| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Nature
of Business Fresh
Vine Wine, Inc. (the Company), a Nevada corporation, is a premium wine brand built to complement consumers’ healthy and active
lifestyles. The Company provides a competitively priced premium product that is blended to deliver several important benefits, such as
low-cal, low-sugar, low-carb. The Company’s wines are also gluten-free and keto and vegan friendly. The Company’s revenue is comprised primarily of wholesale and
direct to consumer (DTC) sales, and representation and distribution services. Wholesale revenue is generated through sales to distributors
located in states throughout the United States of America. DTC revenue is generated from individuals purchasing wine directly from the
Company through club membership and the Company’s website. Representation and distribution service revenue is generated from related
parties by providing such related parties with access to new markets and distribution channels. Service revenues are expected to suspend
at the end of the current calendar quarter to allow the company’s lean team to prioritize on the growth and expansion of the Fresh
Vine Wine brand. Basis
of Presentation The
Company’s financial statements have been prepared and are presented in accordance with United States generally accepted accounting
principles (“U.S. GAAP”). The financial statements include, in the opinion of management, all adjustments, consisting of
normal and recurring items, necessary for the fair presentation of the financial statements. In certain instances, amounts reported in
prior period financial statements have been reclassified to conform to the current financial statement presentation. Corporate
Conversion On
December 8, 2021, in relation to preparing for its initial public offering (“IPO”), Fresh Grapes, LLC filed a certificate
of conversion, whereby Fresh Grapes, LLC effected a corporate conversion from a Texas limited liability company to a Nevada corporation
and changed its name to Fresh Vine Wine, Inc. Pursuant to the corporate conversion, units of membership interest in the limited liability
company were converted into shares of common stock of the corporation at a conversion ratio of 6.1934 units for one share of common stock.
As a result of the corporate conversion, accumulated deficit was reduced to zero on the date of the corporate conversion, and the corresponding
amount was recorded to additional paid-in capital. The corporate conversion was approved by members holding a majority of the outstanding
units, and in connection with such conversion, the Company filed a certificate of incorporation and adopted bylaws. Pursuant to the Company’s
certificate of incorporation, the Company is authorized to issue up to 100,000,000 shares of common stock $0.001 par value per share
and 25,000,000 shares of preferred stock $0.001 par value per share. The Company determined that the corporate conversion is equivalent
to a change in the Company’s capital structure. As such, all references in the audited financial statements to the number of shares
and per-share amounts of member units are now presented as common stock and have been retroactively restated to reflect this conversion. Initial
Public Offering On
December 17, 2021, the Company completed its IPO whereby it sold 2,200,000 shares of common stock at a public offering price of $10 per
share. The aggregate net proceeds received by the Company from the offering were approximately $19.2 million, net of underwriting discounts
and commissions of approximately $1.8 million and offering expenses of approximately $1.1 million. Upon the closing of the IPO, 12,200,013
shares of common stock were outstanding. The shares began trading on December 14, 2021 on The New York Stock Exchange under the symbol
“VINE”. Liquidity, Going Concern, and Management Plan Although the Company’s revenue generated during the first quarter
of 2022 represents a 43% increase over its revenues generated in the fourth quarter of 2021, in addition to paying initial public offering
fees and settling pre- initial public offering net outstanding related party debt in the fourth quarter of 2021, the Company’s operating
expenses have significantly exceeded its revenues over these quarters. The Company has incurred increased expenses to purchase inventory
in advance of retail placement and in efforts to mitigate supply chain risks, invest in sales and marketing activities and increase our
company staffing and infrastructure to position us for future growth. The Company is looking forward to inclusion in the fall retail resets
for both large and national chains. We currently hold no debt and will require and seek debt or equity
financing in the near term to sustain our existing operations. If adequate financing is not available, we may be forced to curtail our
near-term growth priorities, take measures to severely reduce our expenses and business operations, or discontinue them completely. Such
financing may be dilutive. At our current pace of incurring expenses, and without receipt of additional
financing, we project that our existing cash will be sufficient to fund our current operations into the fourth quarter of 2022, after
which additional financing will be needed to continue to satisfy our obligations. As a result, we may defer certain investments in additional
inventory, curtail its sales and marketing efforts and staffing, and take other measures to reduce our expenses and business operations
as the Company works to obtain debt or equity financing to help support short-term working capital needs, as it has no debt on its balance
sheet. These measures may negatively impact the success of our near-term or longer-term growth objectives and prospects. Additional financing may not be available to us on terms favorable
to us or at all. If additional financing is available, it may be highly dilutive to our existing shareholders and may otherwise include
burdensome or onerous terms. Our inability to raise additional working capital at all or to raise it in a timely manner would negatively
impact our ability to fund our operations, to generate revenues, grow our business and otherwise execute our business plan, leading to
the reduction or suspension of our operations and ultimately potentially forcing us to cease operations altogether. Should this occur,
the value of any investment in our securities could be adversely affected. These factors call into question our ability to continue
as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going
concern. Accounting
Estimates Management
uses estimates and assumptions in preparing these financial statements in accordance with U.S. GAAP. Those estimates and assumptions
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include allowance
for doubtful accounts, allowance for inventory obsolescence, the useful lives of intangible assets, equity-based compensation for employees
and non-employees, and the valuation of deferred tax assets. Cash The
Company maintains its accounts at two financial institutions. At times throughout the year the Company’s cash balances may exceed
amounts insured by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and believes
it is not exposed to any significant credit risk. Accounts
Receivable Accounts receivable consists of amounts owed to the Company for sales
of the Company’s products on credit and are reported at net realizable value. Credit terms are extended to customers in the normal
course of business. The Company performs ongoing credit evaluations of its customers’ financial conditions. The Company estimates
allowances for future returns and doubtful accounts based upon historical experience and its evaluation of the current status of receivables.
