers to enjoy Fresh Vine Wines
in non-traditional settings now and for future years, including bottles with screw-off caps, aluminum cans, and smaller
size bottles and cans that can be taken on-the-go and are ideal for in-store point of purchase sales.
Engagement
with Industry Experienced Third Party Vendors
In
October 2022, we executed a strategy that is aimed at amplifying cash preservation initiatives while continuing to focus on accelerating
sales growth. The plan resulted in the termination of ten employees on the Company’s internal sales team and the engagement by
the Company of a third party sales and distribution management company positioned to more efficiently and effectively facilitate current
and future product sales. In addition, the Company engaged a reputable third party vendor to manage marketing initiatives and drive growth
primarily within the Company’s Direct-to-Consumer sales channel.
Consulting
Agreement with Whetstone Consulting
On
June 12, 2019, we entered into a consulting agreement with Whetstone Consulting, through which our winemaker, Jamey Whetstone, does
business, which agreement was subsequently amended on May 15, 2020, amended and restated on March 16, 2021 and further amended
and restated on April 13, 2022 (the “Consulting Agreement”).
As
amended and restated, the Consulting Agreement provides the Company with ownership and intellectual property protections for Inventions
(as defined therein) conceived, made or reduced to practice by Whetstone Consulting that relate to the services provided to the Company.
In addition, Whetstone Consulting has agreed, for a period of one year following termination of the Consulting Agreement, not to directly
or indirectly engage or invest in, be employed by, lend credit to, receive compensation from or render services or advice to any person
engaged in a Competing Business located within a twelve-mile radius of a specified Napa, California address. For such purposes,
a “Competing Business” means any business relating to the development, manufacture, marketing and distribution of any product
that competes with any low calorie and/or low sulfite wine products sold or substantially under development by the Company during the
one-year restricted period. The Consulting Agreement does not restrict the acquisition, operation, management, consulting, or other
commercial activity by Whetstone Consulting, directly or indirectly in or with a winery, brewery, spirits, or other alcoholic beverage
industry business not concerning “low calorie” or “low sulfite” products or services. The Consulting Agreement
also contains non-solicitation restrictions applicable to clients, customers, suppliers, licensors, and employees for a period of
one year follow the agreement’s termination, subject to certain exceptions.
Under
the Consulting Agreement, we pay Whetstone Consulting a base consulting fee of $5,000 per month. In addition, the Company has agreed
to pay Whetstone Consulting additional commission-based compensation subject to satisfaction of identified milestones. Specifically,
the Company will pay Whetstone Consulting a $5,000 commission for each non-overlapping 30-day period in which the Company sells
Fresh Vine Wine Products to a minimum threshold number of separate True Food Kitchen locations for sale to customers from their menus.
For such purposes, “Fresh Vine Wine Products” means Client’s wine products developed with the assistance of Whetstone
Consulting pursuant to the Services. Whetstone Consulting will also be entitled to receive a one-time $100,000 commission upon the
Company selling certain volumes of Fresh Vine Wine Products within any given non-overlapping 30-day period to at least a minimum
threshold number of locations of a single fast casual dining restaurant chain, and a one-time $40,000 commission upon the Company
selling certain volumes of Fresh Vine Wine Products within any given non-overlapping 30-day period to at least a minimum threshold
number of separate fine dining establishments.
The
Consulting Agreement has an initial one year term expiring April 13, 2023, but renews automatically for successive one year periods
unless either party provides advance notice of non-renewal to the other. Whetstone Consulting may terminate the Consulting Agreement
at any time by giving us written notice at least 30 days prior to the termination date. We may terminate the Consulting Agreement
at any time.
As
partial compensation for Whetstone Consulting’s services to the Company pursuant to the Company’s original consulting agreement
with Whetstone Consulting, the Company issued to Whetstone Consulting 619,343 shares of the Company’s common stock (the “Whetstone
Shares”). If the Company terminates the Consulting Agreement for “cause,” as such term is defined therein, and such
cause arises or relates to an act or acts directly related to Whetstone Consulting’s ownership interest in the Company, the Company
may elect to purchase all Whetstone Shares then held by Whetstone Consulting at their fair market value.
Related
party services
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 year ended December 31, 2022, the Company recognized $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 the new agreement are recorded within wholesale
revenue beginning September 1, 2022. Total sales for the year ended December 31, 2022 associated with the new agreement was $25,863. After
our sales of the Appellation Brands, LLC wine inventory has been completed, our affiliation with Appellation Brands, LLC is expected
to cease altogether.
Our Strategy
for Growth
We
expect to deliver meaningful increases in stockholder value by executing the following strategies to gain brand and product visibility
and increase sales and market share:
| ● | Continuing
to establish brand visibility, awareness and credibility through mass and micro marketing
tactics and association with other strong brands, including celebrities, influencers and
top tier winemakers, among others. These will range from organic to paid media. |
| ● | Continuing
to build grass roots demand through high visibility sales and marketing activities that promote
high margin DTC and home delivery sales channels, including continued investment in DTC technologies
and capabilities that are critical to maintaining an intimate relationship with consumers. |
| ● | Expanding
our U.S.-based wholesale and retail distribution network by leveraging our product and
brand differentiation, the emerging better-for-you category and to provide distribution
partners with a differentiated value proposition. |
| ● | Pursuing
distribution of our wines internationally. |
| ● | Embracing
disruptive technologies and customer trends, and exploring and expanding partnerships with
other organizations investing in customer-centric technologies, such as home delivery,
third party wine clubs and evolving alternative DTC purchasing methods, such as ecommerce
marketplaces, product aggregators and virtual distributors. |
| ● | Expanding
and strengthening key supply chain relationships, including with current and future juice
suppliers, bottlers, materials suppliers, and dry goods suppliers, to establish a diversified
portfolio of partners across all areas of our supply chain and to maintain effective capital
management. |
| ● | Continuing
to add to the Fresh Vine Wine product portfolio by developing new varietals that fit within
the better-for-you category and are consistent with our existing brand. |
| ● | Continuing
to invest in packaging innovation, including “active lifestyle packaging” alternatives
to traditional bottling that provides an opportunity for our customers to enjoy Fresh Vine
Wines in non-traditional settings. |
| ● | Capitalizing
on upward price mobility — While many other wine companies are experiencing
downward price pressure to enter the coveted under $30 category, our wines currently sell
for suggested retail prices ranging from $15 to $25 per bottle. |
| ● | Increasing
our on-premises sales effort. COVID-19 severely limited on-premise sales across
the industry. We believe as restrictions continue to loosen, there is significant opportunity
to capture market share and available shelf space. |
| ● | Developing
additional wine brands by replicating the strategies used to build the Fresh Vine Wine brand
via business service line agreements. |
With
over 500,000 licensed retail accounts (according to Neilson) in the United States, there remains ample opportunity to continue broadening
distribution of our wines as well as increasing the volume of wine sold to existing accounts.
Competition
The
wine industry and alcohol markets generally are intensely competitive. Our wines compete domestically and internationally with other
premium or higher quality wines produced in Europe, South America, South Africa, Australia and New Zealand, as well as North America.
Our wines compete on the basis of quality, price, brand recognition and distribution capability. The ultimate consumer has many choices
of products from both domestic and international producers. Our wines may be considered to compete with all alcoholic and non-alcoholic beverages.
At
any given time, there are more than 400,000 wine choices available to consumers, differing with one another based on vintage, variety
or blend, location and other factors. Accordingly, we experience competition from nearly every segment of the wine industry. Additionally,
some of our competitors have greater financial, technical, marketing and other resources, offer a wider range of products, and have greater
name recognition, which may give them greater negotiating leverage with distributors and allow them to offer their products in more locations
and/or on better terms than us. Nevertheless, we believe that our brand offerings, scalable infrastructure and relationships with one
of the largest domestic distributors will allow us to continue growing our business.
IT Systems
We
rely on various IT systems, owned by us and third parties, to effectively manage our sales and marketing, accounting, financial, legal
and compliance functions. Our website is hosted by a third party, and we rely on third-party vendors for regulatory compliance for
order processing, shipments, and e-commerce functionality. We believe these systems are scalable to support our growth plans. We recognize
the value of enhancing and extending the uses of information technology in our business.
Regulatory
Matters
Regulatory
framework
We,
along with our contract growers, producers, manufacturers, distributors, retail accounts and ingredients and packaging suppliers, are
subject to extensive regulation in the United States by federal, state and local government authorities with respect to registration,
production processes, product attributes, packaging, labelling, storage and distribution of wine and other products we make.
We
are also subject to state and local tax requirements in all states where our wine is sold. We monitor the requirements of relevant jurisdictions
to maintain compliance with all tax liability and reporting matters. In California, we are subject to a number of governmental authorities,
and are also subject to city and county building, land use, licensing and other codes and regulations.
Alcohol-related regulation
We
are subject to extensive regulation in the United States by federal, state and local laws regulating the production, distribution
and sale of consumable food items, and specifically alcoholic beverages, including by the TTB and the FDA. The TTB is primarily
responsible for overseeing alcohol production records supporting tax obligations, issuing wine labelling guidelines, including grape
source and bottle fill requirements, as well as reviewing and issuing certificates of label approval, which are required for the sale
of wine through interstate commerce. We carefully monitor compliance with TTB rules and regulations, as well as the state law of each
state in which we sell our wines. In California, where most of our wines are made, we are subject to alcohol-related licensing and
regulations by many authorities, including the ABC. ABC agents and representatives investigate applications for licenses to sell
alcoholic beverages, report on the moral character and fitness of alcohol license applicants and the suitability of premises where sales
are to be conducted and enforce California alcoholic beverages laws. We are subject to municipal authorities with respect to aspects
of our operations, including the terms of our use permits. These regulations may limit the production of wine and control the sale of
wine, among other elements.
