SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to
_________________________
Commission File Number: 001-41147
Fresh Vine Wine, Inc.
(Exact name of registrant as specified in its charter)
Nevada | | 87-3905007 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
| | |
11500 Wayzata Blvd. #1147 | | Minnetonka, MN 55305 |
(Address of principal executive offices) | | (Zip Code) |
(855) 766-9463
(Registrant’s telephone number, including
area code)
|
11500 Wayzata Blvd. # 1147, MN 55305 |
|
(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, $0.001 par value | | VINE | | NYSE American |
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes
☐ No
Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☒ |
If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is
a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 14, 2023, the registrant had 15,976,227 shares
of common stock outstanding.
FRESH VINE WINE, INC.
TABLE OF CONTENTS
Cautionary Statement Concerning Forward-Looking
Statements
We make forward-looking statements
in this Quarterly Report on Form 10-Q. In some cases, you can identify these statements by forward-looking words such as “may,”
“might,” “should,” “would,” “could,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential” or “continue,”
and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and
unknown risks, uncertainties, and assumptions about us, may include projections of our future financial performance based on our growth
strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections
about future events. There are important factors that could cause our actual results, level of activity, performance, or achievements
to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements.
In particular, you should consider the numerous risks and uncertainties described in the section titled “Risk Factors” in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and elsewhere such Annual Report, in the other reports and
documents that we file with the SEC, and in this Quarterly Report on Form 10-Q.
While we believe we have identified
material risks, these risks and uncertainties are not exhaustive. New risks and uncertainties emerge from time to time, and it is not
possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or
achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements in this report
represent our views as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements
whether as a result of new information, future developments or otherwise, and we do not intend to do so.
Forward-looking statements
include, but are not limited to, statements about:
|
● |
our ability to continue as a going concern in the absence of obtaining additional financing; |
|
● |
our ability to obtain additional financing within timeframes required on terms acceptable to us, or at all; |
|
● |
our ability to hire additional personnel and to manage the growth of our business; |
|
● |
our reliance on our brand name, reputation and product quality; |
|
● |
our ability to adequately address increased demands that may be placed on our management, operational and production capabilities. |
|
● |
the effectiveness of our advertising and promotional activities and investments; |
|
● |
our reliance on celebrities to endorse our wines and market our brand; |
|
● |
general competitive conditions, including actions our competitors may take to grow their businesses; |
|
● |
fluctuations in consumer demand for wine; |
|
● |
overall decline in the health of the economy and consumer discretionary spending; |
|
● |
the occurrence of adverse weather events, natural disasters, public health emergencies, including the COVID-19 pandemic, or other unforeseen circumstances that may cause delays to or interruptions in our operations; |
|
● |
risks associated with disruptions in our supply chain for grapes and raw and processed materials, including corks, glass bottles, barrels, winemaking additives and agents, water and other supplies; |
|
● |
disrupted or delayed service by the distributors we rely on for the distribution of our wines; |
|
● |
our ability to successfully execute our growth strategy, including continuing our expansion in the direct-to-consumer sales channel; |
|
● |
quarterly and seasonal fluctuations in our operating results; |
|
● |
our success in retaining or recruiting, or changes required in, our officers, key employees or directors; |
|
● |
our ability to protect our trademarks and other intellectual property rights, including our brand and reputation; |
|
● |
our ability to comply with laws and regulations affecting our business, including those relating to the manufacture, sale and distribution of wine; |
|
● |
the risks associated with the legislative, judicial, accounting, regulatory, political and economic risks and conditions; |
|
● |
claims, demands and lawsuits to which we are, and may in the future, be subject and the risk that our insurance or indemnities coverage may not be sufficient; |
|
● |
our ability to operate, update or implement our IT systems; |
|
● |
our ability to successfully pursue strategic acquisitions and integrate acquired businesses; |
|
● |
our ability to implement additional finance and accounting systems, procedures and controls in order to satisfy public company reporting requirements; |
|
● |
the potential liquidity and trading of our securities; and |
|
● |
the future trading prices of our common stock and the impact of securities analysts’ reports on these prices. |
In addition, statements that
“we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on
information available to us as of the date of this report. Although we believe that information provides a reasonable basis for these
statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive
inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly
rely on these statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
FRESH VINE WINE, INC.
BALANCE SHEETS
June 30, 2023 (Unaudited) and December 31, 2022
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Assets | |
| | |
| |
Current assets | |
| | |
| |
Cash | |
$ | 476,729 | | |
$ | 2,080,335 | |
Accounts receivable | |
| 133,341 | | |
| 259,317 | |
Due from employees, net | |
| - | | |
| 37,733 | |
Insurance recovery receivable | |
| - | | |
| 804,907 | |
Inventories | |
| 1,496,007 | | |
| 3,696,198 | |
Deferred offering costs | |
| - | | |
| 68,286 | |
Prepaid expenses and other | |
| 1,192,356 | | |
| 961,211 | |
Total current assets | |
| 3,298,433 | | |
| 7,907,987 | |
| |
| | | |
| | |
Prepaid expenses (long term) | |
| 521,668 | | |
| 678,167 | |
| |
| | | |
| | |
Total Assets | |
$ | 3,820,101 | | |
$ | 8,586,154 | |
| |
| | | |
| | |
Liabilities, and Stockholders’ Equity | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable | |
$ | 673,531 | | |
$ | 589,204 | |
Accrued compensation | |
| - | | |
| 420,413 | |
Settlement payable | |
| - | | |
| 1,250,000 | |
Accrued expenses | |
| 566,218 | | |
| 422,931 | |
Accrued expenses - related parties | |
| 220,000 | | |
| 280,000 | |
Deferred revenue | |
| 1,289 | | |
| 10,000 | |
Total current liabilities | |
| 1,461,038 | | |
| 2,972,548 | |
| |
| | | |
| | |
Total Liabilities | |
| 1,461,038 | | |
| 2,972,548 | |
| |
| | | |
| | |
Stockholders’ Equity | |
| | | |
| | |
Preferred stock, $0.001 par value - 25,000,000 shares authorized at June 30, 2023 and December 31, 2022; 0 shares issued and outstanding at June 30, 2023 and December 31, 2022 | |
| - | | |
| - | |
Common stock, $0.001 par value - 100,000,000 shares
authorized at June 30, 2023 and December 31, 2022; 17,017,558 and 12,732,257 shares issued and outstanding at June 30, 2023
and December 31, 2022 respectively | |
| 17,017 | | |
| 12,732 | |
Additional paid-in capital | |
| 24,595,025 | | |
| 21,420,732 | |
Accumulated deficit | |
| (22,252,979 | ) | |
| (15,819,858 | ) |
Total Stockholder’s Equity | |
| 2,359,063 | | |
| 5,613,606 | |
| |
| | | |
| | |
Total Liabilities and Stockholders’ Equity | |
$ | 3,820,101 | | |
$ | 8,586,154 | |
See accompanying notes to the financial statements.
FRESH VINE WINE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
| | |
| | |
| |
Wholesale revenue | |
$ | 159,232 | | |
$ | 657,927 | | |
$ | 447,606 | | |
$ | 1,187,767 | |
Direct to consumer revenue | |
| 170,893 | | |
| 215,110 | | |
| 291,149 | | |
| 463,511 | |
Related party service revenue | |
| - | | |
| 146,340 | | |
| - | | |
| 297,224 | |
Total Net Revenue | |
| 330,125 | | |
| 1,019,377 | | |
| 738,755 | | |
| 1,948,502 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues | |
| 2,329,655 | | |
| 836,052 | | |
| 2,741,647 | | |
| 1,448,104 | |
Gross profit (loss) | |
| (1,999,530 | ) | |
| 183,325 | | |
| (2,002,892 | ) | |
| 500,398 | |
| |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 1,970,380 | | |
| 4,050,066 | | |
| 3,643,145 | | |
| 6,755,264 | |
Equity-based compensation | |
| 452,427 | | |
| 697,638 | | |
| 788,350 | | |
| 2,600,224 | |
Operating Loss | |
| (4,422,337 | ) | |
| (4,564,379 | ) | |
| (6,434,387 | ) | |
| (8,855,090 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income | |
| 40 | | |
| 5,489 | | |
| 1,266 | | |
| 9,957 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss | |
$ | (4,422,297 | ) | |
$ | (4,558,890 | ) | |
$ | (6,433,121 | ) | |
$ | (8,845,133 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted Average Shares Outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 16,606,442 | | |
| 12,534,045 | | |
| 14,983,854 | | |
| 12,417,763 | |
Diluted | |
| 16,606,442 | | |
| 12,534,045 | | |
| 14,983,854 | | |
| 12,417,763 | |
| |
| | | |
| | | |
| | | |
| | |
Net Loss per Share - Basic | |
$ | (0.27 | ) | |
$ | (0.36 | ) | |
$ | (0.43 | ) | |
$ | (0.71 | ) |
Net Loss per Share - Diluted | |
$ | (0.27 | ) | |
$ | (0.36 | ) | |
$ | (0.43 | ) | |
$ | (0.71 | ) |
See accompanying notes to the financial statements
FRESH VINE WINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For the Three and Six Month Periods Ended
June 30, 2023 and 2022
(Unaudited)
| |
| | |
| | |
Additional | | |
| | |
| |
| |
Preferred Stock | | |
Common Stock | | |
Paid-In | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Balances at December 31, 2021 | |
| - | | |
| - | | |
| 12,200,013 | | |
$ | 12,200 | | |
$ | 17,681,141 | | |
$ | (617,351 | ) | |
$ | 17,075,990 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Equity-based compensation | |
| - | | |
| - | | |
| 285,184 | | |
| 285 | | |
| 1,824,049 | | |
| - | | |
| 1,824,334 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,286,243 | ) | |
| (4,286,243 | ) |
Balances at March 31, 2022 | |
| - | | |
| - | | |
| 12,485,197 | | |
$ | 12,485 | | |
$ | 19,505,190 | | |
$ | (4,903,594 | ) | |
$ | 14,614,081 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Equity-based compensation | |
| | | |
| | | |
| 247,060 | | |
| 247 | | |
| 619,143 | | |
| 0 | | |
| 619,390 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) | |
| | | |
| | | |
| | | |
| | | |
| - | | |
| (4,558,890 | ) | |
| (4,558,890 | ) |
Balances at June 30, 2022 | |
| - | | |
| - | | |
| 12,732,257 | | |
$ | 12,732 | | |
$ | 20,124,333 | | |
$ | (9,462,484 | ) | |
$ | 10,674,581 | |
Balances at December 31, 2022 | |
| - | | |
| - | | |
| 12,732,257 | | |
$ | 12,732 | | |
$ | 21,420,732 | | |
$ | (15,819,858 | ) | |
$ | 5,613,606 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Rights Offering - common stock and warrants issued | |
| - | | |
| - | | |
| 3,149,969 | | |
| 3,144 | | |
| 2,543,584 | | |
| - | | |
| 2,546,728 | |
Equity-based compensation | |
| - | | |
| - | | |
| 500,000 | | |
| 500 | | |
| 257,172 | | |
| - | | |
| 257,672 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock Forfeiture | |
| - | | |
| - | | |
| (500,000 | ) | |
| (500 | ) | |
| 500 | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (2,010,824 | ) | |
| (2,010,824 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at March 31, 2023 | |
| - | | |
| - | | |
| 15,876,226 | | |
$ | 15,876 | | |
$ | 24,221,988 | | |
$ | (17,830,682 | ) | |
$ | 6,407,182 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Equity-based compensation | |
| - | | |
| - | | |
| 1,141,332 | | |
| 1,141 | | |
| 373,037 | | |
| - | | |
| 374,178 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,422,297 | ) | |
| (4,422,297 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balances at June 30, 2023 | |
| - | | |
| - | | |
| 17,017,558 | | |
$ | 17,017 | | |
$ | 24,595,025 | | |
$ | (22,252,979 | ) | |
$ | 2,359,063 | |
See accompanying notes to
the financial statements.