Accounts considered uncollectible are written off against the allowance. As of March 31, 2022 and December 31, 2021, there was no allowance
for doubtful accounts. The
Company periodically factors outstanding accounts receivable, with full recourse, at a percentage of face value. See Note 10 for further
discussion of this arrangement. Inventories Inventories
primarily include bottled wine which is carried at the lower of cost (calculated using the first-in-first-out (“FIFO”)
method) or net realizable value. The Company reduces the carrying value of inventories that are obsolete
or for which market conditions indicate cost will not be recovered to estimated net realizable value. The Company’s estimate of
net realizable value is based on analysis and assumptions including, but not limited to, historical experience, future demand and market
requirements. Reductions to the carrying value of inventories are recorded in cost of revenues. As of March 31, 2022 and December
31, 2021 there was no allowance for inventory obsolescence. Intangible
Assets The
Company assesses for impairment intangible assets with finite useful lives which are amortized on a systematic basis over their estimated
useful lives. The amortization period and amortization method for an intangible asset with a finite useful life reflects the pattern
in which the assets’ future economic benefits are expected to be consumed. Where the pattern cannot be reliably determined, the straight-line
method is used. The amortization period and method is reviewed at least at each financial year-end. Amortization of intangible assets
with fixed determinable lives is recorded on a straight-line basis over 10 years for trademarks. Deferred
Offering Costs Deferred
offering costs primarily consist of legal, accounting, SEC filing fees, and any other fees relating to the Company’s initial public
offering. The deferred offering costs were capitalized as incurred and were offset against proceeds from the sale of shares of common
stock at the closing of the Company’s IPO. Revenue
Recognition The
Company’s total revenue reflects the sale of wine domestically in the U.S. to wholesale distributors or DTC and related party service
revenues. Under ASC Topic 606, Revenue from Contracts with Customers The
Company also generates revenue through membership in its wine club. Wine club members pay a monthly fee, which varies depending on level
of membership, and are entitled to receive quarterly shipments of wine, free shipping, and discounts on other wine and merchandise purchased.
The Company recognizes revenue for the monthly membership dues when product is delivered. Any membership dues received before product
is delivered is recorded as deferred revenue on the Company’s balance sheet. The Company has determined that related party service revenue should
be recognized over the period of time it provides such services. ASC 606 also notes that when another party is involved in providing goods
or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to
provide the specified goods or services itself (that is, the entity is a principal) or to arrange for those goods or services to be provided
by the other party (that is, the entity is an agent). The Company does not bear responsibility for inventory losses and does not
have pricing determination; therefore, the Company would be considered the agent and revenue should be recognized as net sales. Service
revenues are expected to suspend at the end of the current calendar quarter to allow the Company’s lean team to prioritize the growth
and expansion of the Fresh Vine Wine brand. Products
are sold for cash or on credit terms. Credit terms are established in accordance with local and industry practices, and typically require
payment within 30-60 days of delivery or shipment, as dictated by the terms of each agreement. The Company has elected the practical
expedient to not account for significant financing components as its payment terms are less than one year, and the Company determines
the terms at contract inception. The Company’s sales terms do not allow for the right of return except for matters related to manufacturing
defects, which are not material. Disaggregated
Revenue Information The
following table presents the percentages of total revenue disaggregated by sales channels for the three month periods ended March 31,
2022 and 2021:
Three months ended
March 31,
2022 2021
Wholesale 57.1 % 46.2 %
Direct to consumer 26.7 % 53.8 %
Related party service 16.2 % 0.0 %
Total revenue 100.0 % 100.0 % Contract
Balances When
the Company receives pre-orders or payment from a customer prior to transferring the product under the terms of a contract, the Company
records deferred revenue, which represents a contract liability. The Company will record deferred revenue when cash is collected from
customers prior to the wine shipment date. The Company does not recognize revenue until control of the wine is transferred and the performance
obligation is met. When the Company does not receive payment from a customer prior to or at the transfer of the product under the terms
of a contract, the Company records accounts receivable, which represents a contract asset. The
following table reflects the changes in the contract liability balance during the year ended December 31, 2021 and the three month period
ended March 31, 2022:
December 31, December 31, March 31,
Outstanding at beginning of period $ - $ - $ 13,750
Increase (decrease) attributable to:
Upfront payments - 257,492 57,315
Revenue recognized - (243,742 ) (13,750 )
Outstanding at end of period $ - $ 13,750 $ 57,315 Fair
Value of Financial Instruments The
Company’s accounting for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring or nonrecurring basis adheres to the Financial Accounting Standards Board (FASB) fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
● Level
1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement
date.
● Level
2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly,
for substantially the full term of the asset or liability.
● Level
3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The
level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant
to the fair value measurement in its entirety. The carrying values of cash, accounts receivable, accounts payable,
deferred revenue and other financial working capital items approximate fair value at March 31, 2022 and December 31, 2021, due to the
short maturity nature of these items. Income
Taxes The Company recognizes uncertain tax positions in accordance with ASC
740 on the basis of evaluating whether it is more likely than not that the tax positions will be sustained upon examination by tax authorities.
For those tax positions that meet the more-likely-than not recognition threshold, the Company recognizes the largest amount of tax benefit
that is more than 50 percent likely to be realized upon ultimate settlement. The Company recognizes interest and/or penalties related
to uncertain tax positions in income tax expense. There were no uncertain tax positions as of March 31, 2022 and December 31, 2021, and
as such, no interest or penalties were recorded to income tax expense. As of March 31, 2022 and December 31, 2021, the Company has no
unrecognized tax benefits. There are no unrecognized tax benefits included on the balance sheet that would, if recognized, impact the
effective tax rate. The Company does not anticipate there will be a significant change in unrecognized tax benefits within the next 12
months. Prior
to the conversion, the Company was a limited liability company and therefore was a disregarded legal entity for income tax purposes.
Accordingly, no benefit for income taxes was recorded prior to the conversion. For
years before 2019, the Company is not subject to U.S. federal or state income tax examinations. The Company’s policy is to recognize
interest and penalties related to uncertain tax positions as a component of general and administrative expenses. Equity-Based
Compensation The
Company measures equity-based compensation cost at the grant date based on the fair value of the award and recognizes the compensation
expense over the requisite service period, which is generally the vesting period. The Company recognizes any forfeitures as they occur.
As of March 31, 2022, there was $1,225,917 of unrecognized equity-based compensation expense recorded in prepaid expenses and other assets. The Company measures equity-based compensation when the service inception
date precedes the grant date based on the fair value of the award as an accrual of equity-based compensation and adjusts the cost to fair
value at each reporting date prior to the grant date. In the period in which the grant occurs, the cumulative compensation cost is adjusted
to the fair value at the date of the grant. As of March 31, 2022 and December 31, 2021, there no accrued equity-based compensation. Effective
December 9, 2021, the Company adopted an equity incentive plan which allows for the granting of incentive and non-qualified stock options,
restricted and unrestricted stock and stock units, stock appreciation rights, performance units and other stock-based awards to current
and prospective employees and directors of, and consultants and advisors to, the Company. See
Note 7 for further discussion of equity-based compensation incurred in 2022 and 2021. Advertising The
Company expenses the costs of advertising as incurred. Advertising expense for the three month periods ended March 31, 2022 and 2021
was approximately $578,000 and $190,000, respectively. Application
of New or Revised Accounting Standards Pursuant
to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), a company constituting an “emerging growth company”
is, among other things, entitled to rely upon certain reduced reporting requirements and is eligible to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies. The
Company is an emerging growth company and has elected to use this extended transition period for complying with new or revised accounting
standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is
no longer an emerging growth company or (ii) affirmatively and irrevocable opts out of the extended transition period provide in the
JOBS Act. Recently
Issued Accounting Pronouncements In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), Leases This
guidance will be effective for the Company beginning with the year ended December 31, 2022, with early adoption permitted. In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments, Net
Loss per Share Basic
net loss per share is determined by dividing net loss attributable to shareholders by the weighted-average shares outstanding during
the period. Diluted EPS reflects potential dilution and is computed by dividing net loss by the weighted average number of common shares
outstanding during the period increased by the numbers of additional common shares that would have been outstanding if all potential
common shares had been issued and were dilutive. However, potentially dilutive securities are excluded from the computation of diluted
EPS to the extent that their effect is anti-dilutive. The following table shows the components of diluted shares for the three month
periods ending:
March 31, March 31,
Weighted average shares outstanding – basic 12,299,417 7,099,339
Dilutive effect of shares authorized - -
Shares used in computing net loss per share – diluted 12,299,417 7,099,339 At March 31, 2022, 2,531,794 shares have been excluded from the calculation
of diluted weighted average shares outstanding as the inclusion of these shares would have an anti-dilutive effect. Mezzanine
Equity Due
to the contingently redeemable nature of Class F partner investor units issued in March 2021, the Company classified these units as temporary
equity in the mezzanine section of the balance sheet prior to its conversion to a C-Corporation. These units were recorded at their initial
carrying value, which equaled fair value as determined as of the issue date in March 2021. Upon the Company’s conversion from a
limited liability company to a C-Corporation in December 2021, these units were redeemed and converted to 1,938,534 shares of common
stock. |