Employee
and occupational safety regulation
We
are subject to certain state and federal employee safety and employment practices regulations, including regulations issued pursuant
to the U.S. Occupational Safety and Health Act (“OSHA”), and regulations governing prohibited workplace discriminatory
practices and conditions, including those regulations relating to COVID-19 virus transmission mitigation practices. These regulations
require us to comply with manufacturing safety standards, including protecting our employees from accidents, providing our employees
with a safe and non-hostile work environment and being an equal opportunity employer. In California, we are also subject to employment
and safety regulations issued by state and local authorities.
Environmental
regulation
As
a result of our wine production activities, we and certain third parties with which we work are subject to federal, state and local environmental
laws and regulations. Federal regulations govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment,
handling and storage and disposal of materials and wastes. State environmental regulations and authorities intended to address and oversee
environmental issues are largely state-level analogues to federal regulations and authorities intended to perform the similar purposes.
In California, we are also subject to state-specific rules, such as those contained in the California Environmental Quality Act,
California Air Resources Act, Porter-Cologne Water Quality Control Act, California Water Code sections 13300-13999 and
Title 23 of the California Administrative Code and various sections of the Health and Safety Code. We are subject to local environmental
regulations that address a number of elements of our wine production process, including air quality, the handling of hazardous waste,
recycling, water use and discharge, emissions and traffic impacts.
Labelling
regulation
Many
of our wines are identified by their appellation of origin, which are among the most highly regarded wine growing regions in the world.
An appellation may be present on a wine label only if it meets the requirements of applicable state and federal regulations that seek
to ensure the consistency and quality of wines from a specific territory. These appellations designate the specific geographic origin
of most or all (depending on the appellation) of the wine’s grapes, and can be a political subdivision (e.g., a country, state
or county) or a designated viticultural area. The rules for vineyard designation are similar. Although we expect that most of our labels
will maintain the same appellation of origin from year to year, we may choose to change the appellation of one or more of our wines from
time to time to take advantage of high-quality grapes in other areas or to change the profile of a wine.
Privacy
and security regulation
We
collect personal information from individuals. Accordingly, we are subject to several data privacy and security related regulations,
including but not limited to: U.S. state privacy, security and breach notification laws; the GDPR; and other European privacy laws
as well as privacy laws being adopted in other regions around the world. In addition, the FTC and many state attorneys general are interpreting
existing federal and state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security
of information about individuals. Certain states have also adopted robust data privacy and security laws and regulations. For example,
the CCPA, which took effect in 2020, imposes obligations and restrictions on businesses regarding their collection, use, and sharing
of personal information and provides new and enhanced data privacy rights to California residents, such as affording them the right to
access and delete their personal information and to opt out of certain sharing of personal information. In response to the data privacy
laws and regulations discussed above and those in other countries in which we do business, we have implemented several technological
safeguards, processes, contractual third-party provisions, and employee trainings to help ensure that we handle information about
our employees and customers in a compliant manner. We maintain a global privacy policy and related procedures, and we train our workforce
to understand and comply with applicable privacy laws.
Intellectual
Property
We
strive to protect the reputation of our wine brand. We establish, protect and defend our intellectual property in a number of ways, including
through employee and third-party nondisclosure agreements, copyright laws, domestic and foreign trademark protections, intellectual
property licenses and social media and information security policies for employees. We have been granted three (3) trademark registrations
in the United States for FRESH VINE®, FRESH VINE (Stylized)®, and our FV Logo®, and
numerous trademark registrations in other countries for the FRESH VINE mark, and we have filed, and expect to continue to file, trademark
applications seeking to protect any newly-developed wine brands. We have also been granted a copyright registration in the first
version of our website located at www.freshvine.com. Information contained on or accessible through our website is not incorporated
by reference in or otherwise a part of this report. As a copyright exists in a work of art once it is fixed in tangible medium, we intend
to continue to file copyright applications to protect newly-developed works of art that are important to our business.
We
also rely on, and carefully protect, proprietary knowledge and expertise, including the sources of certain supplies, formulations, production
processes, innovation regarding product development and other trade secrets necessary to maintain and enhance our competitive position.
Seasonality
There
is a degree of seasonality in the growing cycles, procurement and transportation of grapes. The wine industry in general tends to experience
seasonal fluctuations in revenue and net income, with lower sales and net income during the quarter spanning January through March and
higher sales and net income during the quarter spanning from October through December due to the usual timing of seasonal holiday buying.
As our operations expand, we expect that we will be impacted by the seasonality experienced in the wine industry generally.
Employees
As
of December 31, 2022, we had approximately eight full-time employees. All of our employees are employed in the United States.
None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship
with our employees to be good.
ITEM
1A. RISK FACTORS.
Our
business involves a number of challenges and risks. In addition to the other information in this report, you should consider carefully
the following risk factors in evaluating us and our business. The risks described below are not the only ones that we face. Additional
risks not presently known to us or that we currently deem immaterial may also affect our business, financial condition, operating results,
or prospects. In assessing these risks, you should also refer to the other information contained in this report, including our financial
statements and related notes.
Risks
related to our company and our business.
We
have a limited operating history and have generated limited revenue to date.
Our
company was recently founded, and to date we have engaged primarily in finalizing our business plan and establishing the corporation
and other formalities necessary to begin operations. Accordingly, we have a very limited operating history on which to base an evaluation
of our business and prospects. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered
by companies in their early stage of development, particularly companies in new and evolving markets such as ours. The risks include,
but are not limited to, an evolving business model and the management of growth and product development. To address these risks, we must,
among other things, implement and successfully execute our business strategy and other business systems, respond to competitive developments,
and attract, retain and motivate qualified personnel. We cannot assure you that we will be successful in addressing the risks we may
encounter, and our failure to do so could have a material adverse effect on our business, prospects, financial condition and results
of operations.
We
have generated very limited revenues to date, including revenues of $2,860,001 and $1,700,207 during fiscal 2022 and fiscal 2021, respectively.
We have incurred net losses of $15.20 million and $9.97 million during fiscal 2022 and 2021, respectively. We had an accumulated deficit
of $15.82 million and total stockholders’ equity of $5.61 million at December 31, 2022. We may never generate material revenues
or achieve profitability.
We
have not generated profits from operations to date. The success and longevity of our company will depend on our ability to generate profits
from future operations or obtain sufficient capital through financing transactions to meet our business obligations.
The report of our independent registered public
accounting firm on our financial statements for the fiscal year ended December 31, 2022 included an explanatory paragraph indicating that
there is substantial doubt as to our ability to continue as a going concern for twelve months from the financial statement issuance date.
We incurred net losses of $15.1 million and $9.97 million during fiscal 2022 and 2021, respectively. Our cash balance at December 31,
2022 was $2.1 million. On March 14, 2023, we completed a subscription rights offering of common stock and warrants to purchase common
stock in which we received aggregate gross proceeds of approximately $3.14 million, before deducting dealer-manager fees and offering
expenses. Our ability to continue as a going concern will be determined by our ability to generate sufficient cash flow to sustain our
operations and/or raise additional capital in the form of debt or equity financing.
We
need to hire additional executive officers and other personnel.
Our
executive management is currently comprised of an Chief Executive Officer and a Chief Financial Officer, both of whom are serving in
interim positions. Also, pursuant to the Settlement Agreement, Damian Novak, Executive Chairman and a member of our board of directors,
resigned as Executive Chairman and removed himself from his management duties with the Company effective February 20, 2023, and resigned
from our board of directors effective March 14, 2023. Rick Nechio, our interim Chief Executive Officer and a member of our board of directors,
resigned from our board of directors effective February 20, 2023 and we continue to search for a permanent chief executive officer to
replace Mr. Nechio. Our future success will be dependent upon us locating and retaining qualified individuals who will serve as executive
officers on a permanent basis and lead our Company and our business operations, and on us locating additional members to serve on our
board of directors to help oversee and guide our company. We cannot predict with certainty when we will be able locate such individuals.
Following our appointment of a new chief executive officer, Mr. Nechio may aid in the transition of his management duties, we cannot
assure that such transition will be seamless or that it won’t adversely impact our business operations.
In
addition, our future success depends on our ability to identify, attract, hire, train, retain and motivate highly skilled executive and
technical personnel. Competition for qualified personnel is intense, particularly in the wine industry in which there exists a limited
number of qualified individuals with expertise in launching, managing and expanding wine brands. If we fail to successfully attract,
assimilate, and retain a sufficient number of qualified personnel, our business could suffer.
The
success of our business depends heavily on the strength of our wine brand.
Obtaining,
maintaining and expanding our reputation as a producer of premium wine among our customers and the premium wine market generally is critical
to the success of our business and our growth strategy. The premium wine market is driven by a relatively small number of active and
well-regarded wine critics within the industry who have outsized influence over the perceived quality and value of wines. If we are unable
to maintain the actual or perceived quality of our wines, including as a result of contamination or tampering, environmental or other
factors impacting the quality of our grapes or other raw materials, or if our wines otherwise do not meet the subjective expectations
or tastes of one or more of a relatively small number of wine critics, the actual or perceived quality and value of one or more of our
wines could be harmed, which could negatively impact not only the value of that wine, but also the value of the vintage, the particular
brand or our broader portfolio. The winemaking process is a long and labor-intensive process that is built around yearly vintages, which
means that once a vintage has been released we are not able to make further adjustments to satisfy wine critics or consumers. As a result,
we are dependent on our winemakers and tasting panels to ensure that every wine we release meets our exacting quality standards.