FRESH VINE WINE, INC.
STATEMENTS OF CASH FLOWS
For the Six Month Periods Ended June 30
(Unaudited)
| |
2023 | | |
2022 | |
Cash Flows from Operating Activities | |
| | |
| |
Net loss | |
$ | (6,433,121 | ) | |
$ | (8,845,133 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Amortization | |
| - | | |
| 3,990 | |
Equity-based compensation | |
| 788,350 | | |
| 2,600,224 | |
Inventory write-down | |
| 1,732,500 | | |
| - | |
Allowance for doubtful accounts | |
| 37,733 | | |
| | |
Changes in operating assets and liabilities | |
| | | |
| | |
Accounts receivable | |
| 125,975 | | |
| (548,600 | ) |
Insurance recovery receivable | |
| 804,907 | | |
| | |
Accounts receivable - related parties | |
| - | | |
| (492,409 | ) |
Receivables with recourse | |
| - | | |
| 146,314 | |
Related party receivables | |
| - | | |
| (3,413 | ) |
Inventories | |
| 467,691 | | |
| (3,610,687 | ) |
Prepaid expenses and other | |
| (231,145 | ) | |
| (361,559 | ) |
Accounts payable | |
| 84,327 | | |
| 54,120 | |
Accrued compensation | |
| (420,413 | ) | |
| 316,815 | |
Settlement Payable | |
| (1,250,000 | ) | |
| - | |
Accrued expenses | |
| 143,287 | | |
| 392,837 | |
Accrued expenses - related parties | |
| (60,000 | ) | |
| (209,617 | ) |
Deferred revenue | |
| (8,711 | ) | |
| (547 | ) |
Related party payables | |
| - | | |
| 109,392 | |
Net cash used in operating activities | |
| (4,218,620 | ) | |
| (10,448,273 | ) |
| |
| | | |
| | |
Cash Flows from Financing Activities | |
| | | |
| | |
Payments of related party notes payable | |
| - | | |
| (216,000 | ) |
Payments of outstanding secured borrowings | |
| - | | |
| (171,069 | ) |
Proceeds from rights offering - net of issuance costs | |
| 2,615,014 | | |
| - | |
| |
| | | |
| | |
Net cash provided by (used in)
financing activities | |
| 2,615,014 | | |
| (387,069 | ) |
| |
| | | |
| | |
Net (Decrease) in Cash | |
| (1,603,606 | ) | |
| (10,835,342 | ) |
| |
| | | |
| | |
Cash - Beginning of Year | |
| 2,080,335 | | |
| 16,063,941 | |
| |
| | | |
| | |
Cash - End of Year | |
$ | 476,729 | | |
$ | 5,228,599 | |
See accompanying notes to the financial statements
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Fresh Vine Wine, Inc. (the Company), a Nevada corporation, is a premium
wine brand built to complement consumers’ healthy and active lifestyles. The Company provides a competitively priced premium product
that is blended to deliver several important benefits, such as low-cal, low-sugar, low-carb. The Company’s wines are also gluten-free
and keto and vegan friendly.
The Company’s revenue is comprised primarily of wholesale and
direct to consumer (DTC) sales, and representation and distribution services. Wholesale revenue is generated through sales to distributors
located in states throughout the United States of America and Puerto Rico. DTC revenue is generated from individuals purchasing wine
directly from the Company through club membership and the Company’s website. Representation and distribution service revenue is
generated by providing third party wine producers with access to new markets and distribution channels.
Basis of Presentation
The Company’s financial statements have been prepared and are
presented in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The financial statements
include, in the opinion of the management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation
of the financial statements. In certain instances, amounts reported in prior period financial statements have been reclassified to conform
to the current financial statement presentation.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements should be read
in conjunction with the Company’s financial Statements and notes thereto for the fiscal year ended December 31, 2022, included
in the Company’s Annual Report on Form 10-K.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant
items subject to such estimates and assumptions include contingent liabilities, allowance for doubtful accounts, inventory allowances,
equity-based compensation for employees and non-employees, and the valuation of deferred tax assets.
Application of New or Revised Accounting Standards
Pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”), a company constituting an “emerging growth company” is, among other things, entitled to rely upon certain reduced
reporting requirements and is eligible to take advantage of an extended transition period to comply with new or revised accounting standards
applicable to public companies.
The Company is an emerging growth company and has elected to use this
extended transition period for complying with new or revised accounting standards that have different effective dates for public and
private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and
irrevocable opts out of the extended transition period provide in the JOBS Act.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Going Concern and Liquidity
Historically, the Company has incurred losses,
which has resulted in an accumulated deficit of approximately $22.3 million as of June 30, 2023. Cash flows used in operating activities
were $4.2 million and $10.4 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, the Company
had approximately a $1.8 million of working capital, inclusive of $477,000 in cash and cash equivalents.
The Company’s ability to continue as
a going concern is dependent on its ability to meet its liquidity needs through a combination of factors including but not limited to,
cash and cash equivalents, working capital and strategic capital raises. The ultimate success of these plans is not guaranteed.
In considering our forecast for the next
twelve months and the current cash and working capital as of the filing of this Form 10-Q, such matters create a substantial doubt regarding
the Company’s ability to meet our financial needs and continue as a going concern.
As discussed in Note 13 Subsequent Events,
in August of 2023, the Company received gross proceeds of $400,000 from a preferred stock offering of up to $1.0 million. In addition,
the company has reduced its workforce to two full time employees and has taken steps to generate some cash from selective liquidation
of some of its inventory.
The Company will need to seek additional debt or equity financing to
sustain existing operations. If adequate financing is not available, the Company will be forced to take measures to severely reduce our
expenses and business operations, or discontinue them completely. Such financing, if available, may be dilutive. At the current reduced
pace of incurring expenses and without receipt of additional financing (but assuming the receipt of funds upon the Second Closing and
the Option Closing under the Securities Purchase Agreement (as such terms are defined in Note 13 – Subsequent Events) and the receipt
of proceeds from the expected sales of inventory under purchase orders from a discount retailer entered into in the third quarter, the
Company projects that the existing cash balance will be sufficient to fund current operations into the fourth quarter of 2023, after which
additional financing or capital will be needed to satisfy obligations. Additional financing may not be available on favorable terms or
at all. If additional financing is available, it may be highly dilutive to existing shareholders and may otherwise include burdensome
or onerous terms. The Company’s inability to raise additional working capital in a timely manner would negatively impact the ability
to fund operations, generate revenues, maintain or grow the business and otherwise execute the Company’s business plan, leading
to the reduction or suspension of operations and ultimately potentially ceasing operations altogether and initiating bankruptcy proceedings.
Should this occur, the value of any investment in the Company’s securities would be adversely affected.
These factors raise substantial doubt about the Company’s ability
to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit
Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, and also issued subsequent amendments to the initial
guidance, collectively, ASC 326, to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that requires
the reflection of expected credit losses and will also require consideration of a broader range of reasonable and supportable information
to determine credit loss estimates. For many entities with financial instruments, the standard will require the use of a forward-looking
expected loss model rather than the incurred loss model for recognizing credit losses, which may result in the earlier recognition of
credit losses on financial instruments. The Company adopted this guidance during the quarter ended March 31, 2023, which had no material
impact on the financial statements.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
2. REVENUE RECOGNITION
The Company’s total revenue reflects the sale of wine domestically
in the U.S. to wholesale distributors or DTC and related party service revenues. Under ASC Topic 606, Revenue from Contracts with
Customers (“ASC 606”), the Company recognizes revenue when control of the promised good is transferred to the customer
in an amount that reflects the consideration for which the Company is expected to be entitled to receive in exchange for those products.
Each contract includes a single performance obligation to transfer control of the product to the customer. Control is transferred when
the product is either shipped or delivered, depending on the shipping terms, at which point the Company recognizes the transaction price
for the product as revenue. The Company has elected to account for shipping and handling as a fulfillment activity, with amounts billed
to customers for shipping and handling included in total revenue.
The Company also generates revenue through membership in its wine
club. Wine club members pay a monthly fee, which varies depending on level of membership, and are entitled to receive quarterly shipments
of wine, free shipping, and discounts on other wine and merchandise purchased. The Company recognizes revenue for the monthly membership
dues when the product is delivered. Any membership dues received before the product is delivered is recorded as deferred revenue on the
Company’s balance sheet.
The Company has determined that related party service revenue should
be recognized over the period of time it provides such services. ASC 606 also notes that when another party is involved in providing
goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to
provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods or services to be provided
by the other party (that is, the entity is an agent). The Company does not bear responsibility for inventory losses and does not
have pricing determination; therefore, the Company would be considered the agent and revenue should be recognized as net sales.
The following table presents the percentages of total revenue disaggregated
by sales channels for the three and six month periods ended June 30, 2023 and 2022:
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Wholesale | |
| 48.2 | % | |
| 64.5 | % | |
| 60.6 | % | |
| 61 | % |
Direct to consumer | |
| 51.8 | % | |
| 21.1 | % | |
| 39.4 | % | |
| 24 | % |
Related party service | |
| 0.0 | % | |
| 14.4 | % | |
| 0.0 | % | |
| 15 | % |
Total revenue | |
| 100.0 | % | |
| 100 | % | |
| 100.0 | % | |
| 100 | % |
3. LOSS PER SHARE
Basic net loss per share is determined by dividing net loss attributable
to shareholders by the weighted-average shares outstanding during the period. Diluted EPS reflects potential dilution and is computed
by dividing net loss by the weighted average number of common shares outstanding during the period increased by the numbers of additional
common shares that would have been outstanding if all potential common shares had been issued and were dilutive. However, potentially
dilutive securities are excluded from the computation of diluted EPS to the extent that their effect is anti-dilutive. The following
table presents a reconciliation between basic and diluted net loss per share for the three and six month periods ending:
| |
Three Months Ended | | |
Six Months Ended | |
| |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Numerator: | |
| | |
| | |
| | |
| |
Net loss attributable to Fresh Vine Wine shareholders | |
$ | (4,422,297 | ) | |
$ | (4,458,890 | ) | |
$ | (6,433,121 | ) | |
$ | (8,845,133 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Basic – weighted shares outstanding | |
| 16,606,442 | | |
| 12,534,045 | | |
| 14,983,854 | | |
| 12,417,763 | |
Dilutive effect from shares authorized | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted – weighted shares outstanding | |
| 16,606,442 | | |
| 12,534,045 | | |
| 14,983,854 | | |
| 12,417,763 | |
| |
| | | |
| | | |
| | | |
| | |
Basic loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.27 | ) | |
$ | (0.36 | ) | |
$ | (0.43 | ) | |
$ | (0.71 | ) |
Diluted loss per share attributable to Fresh Vine Wine shareholders: | |
$ | (0.27 | ) | |
$ | (0.36 | ) | |
$ | (0.43 | ) | |
$ | (0.71 | ) |
At June 30, 2023 and 2022, 4,826,446 and 1,888,336 shares have been
excluded from the calculation of diluted weighted average shares outstanding as the inclusion of these shares would have an anti-dilutive
effect.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
4. INVENTORIES
Inventories primarily include bottled
wine which is carried at the lower cost (calculated using the average cost method) or net realizable value. The Company completed
an evaluation of the net realizable value of our inventory during the three months ended June 30, 2023. As a result of this evaluation,
the Company recorded a $1.7 million inventory write down to reflect it at its net realizable value, which is recorded in cost of
revenue in the financial statements. Inventories consist of the following at:
| |
June 30, 2023 | | |
December 31, 2022 | |
Inventory – finished goods | |
$ | 1,496,007 | | |
$ | 3,683,159 | |
Inventory – merchandise | |
| - | | |
| 13,039 | |
Total | |
$ | 1,496,007 | | |
$ | 3,696,198 | |
5. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of
the following at:
| |
June 30, 2023 | | |
December 31, 2022 | |
Prepaid marketing expenses – current | |
$ | 313,000 | | |
$ | 313,000 | |
Prepaid marketing expenses – long-term | |
| 521,668 | | |
| 678,167 | |
Inventory deposits | |
| 293,824 | | |
| 569,377 | |
Other prepaid expenses | |
| 585,532 | | |
| 78,834 | |
Total | |
$ | 1,714,024 | | |
$ | 1,639,378 | |
6. ACCRUED EXPENSES
Accrued expenses consist of the following at:
| |
June 30, | | |
December 31, | |
| |
2023 | | |
2022 | |
Sponsorship agreements | |
$ | 411,157 | | |
$ | 234,494 | |
Accrued credit card charges | |
| - | | |
| 21,013 | |
General trade payable accruals | |
| 134,433 | | |
| 107,424 | |
Other accrued expenses | |
| 20,628 | | |
| 60,000 | |
Total | |
$ | 566,218 | | |
$ | 422,931 | |
The sponsorship agreements relate to marketing contracts with unrelated
parties within the sports and entertainment industry. The terms of the agreements range from two to four years with annual payments range
from $103,000 to $216,000 per agreement. The total expense relating to these agreements for the three and six month periods ended June
30, 2023 was $123,998 and $176,662, respectively. The total expense relating to these agreements for the three and six month periods
ended June 30, 2022 was $184,720 and $366,158, respectively.
Accrued credit card charges primarily consist of warehouse, shipping
and other operating costs paid via a Company credit card as a tool for managing cashflow.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
7. STOCKHOLDERS EQUITY
Rights offering
During the first quarter of 2023, the Company distributed, at no charge
to holders of the Company’s common stock, non-transferable subscription rights to purchase up to an aggregate of 6,366,129 Units.
Each Unit consisted of one share of our common stock and a Warrant to purchase one share of our common stock. The Warrants were exercisable
immediately, expire five years from the date of issuance and have an exercise price of $1.25 per share. For each share
of common stock held by a stockholder of the Company on February 22, 2023, the record date of the Rights Offering, such stockholder received 0.5 subscription
rights. Each whole subscription right allowed the holder thereof to subscribe to purchase one Unit, which we refer to as the basic subscription
right, at a subscription price of $1.00 per Unit. In addition, any holder of subscription rights exercising his, her or its basic
subscription right in full was eligible to subscribe to purchase additional Units that remained unsubscribed in the Rights Offering at
the same subscription price per Unit that applied to the basic subscription right, subject to proration among participants exercising
their over-subscription privilege, which we refer to as the over-subscription privilege. Upon the closing of the Rights Offering, which
occurred on March 14, 2023, we issued 3,143,969 shares of common stock and 3,143,969 warrants and received aggregate
gross cash proceeds of approximately $3.14 million. After deducting dealer-manager fees and other fees and expenses related to the
Rights Offering, we received net proceeds of approximately $2.6 million. If exercised, additional gross proceeds of up to approximately
$3.93 million may be received through the exercise of warrants issued in the Rights Offering.
8. EQUITY BASED COMPENSATION
As of June 30, 2023, there was $834,668 of unrecognized equity-based
compensation expense recorded in prepaid expenses and other assets. The estimated expense for various marketing and advertising services
in exchange for common stock, for the periods subsequent to June 30, 2023 is as follows:
| |
Advertising and Marketing Expense | |
2023 | |
| 156,500 | |
2024 | |
| 313,000 | |
2025 | |
| 313,000 | |
2026 | |
| 52,168 | |
| |
$ | 834,668 | |
Restricted Stock Units
On April 24, 2023 the Company granted 319,023 restricted
stock units to its Chief Executive Officer. On May 11, 2023 the Company granted 170,958 restricted stock units to its Executive
Vice President Sales and Marketing. On May 25, 2023, the Company granted 124,902 restricted stock units to its Chief Financial
Officer. Restricted stock units represent the right to receive one share of common stock from the Company upon vesting. These restricted
stock units had a vesting period that coincided with the company filing its Form 10-K for the year ended on December 31, 2023 and had
a stipulation that each of the Executives attained performance objectives.