With
the advent of social media, word within the premium wine market spreads quickly, which can accentuate both the positive and the negative
reviews of our wines and of wine vintages generally. Public perception of our brands could be negatively affected by adverse publicity
or negative commentary on social media outlets, particularly negative commentary on social media outlets that goes “viral,”
or our responses relating to, among other things:
| ● | an
actual or perceived failure to maintain high-quality, safety, ethical, social and environmental
standards for all of our operations and activities; |
| ● | an
actual or perceived failure to address concerns relating to the quality, safety or integrity
of our wines and the hospitality we offer to our guests at our potential future tasting rooms; |
| ● | our
environmental impact, including our use of agricultural materials, packaging, water and energy
use, and waste management; or |
| ● | an
actual or perceived failure by us to promote the responsible consumption of alcohol. |
If
we do not produce wines that are well-regarded by the relatively small wine critic community, the wine market will quickly become aware
and our reputation, wine brand, business and financial results of our operations could be materially and adversely affected. In addition,
if our wine receives negative publicity or consumer reaction, whether as a result of our wines or wines of other producers, our wines
in the same vintage could be adversely affected. Unfavorable publicity, whether accurate or not, related to our industry, us, our winery
brands, marketing, personnel, operations, business performance or prospects could also unfavorably affect our corporate reputation, company
value, ability to attract high-quality talent or the performance of our business.
Any
contamination or other quality control issue could have an adverse effect on sales of the impacted wine or our broader portfolio of wines.
If any of our wines become unsafe or unfit for consumption, cause injury or are otherwise improperly packaged or labelled, we may have
to engage in a product recall and/or be subject to liability and incur additional costs. A widespread recall, multiple recalls, or a
significant product liability judgment against us could cause our wines to be unavailable for a period of time, depressing demand and
our brand equity. Even if a product liability claim is unsuccessful or is not fully pursued, any resulting negative publicity could adversely
affect our reputation with existing and potential customers and accounts, as well as our corporate and individual winery brands image
in such a way that current and future sales could be diminished. In addition, should a competitor experience a recall or contamination
event, we could face decreased consumer confidence by association as a producer of similar products.
Additionally,
third parties may sell wines or inferior brands that imitate our wine brand or that are counterfeit versions of our labels, and customers
could be duped into thinking that these imitation labels are our authentic wines. For example, there could be instances of potential
counterfeiting. A negative consumer experience with such a wine could cause them to refrain from purchasing our brands in the future
and damage our brand integrity. Any failure to maintain the actual or perceived quality of our wines could materially and adversely affect
our business, results of operations and financial results.
Damage
to our reputation or loss of consumer confidence in our wines for any of these or other reasons could result in decreased demand for
our wines and could have a material adverse effect on our business, operational results, and financial results, as well as require additional
resources to rebuild our reputation, competitive position and winery brand strength.
If
our business grows, it will place increased demands on our management, operational and production capabilities that we may not be able
to adequately address. If we are unable to meet these increased demands, our business will be harmed.
Unless
we manage our growth effectively, we may make mistakes in operating our business, such as inaccurate forecasting. The anticipated growth
of our operations will place significant demand on our management and operational resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a timely basis. Our key personnel have limited experience
managing this type of business. If we cannot manage our business effectively, our business could suffer.
Our
advertising and promotional investments may affect our financial results but not be effective.
Consumer
awareness is of great importance to the success of businesses operating in the wine industry. We have incurred, and expect to continue
to incur, significant advertising and promotional expenditures to enhance our wine brand and raise consumer awareness, which we believe
is vital to the long-term success of our operations. These expenditures may adversely affect our results of operations in a particular
quarter or even a full fiscal year and may not result in increased sales. Variations in the levels of advertising and promotional expenditures
have in the past caused, and are expected in the future to continue to cause, variability in our quarterly results of operations. While
we strive to invest only in effective advertising and promotional activities in both the digital and traditional segments, it is difficult
to correlate such investments with sales results, and there is no guarantee that our expenditures will be effective in building brand
strength or growing long term sales.
We
rely heavily on celebrities and sports organizations to endorse our wines and market our brand.
The
success of our business is heavily dependent on positive image and public popularity of, and affinity towards, celebrity spokespersons.
Nina Dobrev and Julianne Hough, two of our founders, currently serve as ambassadors of our company who actively endorse our wines on
their sizable social media and other outlets and are considered by many to be the face of our brand. Customers may be drawn to our products
because of their involvement in our Company as celebrities. We also have sponsorship arrangements with teams and/or venues associated
with the National Football League, National Hockey League, National Basketball Association and Major League Baseball.
We
have entered into license agreements with Ms. Dobrev and Ms. Hough, pursuant to which each granted us a license to use her pre-approved
name, likeness, image, and other indicia of identity, as well as certain content published by her on her social media and other channels,
on and in conjunction with the sale and related pre-approved advertising and promotion of our wine. The license agreements are scheduled
to expire in March 2026. However, the license agreements provide that each of Ms. Dobrev and Ms. Hough will have the right to terminate
her agreement if as of the end of calendar year 2023, we have not achieved at least $5.0 million in EBITDA in either fiscal 2022 or fiscal
2023. See “Certain Relationships and Related Party Transactions — License Agreements with Nina Dobrev and Julianne Hough.”
If we are unable to renew our license arrangements with Ms. Dobrev and Ms. Hough upon the expiration of these agreements in March 2026,
or if Ms. Dobrev and Ms. Hough are entitled to and elect to terminate the license agreements after 2023, the rights and licenses granted
to us will be revoked and we will be required to cease the marketing and sale of products that feature their name, likeness, image, and
other indicia of identity. In such event, we would be required to refocus our marketing and brand promotion efforts, which may adversely
affect our business and results of operations.
In
addition, there is no assurance that our celebrity-based brand promotion and marketing activities will be well-received by consumers
and result in the levels of product sales that we anticipate. Under extreme situations, our marketing efforts through celebrity endorsement
may have a material adverse effect on our brand image. For example, any damage to the reputations of our celebrity founders or any negative
or controversial publicities that our celebrities are involved in, either directly or indirectly, may result in the public’s negative
perception of our brands and thus adversely affect our reputation and the marketability and sales of our products. It is possible for
negative posts or comments about our Company or our celebrity spokespersons to be shared quickly and disseminated widely due to the continued
growing use of social and digital media, possibly resulting in “cancellation.” Celebrities’ reputation and favorability
in the eyes of the public could also decrease for a number of other reasons, including, without limitation, participation in media endeavors
that are unsuccessful, diminished recognition with the public due to decreased participation in the media landscape or shifting tastes
of the public, failure to generate engagement on new social media platforms at the levels they have enjoyed on existing platforms, and
an inability to access to social media platforms due to violations of terms of use or otherwise.
If
the positive image and public popularity of our celebrity spokespersons wanes or the public’s affinity towards the sports organizations
that we sponsor decreases, regardless of the reason, it would have a material adverse impact on one of our primary marketing activities
and could result in decreased demand for our wines, which would have a material adverse effect on our business, operational results and
financial results, and require us to seek additional resources to rebuild our reputation, competitive position and winery brand strength.
We
rely heavily on third-party suppliers and service providers, and they may not continue to produce products or provide services that are
consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and
require us to find alternative suppliers and service providers.
We
have strategically structured our organization and operations with a view towards minimizing our capital investment requirements. We
do this by leveraging a network of third-party providers with industry experience and expertise that we use to perform various functions
on our behalf. Specifically, we contract with Fior di Sole, an industry leading packaging innovation and wine production company based
in Napa Valley, California, to serve as a “host” winery” and permit us occupy a portion of its production and warehouse
facility and its production equipment on an alternating proprietorship basis. Under this arrangement, we are able to use capacity at
Fior di Sole’s production facility at times mutually convenient to us and Fior di Sole to produce and bottle our wines. Fior di
Sole is responsible for keeping its production equipment in good operating order. Although we are solely responsible for managing and
conducting our own winemaking activities, we may request use of the Fior di Sole’s personnel to perform crush, fermentation, blending,
cellar, warehousing, barrel topping and/or bottling services for additional fees. Under a separate agreement, Fior di Sole provides us
with bulk juice and blends, finishes, bottles, stops, labels, and packages our wine. Fior di Sole provides these services on a purchase
order basis, which purchase orders are subject to the parties’ mutual agreement.
In
addition, in October 2022, we executed a strategy that is aimed at amplifying cash preservation initiatives while continuing to focus
on accelerating sales growth. The plan resulted in the termination of ten employees on the Company’s internal sales team and the
engagement by the Company of a third party sales and distribution management company positioned to more efficiently and effectively facilitate
current and future product sales. In addition, the Company engaged a reputable third party vendor to manage marketing initiatives and
drive growth primarily within the Company’s Direct-to-Consumer sales channel. The Company relies heavily on the third parties to
manage the sales and distribution of our wine and manage our DTC marketing initiatives. We also utilize third parties to help manage
all of our regulatory licensing and compliance activities, and we utilize additional software tools available to the industry to navigate
and manage the complex state-by-state regulations that apply to our operations in the beverage alcohol industry.
We
engage many of our third-party suppliers and service providers on a purchase order basis or pursuant to agreements that are generally
one year or less in duration. The ability and willingness of these third parties to supply and provide services to us may be affected
by competing orders placed by other companies, the demands of those companies or other factors. If we experience significant increases
in demand or need to replace a significant third party supplier or service provider, there can be no assurance that alternative third
party vendors will be available when required on terms that are acceptable to us, or at all, or that any such vendor will allocate sufficient
capacity to us in order to meet our requirements. If we fail to replace a supplier or servicer provider in a timely manner or on commercially
reasonable terms, we could incur product disruptions and our operating results and financial condition could be materially harmed. Switching
or adding additional vendors, particularly our alternating proprietorship host winery, would also involve additional costs and require
management time and focus.
Except
for remedies that may be available to us under our agreements with our third-party vendors, we cannot control whether or not they devote
sufficient time and resources to supporting our business operations. These third parties may also have relationships with other commercial
entities, including our competitors, for whom they may also be providing services, which could affect their performance on our behalf.
If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines or need to be
replaced for other reasons, it could adversely impact our ability to meet consumers’ demands for our products or comply with regulatory
requirements and subject us to potential liability, any of which may harm the reputation of our company and our products.
Although
we carefully manage our relationships with our network of third-party vendors, there can be no assurance that we will not encounter challenges
or delays in the future or that these challenges or delays will not have a material adverse impact on our business, financial condition
and prospects.
We
face significant competition with an increasing number of products and market participants that could materially and adversely affect
our business, results of operations and financial results.