Restricted stock unit activity for the six months ended June 30, 2023
was as follows:
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
| | |
Remaining | |
| |
| | |
Contractual | |
| |
Number of | | |
Term | |
| |
RSUs | | |
(Years) | |
Outstanding at December 31, 2022 | |
| - | | |
| - | |
Granted | |
| 614,883 | | |
| 0.9 | |
Vested or released | |
| - | | |
| - | |
Forfeited | |
| - | | |
| - | |
Outstanding at June 30, 2023 | |
| 614,883 | | |
| 0.7 | |
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Shares of Restricted Stock
During the first quarter of 2023, 6,666 shares of restricted stock
from previous periods were forfeited by employees that terminated their employment. There was a new grant of 500,000 shares of restricted
stock which relates to the settlement reached with a previous employee, as further disclosed in Note 12. On April 24, 2023 the Company
granted 463,917 restricted stock to its Chief Executive Officer. On May 11, 2023 the Company granted 380,952 restricted
stock to its Executive Vice President Sales and Marketing. On May 25, 2023, the Company granted 196,463 restricted stock to
its Chief Financial Officer. In addition, the Company Board of Directors were granted 100,000 shares of restricted stock. Stock compensation
expense related to restricted stock issuances for the three and six month periods ended June 30, 2023 was $304,558 and $493,058,
respectively. Stock compensation expense related to restricted stock for the three and six month periods ended June 30, 2022 was $675,339 and
$2,277,136, respectively. Total unrecognized equity-based compensation expense is $116,441, net of known forfeitures, related to restricted
stock as of June 30, 2023.
Restricted stock activity during the six-month
period ended June 30, 2023 was as follows:
| |
| | |
Weighted | |
| |
| | |
Average | |
| |
Number of | | |
Remaining | |
| |
Shares of | | |
Vesting | |
| |
Restricted | | |
Term | |
| |
Stock | | |
(Years) | |
Outstanding at December 31, 2022 | |
| 6,666 | | |
| 0.9 | |
Granted | |
| 1,641,332 | | |
| 0.6 | |
Vested or released | |
| (25,000 | ) | |
| - | |
Forfeited | |
| (6,666 | ) | |
| - | |
Outstanding at June 30, 2023 | |
| 1,616,332 | | |
| 0.3 | |
Vendor Stock Awards
Vendor stock award activity subject to revenue-related performance
conditions during the six-month period ended June 30, 2023 was as follows:
| |
Number of Shares of Vendor
Stock
Awards | | |
Weighted Average Remaining Vesting Term (Years) | |
Outstanding at December 31, 2022 | |
| 1,030,000 | | |
| 2.25 | |
Granted | |
| - | | |
| - | |
Vested | |
| - | | |
| - | |
Expired | |
| - | | |
| - | |
Outstanding at June 30, 2023 | |
| 1,030,000 | | |
| 1.75 | |
For stock awards that contain revenue-related performance conditions,
compensation cost is recognized in the period in which it becomes probable that the performance condition will be satisfied. During the
second quarter of 2023, it has become not probable that the revenue-related performance will be achieved. Accordingly, the Company has
reversed the $15,500 of expense recorded in the first quarter and has not booked any expense in the second quarter. Stock compensation
expense related to vendor stock awards subject to revenue-related performance conditions totaled $0 and $0 for the six months ended June
30, 2023 and 2022, respectively.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Stock Options
Stock option activity as of and during the six-month
period ended June 30, 2023 was as follows:
|
|
Number of
Options |
|
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Contract
Term
(Years) |
|
Outstanding at December 31, 2022 |
|
|
1,574,892 |
|
|
|
9.67 |
|
|
|
8.94 |
|
Granted |
|
|
1,500,000 |
|
|
|
0.50 |
|
|
|
5.00 |
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
(3,333 |
) |
|
|
2.78 |
|
|
|
- |
|
Outstanding at June 30, 2023 |
|
|
3,071,559 |
|
|
|
5.20 |
|
|
|
6.72 |
|
Exercisable at June 30, 2023 |
|
|
71,559 |
|
|
|
3.03 |
|
|
|
9.17 |
|
Stock compensation expense related to options issued amounted to $138,791
and $173,242 for the six months ended June 30, 2023 and 2022 respectively. Total unrecognized equity-based compensation expense is $38,045,
net of known forfeitures, related to stock options as of June 30, 2023.
Warrants
During the first half of 2023, no warrants from previous periods were
exercised or forfeited. As described above, 3,143,969 warrants were granted as part of the Rights Offering, as disclosed in Note 7.
|
|
Number of
Warrants |
|
|
Weighted
Average
Exercise
Price |
|
|
Weighted
Average
Remaining
Contract
Term (Years) |
|
Outstanding at December 31, 2022 |
|
|
110,000 |
|
|
|
12.00 |
|
|
|
3.71 |
|
Granted |
|
|
3,143,969 |
|
|
|
1.25 |
|
|
|
5.00 |
|
Exercised |
|
|
- |
|
|
|
|
|
|
|
- |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
- |
|
Outstanding at June 30, 2023 |
|
|
3,253,969 |
|
|
|
1.61 |
|
|
|
4.66 |
|
The Company uses the Black-Scholes option-pricing model to estimate
the fair value of equity-based awards. The inputs for the Black-Scholes valuation model require management’s significant assumptions.
Prior to the Company’s IPO, the price per share of common stock was determined by the Company’s board based on recent prices
of common stock sold in private offerings. Subsequent to the IPO, the price per share of common stock is determined by using the closing
market price on The NYSE American stock exchange on the grant date. The risk-free interest rates, ranging from 0.02% to 4.45%, are based
on the rate for U.S. Treasury securities at the date of grant with maturity dates approximately equal to the expected life of the awards
at the grant date. The expected term for employee and nonemployee awards ranged from 3 to 10 years based on industry data, vesting period,
contractual period, among other factors. The expected volatility was estimated at 175% based on historical volatility information of
peer companies that are publicly available in combination with the Company’s calculated volatility since being publicly traded.
The Company does not expect to pay dividends. For awards with a performance condition, stock compensation is recognized over the requisite
service period if it is probable that the performance condition will be satisfied.
9. INCOME TAXES
The Company has federal and state net operating loss carryforwards
with a full valuation allowance against the deferred tax assets as of June 30, 2023. No income tax expense or benefit was recorded
for the six month periods ended June 30, 2023 and 2022 due to the Company’s net loss position.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
10. SUPPLIER AND CUSTOMER CONCENTRATION
The Company has an agreement with an unrelated party for various wine
making activities, including production, bottling, labeling, and packaging. The Company purchases finished goods through blanket sales
orders that require a minimum 20% deposit. In addition to the purchases of finished goods, the Company pays certain storage, administrative
fees and taxes related to the purchased goods. There is no specified term of the agreement but continues as additional blanket sales orders
are issued. For the six month periods ended June 30, 2023 and 2022, substantially all of the Company’s inventory purchases were
from this supplier.
The Company also engages with other suppliers as needed for the purchase
of a select varietal of wine to be offered in limited quantities. There are no formal agreements due to the infrequency of activity with
these suppliers.
A significant portion of the Company’s wholesale revenue comes
from two national distributor customers that operate in several markets. For the three and six month periods ended June 30, 2023 and 2022,
approximately 71% and 60% respectively of the Company’s wholesale revenue came from these two customers. As of June 30, 2023 and
2022, these customers accounted for approximately 58% and 69% respectively of accounts receivable.
11. COMMITMENTS AND CONTINGENCIES
During March 2021, the Company entered into two license agreements
with the Class F partner investors for marketing and advertising services. The agreements require ongoing payments of $300,000 per agreement
each year for an initial term of five years. Additionally, the agreements require the Company to reimburse out of pocket expenses related
to promotion of the Company’s products. In November 2021, the agreements were amended to include, among other provisions, partners
investor options to terminate the agreements if a $5 million EBITDA threshold is not met in either 2022 or 2023. The net expense relating
to the agreements was $120,000 and $240,000 for the three and six month periods ended June 30, 2023. The net expense was $120,000 and
$140,000 for the three and six month periods ended June 30, 2022.
License Agreements
The estimated expense related to the license agreements for the periods
ending December 31 subsequent to June 30, 2023 is as follows:
| |
Advertising
and
Marketing
Expense | |
2023 | |
$ | 240,000 | |
2024 | |
| 480,000 | |
2025 | |
| 480,000 | |
2026 | |
| 80,000 | |
| |
$ | 1,280,000 | |
Sponsorship Agreements
The estimated expense for the sponsorship agreements as described in
Note 6 for the periods ending December 31 subsequent to June 30, 2023 is as follows:
| |
Advertising
and
Marketing
Expense | |
2023 | |
$ | 195,763 | |
2024 | |
| 160,147 | |
| |
$ | 355,910 | |
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
12. LEGAL PROCEEDINGS
Timothy Michaels
On February 24, 2022, Timothy Michaels, the former Chief Operating
Officer of the Company, signed a Separation Agreement and Release (the “Separation Agreement”) in connection with the termination
of his employment with the Company, which occurred on February 7, 2022.
On May 27, 2022, Mr. Michaels filed a complaint against the Company
in the Fourth Judicial District Court, Hennepin County, Minnesota, alleging that the Company breached the February 24, 2022 Separation
Agreement by including a restricted “lock-up” legend on shares of the Company’s common stock issued to Mr. Michaels
pursuant to the Settlement Agreement. 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. The action remains pending.
Janelle Anderson Litigation
Settlement and Related Founder Share Forfeitures
The Company was a party to an
action pending in Hennepin County District Court, captioned Janelle Anderson v. Fresh Vine Wine, Inc., Damian Novak, and Rick Nechio,
Court File No. 27-CV-22-11491 (the “Lawsuit”), in which Ms. Anderson alleged, among other things, that the Company terminated
her employment in retaliation for reports of alleged wrongdoing pursuant to the Minnesota Whistleblower Act. Defendants also included
Damian Novak, former Executive Chairman and a former director of the Company, and Rick Nechio, former interim Chief Executive Officer
and a director of the Company. The suit was dismissed on March 6, 2023, with prejudice.
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 the Settlement Agreement, Ms. Anderson agreed to dismiss the Lawsuit with prejudice
and to file with the court any and all documents necessary to effect such dismissal with prejudice within five business days after all
settlement consideration has been actually received by her, and the parties agreed to general mutual releases. The Company also agreed
to indemnify Ms. Anderson and hold her harmless against any liability, civil damages, penalties, or fines claimed against her for any
of her actions done within the course and scope of her employment with the Company as required by Minn. Stat. §181.970, and under
any applicable insurance policies, including but not limited to any directors and officers policies. The Settlement Agreement also contains
a non-disparagement provision.
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. The Company recouped approximately $805,000 of this cash payment from insurance coverage. The cash payment
is in addition to the $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 agreed to enter into a consulting agreement (the “Anderson Consulting Agreement”) pursuant to
which Ms. Anderson would provide certain consulting services to the Company for a period of six months. As consideration for such services,
the Company agreed to grant and issue 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, with prejudice. No additional expense has been recorded
during 2023 regarding this matter.
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
Also pursuant to the Settlement
Agreement, Damian Novak, former Executive Chairman and director, resigned as Executive Chairman and removed himself from his management
duties with the Company effective February 20, 2023, and has resigned from our board of directors promptly following completion of
the subscription rights offering on March 14, 2023. In addition, Rick Nechio, the Company’s former interim Chief Executive Officer
and director, resigned from our board of directors effective February 20, 2023.
In conjunction with entering
into the Settlement Agreement, Rick Nechio and Damian Novak entered into Agreements to Forfeit Shares of Common Stock (the “Forfeiture
Agreements”) pursuant to which each agreed to forfeit and transfer back to the Company without consideration 250,000 shares
of common stock of the Company held by them (a total of 500,000 shares), to enable the Company to issue the Anderson Consulting
Shares to Ms. Anderson without subjecting the Company’s other stockholders to dilution therefrom (the “Anderson Consulting-related Forfeitures”).
The Anderson Consulting-related Forfeitures became effective in connection with the Settlement Closing.
13. SUBSEQUENT EVENTS
Management Change
Effective July 19, 2023, the Board of Directors
of the Company (the “Board”) appointed Michael Pruitt to serve as Interim Chief Executive Officer of the Company, succeeding
Roger Cockroft.
Series A Convertible
Preferred Stock
On August 2, 2023, the Company entered into
a Securities Purchase Agreement (the “Securities Purchase Agreement”) with two accredited investors (the “Purchasers”)
pursuant to which the Company agreed to issue and sell in a private placement (the “Offering”) shares of a newly created series
of preferred stock designated as “Series A Convertible Preferred Stock” (the “Series A Stock”).
Pursuant to the Securities Purchase Agreement, the Purchasers collectively
agreed to purchase up to 10,000 shares of Series A Stock at a per share purchase price equal to $100.00 (the “Stated Value”),
for total gross proceeds of up to $1.0 million. The Purchasers agreed to purchase 4,000 shares of Series A Stock for an aggregate purchase
price of $400,000 at an initial closing of the Offering (the “Initial Closing”), which occurred on August 2, 2023. The Securities
Purchase Agreement provides that the Company will issue and sell to the Purchasers, and the Purchasers will purchase, an additional 4,000
shares of Series A Stock at a second closing (the “Second Closing”) that is scheduled to occur within 30 days following the
Initial Closing, subject to satisfaction of applicable closing conditions. Pursuant to the Securities Purchase Agreement, the Purchasers
may elect, but are not required, to purchase an additional 2,000 shares of Series A Stock from the Company at a closing (the “Optional
Closing”) within 60 days following the date of the Initial Closing. There is no guaranty the Second Closing or the Optional Closing
will occur.
Each share of Series A Stock is convertible,
at any time and from time to time from and after the date of the Initial Closing at the option of the holder thereof, into the number
of shares of common stock (“Conversion Shares”) calculated by dividing the Stated Value by a conversion price (the “Conversion
Price”) of $0.10. However, if the Company’s common stock fails to continue to be listed or quoted for trading on a stock exchange,
then the Conversion Price thereafter will mean the lesser of (i) $0.10, or (ii) the closing sale price of the common stock on the trading
day immediately preceding the conversion date; provided that the Conversion Price shall not be less than $0.05 (the “Floor Price”).
The Conversion Price is subject to standard adjustments based stock splits, stock dividends, stock combinations and the like, and the
Floor Price is also subject to anti-dilution adjustments resulting from future offerings of common stock (or common stock equivalents)
at a price less than the prevailing Conversion Price.
The Series A Stock contains “blocker”
provisions restricting the holders’ ability to exercise conversion rights if the issuance of Conversion Shares would result in such
holder beneficially owning in excess of 4.99% of the Company’s common stock. In addition, a Series A Stock holder’s ability
to convert Series A Stock to common stock will be subject to an “Exchange Share Cap” and an “Individual Holder Share
Cap.” Under the Exchange Cap, the total number of shares of common stock issuable upon conversion of outstanding Preferred Shares,
when added to any previously issued Dividend Shares (as defined below), may not exceed 19.9% of the Company’s issued and outstanding
common stock immediately prior to the date on which shares of Series A Stock are first issued. Under the Individual Holder Share Cap,
no holder of Series A Stock will have the right to acquire common stock upon conversion of the Series A Stock if the issuance of shares
of common stock would result in converting holder beneficially owning in excess of 19.9% of the number of shares of common stock outstanding
immediately after giving effect to the issuance. The Exchange Share Cap and the Individual Holder Share Cap will not apply if the Company
obtains stockholder approval to issue the shares of common stock exceeding the applicable cap as required by the NYSE American LLC Company
Guide.
Each holder of a share of Series A Stock is
entitled to receive dividends payable, subject to certain conditions, in cash or shares of common stock (“Dividend Shares”)
valued as either (i) the then applicable Conversion Price, or (ii) 50% of the then current market price of the Company’s common
stock, at the dividend rate of 12% per annum. Dividends are cumulative and will be payable on July 31st of each year. However, the Company
may not pay dividends by issuing Dividend Shares if and to the extent that the issuance of such Dividend Shares, when added to all Conversion
Shares previously issued upon prior conversions of Series A Stock and previously issued Dividend Shares (if any), would exceed the Exchange
Share Cap or result in a Series A Stock holder beneficially owning shares of common stock in excess of the Individual Holder Share Cap,
in each case unless the Company obtains stockholder approval for such issuances.
The shares of Series A Stock will vote with
the common stock as a single class on all matters submitted to a vote of stockholders of the Company other than any proposal to approve
the issuance of shares of common stock in excess of the Exchange Share Cap or the Individual Holder Share Cap. The Preferred Shares will
vote on an as-converted to common stock basis, taking into account the conversion limitations resulting from the Exchange Share Cap and
the Individual Holder Share Cap, if and as applicable; however, solely for purposes of determining voting rights, the Conversion Price
shall be equal to the most recent closing sale price of the Common Stock as of the execution and delivery of the Securities Purchase Agreement,
which was $0.47.
Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a “Liquidation”), the Holders shall (i) first be entitled to receive out
of the assets, whether capital or surplus, of the Company an amount equal to 150% times the Stated Value for each share of Series A Stock
before any distribution or payment shall be made to the holders of any junior securities and (ii) then be entitled to participate in the
distribution of remaining assets with the holders of common stock on an as-if-converted to common stock basis (disregarding for such purposes
any conversion limitations).
The Company may redeem (i) up to 75% of the
issued and outstanding shares of Series A Stock for a price per share equal to 150% of the Stated Value thereof if such redemption occurs
within six months from the date of issuance, and (ii) up to 50% of the issued and outstanding shares of Series A Stock for a price per
share equal to 200% of the Stated Value thereof if such redemption occurs after six months but before the expiration of twelve months
from the date of issuance.
Other Events
On August 8, 2023, the Company received written letters from each of
Nina Dobrev and Jaybird Investments, LLC notifying the Company that it is in default of their respective license agreements based on failure
to pay their August 2023 license fees (each, a “Notice”). Each Notice also stated that it serves as written notice of termination
of the respective license agreements, effective 30 days from delivery of the Notice (the “Termination Date”), which shall
occur without further action or notice if the Company’s payment of the applicable August license fee is not made prior to the Termination
Date.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion
and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related
notes to those statements as included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information,
the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. See “Cautionary
Note Regarding Forward-looking Statements” included elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Part I
“Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Overview
Fresh Vine Wine, Inc. (the “Company”)
is 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. 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 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 June
30, 2023, we hold active relationships with wholesale distributors in 50 states, up from 48 states as of December 31, 2022. 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 core wine offerings are
priced strategically to appeal to mass markets and sell at a list price between $15 and $25 per bottle. 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. Additionally, Fresh Vine Wine is one of the very few products available at
this price point that includes a named winemaker, Jamey Whetstone.
Our marketing activities focus
primarily on consumers in the 21-to-34 year old demographic with moderate to affluent income and on those with a desire to pursue healthy
and active lifestyles.
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.
Key Financial Metrics
We use net revenue, gross profit
(loss) and net income (loss) to evaluate the performance of Fresh Vine Wine. These metrics are useful in helping us to identify trends
in our business, prepare financial forecasts and make capital allocation decisions, and assess the comparable health of our business relative
to our direct competitors.