Our
industry is intensely competitive and highly fragmented. Our wines compete with many other domestic and foreign wines. Our wines compete
with popularly priced generic wines and with other alcoholic and, to a lesser degree, non-alcoholic beverages, for drinker acceptance
and loyalty, shelf space and prominence in retail stores, presence, and prominence on restaurant wine lists and for marketing focus by
the Company’s distributors, many of which carry extensive portfolios of wines and other alcoholic beverages. This competition is
driven by established companies as well as new entrants in our markets and categories. In the United States, wine sales are relatively
concentrated among a limited number of large suppliers, including E&J Gallo, Constellation, Duckhorn, Trinchero, Jackson Family Wines,
Ste. Michelle and The Wine Group, and these and our other competitors may have more robust financial, technical, marketing and distribution
networks and public relations resources than we have. As a result of this intense competition, combined with our growth goals, we have
experienced and may continue to face upward pressure on our selling, marketing and promotional efforts and expenses. There can be no
assurance that in the future we will be able to successfully compete with our competitors or that we will not face greater competition
from other wineries and beverage manufacturers.
If
we are unable to successfully compete with existing or new market participants, or if we do not effectively respond to competitive pressures,
we could experience reductions in market share and margins that could have a material and adverse effect on our business, results of
operations and financial results.
Consolidation
of the distributors of our wines, as well as the consolidation of retailers, may increase competition in an already crowded space and
may have a material adverse effect on our business, results of operations and financial results.
Other
than sales made directly to our consumers, the majority of our wine sales are made through distributors for resale to retail outlets,
restaurants and hotels across the United States. We expect sales to distributors to represent an increasingly substantial portion of
our future net sales as we continue to grow our network of wholesale distributors. Consolidation among wine producers, distributors,
wholesalers, suppliers and retailers could create a more challenging competitive landscape for our wines. In addition, we believe that
the increased growth and popularity of the retail e-commerce environment across the consumer product goods market, which accelerated
during the COVID-19 pandemic and the resulting quarantines, “stay at home” orders, travel restrictions, retail store closures,
social distancing requirements and other government action, has and is likely to continue to to change the competitive landscape for
our wines. Consolidation at any level could hinder the distribution and sale of our wines as a result of reduced attention and resources
allocated to our winery brands both during and after transition periods, because our winery brands might represent a smaller portion
of the new business portfolio. Furthermore, consolidation of distributors may lead to the erosion of margins as newly consolidated distributors
take down prices or demand more margin from existing suppliers. Changes in distributors’ strategies, including a reduction in the
number of brands they carry or the allocation of resources for our competitors’ brands or private label products, may adversely
affect our growth, business, financial results and market share. Distributors of our wines offer products that compete directly with
our wines for inventory and retail shelf space, promotional and marketing support and consumer purchases. Expansion into new product
categories by other suppliers or innovation by new entrants into the market could increase competition in our product categories.
An
increasingly large percentage of our net sales is concentrated within a small number of wholesale customers. The purchasing power of
large retailers is significant, and they have the ability to command concessions. There can be no assurance that the distributors and
retailers will purchase our wines or provide our wines with adequate levels of promotional and merchandising support. The failure to
bring on major accounts or the need to make significant concessions to retain one or more such accounts could have a material and adverse
effect on our business, results of operations and financial position.
A reduction
in consumer demand for wine, which may result from a variety of factors, including demographic shifts and decreases in discretionary
spending, could materially and adversely affect our business, results of operations and financial results.
We
rely on consumers’ demand for our wine. Consumer preferences may shift due to a variety of factors, including changes in demographic
or social trends, changes in discretionary income, public health policies and perceptions and changes in leisure, dining and beverage
consumption patterns. Our success will require us to anticipate and respond effectively to shifts in consumer behavior and drinking tastes.
If consumer preferences were to move away from our wine brand, our results of operations would be materially and adversely affected.
A
limited or general decline in consumer demand could occur in the future due to a variety of factors, including:
| ● | a
general decline in economic or geopolitical conditions; |
| ● | a
general decline in the consumption of alcoholic beverage products in on-premise establishments,
such as those that may result from smoking bans and stricter laws relating to driving while
under the influence of alcohol and changes in public health policies, including those implemented
to address the COVID-19 pandemic; |
| ● | a
generational or demographic shift in consumer preferences away from wines to other alcoholic
beverages; |
| ● | increased
activity of anti-alcohol groups; |
| ● | concern
about the health consequences of consuming alcoholic beverage products; and |
| ● | increased
federal, state, provincial, and foreign excise, or other taxes on beverage alcohol products
and increased restrictions on beverage alcohol advertising and marketing. |
Demand
for premium wine brands, like ours, may be particularly susceptible to changing economic conditions and consumer tastes, preferences
and spending habits, which may reduce our sales of these products and adversely affect our profitability. An unanticipated decline or
change in consumer demand or preference could also materially impact our ability to forecast for future production requirements, which
could, in turn, impair our ability to effectively adapt to changing consumer preferences. Any reduction in the demand for our wines would
materially and adversely affect our business, results of operations and financial results.
Due
to the three-tier alcohol beverage distribution system in the United States, we are heavily reliant on our distributors that resell alcoholic
beverages in all states in which we do business. A significant reduction in distributor demand for our wines would materially and adversely
affect our sales and profitability.
Due
to regulatory requirements in the United States, we sell a significant portion of our wines to wholesalers for resale to retail accounts.
A change in the relationship with any of our significant distributors could harm our business and reduce our sales. The laws and regulations
of several states prohibit changes of distributors, except under certain limited circumstances, making it difficult to terminate or otherwise
cease working with a distributor for poor performance without reasonable justification, as defined by applicable statutes. Any difficulty
or inability to replace distributors, poor performance of our major distributors or our inability to collect accounts receivable from
our major distributors could harm our business. In addition, an expansion of the laws and regulations limiting the sale of our wine would
materially and adversely affect our business, results of operations and financial results. There can be no assurance that the distributors
and accounts to which we sell our wines will continue to purchase our wines or provide our wines with adequate levels of promotional
support, which could increase competitive pressure to increase sales and marketing spending and could materially and adversely affect
our business, results of operations and financial results.
Our
marketing strategy involves continued expansion into the direct-to-consumer channel, which may present risks and challenges for which
we are not adequately prepared and which could negatively affect our sales in these channels and our profitability.
During the year ended December 31, 2022, we generated
total revenue of $2,860,001 from all sources. Of this amount, we generated $911,326 from direct-to-consumer sales, which represents a
$136,905 increase in direct to consumer revenue generate during the year ended December 31, 2021. A portion of our operating strategy
is to expand our sales of wine through this direct-to-consumer channel. However, the direct-to-consumer marketplace is highly competitive
and in recent years has seen the entrance of new competitors and products targeting similar customer groups as our business. To be competitive
and forge new connections with customers, we are continuing investment in the expansion of our direct-to-consumer channel. Such expansion
may require significant investment in e-commerce platforms, marketing, fulfilment, information technology (“IT”) infrastructure
and other known and unknown costs. The success of our direct-to-consumer sales channel depends on our ability to maintain the efficient
and uninterrupted operation of online order-processing and fulfilment and delivery operations. As such, we are heavily dependent on the
performance of our shipping and technology partners. Any system interruptions or delays could prevent potential customers from purchasing
our wines directly.
Our
ability to ship wines directly to our customers is the result of court rulings, including the U.S. Supreme Court ruling in Granholm v.
Heald, which allow, in certain circumstances, shipments to customers of wines from out-of-state wineries. Any changes to the judicial,
legal, or regulatory framework that reduce our ability to sell wines in most states using our direct-to-consumer sales channel could
have a materially adverse effect on our business, results of operations and financial results.
We
may be unable to adequately adapt to shifts in consumer preferences for points of purchase, such as an increase in at-home delivery during
the COVID-19 pandemic, and our competitors may react more rapidly or with improved customer experiences. A failure to react quickly to
these and other changes in consumer preferences, or to create infrastructure to support new or expanding sales channels may materially
and adversely affect our business, results of operations and financial results.
A failure
to adequately prepare for adverse events that could cause disruption to elements of our business, including the availability of bulk
grapes, and the blending, inventory aging or distribution of our wines could materially and adversely affect our business, results of
operations and financial results.
Disruptions
to our operations caused by adverse weather, natural disasters, public health emergencies, including the COVID-19 pandemic, or unforeseen
circumstances may cause delays to or interruptions in our operations. Concerns regarding the availability of water for production is
particular to companies that produce and bottle wines in California. A consequence of any of these or supply or supply chain disruptions,
including the temporary inability to produce our wines due to the closure of our production sites, could prevent us from meeting consumer
demand in the near term or long term for our aged wines. For example, as result of the COVID-19 pandemic, our industry has experienced
temporary supply chain disruptions for certain processed materials, cardboard packaging, and glass, as well as increased strain on logistics
networks and shipping partners. The occurrence of any such disruptions during a peak time of demand for such processed materials could
increase the magnitude of the effect on our distribution network and sales. Failure to adequately prepare for and address any such disruptions
could materially and adversely affect our business, results of operations and financial results.
A
catastrophic event causing physical damage, disruption or failure at our production facility could adversely affect our business. Although
our wines currently available for sale do not require substantial aging, we expect that certain of our wines, including the Reserve Cabernet
Sauvignon, require aging for some period of time. As a result, we expect to maintain inventory of aged and maturing wines in warehouses.
The loss of a substantial amount of aged inventory through fire, accident, earthquake, other natural or man-made disaster, contamination
or otherwise could significantly reduce the supply of the affected wine or wines, including our aged wines, which are typically the highest
priced and limited production wines.
Any
disruptions that cause forced closure or evacuation could materially harm our business, results of operations and financial results.
Additionally, should multiple closings occur, we may lose guest confidence resulting in a reduction in direct sales, which could materially
and adversely affect our business, results of operations and financial results. If we expand our future operations to include tasting
rooms, such closings would also negatively impact visitation.
Inclement
weather, drought, pests, plant diseases and other factors could reduce the amount or quality of the grapes available to produce our wines,
which could materially and adversely affect our business, results of operations and financial results.
A
shortage in the supply of quality grapes may result from the occurrence of any number of factors that determine the quality and quantity
of grape supply, including adverse weather conditions (including heatwaves, frosts, drought and excessive rainfall), and various diseases,
pests, fungi and viruses. We cannot anticipate changes in weather patterns and conditions, and we cannot predict their impact on our
operations if they were to occur. Any shortage could cause an increase in the price of some or all of the grape varietals required for
our wine production or a reduction in the amount of wine we are able to produce, which could materially and adversely affect our business,
results of operations and financial results.
Factors
that reduce the quantity of grapes the growers with which we contract grow may also reduce their quality. Deterioration in the quality
of our wines could harm our winery brand strength, and a decrease in our production could reduce our sales and increase our expenses,
both of which could materially and adversely affect our business, results of operations and financial results.
If
we are unable to obtain adequate supplies of premium juice from third-party juice suppliers, the quantity or quality of our annual production
of wine could be adversely affected, causing a negative impact on our business, results of operations and financial condition.
The
production of our wines and the ability to fulfill the demand for our wines is restricted by the availability of premium grapes and juice
from third-party growers. If we are unable to source grapes and juice of the requisite quality, varietal and geography, among other factors,
our ability to produce wines to the standards, quantity and quality demanded by our customers could be impaired.
Factors
including climate change, agricultural risks, competition for quality, water availability, land use, wildfires, floods, disease, and
pests could impact the quality and quantity of grapes and bulk juice available to our company. Furthermore, these potential disruptions
in production may drive up demand for grapes and bulk juice creating higher input costs or the inability to purchase these materials.
Following the 2020 wildfires in Northern California, the price of bulk juice increased substantially in a very short period of time,
leading to some wine producers reducing lot sizes of certain wines. As a result, our financial results could be materially and adversely
affected both in the year of the harvest and future periods.
If
we are unable to identify and obtain adequate supplies of quality agricultural, raw and processed materials, including corks, glass bottles,
barrels, winemaking additives and agents, water and other supplies, or if there is an increase in the cost of the commodities or products,
our profitability, production and distribution capabilities could be negatively impacted, which would materially and adversely affect
our business, results of operations and financial condition.
We
use grapes and other raw materials to produce and package our wine, including corks, barrels, winemaking additives, and water, as well
as large amounts of packaging materials, including metal, cork, glass and cardboard. We purchase raw materials and packaging materials
under contracts of varying maturities from domestic and international suppliers.
Glass
bottle costs are one of our largest packaging components of cost of goods sold. In North America, glass bottles have only a small number
of producers. The inability of any of our glass bottle suppliers to satisfy our requirements could materially and adversely affect our
business. In addition, costs and programs related to mandatory recycling and recyclable materials deposits could be adopted in states
of manufacture, imposing additional and unknown costs to manufacture products utilizing glass bottles. The amount of water available
for use is important to the supply of our grapes and winemaking, other agricultural raw materials, and our ability to operate our business.
If climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality, which may affect
our production costs, consistency of yields or impose capacity constraints. We depend on sufficient amounts of quality water for operation
of our wineries, as well as to conduct our other operations. The suppliers of the grapes and other agricultural raw materials we purchase
also depend upon sufficient supplies of quality water for their vineyards and fields. Prolonged or severe drought conditions in the western
United States or restrictions imposed on irrigation options by governmental authorities could have an adverse effect on our operations
in the region. If water available to our operations or the operations of our suppliers becomes scarcer, restrictions are placed on our
usage of water or the quality of that water deteriorates, we may incur increased production costs or face manufacturing constraints which
could negatively affect our production. Even if quality water is widely available to us, water purification and waste treatment infrastructure
limitations could increase our costs or constrain operation of our production facilities. Any of these factors could materially and adversely
affect our business, results of operations and financial results.
Our
production and shipping activities also use energy in their operations, including electricity, propane and natural gas. Energy costs
could rise in the future, which would result in higher transportation, freight and other operating costs, such as ageing and bottling
expenses. Our freight cost and the timely delivery of our wines could be adversely affected by a number of factors that could reduce
the profitability of our operations, including driver shortages, higher fuel costs, weather conditions, traffic congestion, increased
government regulation, and other matters. In addition, increased labor costs or insufficient labor supply could increase our production
costs.
Our
supply and the price of raw materials, packaging materials and energy and the cost of energy, freight and labor used in our productions
and distribution activities could be affected by a number of factors beyond our control, including market demand, global geopolitical
events (especially their impact on energy prices), economic factors affecting growth decisions, exchange rate fluctuations and inflation.
To the extent any of these factors, including supply of goods and energy, affect the prices of ingredients or packaging, or we do not
effectively or completely hedge changes in commodity price risks, or are unable to recoup costs through increases in the price of our
finished wines, our business, results of operations and financial results could be materially and adversely affected.
The
COVID-19 pandemic has affected our customers, our suppliers and our business operations, and the duration and extent to which this and
any future global health pandemics will impact our business, results of operations and financial results in future periods remains uncertain.
The
COVID-19 pandemic is having widespread, rapidly evolving and unpredictable impacts on global society, economies, financial markets and
business practices. Federal, state and foreign governments have implemented measures to contain the virus, including social distancing,
travel restrictions, border closures, limitations on public gatherings, work from home requirements and closure of non-essential businesses.
While we continue to closely monitor the situation and may adjust our current policies as more information and public health guidance
become available, such precautionary measures, or any similar precautionary measures we are required or deem advisable to take in the
future could negatively affect our business, results of operations and financial results. Our business may suffer should there be supply
disruption due to restrictions on the ability of employees or our suppliers to travel and work, or if government or public health officials
limit the travel of individuals impacting our ability to source materials. These events may impair our ability to make, bottle and ship
our wines, our distributors’ ability to distribute our wines or our ability to obtain the grapes needed to produce our wines. Our
operations may become less efficient or otherwise be negatively impacted if critical employees are unable to work or if a significant
percentage of the workforce is unable to work.
In
addition to litigation that may arise from time to time in the ordinary course of business, we have been engaged in litigation with each
of our former Chief Operating Officer and former Chief Executive Officer.
As
disclosed under Item 3 – Legal Proceedings, the Company has been involved in litigation with two of its former executive officers,
Timothy Michaels and Janelle Anderson.
Mr.
Michaels’ lawsuit alleges that the Company breached a Separation Agreement entered into with Mr. Michael following termination
of his employment by including a restricted “lock-up” legend on certain shares of common stock that the Company issued to
Mr. Michaels. The complaint also included counts alleging breach of the implied covenant of good faith and fair dealing, issuer liability
under Minn. Stat. § 336.8-401 for delay in removing or directing the Company’s transfer agent to remove the lock-up legend
from the shares, conversion and civil theft. The Company has denied the allegations and intends to vigorously defend against the lawsuit.
The Company has made a motion seeking dismissal of the conversion and civil theft counts, which was granted by the Fourth Judicial District
Court, Hennepin County, Minnesota on October 31, 2022.
Although
the Company has denied Mr. Michaels’ claims in his complaint, litigation and related actions may be expensive to defend, the outcome
of any litigation is difficult to predict and may result in damages, penalties or fines as well as reputational damage to the Company
and its wine brands, and the existence of litigation may impact the ability of management to focus on other business matters. Furthermore,
any adverse judgment may result in an increase in future insurance premiums, and any judgments for which the Company is not fully insured
may result in a significant financial loss and may materially and adversely affect the Company’s business, results of operations
and financial results.
The
complaint in Ms. Anderson’s lawsuit alleged, among other things, that the Company terminated her employment as retaliation for
reports of alleged wrongdoing in violation of the Minnesota Whistleblower Act. Mr. Novak, Executive Chairman and a director of the Company,
and Mr Nechio, interim Chief Executive Officer and a director of the Company, were also named as defendants in Ms. Anderson’s complaint.
On January 27, 2023, the Company entered into a Global Mutual Compromise, Release and Settlement Agreement (the “Settlement Agreement”)
among Ms. Anderson and each of Messrs. Novak and Nechio, pursuant to which Ms. Anderson has agreed to dismiss the lawsuit with prejudice.
As
consideration for Ms. Anderson’s dismissal and release, and provided that she does not revoke or rescind the Settlement Agreement
within prescribed time periods, the Company agreed to make a cash payment to Ms. Anderson in the amount of $1,250,000, less certain attorney
fees and relevant taxes and other withholdings, in a lump sum. This cash payment is in addition to $400,000 that the Company previously
paid to Ms. Anderson in January 2023 in respect of 2022 bonus compensation earned by Ms. Anderson under her employment agreement while
employed by the Company. Also as contemplated by the Settlement Agreement, the Company and Ms. Anderson have agreed to enter into a consulting
agreement (the “Anderson Consulting Agreement”) pursuant to which Ms. Anderson will provide certain consulting services to
the Company for a period of six months in exchange for the Company granting and issuing to Ms. Anderson 500,000 shares of the Company’s
common stock (the “Anderson Consulting Shares”) from the Company’s 2021 Equity Incentive Plan (the “Anderson
Consulting Share Grant”). The cash payment and the Anderson Consulting Share Grant were scheduled to be made at the “closing”
of the Settlement Agreement (the “Settlement Closing”), subject to Ms. Anderson not revoking or rescinding the Settlement
Agreement during the applicable revocation period. The Settlement Closing was completed on February 20, 2023. The Anderson Consulting
Shares are unrestricted and freely tradable. If Ms. Anderson were to sell the Anderson Consulting Shares, such sales may adversely impact
the market price of our common stock, especially given the significant number of shares available for sale and the low volume of our
shares that trade.
The
impact of U.S. and worldwide economic trends and financial market conditions could materially and adversely affect our business, liquidity,
financial condition and results of operations.
We
are subject to risks associated with adverse economic conditions in the United States and globally, including economic slowdown, inflation,
and the disruption, volatility and tightening of credit and capital markets. Unfavorable global or regional economic conditions could
materially and adversely impact our business, liquidity, financial condition and results of operations. In general, positive conditions
in the broader economy promote customer spending on wine, while economic weakness, which generally results in a reduction of customer
spending, may have a more pronounced negative effect on spending on wine. Unemployment, tax increases, governmental spending cuts or
a return of high levels of inflation could affect consumer spending patterns and purchases of our wines and other alcoholic beverage
products. Reduced consumer discretionary spending and reduced consumer confidence could negatively affect the trend towards consuming
premium wines and could result in a reduction of wine and beverage alcohol consumption in the United States generally. In particular,
extended periods of high unemployment, lower consumer discretionary spending and low consumer confidence could result in lower sales
of premium wine brands, including our wine, in favor of wine brands which have a lower average sales price and generally have lower gross
profit margins and lower overall sales, which could negatively impact our business and results of operations. These conditions could
also create or worsen credit issues, cash flow issues, access to credit facilities and other financial hardships for us and our suppliers,
distributors, accounts and consumers. An inability of our suppliers, distributors and retailers to access liquidity could impact our
ability to produce and distribute our wines.
If
we are unable to secure and protect our intellectual property in domestic and foreign markets, including trademarks for our wine brands
and wines, the value of our wine brands and intellectual property could decline, which could have a material and adverse effect on our
business, results of operations and financial results.
Our
future success depends significantly on our ability to protect our current and future wine brands and wines and to enforce and defend
our trademarks and other intellectual property rights. We rely on a combination of trademark, copyright and trade secret laws, as well
as confidentiality procedures and contractual restrictions, to secure and protect our intellectual property rights. We have been granted
three (3) trademark registrations in the United States for FRESH VINE®, FRESH VINE (Stylized)®, and our FV Logo®, and numerous
trademark registrations in other countries for the FRESH VINE mark, and we have filed, and expect to continue to file, trademark applications
seeking to protect newly-developed wine brands. We have also been granted a copyright registration in the first version of our website
located at www.freshvine.com. While a copyright exists in a work of art once it is fixed in tangible medium, we intend to continue to
file copyright applications to protect newly-developed works of art that are important to our business.
We
cannot be sure that any trademark office or copyright office will issue trademark registrations under any of our trademark applications,
or copyright registrations under any of our copyright applications. Third parties may oppose the registration of our trademark applications,
contest our trademark rights or copyrights, and petition to cancel our registered trademarks. We cannot assure you that we will be successful
in defending our trademarks or copyrights in actions brought by third parties. There is also a risk that we could fail to timely maintain
or renew our trademark registrations or otherwise protect our trademark rights or copyrights, which could result in the loss of those
trademark rights (including in connection with failure to maintain consistent use of these trademarks). If we fail to maintain our trademarks
or a third party successfully challenges our trademarks or copyrights, we could be forced to rebrand our wineries, wines, and other products,
which could result in a loss of winery brand recognition and could require us to devote additional resources to the development and marketing
of new wine brands.
Notwithstanding
any trademark registrations or copyright registrations held by us, a third party could bring a lawsuit or other claim alleging that we
have infringed that third party’s trademark rights or copyrights. Any such claims, with or without merit, could require significant
resources to defend, could damage the reputation of our wine brands, could result in the payment of compensation (whether as a damages
award or settlement) to such third parties, and could require us to stop using our wine brands or otherwise agree to an undertaking to
limit that use. In addition, our actions to monitor and enforce trademark rights or copyrights against third parties may not prevent
counterfeit products or products bearing confusingly similar trademarks from entering the marketplace, which could divert sales from
us, tarnish our reputation or reduce the demand for our products or the prices at which we sell those products. Any enforcement litigation
brought by us, whether or not successful, could require significant costs and resources, and divert the attention of management, which
could negatively affect our business, results of operations and financial results. Third parties may also acquire and register domain
names that are confusingly similar to or otherwise damaging to the reputation of our trademarks, and we may not be able to prevent or
cancel any such domain name registrations.
In
addition to registered intellectual property rights such as trademark registrations and copyright registrations, we rely on non-registered
proprietary information, such as trade secrets, confidential information, and know-how, including in connection with the crafting of
our low calorie, low-carb, premium tasting wines. In order to protect our proprietary information, we rely in part on agreements with
our employees, independent contractors and other third parties that place restrictions on the use and disclosure of this intellectual
property. These agreements may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become
known to our competitors, which could cause us to lose any competitive advantage resulting from this intellectual property. To the extent
that our employees, independent contractors or other third parties with whom we do business use intellectual property owned by others
in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. The loss of trade secret protection
could make it easier for third parties to compete with our products. In addition, any changes in, or unexpected interpretations of, intellectual
property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation
could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our
trade secrets or other proprietary information could harm our business, financial condition, results of operations and competitive position.
We
may not be fully insured against catastrophic perils, including catastrophic loss or inaccessibility of wineries, production facilities
and/or distribution systems resulting from fire, wildfire, flood, wind events, earthquake and other perils, which may cause us to experience
a material financial loss.
Although
we currently store the bulk of our wine inventory at our third-party warehouse in California, which is prone to seismic activity, wildfires
and floods, among other perils. If any of these facilities were to experience a catastrophic loss in the future, it could disrupt our
operations, delay production, shipments and our recognition of revenue, and result in potentially significant expenses to repair or replace
the facility. If such a disruption were to occur, we could breach agreements, our reputation could be harmed and our business and operating
results could be materially and adversely affected. Although we carry insurance to cover property and inventory damage and business interruption,
these coverages are subject to deductibles and self-insurance obligations, as well as caps on coverage that could be below the value
of losses we could incur in certain catastrophic perils. Furthermore, claims for recovery against our insurance policies can be time-consuming,
and may result in significant delays between when we incur damages and when we receive payment under our insurance policies. If one or
more significant catastrophic events occurred damaging our own or third-party assets and/or services, we could suffer a major financial
loss and our business, results of operations and financial condition could be materially and adversely affected.
Furthermore,
increased incidence or severity of natural disasters has adversely impacted our ability to obtain adequate property damage, inventory,
and business interruption insurance at financially viable rates, if at all. For example, we have observed certain insurers ceasing to
offer certain inventory protection policies, and we have supplemented our insurance coverage recently by purchasing policies at higher
premiums. If these trends continue and our insurance coverage is adversely affected, and to the extent we elect to increase our self-insurance
obligations, we may be at greater risk that similar future events will cause significant financial losses and materially and adversely
affect our business, results of operations and financial results.
From
time to time, we may become subject to litigation specifically directed at the alcoholic beverage industry, as well as litigation arising
in the ordinary course of business.
Companies
operating in the alcoholic beverage industry may, from time to time, be exposed to class action or other private or governmental litigation
and claims relating to product liability, alcohol marketing, advertising or distribution practices, alcohol abuse problems or other health
consequences arising from the excessive consumption of or other misuse of alcohol, including underage drinking. Various groups have,
from time to time, publicly expressed concern over problems related to harmful use of alcohol, including drinking, and driving, underage
drinking and health consequences from the misuse of alcohol. These campaigns could result in an increased risk of litigation against
the Company and our industry. Lawsuits have been brought against beverage alcohol companies alleging problems related to alcohol abuse,
negative health consequences from drinking, problems from alleged marketing or sales practices and underage drinking. While these lawsuits
have been largely unsuccessful in the past, others may succeed in the future.
From
time to time, we may also be party to other litigation in the ordinary course of our operations, including in connection with commercial
disputes, enforcement or other regulatory actions by tax, customs, competition, environmental, anti-corruption and other relevant regulatory
authorities, or, securities-related class action lawsuits, particularly following any significant decline in the price of our securities.
Any such litigation or other actions may be expensive to defend and result in damages, penalties, or fines as well as reputational damage
to our company and our winery brands and may impact the ability of management to focus on other business matters. Furthermore, any adverse
judgments may result in an increase in future insurance premiums, and any judgments for which we are not fully insured may result in
a significant financial loss and may materially and adversely affect our business, results of operations and financial results.
A failure
of one or more of our key IT systems, networks, processes, associated sites or service providers could have a material adverse impact
on business operations, and if the failure is prolonged, our financial condition.
We
rely on IT systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including
laptops and mobile devices), software and technical applications and platforms, some of which are managed, hosted, provided, and used
by third parties or their vendors, to assist us in the management of our business. The various uses of these IT systems, networks and
services include, but are not limited to: hosting our internal network and communication systems; supply and demand planning; production;
shipping wines to customers; hosting our winery websites and marketing products to consumers; collecting and storing customer, consumer,
employee, stockholder, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing
and sharing confidential and proprietary research, business plans and financial information; complying with regulatory, legal or tax
requirements; providing data security; and handling other processes necessary to manage our business.
Increased
IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware,
unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other types of attacks pose a potential
risk to the security of our IT systems, networks and services, as well as the confidentiality, availability, and integrity of our data,
and we have in the past, and may in the future, experience cyberattacks and other unauthorized access attempts to our IT systems. Because
the techniques used to obtain unauthorized access are constantly changing and often are not recognized until launched against a target,
we or our vendors may be unable to anticipate these techniques or implement sufficient preventative or remedial measures. If we are unable
to efficiently and effectively maintain and upgrade our system safeguards, we may incur unexpected costs and certain of our systems may
become more vulnerable to unauthorized access. In the event of a ransomware or other cyber-attack, the integrity and safety of our data
could be at risk, or we may incur unforeseen costs impacting our financial position. If the IT systems, networks or service providers
we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information due to any number
of causes ranging from catastrophic events, power outages, security breaches, unauthorized use or usage errors by employees, vendors
or other third parties and other security issues, we may be subject to legal claims and proceedings, liability under laws that protect
the privacy and security of personal information (also known as personal data), litigation, governmental investigations and proceedings
and regulatory penalties, and we may suffer interruptions in our ability to manage our operations and reputational, competitive or business
harm, which may adversely affect our business, results of operations and financial results. In addition, such events could result in
unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or
misappropriated confidential information belonging to us or to our employees, stockholders, customers, suppliers, consumers or others.
In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a
security breach or technological failure and the reputational damage resulting therefrom, to pay for investigations, forensic analyses,
legal advice, public relations advice or other services, or to repair or replace networks and IT systems. As a result of the COVID-19
pandemic, a greater number of our employees are working remotely and accessing our IT systems and networks remotely, which may further
increase our vulnerability to cybercrimes and cyberattacks and increase the stress on our technology infrastructure and systems. Even
though we maintain cyber risk insurance, this insurance may not be sufficient to cover all of our losses from any future breaches or
failures of our IT systems, networks and services.
Our
failure to adequately maintain and protect personal information of our customers or our employees in compliance with evolving legal requirements
could have a material adverse effect on our business.
We
collect, use, store, disclose or transfer (collectively, “process”) personal information, including from employees and customers,
in connection with the operation of our business. A wide variety of local and international laws as well as regulations and industry
guidelines apply to the privacy and collecting, storing, use, processing, disclosure, and protection of personal information and may
be inconsistent among countries or conflict with other rules. Data protection and privacy laws and regulations are changing, subject
to differing interpretations and being tested in courts and may result in increasing regulatory and public scrutiny and escalating levels
of enforcement and sanctions.
A
variety of data protection legislation apply in the United States at both the federal and state level, including new laws that may impact
our operations. For example, the State of California has enacted the California Consumer Privacy Act of 2018 (“CCPA”), which
generally requires companies that collect, use, share and otherwise process “personal information” (which is broadly defined)
of California residents to make disclosures about their data collection, use, and sharing practices, allows consumers to opt-out of certain
data sharing with third parties or the sale of personal information, allows consumers to exercise certain rights with respect to any
personal information collected and provides a new cause of action for data breaches. In addition, a new privacy law, the California Privacy
Rights Act (“CPRA”), which significantly modifies the CCPA, was recently approved by ballot initiative during the November
3, 2021 general election. On January 1, 2023 the CCPA became effective and added additional privacy protection. This may require us to
incur additional expenditures to ensure compliance. Additionally, the Federal Trade Commission, and many state attorneys general are
interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination, and security
of data. The burdens imposed by the CCPA and other similar laws that have been or may be enacted at the federal and state level may require
us to modify our data processing practices and policies and to incur additional expenditures in order to comply.
Foreign
laws and regulations relating to privacy, data protection, information security and consumer protection often are more restrictive than
those in the United States. The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations
relating to privacy, data protection and consumer protection than the United States. In May 2018 the European Union’s new regulation
governing data practices and privacy called the General Data Protection Regulation, or GDPR, became effective and substantially replaced
the data protection laws of the individual European Union member states. The law requires companies to meet more stringent requirements
regarding the handling of personal data of individuals in the EU than were required under predecessor EU requirements. In the United
Kingdom, a Data Protection Bill that substantially implements the GDPR also became law in May 2018. The GDPR and other similar regulations
require companies to give specific types of notice and in some cases seek consent from consumers and other data subjects before collecting
or using their data for certain purposes, including some marketing activities. Outside of the European Union, many countries have laws,
regulations, or other requirements relating to privacy, data protection, information security, and consumer protection, and new countries
are adopting such legislation or other obligations with increasing frequency. Many of these laws may require consent from consumers for
the use of data for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized
approach to these laws and regulations globally. Consequently, we would increase our risk of non-compliance with applicable foreign data
protection laws by expanding internationally. We may need to change and limit the way we use personal information in operating our business
and may have difficulty maintaining a single operating model that is compliant. In addition, various federal, state and foreign legislative
and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue
revised rules or guidance regarding privacy, data protection, information security and consumer protection.
Compliance
with these and any other applicable privacy and data protection laws and regulations is a rigorous and time-intensive process, and we
may be required to put in place additional mechanisms ensuring compliance with the new privacy and data protection laws and regulations.
Our actual or alleged failure to comply with any applicable privacy and data protection laws and regulations, industry standards or contractual
obligations, or to protect such information and data that we process, could result in litigation, regulatory investigations, and enforcement
actions against us, including fines, orders, public censure, claims for damages by employees, customers and other affected individuals,
public statements against us by consumer advocacy groups, damage to our reputation and competitive position and loss of goodwill (both
in relation to existing customers and prospective customers) any of which could have a material adverse effect on our business, financial
condition, results of operations, and cash flows. Additionally, if third parties that we work with, such as vendors or developers, violate
applicable laws or our policies, such violations may also place personal information at risk and have an adverse effect on our business.
Even the perception of privacy concerns, whether or not valid, may harm our reputation, subject us to regulatory scrutiny and investigations,
and inhibit adoption of our wines by existing and potential customers.
Risks
related to regulation.
As
a producer of alcoholic beverages, we are regularly the subject of regulatory reviews, proceedings and audits by governmental entities,
any of which could result in an adverse ruling or conclusion, and which could have a material adverse effect on our business, financial
condition, results of operations and future prospects.
We
are subject to extensive regulation in the United States by federal, state, and local laws regulating the production, distribution and
sale of consumable food items, and specifically alcoholic beverages, including by the Alcohol and Tobacco Tax and Trade Bureau (the “TTB”)
and the Food and Drug Administration (the “FDA”). These and other regulatory agencies impose a number of product safety,
labelling and other requirements on our operations and sales. In California, where all of our wines are made, we are subject to alcohol-related
licensing and regulations by many authorities, including the Department of Alcohol Beverage Control (the “ABC”), which investigates
applications for licenses to sell alcoholic beverages, reports on the moral character and fitness of alcohol license applicants and the
suitability of premises where sales are to be conducted. We are also subject to regulatory compliance requirements in all states in which
we sell our wines. Any governmental litigation, fines, or restrictions on our operations resulting from the enforcement of these existing
regulations or any new legislation or regulations could have a material adverse effect on our business, results of operations and financial
results. Any government intervention challenging the production, marketing, promotion, distribution or sale of beverage alcohol or specific
brands could affect our ability to sell our wines. Because litigation and other legal proceedings can be costly to defend, even actions
that are ultimately decided in our favor could have a negative impact on our business, results of operations or financial results. Adverse
developments in major lawsuits concerning these or other matters could result in management distraction and have a material adverse effect
on our business. Changes to the interpretation or approach to enforcement of regulations may require changes to our business practices
or the business practices of our suppliers, distributors, or customers. The penalties associated with any violations or infractions may
vary in severity, and could result in a significant impediment to our business operations, and could cause us to have to suspend sales
of our wines in a jurisdiction for a period of time.
New
and changing environmental requirements, and new market pressures related to climate change, could materially and adversely affect our
business, results of operations and financial results.
There
has been significant public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere have an adverse
impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Federal regulations
govern, among other things, air emissions, wastewater and stormwater discharges, and the treatment, handling and storage and disposal
of materials and wastes. State environmental regulations and authorities intended to address and oversee environmental issues are largely
state-level analogues to federal regulations and authorities intended to perform the similar purposes. We are subject to local environmental
regulations that address a number of elements of our wine production process, including air quality, the handing of hazardous waste,
recycling, water use and discharge, emissions and traffic impacts. Compliance with these and other environmental regulation requires
significant resources. Continued regulatory and market trends towards sustainability may require or incentivize us to make changes to
our current business operations. We may experience future increases in the costs associated with environmental regulatory compliance,
including fees, licenses and the cost of capital improvements to meet environmental regulatory requirements. Although we don’t
cultivate our own grapes, increased costs associated with environmental regulatory compliance may impact grape growers, which may increase
out costs to purchase bulk juice.
Changes
in foreign and domestic laws and government regulations to which we are currently subject, including changes to the method or approach
of enforcement of these government rules and regulations, may increase our costs or limit our ability to sell our wines into certain
markets, which could materially and adversely affect our business, results of operations and financial condition.
Government
laws and regulations may result in increased production and sales costs, including an increase on the applicable tax in various state,
federal and foreign jurisdictions in which we do business. The amount of wine that we can sell directly to consumers outside of California
is regulated, and in certain states we are not allowed to sell wines directly to consumers at all. Changes in these laws and regulations
that tighten current rules could have an adverse impact on sales or increase costs to produce, market, package or sell wine. Changes
in regulation that require significant additional source data for registration and sale, in the labelling or warning requirements, or
limitations on the permissibility of any component, condition or ingredient, in the places in which our wines can be legally sold could
inhibit sales of affected products in those markets.
The
wine industry is subject to extensive regulation by a number of foreign and domestic agencies, state liquor authorities and local authorities.
These regulations and laws dictate such matters as licensing requirements, land use, production methods, trade and pricing practices,
permitted distribution channels, permitted and required labelling, advertising, sequestration of classes of wine and relations with wholesalers
and retailers. Any expansion of our existing facilities may be limited by present and future zoning ordinances, use permit terms, environmental
restrictions and other legal requirements. In addition, new or updated regulations, requirements or licenses, particularly changes that
impact our ability to sell DTC and/or retain accounts in California, or new or increased excise taxes, income taxes, property and sales
taxes or international tariffs, could affect our financial condition or results of operations. From time to time, states consider proposals
to increase state alcohol excise taxes. New or revised regulations or increased licensing fees, requirements or taxes could have a material
adverse effect on our business, financial condition, and results of operations.
Risks
related to our common stock
Our
current executive management has limited direct experience in satisfying public company reporting requirements and we must implement
additional finance and accounting systems, procedures, and controls in order to satisfy such requirements, which will increase our costs
and divert management’s time and attention.
As
a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company, including
costs associated with our public company reporting requirements and corporate governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, as well as new rules implemented by the SEC and the NYSE American. Our current executive management has little
to no experience in complying with such requirements and rules.
As
an example of reporting requirements, we are evaluating our internal control systems in order to allow management to report on our internal
control over financing reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. As a company with limited capital and
human resources, we anticipate that more of management’s time and attention will be diverted from our business to ensure compliance
with these regulatory requirements than would be the case with a company that has established controls and procedures. This diversion
of management’s time and attention may have a material adverse effect on our business, financial condition and results of operations.
We
are eligible to be treated as an emerging growth company, and we cannot be certain that the reduced disclosure requirements applicable
to emerging growth companies will not make our shares less attractive to investors.
We
are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take
advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies, including, among others, (1) not being required to comply with the auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements,
(3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved and (4) the requirement to present only two years of audited financial statements and
only two years of related “Management’s discussion and analysis of financial condition and results of operations” in
this report. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of the end of the second fiscal quarter
in any fiscal year before that time or if we have total annual gross revenues of $1.07 billion or more during any fiscal year before
that time, in which case we would no longer be an emerging growth company as of the fiscal year end, or if we issue more than $1.0 billion
in non-convertible debt during any three-year period before that time we would cease to be an emerging growth company immediately. We
cannot predict if investors will find our shares of common stock less attractive because we may rely on these exemptions. If some investors
find our common stock less attractive as a result, there may be a less active trading market for our common stock and our share price
may be more volatile.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards
that have different effective dates for public and private companies and intend to continue such election until the earlier of the date
we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided
in the JOBS Act. Our financial statements may therefore not be comparable to those of other public companies that comply with such new
or revised accounting standards.
As
a result of being a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting
and any failure to maintain the adequacy of these internal controls may negatively impact investor confidence in our company and, as
a result, the value of our common stock.
We
are required pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness
of our internal control over financial reporting. This assessment will need to include disclosure of any material weaknesses identified
by our management in our internal control over financial reporting. In addition, our independent registered public accounting firm will
be required to attest to the effectiveness of our internal control over financial reporting in our first annual report required to be
filed with the Securities and Exchange Commission (the “SEC”) following the date we are no longer an emerging growth company.
Any failure to maintain effective internal control over financial reporting could severely inhibit our ability to accurately report our
financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective,
or if our independent registered public accounting firm determines we have a material weakness in our internal control over financial
reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common
stock could decline, we could be subject to sanctions or investigations by the NYSE American, the SEC or other regulatory authorities
and our access to the capital markets could be restricted.
In this report, our management concluded that
our disclosure controls and procedures and our internal control over financial reporting were not effective as of December 31, 2022 due
to the existence of material weaknesses, including those related to the lack of segregation of duties, accounting for inventory deposits,
accounting for insurance recoveries, and accounting for executive bonus compensation. See Item 9A – Controls and Procedures. Although
we intend to engage in activities aimed at remediating these material weaknesses, our remediation activities may not be successful, and
our management may continue to conclude that our disclosure controls and procedures and our internal control over financial reporting
are not effective in future periods.
Provisions
of our corporate governance documents could make an acquisition of our Company more difficult and may prevent attempts by our stockholders
to replace or remove our current management, even if beneficial to our stockholders.
Our
articles of incorporation and bylaws and the Nevada Revised Statutes contain provisions that could make it more difficult for a third
party to acquire us, even if doing so might be beneficial to our stockholders. These provisions include:
| ● | advance
notice requirements for stockholder proposals and director nominations; |
| ● | the
ability of our board of directors to issue new series of, and designate the terms of, preferred
stock, without stockholder approval, which could be used to, among other things, institute
a rights plan that would have the effect of significantly diluting the stock ownership of
a potential hostile acquirer, likely preventing acquisitions that have not been approved
by our board of directors; and |
| ● | limitations
on the ability of stockholders to call special meetings and to take action by written consent. |
Because
our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt
to replace current members of our management team. As a result, you may lose your ability to sell your stock for a price in excess of
the prevailing market price due to these protective measures, and efforts by stockholders to change the direction or management of the
Company may be unsuccessful.
Your
percentage ownership in us may be diluted by future issuances of capital stock, which could reduce your influence over matters on which
stockholders vote.
Pursuant
to our articles of incorporation and bylaws, our board of directors has the authority, without action or vote of our stockholders, to
issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options,
or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence
over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in
us being subject to the prior rights of holders of that preferred stock.
An
active, liquid trading market for our common stock may not develop, which may limit your ability to sell your shares.
Prior
to our December 2021 initial public offering, there was no public market for our common stock. Although we list shares of our common
stock on the NYSE American under the symbol “VINE,” an active trading market for our shares may not develop or be sustained
going forward. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence
of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over
which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely
have a material adverse effect on the value of our common stock. The market price of our common stock may decline, and you may not be
able to sell your shares of our common stock at or above the price you paid for them, or at all. An inactive market may also impair our
ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies
by using our shares as consideration.
Sales
of a substantial number of shares of our common stock in the public market could cause the market price of our common stock to drop significantly,
even if our business is performing well.
Sales
of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in
the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
As
a public company, we are subject to additional laws, regulations and stock exchange listing standards, which will result in additional
costs to us and may strain our resources and divert our management’s attention.
Prior
to our December 2021 initial public offering, we operated on a private basis. As a public reporting company, we are now subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act, the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the NYSE American and other applicable
securities laws and regulations. Compliance with these laws and regulations will increase our legal and financial compliance costs and
make some activities more difficult, time-consuming or costly. We also expect that being a public company and being subject to new rules
and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. However, the incremental costs that we incur as a result of
becoming a public company could exceed our estimate. These factors may therefore strain our resources, divert management’s attention
and affect our ability to attract and retain qualified members of our board of directors.
Since
we have no current plans to pay regular cash dividends on our common stock, you may not receive any return on investment unless you sell
your common stock for a price greater than that which you paid for it.
We
do not anticipate paying any regular cash dividends on our common stock in the foreseeable future. Any decision to declare and pay dividends
in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations,
financial condition, cash requirements, contractual restrictions, and other factors that our board of directors may deem relevant. In
addition, our ability to pay dividends is, and may be, limited by covenants of existing and any future outstanding indebtedness we incur.
Therefore, any return on investment in our common stock is solely dependent upon the appreciation of the price of our common stock on
the open market, which may not occur. See Item 5. “Market For Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities - Dividends” for more detail.
If
securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations
regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.
The
trading market for our shares will be influenced by the research and reports that industry or securities analysts publish about us or
our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish
research on our Company. If no securities or industry analysts commence coverage of our Company, the trading price of our shares would
likely be negatively impacted. In the event securities or industry analysts-initiated coverage, and one or more of these analysts cease
coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn
could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock,
or if our results of operations do not meet their expectations, our share price could decline.
General
risks
Our
operating results and share price may be volatile, and the market price of our common stock may drop below the price you pay.
Our
year-end and quarterly operating results are likely to fluctuate in the future as a publicly traded company. In addition, securities
markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market
volatility, as well as general economic, market or political conditions, could subject the market price of our shares to wide price fluctuations
regardless of our operating performance. You may not be able to resell your shares at or above the price that you paid or pay for them
or at all. Our operating results and the trading price of our shares may fluctuate in response to various factors, including:
| ● | market
conditions in the broader stock market; |
| ● | actual
or anticipated fluctuations in our quarterly financial and operating results; |
| ● | introduction
of new wines by us or our competitors; |
| ● | issuance
of new or changed securities analysts’ reports or recommendations; |
| ● | results
of operations that vary from expectations of securities analysis and investors; |
| ● | guidance,
if any, that we provide to the public, any changes in this guidance or our failure to meet
this guidance; |
| ● | strategic
actions by us or our competitors; |
| ● | announcement
by us, our competitors or our vendors of significant contracts or acquisitions; |
| ● | sales,
or anticipated sales, of large blocks of our stock; |
| ● | additions
or departures of key personnel; |
| ● | regulatory,
legal, or political developments; |
| ● | public
response to press releases or other public announcements by us or third parties, including
our filings with the SEC; |
| ● | litigation
and governmental investigations; |
| ● | changing
economic conditions; |
| ● | changes
in accounting principles; |
| ● | default
under agreements governing our indebtedness; |
| ● | exchange
rate fluctuations; and |
| ● | other
events or factors, including those from natural disasters, war, actors of terrorism or responses
to these events. |
These
and other factors, many of which are beyond our control, may cause our operating results and the market price and demand for our shares
to fluctuate substantially. While we believe that operating results for any particular year or quarter are not necessarily a meaningful
indication of future results, fluctuations in our yearly or quarterly operating results could limit or prevent investors from readily
selling their shares and may otherwise negatively affect the market price and liquidity of our shares. In addition, in the past, when
the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against
the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending
the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business, which could significantly harm
our profitability and reputation.
We
may require additional debt and equity capital to pursue our business objectives and respond to business opportunities, challenges, or
unforeseen circumstances. If such capital is not available to us, our business, financial condition, and results of operations may be
materially and adversely affected.
We
may require additional capital to pursue our business objectives and respond to business opportunities, challenges, or unforeseen circumstances,
including to increase our marketing expenditures to improve our wine brand awareness, build and maintain our product inventory, develop
new wines, enhance our operating infrastructure and acquire complementary businesses. Accordingly, we may need to engage in equity or
debt financings to secure additional funds. However, additional funds may not be available when we need them on terms that are acceptable
to us or at all. Moreover, any debt financing that we secure in the future could involve restrictive covenants, which may make it more
difficult for us to obtain additional capital and to pursue business opportunities. Volatility in the credit markets may also have an
adverse effect on our ability to obtain debt financing. If we raise additional funds through further issuances of equity or convertible
debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights,
preferences, and privileges superior to those of holders of our common stock. If we are unable to obtain adequate financing or financing
on terms satisfactory to us when we require it, we may be forced to obtain financing on undesirable terms or our ability to continue
to pursue our business objectives and to respond to business opportunities, challenges or unforeseen circumstances could be significantly
limited, and our business, financial condition and results of operations could be materially and adversely affected.