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Net revenue | |
$ | 330,125 | | |
$ | 1,019,377 | | |
$ | 738,755 | | |
$ | 1,948,502 | |
Gross profit (loss) | |
$ | (1,999,530 | ) | |
$ | 183,325 | | |
$ | (2,002,892 | ) | |
$ | 500,398 | |
Net loss | |
$ | (4,422,297 | ) | |
$ | (4,558,890 | ) | |
$ | (6,433,121 | ) | |
$ | (8,445,133 | ) |
Components of Results of Operations and Trends
That May Impact Our Results of Operations
Net Revenue
Our net revenue consists primarily
of wine sales to distributors and retailers, which together comprise our wholesale channel, and directly to individual consumers through
our DTC channel. Net revenues generally represent wine sales and shipping, when applicable, and to a lesser extent branded merchandise
and wine club memberships. For wine and merchandise sales, revenues are recognized at time of shipment. For Wine Club memberships, revenues
are recognized quarterly at the time of fulfilment.
We refer to the volume of wine
we sell in terms of cases. Each case contains 12 standard bottles, in which each bottle has a volume of 750 milliliters. Cases are sold
through Wholesale/Retail or DTC channels.
The following factors and trends
in our business have driven our net revenue results and are expected to be key drivers of our net revenue for the foreseeable future:
Brand recognition: As
we expand our marketing presence and drive visibility through traditional and modern marketing methods, we expect to build awareness and
name recognition for Fresh Vine Wine in consumers’ minds. Brand awareness will be built substantially through social media channels,
where we are currently able to access more than 30 million potential consumers through our celebrities’ Instagram and Facebook
platforms.
Portfolio evolution: As
a relatively new, high-growth brand, we expect and seek to learn from our consumers. We will continuously evolve and refine our products
to meet our consumers’ specific needs and wants, adapting our offering to maximize value for our consumers and stakeholders. Our
growth mindset, coupled with our differentiated production and distribution platform, will enable us to accelerate growth and deliver
on our value proposition over time.
One way in which we will evolve
our portfolio is through product extensions. Fresh Vine Wine added a sixth varietal, Sauvignon Blanc, late in the second quarter of 2022
and seventh varietal, Sparkling Rosé, in the third quarter of 2022, currently offering seven varietals (Cabernet Sauvignon, Cabernet
Sauvignon Reserve, Pinot Noir, Chardonnay, Sauvignon Blanc, Rosé, and Sparkling Rosé) within our product portfolio. In the
future, we can use the same knowledge and supplier networks to launch new varietals with much greater efficiency than we were previously
able to achieve.
Distribution expansion
and acceleration: Purchasing by distributors and loyal accounts that continue to feature our wines are key drivers of net
revenue. We plan to continue broadening our distributor network, adding new geographies, and increasing each distributor’s average
order size as we accelerate growth.
Seasonality: In
line with industry norms, we anticipate our net revenue peaking during the quarter spanning from October through December due to increased
consumer demand around the major holidays. This is particularly true in our DTC revenue channel, where marketing programs will often be
aligned with the holiday season and product promotions will be prevalent.
Revenue Channels
Our sales and distribution platform
is built upon a highly developed network of distributor accounts. Within this network, we have signed agreements in place with several
of the nation’s largest distributors including Southern Glazer’s Wine & Spirits and RNDC, among others. While we
are actively working with these distributors in certain markets, they operate across the United States, and we intend to grow our
geographic/market presence through these relationships. The development of these relationships and impacts to our related product mix
will impact on our financial results as our channel mix shifts.
| ● | Wholesale channel: Consistent with sales practices in the wine industry, sales to retailers and distributors
occur below SRP (Suggested Retail Price). We work closely with distributors to increase wine volumes and the number of products sold by
their retail accounts in their respective territories. |
| ● | DTC channel: Wines sold through our DTC channels are generally sold at SRP, although we do periodically
offer various promotions. Our DTC channel continues to grow as a result of a number of factors, including expanded e-commerce sites and
social media capabilities. |
| ● | Related party services: We previously entered into service agreements with related parties in the
wine industry to provide representation and distribution services. These services were suspended in June 2022 to allow the Company’s
lean team to prioritize the growth and expansion of the Fresh Vine Wine brand. |
Wholesale channel sales made
on credit terms generally require payment within 30 days of delivery; however our credit terms with Southern Glazer’s Wine &
Spirits requires payment within 60 days of delivery. During periods in which our net revenue channel mix reflects a greater concentration
of wholesale sales, we typically experience an increase in accounts receivable for the period to reflect the change in sales mix; payment
collections in the subsequent period generally reduce our accounts receivable balance and have a positive impact on cash flows.
While we seek to increase revenue
across all channels, we expect the majority of our future revenue to be driven through the wholesale channel. We intend to maintain and
expand relationships with existing distributors and form relationships with new distributors as we work to grow the Company. With multiple
varietals within the Fresh Vine Wine portfolio, we consider ourselves to be a ‘one-stop shop’ for better-for-you wines. We
continue to innovate with new products at competitive price points and strive to enhance the experience as we increase revenue with new
and existing consumers.
In the DTC channel, our comprehensive
approach to consumer engagement in both online and traditional forums is supported by an integrated e-commerce platform. Our marketing
efforts target consumers who have an interest in healthy and active lifestyles. We attempt to motivate consumers toward a simple and easy
purchasing decision using a combination of defined marketing programs and a modernized technology stack.
Increasing customer engagement
is a key driver of our business and results of operations. We continue to invest in our DTC channel and in performance marketing to drive
customer engagement. In addition to developing new product offerings and cross-selling wines in our product portfolio, we focus on increasing
customer conversion and retention. As we continue to invest in our DTC channel, we expect to increase customer engagement and subsequently
deliver greater satisfaction. We also distribute our wines via other wine e-commerce sites such as Wine.com and Vivino.com and plan to
continue to add affiliate retail websites.
Net Revenue Percentage by Channel
We calculate net revenue percentage
by channel as net revenue made through our wholesale channel to distributors, through our wholesale channel directly to retail accounts,
and through our DTC channel, respectively, as a percentage of our total net revenue. We monitor net revenue percentage across revenue
channels to understand the effectiveness of our distribution model and to ensure we are employing resources effectively as we engage
customers. See Note 2 to the accompanying financial statements for further details.
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | | |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Wholesale | |
| 48.2 | % | |
| 64.5 | % | |
| 60.6 | % | |
| 61 | % |
Direct to consumer | |
| 51.8 | % | |
| 21.1 | % | |
| 39.4 | % | |
| 23.8 | % |
Related party service | |
| 0.0 | % | |
| 14.4 | % | |
| | % | |
| 15.2 | % |
Total revenue | |
| 100.0 | % | |
| 100 | % | |
| 100 | % | |
| 100 | % |
Cost of Revenues
Cost of revenues (or cost of goods sold) is comprised
of all direct product costs such as juice, bottles, caps, corks, labels, capsules, storage and shipping. Additionally, we also categorize
boxes and quality assurance testing within our cost of revenues. We expect that our cost of revenues will increase as our net revenue
increases. As the volume of our product input increases, we intend to work to renegotiate vendor contracts with key suppliers to reduce
overall product input costs as a percentage of net revenue. The Company completed an evaluation of the net realizable value of our inventory
during the three months ended June 30, 2023. As a result of this evaluation, the Company recorded a $1.7 million inventory write
down to reflect it at its net realizable value, which is recorded in cost of revenue in the financial statements.
Additionally, the Company includes
shipping fees in all DTC revenues. These fees are paid by end consumers at time of order and subsequently itemized within the cost of
each individual sale.
As a commodity product, the
cost of wine fluctuates due to annual harvest yields and the availability of juice. This macroeconomic consideration is not unique to
Fresh Vine Wine, although we are conscious of its potential impact to our product cost structure.
Gross Profit (Loss)
Gross profit (loss) is equal
to our net revenue less cost of revenues. As we grow our business in the future, we expect gross profit to increase as our revenue grows
and as we optimize our cost of revenues.
Selling, General, and Administrative Expenses
Selling, general, and administrative
expenses consist of selling expenses, marketing expenses, and general and administrative expenses. Selling expenses consist primarily
of direct selling expenses in our wholesale and DTC channels, including payroll and related costs, product samples, processing fees, and
other outside service fees or consulting fees. Marketing expenses consist primarily of advertising costs to promote brand awareness, contract
fees incurred as a result of significant sports marketing agreements, customer retention costs, payroll, and related costs. General and
administrative expenses consist primarily of payroll and related costs.
Equity-Based Compensation
Equity-based compensation consists
of the non-cash expense resulting from our issuance of equity or equity-based grants issued in exchange for employee or non-employee
services. We measure equity-based compensation cost at the grant date based on the fair value of the award and recognize the compensation
expense over the requisite service period, which is generally the vesting period. We recognize any forfeitures as they occur.
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Net revenue | |
$ | 330,125 | | |
$ | 1,019,377 | | |
$ | 738,755 | | |
$ | 1,948,502 | |
Cost of revenues | |
$ | 2,329,655 | | |
$ | 836,052 | | |
$ | 2,741,647 | | |
$ | 1,448,104 | |
Gross profit (loss) | |
$ | (1,999,530 | ) | |
$ | 183,325 | | |
$ | (2,002,892 | ) | |
$ | 500,398 | |
Selling, general and administrative expenses | |
$ | 1,970,380 | | |
$ | 4,050,066 | | |
$ | 3,643,145 | | |
$ | 6,755,264 | |
Equity-based compensation | |
$ | 452,427 | | |
$ | 697,638 | | |
$ | 788,350 | | |
$ | 2,600,224 | |
Loss from operations | |
$ | (4,422,337 | ) | |
$ | (4,564,379 | ) | |
$ | (6,434,387 | ) | |
$ | (8,855,090 | ) |
Other income | |
$ | 40 | | |
$ | 5,489 | | |
$ | 1,266 | | |
$ | 9,957 | |
Net loss | |
$ | (4,422,297 | ) | |
$ | (4,558,890 | ) | |
$ | (6,433,121 | ) | |
$ | (8,845,133 | ) |
Comparison of the Three and Six months ended
June 30, 2023 and 2022
Net Revenue, Cost of Revenues and Gross Profit
| |
Three months ended | | |
| | |
| | |
Six months ended | | |
| | |
| |
| |
June 30, | | |
Change | | |
June 30, | | |
Change | |
| |
2023 | | |
2022 | | |
$ | | |
% | | |
2023 | | |
2022 | | |
$ | | |
% | |
Net revenue | |
$ | 330,125 | | |
$ | 1,019,377 | | |
| (689,252 | ) | |
| -67.6 | % | |
$ | 738,755 | | |
$ | 1,948,502 | | |
| (1,209,747 | ) | |
| -62.1 | % |
Cost of revenues | |
$ | 2,329,655 | | |
$ | 836,052 | | |
| 1,493,603 | | |
| 178.6 | % | |
$ | 2,741,647 | | |
$ | 1,448,104 | | |
| 1,293,543 | | |
| 89.3 | % |
Gross profit (loss) | |
$ | (1,999,530 | ) | |
$ | 183,325 | | |
| (2,182,855 | ) | |
| -1190.7 | % | |
$ | (2,002,892 | ) | |
$ | 500,398 | | |
| (2,503,290 | ) | |
| -500.3 | % |
For the three and six
months ended June 30, 2023, we experienced a decrease of 68% and 62%, respectively, in net revenue compared to the same periods in
2022. The decrease in net revenue was attributable to decreasing sales and marketing spending, the termination of related party sales
agreements and increased billbacks. The cost of revenues increased during the three and six months ended June 30, 2023 179% and 89%, respectively,
compared to the same periods in 2022. The cost of revenues for the three and six months ended June 30, 2023 included an inventory write-down
of $1.7 million.
Selling, general and administrative expenses
| |
Three months ended | | |
| | |
| | |
Six months ended | | |
| | |
| |
| |
June 30, | | |
Change | | |
June 30, | | |
Change | |
| |
2023 | | |
2022 | | |
$ | | |
% | | |
2023 | | |
2022 | | |
$ | | |
% | |
Selling expenses | |
$ | 265,201 | | |
$ | 420,732 | | |
| (155,531 | ) | |
| -37.0 | % | |
$ | 592,121 | | |
$ | 723,932 | | |
| (131,811 | ) | |
| -18.2 | % |
Marketing expenses | |
| 550,492 | | |
| 1,173,679 | | |
| (623,187 | ) | |
| -53.1 | % | |
| 1,160,302 | | |
| 1,673,868 | | |
| (513,566 | ) | |
| -30.7 | % |
General and administrative expenses | |
$ | 1,154,687 | | |
$ | 2,455,655 | | |
| (1,300,968 | ) | |
| -53.0 | % | |
$ | 1,890,722 | | |
$ | 4,357,464 | | |
| (2,466,742 | ) | |
| -56.6 | % |
For
the three and six months ended June 30, 2023, selling, general and administrative expenses decreased 51% and 46%, respectively, compared
to the same periods in the 2022. Selling, general and administrative expense decreases were largely driven by certain one-time charges
associated with the leadership transition described, as well as decreases in general and administrative expenses due to lower staffing
headcount and related salaries and additional consulting, legal and financial expenses as operational activity decreased from 2023 to
2022.
Cash Flows
| |
Six months ended | |
| |
June 30, | |
| |
2023 | | |
2022 | |
Cash provided by (used in): | |
| | |
| |
Operating activities | |
$ | (4,218,620 | ) | |
$ | (10,448,273 | ) |
Investing activities | |
| - | | |
| - | |
Financing activities | |
| 2,615,014 | | |
| (387,069 | ) |
Net (decrease) in cash | |
$ | (1,603,606 | ) | |
$ | (10,835,342 | ) |
Cash used in operating activities decreased in
the 2023 period primarily due to the fact that no inventory purchases were made in 2023 to maintain our inventory levels to meet demand.
Net cash provided by financing activities was
$2,615,014, raised in the Rights Offering (detailed in Note 7 in the financial statements) that was completed on March 14, 2023 for the
six months ended June 30, 2023 and net cash used in financing activities of $387,069 for the six months ended June 30, 2022.
Liquidity and Capital Resources
Our primary cash needs are
for working capital purposes, such as producing or purchasing inventory and funding operating expenses. We have funded our operations
through equity and debt financings, as described under the caption “Financing Transactions” below.
We have incurred losses and
negative cash flows from operations since our inception in May 2019, including net losses of approximately $6.4 million and
$15.2 million during the six months ended June 30, 2023 and the year ended December 31, 2022, respectively. As of June 30,
2023, we had an accumulated deficit of approximately $22.3 million and a total stockholders’ equity of approximately $2.4 million.
We expect to incur losses in future periods as we continue to operate our business and incur expenses associated with being a public
company.
As of June 30, 2023, we
had $0.5 million in cash, accounts receivable of $133,000, inventory of $1.5 million and prepaid expenses of $1.7 million. On June 30,
2023, current assets amounted to approximately $3.3 million and current liabilities were $1.5 million, resulting in a working capital
surplus (with working capital defined as current assets minus current liabilities) of approximately $1.8 million.
Since the commencement of its
operations, the Company’s operating and other expenses have continued to significantly exceed its revenues. The Company put in
place cash preservation initiatives in the second half of 2022, including a strategic restructuring plan aimed at cash resources while
continuing to focus on accelerating sales growth. That plan resulted in the termination of members of the Company’s internal sales
team, the engagement of a third party vendor positioned to more efficiently and effectively facilitate sales, and the engagement of a
third party vendor to manage marketing initiatives and drive growth within the Direct-to-Consumer sales channel.
Upon the April 2023 hiring
of Roger Cockroft, the Company’s former Chief Executive Officer, the Company undertook a review of the Company’s operations
and strategic plans, and took measures aimed at improving the Company’s operational efficiency, curtailing operating expenses and
further preserving cash resources. In the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed with
the Securities and Exchange Commission on May 22, 2023, the Company projected that its then-existing cash balance, when added to anticipated
proceeds from budgeted sales, would be sufficient to fund operations into the third quarter of 2023, after which additional financing
or capital will be needed to satisfy obligations.
During June and July 2023, the Company continued to work aggressively
to identify prospective new sources of capital, while working with advisors to assess and improve its liquidity position, including from
the sale of existing inventory. Early in the third quarter, the Company entered into purchase orders for the sale of up to 45,000 cases
of the Company’s wine to Grocery Outlet, a discount retailer. The Company expects that sales of such inventory will occur over the
next 3 months and expects to obtain sales proceeds totaling approximately $800,000 from such sales. Receipt of such revenues is subject
to the purchase orders being filled and applicable payment terms.
On August 2, 2023, the
Company entered into a Securities Purchase Agreement dated (the “Securities Purchase Agreement”) with two accredited
investors (the “Purchasers”) pursuant to which the Company agreed to issue and sell in a private placement (the
“Offering”) shares of a newly created series of preferred stock designated as Series A Convertible Preferred Stock (the
“Series A Stock”). The rights and preferences of the Series A Stock were described in the Company’s Current Report
on Form 8-K filed with the SEC on August 2, 2023.
Pursuant to the Securities
Purchase Agreement, the Purchasers collectively agreed to purchase up to 10,000 shares of Series A Stock at a per share purchase price
equal to $100.00, for total gross proceeds of up to $1.0 million. The Purchasers agreed to purchase 4,000 shares of Series A Stock for
an aggregate purchase price of $400,000 at an initial closing of the Offering (the “Initial Closing”), which occurred on
August 4, 2023. The Securities Purchase Agreement provides that the Company will issue and sell to the Purchasers, and the Purchasers
will purchase, an additional 4,000 shares of Series A Stock at a second closing (the “Second Closing”) that is scheduled
to occur within 30 days following the Initial Closing, subject to satisfaction of applicable closing conditions. Pursuant to the Securities
Purchase Agreement, the Purchasers may elect, but are not required, to purchase an additional 2,000 shares of Series A Stock from the
Company at a closing (the “Optional Closing”) within 60 days following the date of the Initial Closing. There is no guaranty
the Second Closing or the Optional Closing will occur.
The Company previously engaged
The Oak Ridge Financial Services Group, Inc. to serve as a financial adviser to the Company in connection with the capital raising activities.
The Company paid Oak Ridge a $10,000 cash advisory fee upon commencement of the engagement and, in connection with the Offering, the
Company has agreed to pay the Oak Ridge a cash fee equal to 5.0% of the gross proceeds received by the Company in the Offering, in addition
to reimbursing Oak Ridge for its out-of-pocket expenses.
The Company will need to seek
additional debt or equity financing to sustain existing operations. If adequate financing is not available, the Company will be forced
to take measures to severely reduce our expenses and business operations, or discontinue them completely. Such financing, if available,
may be dilutive. At the current reduced pace of incurring expenses and without receipt of additional financing (but assuming the receipt
of funds upon the Second Closing and the Option Closing under the Securities Purchase Agreement and the receipt of proceeds from the
sales of inventory under the Grocery Outlet purchase orders, the Company projects that the existing cash balance will be sufficient to
fund current operations into the fourth quarter of 2023, after which additional financing or capital will be needed to satisfy obligations.
Additional financing may not be available on favorable terms or at all. If additional financing is available, it may be highly dilutive
to existing shareholders and may otherwise include burdensome or onerous terms. The Company’s inability to raise additional working
capital in a timely manner would negatively impact the ability to fund operations, generate revenues, maintain or grow the business and
otherwise execute the Company’s business plan, leading to the reduction or suspension of operations and ultimately potentially
ceasing operations altogether and initiating bankruptcy proceedings. Should this occur, the value of any investment in the Company’s
securities would be adversely affected.
These factors raise substantial
doubt about the Company’s ability to continue as a going concern. Our financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Our ability to continue as
a going concern in the future 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. Our forecast of cash resources is forward-looking information that involves
risks and uncertainties, and the actual amount of our expenses could vary materially as a result of a number of factors. We have based
our estimates on assumptions that may prove to be wrong, and our revenue could prove to be less and our expenses higher than we currently
anticipate. Management does not know whether additional financing will be on terms favorable or acceptable to us when needed, if at all.
If we are unable to generate sufficient cash flow to fund our operations and adequate additional funds are not available when required,
management may need to curtail its sales and marketing efforts, which would adversely affect our business prospects, or we may be unable
to continue operations.
Financing Transactions
We have funded our operations
through debt and equity financing, as described in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results
of Operations) of our Annual Report on Form 10-K for the year ended December 31, 2022 under the caption “Financing Transactions,”
Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our Quarterly Report on Form
10-Q for the quarter ended March 31, 2023 under the caption “Financing Transactions,” and as described in this report under
the caption “Liquidity and Capital Resources.”
Critical Accounting Policies and Estimates
The Company’s significant
accounting policies are detailed in “Note 1: Summary of Significant Accounting Policies” to the financial statements included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q. The Company
follows these policies in preparation of the financial statements.
Off-Balance Sheet Arrangements
We have not engaged in any
off-balance sheet activities as defined in Item 303(a)(4) of Regulation S-K.
Accounting Standards and Recent Accounting
Pronouncements
See Note 1 to our financial
statement for a discussion of recent accounting pronouncements.
Emerging Growth Company Status
Pursuant to the JOBS Act, a
company constituting an “emerging growth company” is, among other things, entitled to rely upon certain reduced reporting
requirements and is eligible to take advantage of an extended transition period to comply with new or revised accounting standards applicable
to public companies. We are an emerging growth company and 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 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.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act), defines the term “disclosure controls and procedures” as those controls
and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms
and that such information is accumulated and communicated to our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation
of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2023. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act) were not effective as of June 30, 2023 due to the material weaknesses in internal control over
financial reporting as described below.
Material Weakness Remediation Activities
Management had previously determined
that there were material weaknesses in our internal control over financial reporting resulting from (i) a lack of segregation of incompatible
duties based on the limited number of employees responsible for the Company’s accounting and reporting functions, (ii) the lack
of a properly designed control or process in place to reconcile the inventory deposit accounting in a timely manner; (iii) a failure
to consider the gross versus net balance sheet treatment for the settlement and related insurance recoverable resulting in a material
adjustment to gross up assets and liabilities, (iv) a failure to evaluate the performance conditions for the former Chief Executive Officer’s
bonus, resulting in a material entry to record accrued compensation at December 31, 2022, and (v) the lack of properly designed controls
to prepare complete and accurate financial statements and footnotes in accordance with US GAAP in a timely manner. In an effort to remediate
the material weakness in our internal control over financial reporting described above, we intend to take the actions to implement the
processes described below.
Lack of Segregation of Duties. To
ensure timely and accurate financial reporting, management is designing processes to keep authorization, recordkeeping, custody of assets,
and reconciliation duties separate, and intends to reevaluate its overall staffing levels within the accounting, finance and information
technology departments and may hire additional staff to enable segregation of duties.
Accounting for inventory
deposits. The current process requires re-engineering to ensure the inventory deposit balance is accurately measured. In the future,
the Company plans to communicate with our inventory warehouse vendor to reconcile any discrepancies.
Accounting for insurance
recoveries. The Company has gathered and reviewed all applicable guidance regarding the accounting treatment of insurance recoveries.
We plan to use this guidance to appropriately record any future insurance recoveries.
Accounting for executive
bonus compensation. The performance conditions of bonuses will be reviewed periodically to ensure the Company is accurately
recording accrued bonus compensation.
Inability to prepare complete
and accurate financial statements and footnotes. To ensure timely and accurate financial reporting, management intends to hire
experienced staff to remedy this material weakness.
Once the above actions and
processes have been in operation for a sufficient period of time for our management to conclude that the material weaknesses have been
fully remediated and our internal controls over financial reporting are effective, we will consider these material weaknesses fully addressed.
Changes in Internal Control Over Financial Reporting
The Company continues to evaluate
its internal control framework for further enhancements. There were no other changes in the Company’s internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2023 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is engaged in litigation
with Timothy Michaels. See Note 12 to the accompanying financial statements.
Item 1A. Risk Factors
We need to hire additional executive
officers and other personnel.
The employment of Roger
Cockroft, our former Chief Executive Officer, and Hitesh Dheri, our former Chief Financial Officer, terminated on July 14, 2023. Our
executive management is currently comprised of an Chief Executive Officer and a Chief Financial Officer, both of whom are serving in
interim positions. 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. We cannot predict when we will be able locate such individuals
and, based on our current financial position, the terms of employment that we may offer could impede our ability to do so.
We have relied heavily on celebrities
to endorse our wines and market our brand.
Our brand, and to a large
extent our direct-to-consumer sales outlet, has been heavily dependent on the positive image and public popularity of, and affinity towards,
Nina Dobrev and Julianne Hough. Ms. Dobrev and Ms. Hough have served as celebrity spokespersons and ambassadors of our company, have actively
endorsed our wines on their sizable social media and other outlets, and are considered by many to be the face of our brand. Under our
license agreements with Ms. Dobrev and Jaybird Investments, LLC (an entity managed by Ms. Hough), each of Ms. Dobrev and Ms. Hough has
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. Although the terms of the license agreements are scheduled to run until March 2026, 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. Based on our operating performance to date, it is highly unlikely that we will meet that EBITDA
threshold.
Ms. Dobrev and Ms. Hough
also have the right to terminate their respective agreement earlier upon a material breach by our company that is not cured within 30
days after receiving notice of such breach. On August 8, 2023, the Company received written letters from each of Ms. Dobrev and Jaybird
Investments, LLC, notifying the Company that it is in default of their respective license agreements based on failure to pay their August
2023 license fees (each, a “Notice”). Each Notice also stated that it serves as written notice of termination of the respective
license agreements, effective 30 days from delivery of the delivery date of the Notice (the “Termination Date”), which shall
occur without further action or notice if the Company’s payment of the applicable August license fee is not made prior to the Termination
Date.
If Ms. Dobrev and Ms. Hough
are entitled to and elect to terminate the license agreements after 2023,or earlier upon a breach of the agreements by us, 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 after a 90 day run-off period. In such event, we will be required to refocus our marketing
and brand promotion efforts, which may adversely affect our business and results of operations.
We continue to be
engaged in litigation with our former Chief Operating Officer may become subject to other litigation arising in the ordinary course of
business or otherwise.
As disclosed under Item 1 –
Legal Proceedings, the Company has been involved in litigation with its former Chief Operating Officer. From time to time, we may also
become party to other litigation in the ordinary course of our operations or otherwise, including in connection with commercial disputes,
employment 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 wine 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.
Even in the absence of adverse judgments, defense costs associated with such litigation may have a material adverse effect on our company’s
cash position.
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On August 8, 2023, the Company received written letters from each of
Nina Dobrev and Jaybird Investments, LLC notifying the Company that it is in default of their respective license agreements based on failure
to pay their August 2023 license fees (each, a “Notice”). Each Notice also stated that it serves as written notice of termination
of the respective license agreements, effective 30 days from delivery of the Notice (the “Termination Date”), which shall
occur without further action or notice if the Company’s payment of the applicable August license fee is not made prior to the Termination
Date. See “Item 1A Risk Factors - We have relied heavily on celebrities to endorse our wines and market our brand.”
Item 6. Exhibits
See “Exhibit Index”
following the signature page of this Quarterly Report on Form 10-Q for a description of the documents that are filed as Exhibits to this
Quarterly Report on Form 10-Q or incorporated by reference herein.
SIGNATURES:
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
FRESH VINE WINE, INC. |
|
|
Date: August 14, 2023 |
By: |
/s/ Michael Pruitt |
|
|
Michael Pruitt |
|
|
Interim Chief Executive Officer |
|
|
|
Date: August 14, 2023 |
By: |
/s/ Keith Johnson |
|
|
Keith Johnson |
|
|
Interim Chief Financial Officer |
EXHIBIT INDEX
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In connection with the
Quarterly Report on Form 10-Q of Fresh Vine Wine Inc. (the “Company”) for the quarter ended June 30, 2023 as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Pruitt, Chief Executive Officer,
and I, Keith Johnson, Chief Financial Officer, of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. § 1350, that to our knowledge: