SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from _________________________ to _________________________
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FRESH VINE WINE, INC.
TABLE OF CONTENTS
i
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, 2023 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 complete, on a timely basis or at all, the proposed Merger (as defined below) with Notes Live, Inc. announced on January 29, 2024, pursuant to the terms and conditions of the Merger Agreement (as defined below); | |
| ● | the likelihood of the satisfaction of certain conditions to the completion of the Merger and whether and when the Merger will be completed; |
| ● | the expected number of Fresh Vine securities included in the fully diluted number of outstanding shares of Fresh Vine common stock for purposes of calculating the exchange ratio for the Merger transaction; |
| ● | the continued listing of our common stock on the NYSE American pending closing of the proposed Merger, or the combined company’s ability to satisfy the initial listing standards of the NYSE American; |
| ● | our ability to engage in a sale, license, transfer, disposition, divestiture or other monetization transaction, or winding down of Fresh Vine’s current wine production business in a manner reasonably acceptable to Notes Live, Inc., which is a condition to the closing of the Merger transaction, and the terms, conditions and timing of a such a transaction; |
| ● | the relative values ascribed to Fresh Vine, Inc. and Notes Live, Inc. for purposes of the Merger transaction, and the risk that as a result of adjustments to the exchange ratio in the merger transaction, Fresh Vine stockholders or Notes Live shareholders could own less of the combined company than is currently anticipated; |
| ● | the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the Merger Agreement; |
ii
| ● | the sufficiency of Fresh Vine’s cash and working capital to support continuing operations, to pay transaction costs through a closing of the proposed Merger transaction and to satisfy the net cash requirements that are a condition to the closing of the Merger transaction; |
| ● | the effect of the announcement, pendency or completion of the proposed Merger on Fresh Vine’s or Notes Live’s business relationships, operating results and business generally; |
| ● | the outcome of any legal proceedings that may be instituted against Fresh Vine, Notes Live or any of their respective directors or officers related to the Merger Agreement or the transactions contemplated thereby; |
| ● | the expected benefits of, and potential value created by, the Merger for the Fresh Vine stockholders and Notes Live stockholders; |
| ● | the strategy or future operations of the combined company following the closing of the proposed Merger with Notes Live, Inc.; |
| ● | the combined company’s projected financial performance; |
| ● | expectations concerning Fresh Vine’s or Notes Live’s relationships and actions with third parties; |
| ● | future regulatory, judicial and legislative changes in Fresh Vine’s or Notes Live’s industry; |
| ● | our ability to continue as a going concern in the absence of obtaining additional financing; |
| ● | 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 ability to refocus our marketing and brand promotion efforts following the termination of the license agreements with our celebrity brand ambassadors; |
| ● | 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; |
| ● | the impact of COVID-19 on our customers, suppliers, business operations and financial results; |
| ● | disrupted or delayed service by the distributors we rely on for the distribution of our wines; |
iii
| ● | 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 existence or sufficiency of our insurance or indemnities coverage; |
| ● | 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; |
| ● | the future trading prices of our common stock and the impact of securities analysts’ reports on these prices; |
| ● | any statements of the plans, strategies and objectives of management for future operations, including the execution of integration plans and the anticipated timing of filings; and |
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.
iv
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
1
FRESH VINE WINE, INC.
BALANCE SHEETS
| March 31, | ||||||||
| 2024 (Unaudited) | December 31, 2023 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Deferred offering costs | - | |||||||
| Total current assets | ||||||||
| Equity investment | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, and stockholders’ deficit | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Settlement payable | ||||||||
| Accrued expenses | ||||||||
| Accrued expenses - related parties | ||||||||
| Note payable | ||||||||
| Deferred revenue | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit | ||||||||
| Preferred stock, $ | ||||||||
| Series A preferred stock, | ||||||||
| Series B preferred stock, | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to the financial statements.
2
FRESH VINE WINE, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Wholesale revenue | $ | $ | ||||||
| Direct to consumer revenue | ||||||||
| Total net revenue | ||||||||
| Cost of revenues | ||||||||
| Gross loss | ( | ) | ( | ) | ||||
| Selling, general and administrative expenses | ||||||||
| Equity-based compensation | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Series A preferred dividends | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Weighted averages shares outstanding | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
| Net loss per share - basic | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - diluted | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to the financial statements.
3
FRESH VINE WINE, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
For the Three Month Periods Ended March 31, 2024 and 2023
(Unaudited)
| Preferred
Stock Series A | Preferred
Stock Series B | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Rights offering – common stock and warrants issued | - | - | ||||||||||||||||||||||||||||||||||
| Equity-based compensation | - | - | ||||||||||||||||||||||||||||||||||
| Stock forfeiture | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Preferred
Stock Series A | Preferred
Stock Series B | Common Stock | Additional Paid-In | Accumulated | ||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Issuance of Series B preferred stock | - | |||||||||||||||||||||||||||||||||||
| Accrued preferred dividends, Series A ( | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Equity-based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||
See accompanying notes to the financial statements.
4
FRESH VINE WINE, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Equity-based compensation | ||||||||
| Inventory write-down | ||||||||
| Allowance for doubtful accounts | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ||||||||
| Insurance recovery receivable | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other | ( | ) | ||||||
| Deferred offering costs | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued compensation | ( | ) | ||||||
| Settlement payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Accrued expenses - related parties | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from note payable | ||||||||
| Proceeds from issuance of Series B preferred stock - net of issuance costs | ||||||||
| Proceeds from rights offering - net of issuance costs | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and restricted cash | ( | ) | ||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Accrued Series A dividends | $ | $ | ||||||
See accompanying notes to the financial statements.
5
FRESH VINE WINE, INC.
Notes to Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Fresh Vine Wine, Inc. (“the Company”, “our”, “we”), 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.
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.
Agreement and Plan of Merger
On January 25, 2024, the Company, FVW Merger Sub, Inc., a Colorado corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), and Notes, Live, Inc., a Colorado corporation (“Notes Live”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, among other things, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into Notes Live, with Notes Live continuing as a wholly-owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”).
Subject to the terms and conditions of the Merger Agreement, at the closing of the Merger, (i) each then outstanding share of Notes Live common stock (collectively, “Notes Live common stock”) (which comprises all of Notes Live’s outstanding capital stock) will be converted into the right to receive a number of shares of Fresh Vine common stock calculated in accordance with the Merger Agreement (the “Exchange Ratio”), (ii) each then outstanding warrant to purchase Notes Live common stock will be exchanged (or otherwise amended) for a warrant exercisable (at an exercise price adjusted to reflect to the Exchange Ratio) to acquire that number of shares of Fresh Vine common stock equal to the number of warrant shares multiplied by the Exchange Ratio, and (iii) any then outstanding Notes Live promissory note that is convertible into Notes Live common stock will be exchanged, or otherwise amended, such that it will be convertible from and after the Merger into shares of Fresh Vine common stock at a per share conversion price adjusted to reflect the Exchange Ratio. Each share of Fresh Vine common stock and each option and warrant to purchase Fresh Vine common stock that is outstanding at the effective time of the Merger will remain outstanding in accordance with its terms and such shares of Fresh Vine common stock, options and warrants will be unaffected by the merger (subject adjustment based on the proposed Reverse Split described below).
As contemplated by the Merger
Agreement, Fresh Vine intends to effect a reverse stock split at or around the effective date of the merger at a ratio that results in
the Fresh Vine common stock satisfying the initial listing standards of the NYSE American stock exchange and the exchange ratio in the
Merger being as near to one as reasonably practicable (i.e., so that each share of Notes Live capital stock will be exchanged in the Merger
for approximately
6
At the effective time of the Merger, the board of directors of Fresh Vine is expected to consist of seven members, all of whom will be designated by Notes Live.
The Merger Agreement
contains certain termination rights of each of Fresh Vine and Notes Live. Upon termination of the Merger Agreement under specified circumstances,
Fresh Vine may be required to pay Notes Live a termination fee of $
Liquidity, Going Concern, and Management Plan
Historically, the Company has incurred
losses, which has resulted in an accumulated deficit of approximately $
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 their financial needs and continue as a going concern.
The Company received gross proceeds of $
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.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include allowance for doubtful accounts, allowance for inventory obsolescence, equity-based compensation for employees and non-employees, and the valuation of deferred tax assets.
7
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.
Restricted Cash
Included in the cash balance is a balance of $
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, 2024 and December 31, 2023 there was no allowance for doubtful accounts.
Inventories
Inventories primarily include bottled wine which is carried at the lower of cost (calculated using the average cost 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, 2024 and December
31, 2023, the Company had recorded an inventory allowance of approximately $
Deferred Offering Costs
Deferred offering costs primarily consists of legal fees and any other fees relating to the Company’s Series B preferred stock offering. The deferred offering costs were capitalized as incurred and were offset against proceeds from the sale of Series B preferred stock at the closing of the Company’s offering.
Investment in Equity Securities
The Company has elected the measurement alternative for non-marketable equity securities under ASC 321 Investments – Equity Securities. In accordance with ASC 321, the non-marketable equity securities are initially measured at cost and reviewed at year end for impairment and fair value changes. As of March 31, 2024, there were no changes recorded for the value of the investment since the initial measurement.
8
Revenue recognition
The Company’s total revenue reflects the sale of wine domestically in the U.S. to wholesale distributors or DTC customers. 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.
ASC 606 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.
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.
| Three months ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Wholesale | % | % | ||||||
| Direct to consumer | % | % | ||||||
| Total revenue | % | % | ||||||
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, 2024 and December 31, 2023, due to the short maturity nature of these items.
9
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
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.
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.
See Note 8 for further discussion of equity-based compensation incurred in 2024 and 2023.
Advertising
The Company expenses the costs of advertising
as incurred. Advertising expenses were approximately $
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.
NYSE Listing Requirements
On September 8, 2023, the Company received a written
notice (the “Notice”) from NYSE American stating that it was not in compliance with Section 1003(a)(ii) of the NYSE American
Company Guide (the “Company Guide”), which requires a listed company that has reported losses from continuing operations and/or
net losses in three of its four most recent fiscal years to maintain at least $
10
On November 21, 2023, the Company received notification
(the “Acceptance Letter”) from NYSE American that the Company’s plan to regain compliance with NYSE American’s
listing standards was accepted. The Acceptance Letter also stated that the Company is not in compliance with Section 1003(a)(i) of
the Company Guide, which requires an issuer to have stockholders’ equity of $
2. 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.
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Less: dividends on Series A preferred stock | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Basic – weighted shares outstanding | ||||||||
| Dilutive effect from shares authorized | ||||||||
| Diluted – weighted shares outstanding | ||||||||
| Basic loss per share | $ | ( | ) | $ | ( | ) | ||
| Diluted loss per share | $ | ( | ) | $ | ( | ) | ||
At March 31, 2024 and 2023,
3. INVENTORIES
Inventory is primarily bottled wine which is carried at the lower cost
(calculated using the average cost method) or net realizable value. During the quarter ended March 31, 2024, the Company recorded a $
11
4. PREPAID EXPENSES
| March 31, 2024 | December 31, 2023 | |||||||
| Prepaid marketing expenses - current | $ | $ | ||||||
| Other prepaid expenses | ||||||||
| Total | $ | $ | ||||||
5. INVESTMENTS
In December 2023, the Company made a $
6. ACCRUED EXPENSES
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Sponsorship agreements | $ | $ | ||||||
| Accrued credit card charges | ||||||||
| Series A Stock dividends | ||||||||
| Legal and professional | ||||||||
| Deferred offering costs | - | |||||||
| Other accrued expenses | ||||||||
| Total | $ | $ | ||||||
The sponsorship agreements relate to marketing
contracts with unrelated parties within the sports and entertainment industry. The terms of the agreements range from to years with
annual payments ranging from $
Accrued credit card charges primarily consist of warehouse, shipping and other operating costs paid via Company credit card as a tool for managing cashflow.
7. NOTE PAYABLE
The Company entered into a short-term agreement
with Sky Direct in March 2024 for $
8. 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
12
Series A Convertible Preferred Stock
On July
27, 2023, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock, par value $
On August 2, 2023, the Company entered into a 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 Series A Stock.
Pursuant to the Securities Purchase Agreement,
the Purchasers collectively agreed to purchase up to
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 $
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
The Company may redeem (i) up to
13
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)
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 $
There was no issuance activity of the Series A Stock for the three months ended March 31, 2024 and 2023.
The Series A Stock meets the requirements for permanent equity classification as prescribed by the authoritative guidance.
| March 31, 2024 | December 31, 2023 | |||||||
| Series A preferred stock | $ | $ | ||||||
Series B Convertible Preferred Stock
On March
14, 2024, the Company filed with the Secretary of State of the State of Nevada a Certificate of Designation of Preferences, Rights and
Limitations of Series B Convertible Preferred Stock, par value $
As of March 31, 2024, the Company entered into two Securities Purchase Agreements with accredited investors (the “Purchasers”) pursuant to which the Company agreed to issue and sell in a private placement (the “Offering”) shares of Series B Stock.
Pursuant to the Securities Purchase Agreement,
each share of Series B Stock will have a stated value equal to $
Each share
of Series B Stock shall be convertible at the option of the holder thereof into the number of shares common stock (“Conversion Shares”)
calculated by dividing the Stated Value by the Conversion Price (the “Conversion Ratio”)(subject to the limitations described
below). For such purposes, the “Conversion Price” means $
14
Except for stock dividends or distributions for which adjustments are to be made pursuant to antidilution provisions of the Certificate, holders of Series B Stock shall be entitled to receive dividends on shares of Series B Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid on shares of the Common Stock.
The Company
may redeem (i) up to
The Series B Stock will vote with the common stock and the Series A Convertible Preferred 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 upon the conversion of Series B Stock in excess of the Exchange Share Cap or the Individual Holder Share Cap. The shares of Series B Stock 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 with respect to each share of Series B Stock 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 or other subscription or similar agreement pursuant to which such share of Series B Stock was issued by the Company.
The Company previously engaged The Oak Ridge Financial
Services Group, Inc. to serve as a financial advisor to the Company in connection with capital raising activities. In connection with
the Offering, the Company has agreed to pay the Oak Ridge a cash fee equal to
| Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | |||||||
| Series B preferred stock shares issued | ||||||||
| Net proceeds | $ | $ | ||||||
The Series B Stock meets the requirements for permanent equity classification as prescribed by the authoritative guidance.
Third Party Vendor Engagements and Related Founder Share Forfeitures
In December 2022, Rick Nechio and Damian Novak,
two of the Company’s founders, together agreed to forfeit and transfer back to the Company without consideration a total of
15
9. EQUITY-BASED COMPENSATION
This expense was for various marketing and advertising services in exchange for common stock and was being expensed over the lifetime of license agreements with celebrity endorsers. The license agreements were terminated during the period ending September 30, 2023.
Restricted Stock Units
On April 24, 2023, the Company granted
Restricted stock units had no balances for the periods ended March 31, 2024 and December 31, 2023
Shares of Restricted Stock
In April 2023, the members of the Company’s
Board of Directors, collectively, were granted a total of
Total equity-based compensation expense related
to shares of restricted stock issuances was $
| Number of Shares of Restricted Stock | Weighted Average Remaining Contractual Term (Years) | |||||||
| Outstanding at December 31, 2023 | ||||||||
| Granted | ||||||||
| Vested or released | ( | ) | ||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2024 | ||||||||
16
Vendor Stock Awards
| Number of Shares of Vendor Stock Awards | Weighted Average Remaining Vesting Term (Years) | |||||||
| Outstanding at December 31, 2023 | ||||||||
| Granted | ||||||||
| Vested or released | ||||||||
| Forfeited | ||||||||
| Outstanding at March 31, 2024 | ||||||||
Stock Options
Equity-based compensation expense totaling $
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ||||||||||||
| Outstanding at March 31, 2024 | $ | |||||||||||
| Exercisable at March 31, 2024 | $ | |||||||||||
Warrants
As disclosed in Note warrants were granted as part of the Rights Offering in March 2023. Also noted in Note warrants were granted in March 2024 to our financial advisor and placement agent in connection with our offering and sale of Series B Preferred Stock.
17
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| Outstanding at December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Vested or released | ||||||||||||
| Forfeited | ||||||||||||
| Outstanding at March 31, 2024 | $ | |||||||||||
The Company uses the Black-Scholes option-pricing
model to estimate the fair value of equity-based awards. The inputs for the Black-Scholes valuation model require management’s significant
assumptions. Prior to the Company’s IPO, the price per share of common stock was determined by the Company’s board based on
recent prices of common stock sold in private offerings. Subsequent to the IPO, the price per share of common stock is determined by using
the closing market price on the New York Stock Exchange on the grant date. The risk-free interest rate is based on the rate for U.S. Treasury
securities at the date of grant with maturity dates approximately equal to the expected life at the grant date. The expected term for
employee and nonemployee awards ranged from
10. INCOME TAXES
The Company has federal and state net operating loss carryforwards with a full valuation allowance against the deferred tax assets as of March 31, 2024. income tax expense or benefit was recorded for the three month periods ended March 31, 2024 and 2023 due to the Company’s net loss position.
11. SUPPLIER AND CUSTOMER CONCENTRATION
The Company has an agreement with an unrelated party for various wine making activities, including production, bottling, labelling, and packaging. The Company pays certain storage, administrative fees and taxes related to the purchased goods. There is no specified term of the agreement but continues as additional blanket sales orders are issued. For the three month periods ended March 31, 2024 and 2023, substantially all of the Company’s inventory purchases were from this supplier.
The Company also engages with other suppliers 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 in 2024 comes from three national distributor customers that operate in several markets. For the three month period ended March
31, 2024, approximately
18
12. COMMITMENTS AND CONTINGENCIES
License agreements
During March 2021, the Company entered into two
license agreements with certain equity investors for marketing and advertising services. These two agreements were terminated during the
third quarter of 2023 and the remaining prepaid license fee was expensed. The net expense relating to the agreements was $
Sponsorship Agreements
| Sponsorship Agreements | ||||
| 2024 | $ | |||
13. 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 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. On August 9, 2023, the Company moved for summary judgment on Mr. Michaels’ remaining claims. A jury trial commenced on
January 23, 2024. During trial, on January 24, 2024, the Company filed a motion for judgement in favor of the Company as a matter of law,
which was denied by the Court. On January 25, 2024, the jury in the lawsuit rendered a verdict against the Company awarding damages to
Mr. Michaels in the amount of $
Website-related Plaintiff’s Lawsuit
On January 26, 2024, the Company was served with a complaint filed in the United States District Court for the Southern District of New York alleging that the Company has failed to design, construct, maintain and operate its Internet website to be fully accessible to and independently usable by blind or visually-impaired persons, thereby denying blind and visually-impaired persons with equal access to the Company’s goods and services in violation of the Title III of the Americans with Disabilities Act of 1990 and the New York Human Rights Law, the New York Civil Rights Law. On February 16, 2024, the Company filed an Answer to the complaint denying the plaintiff’s allegations and asserting affirmative defenses thereto.
14. SUBSEQUENT EVENTS
As of May 14, 2024, the
Company has received subscriptions from accredited investors for the purchase of a total of
19
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, 2023, and in our subsequently filed documents with the SEC.
Under this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “we,” “us,” “our” “Fresh Vine Wine,” “Fresh Vine” and the “Company” refer to Fresh Vine Wine, Inc.
Overview
Fresh Vine Wine, Inc. is a producer of low carb, low calorie, premium wines in the United States. Founded in 2019, Fresh Vine brings an innovative “better-for-you” solution to the wine market. We currently sell seven 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.
Fresh Vine’s wines are distributed across the United States and Puerto Rico through wholesale, retail, and direct-to-consumer (DTC) channels. Fresh Vine is able to conduct wholesale distribution of our wines in all 50 states and Puerto Rico, and it is licensed to sell through DTC channels in 43 states. As of March 31, 2024, Fresh Vine holds active relationships with wholesale distributors in 50 states. Fresh Vine is 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.
Fresh Vine’s 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 “better-for-you” appeal, and overall product quality, Fresh Vine believes that it presents today’s consumers with a unique value proposition within this price category. Additionally, Fresh Vine Wine is one of very few products available at this price point that includes a named winemaker, Jamey Whetstone.
Fresh Vine’s 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 a healthy and active lifestyle.
Fresh Vine’s asset-light operating model allows it 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 Fresh Vine sources product inputs from multiple geographically dispersed vendors, it reduces 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.
20
Key Financial Metrics
We use net revenue, gross profit (loss) and net income (loss) to evaluate the performance of Fresh Vine. 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 March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net revenue | $ | 104,568 | $ | 408,630 | ||||
| Gross loss | $ | (111,248 | ) | $ | (3,362 | ) | ||
| Net loss | $ | (1,212,315 | ) | $ | (2,010,824 | ) | ||
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. Our brand, and to a large extent our direct-to-consumer sales outlet, has historically been dependent on the image and popularity of, and affinity towards, Nina Dobrev and Julianne Hough. Ms. Dobrev and Ms. Hough served as celebrity spokespersons and ambassadors of our company, and actively endorsed our wines on their sizable social media and other outlets pursuant to agreements that granted us licenses to use their pre-approved name, likeness, image, and other indicia of identity, as well as certain content published on their social media and other channels, on and in conjunction with the sale and related pre-approved advertising and promotion of our wine. Such license agreements terminated on September 7, 2023 and, as a result, we will be required to refocus our marketing and brand promotion efforts. See “Item 1A Risk Factors - We have relied heavily on celebrities to endorse our wines and market our brand pursuant to license agreements which have been terminated.”
Portfolio evolution: As a relatively new, high-growth brand, we expect and seek to learn from our consumers. We intend to 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.
Distribution expansion and acceleration: Purchasing by distributors and loyal accounts that continue to feature our wines are key drivers of net revenue.
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.
21
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. |
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.
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Wholesale | 27 | % | 71 | % | ||||
| Direct to consumer | 73 | % | 29 | % | ||||
| 100 | % | 100 | % | |||||
22
Cost of Revenues
Cost of revenues is comprised of all direct product costs such as juice, bottles, caps, corks, labels, and capsules. Additionally, we also categorize boxes and quality assurance testing within our cost of revenues. Fresh Vine expects that cost of revenues will decrease as net revenue decreases.
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 Loss
Gross loss is equal to our net revenue less 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 accounting 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.
Results of Operations
| Three months ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net revenue | $ | 104,568 | $ | 408,630 | ||||
| Cost of revenues | 215,816 | 411,992 | ||||||
| Gross profit (loss) | (111,248 | ) | (3,362 | ) | ||||
| Selling, general and administrative expenses | 1,099,480 | 1,672,766 | ||||||
| Equity-based compensation | 1,626 | 335,992 | ||||||
| Loss from operations | (1,212,354 | ) | (2,012,050 | ) | ||||
| Other income | 39 | 1,226 | ||||||
| Net loss | $ | (1,212,315 | ) | $ | (2,010,824 | ) | ||
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Comparison of the Three months ended March 31, 2024 and 2023
Net Revenue, Cost of Revenues and Gross Profit
| Three months ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Net revenue | $ | 104,568 | $ | 408,630 | (304,062 | ) | -74 | % | ||||||||
| Cost of revenues | 215,816 | 411,992 | (196,176 | ) | -48 | % | ||||||||||
| Gross loss | $ | (111,248 | ) | $ | (3,362 | ) | (107,886 | ) | 3,209 | % | ||||||
For the three months ended March 31, 2024, net revenue was lower compared to the same period in 2023 due to business slowing down as the Company works towards the anticipated Merger with Notes Live, Inc. Gross loss increased significantly and this is attributed to the discounted sales the Company made to Grocery Outlet during the quarter ending March 31, 2024 while no discounted sales were made to this vendor during the quarter ending March 31, 2023.
Selling, general and administrative expenses
| Three months ended March 31, | Change | |||||||||||
| 2024 | 2023 | $ | ||||||||||
| Selling expenses | $ | 84,372 | $ | 326,920 | $ | (242,548 | ) | |||||
| Marketing expenses | 145,026 | 609,810 | (464,784 | ) | ||||||||
| General and administrative expenses | 870,082 | 736,036 | 134,046 | |||||||||
| Total selling, general and administrative expenses | $ | 1,099,480 | $ | 1,672,766 | $ | (573,286 | ) | |||||
For the three months ended March 31, 2024, selling, general and administrative expenses decreased 34%, compared to the three months ended March 31, 2023. The decrease related to selling expenses was largely driven by terminations of consultants and contractors in the first quarter of 2024 compared to the first quarter of 2023, as well as less travel since overall sales have decreased. General and administrative expenses saw an increase attributed to an increase in legal expenses quarter over quarter due to the pending lawsuits described in Part II, Item 1 (Legal Proceedings) and the anticipated Merger with Notes Live, Inc. The decrease in marketing expenses primarily resulted from decreased advertising, social media marketing, tastings, and other promotion materials and events as selling and marketing expenses are directly related to sale trends.
Cash Flows
| Three months ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash provided by (used in): | ||||||||
| Operating activities | $ | (332,814 | ) | $ | (2,091,809 | ) | ||
| Investing activities | - | - | ||||||
| Financing activities | 105,325 | 2,615,014 | ||||||
| Net (decrease) increase in cash | $ | (227,489 | ) | $ | 523,205 | |||
24
Net cash used in operating activities was ($332,814) and ($2,091,809) for the three months ended March 31, 2024 and 2023, respectively. Cash used in operating activities decreased in the three months ended March 31, 2024 primarily because of one-time expenses related to the settlement payable and accrued compensation of approximately $1.7 million paid to the former Chief Executive Officer in 2023.
Net cash provided by financing activities was $105,325 and $2,615,014 for the three months ended March 31, 2024 and 2023, respectively. The difference is mostly attributed to the Rights Offering of $2,615,014 during the three months ended March 31, 2023.
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 $1.2 million and $2.0 million during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024, we had an accumulated deficit of approximately $27.7 million and a total stockholders’ deficit of approximately $2.0 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 March 31, 2024, we had $108,851 in cash and restricted cash, accounts receivable of $48,982, inventory of $172,332, prepaid expenses of $31,865 and deferred offering costs of $22,850. On March 31, 2024, current assets amounted to approximately $385,000 and current liabilities were $2.9 million, resulting in a working capital deficit (with working capital defined as current assets minus current liabilities) of approximately $2.5 million.
Since the commencement of its operations, the Company’s operating and other expenses have significantly exceeded its revenues. During the second quarter of 2023, 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. Since then, the Company continued to work to reduce its operating expenses, including reducing its warehousing costs, while continuing to provide customers the opportunity to experience its wine and supporting its current retail customers and those purchasing via the Company’s wine club or from its website.
Commencing in June 2023, the Company has worked 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. Later in 2023, the Company entered into purchase orders with Grocery Outlet, a discount retailer who has become one of the largest wholesalers for the Company.
On August 2, 2023, the Company entered into a Securities Purchase Agreement with two accredited investors (the “Purchasers”) pursuant to which the Company agreed to issue and sell in a private placement 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 purchased 10,000 shares of Series A Stock at a per share purchase price equal to $100.00, for total gross proceeds of $1.0 million. For a description of the Company’s offering of Series A Stock, see 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, 2023 under the caption “Financing Transactions.”
In August 2023, Fresh Vine announced that it had initiated an exploration of strategic opportunities by way of merger, acquisition, or any accretive strategic transaction to enhance stockholder value, which is a focus of the Company’s plan to increase its stockholders’ equity and regain compliance with the NYSE American’s continued listing standards. On January 25, 2024, Fresh Vine entered into an Agreement and Plan of Merger (the “Merger Agreement”) Notes, Live, Inc., a Colorado corporation (“Notes Live”), pursuant to which, among other things, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, our newly-formed wholly-owned subsidiary will merge with and into Notes Live, with Notes Live continuing as a wholly-owned subsidiary of the Company and the surviving corporation of the merger (the “Merger”). See Part I, “Item 1 Business - Recent Developments – Anticipated Merger with Notes Live, Inc.” included in our Annual Report on Form 10-K for the year ended December 31, 2023.
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As disclosed under Part II, Item 1 (Legal Proceedings) of this report, the Company was a defendant in a lawsuit styled Timothy Michaels v. Fresh Vine Wine, Inc. filed May 27, 2022 in the Fourth Judicial District Court, Hennepin County, Minnesota. On January 25, 2024, the jury in the lawsuit rendered a verdict against the Company awarding damages to Mr. Michaels in the amount of $585,976.25. The damages awarded to Mr. Michaels by the trial court are not covered by the Company’s insurance policies. On March 25, 2024, Mr. Michaels filed a Notice and Application for Taxation of Costs and Disbursements. On March 26, 2024, the Company filed its Notice of Appeal. On March 26, 2024, Mr. Michaels served a motion for Pre-verdict and Prejudgment Interest. On March 27, 2024, a Notice of Entry of Judgment was filed and, on March 28, 2024, a Notice of Docketing of Judgment was entered. Although the Company believes it has legal grounds to appeal the verdict, continued litigation and related actions may be expensive, the outcome of any litigation (including any appeal) is difficult to predict and the existence of continued litigation may impact the ability of management to focus on other business matters. Furthermore, the Company may be required to post an appeal bond in order to stay execution of the money judgment pending any appeal. Given the Company’s current financial position, the cost of such an appeal bond is uncertain and may be higher than the typical cost of such a bond or require the Company to provide cash or other collateral.
On March 14, 2024, Fresh Vine filed with the Secretary of State of the State of Nevada a Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, par value $0.001 per share (the “Series B Certificate”). The Series B Certificate designates 50,000 shares of the Fresh Vine’s undesignated preferred stock as Series B Convertible Preferred Stock (“Series B Stock”) and establishes the rights and preferences of the Series B Stock. Fresh Vine’s board of directors has approved the issuance and sale of up to 20,000 shares of Series B Convertible Preferred Stock for a purchase price equal to $100.00 per share. As of May 14, 2024, Fresh Vine has received subscriptions from accredited investors for the purchase of a total of 6,785 shares of Series B Stock and has received aggregate subscription funds (gross) of $678,500. The total number of shares of Series B Stock that the Company will issue and sell has not been finally determined.
At the current reduced pace of incurring expenses and without receipt of additional financing, the Company projects that the existing cash balance will be sufficient to fund current operations through the second quarter of 2024. The Company requires additional debt or equity financing to satisfy its existing obligations, sustain existing operations, pay expenses associated with its pending business combination transaction and to satisfy financial related conditions to the closing of such transaction. See “Current Strategy — The Merger” below. Additional financing may not be available on favorable terms or at all. If additional financing is available, it may be highly dilutive to existing stockholders and may otherwise include burdensome or onerous terms. The Company’s inability to raise additional working capital in a timely manner will negatively impact the ability to fund operations, generate revenues, maintain or grow the business and otherwise execute the Company’s business plan, including its pursuit of its pending business combination transaction, 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, raise additional capital in the form of debt or equity financing and/or complete a successful combination transaction with a suitable target company. 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.
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Current Strategy
The Merger
In August 2023, Fresh Vine announced that it had initiated an exploration of strategic opportunities by way of merger, acquisition, or any accretive strategic transaction to enhance stockholder value, which is a focus of the Company’s plan to increase its stockholders’ equity and regain compliance with the NYSE American’s continued listing standards. On January 25, 2024, Fresh Vine entered into the Merger Agreement. See Part I, “Item 1 Business - Recent Developments – Anticipated Merger with Notes Live, Inc.” included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Although Fresh Vine has entered into the Merger Agreement and intends to consummate the Merger, there is no assurance that it will be able to successfully consummate the Merger on a timely basis, or at all. Among other conditions to the closing of the Merger, Fresh Vine is required to have cash, cash equivalent assets or other liquid assets at the closing of the Merger in an amount that equals or exceeds the “Net Cash Target,” and having no liabilities on its balance sheet or unpaid or unsatisfied obligations that will require a cash expenditure by Fresh Vine after the effective time of the Merger. If, for any reason, the Merger does not close, the Fresh Vine board of directors may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of the various assets of Fresh Vine, continue to operate the business of Fresh Vine or dissolve and liquidate its assets.
If the Merger is not completed, the Fresh Vine board of directors may decide that it is in the best interests of the Fresh Vine stockholders to suspend or cease its operations, seek to dissolve the Company and liquidate its assets, or initiate bankruptcy proceedings. In that event, the amount of cash available for distribution to the Fresh Vine stockholders would depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as Fresh Vine funds its operations and incurs fees and expenses related to the Merger. In addition, if the Fresh Vine board of directors were to approve and recommend, and the Fresh Vine stockholders were to approve, a dissolution of Fresh Vine, it would be required under Nevada corporate law to pay its outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to the Fresh Vine stockholders. As a result of this requirement, a portion or all of Fresh Vine’s assets may need to be reserved pending the resolution of such obligations. In addition, Fresh Vine may be subject to litigation or other claims related to a liquidation and dissolution of the company. If a liquidation and dissolution were pursued, the Fresh Vine board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, the Fresh Vine stockholders could lose all or a significant portion of their investment in the event of a liquidation and dissolution of Fresh Vine.
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, 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, 2023 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.
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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 March 31, 2024. 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 March 31, 2024 due to the material weaknesses in internal control over financial reporting as described below.
Material Weaknesses in Internal Control Over Financial Reporting; 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 and (ii) 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.
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
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fiscal year ended December 31, 2023 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Timothy Michaels Lawsuit
The Company was a defendant in a lawsuit styled Timothy Michaels v. Fresh Vine Wine, Inc. filed May 27, 2022 in the Fourth Judicial District Court, Hennepin County, Minnesota. The lawsuit related to a complaint filed by Mr. Michaels resulting from the Company including a restricted “lock-up” legend on shares of the Company’s common stock issued to Mr. Michaels pursuant to a settlement agreement that the Company entered into with Mr. Michaels following termination of his employment and for not removing or directing the Company’s transfer agent to remove such legend. A jury trial commenced on January 23, 2024. During trial, on January 24, 2024, the Company filed a motion for judgement in favor of the Company as a matter of law, which was denied by the Court. On January 25, 2024, the jury in the lawsuit rendered a verdict against the Company awarding damages to Mr. Michaels in the amount of $585,976.25. On February 22, 2024, the Company filed a renewed motion for post-verdict judgment in favor of the Company as a matter of law. On February 26, 2024, the Judge in the lawsuit denied the renewed motion for post-verdict judgment. On March 25, 2024, Mr. Michaels filed a Notice and Application for Taxation of Costs and Disbursements. On March 26, 2024, the Company filed its Notice of Appeal. On March 26, 2024, Mr. Michaels served a motion for Pre-verdict and Prejudgment Interest. On March 27, 2024, a Notice of Entry of Judgment was filed and, on March 28, 2024, a Notice of Docketing of Judgment was entered. Although the Company believes it has legal grounds to appeal the verdict, continued litigation and related actions may be expensive, the outcome of any litigation (including any appeal) is difficult to predict, and the existence of litigation may impact the ability of management to focus on other business matters. Furthermore, the Company may be required to post an appeal bond in order to stay execution of the money judgment pending any appeal. Given the Company’s current financial position, the cost of such an appeal bond is uncertain and may be higher than the typical cost of such a bond or require the Company to provide cash or other collateral.
Website-related Plaintiff’s Lawsuit
On January 26, 2024, the Company was served with a complaint filed in the United States District Court for the Southern District of New York alleging that the Company has failed to design, construct, maintain and operate its Internet website to be fully accessible to and independently usable by blind or visually-impaired persons, thereby denying blind and visually-impaired persons with equal access to the Company’s goods and services in violation of the Title III of the Americans with Disabilities Act of 1990 and the New York Human Rights Law, the New York Civil Rights Law. On February 16, 2024, the Company filed an Answer to the complaint denying the plaintiff’s allegations and asserting affirmative defenses thereto.
Item 1A. Risk Factors
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In a Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 20, 2024, the Company disclosed that it designated 50,000 shares of its preferred stock as Series B Convertible Preferred Stock (the “Series B Stock”), and summarized the rights and preferences of the Series B Stock in such report.
In a Current Report on Form 8-K filed with the SEC on March 27, 2024, the Company previously disclosed that the Company’s board of directors approved the issuance and sale of up to 20,000 shares of Series B Stock for a purchase price equal to $100.00 per share in a private placement transaction (the “Offering”). As of May 14, 2024, the Company has received securities purchase agreements from accredited investors for the purchase of a total of 6,785 shares of Series B Stock in the Offering and has received aggregate subscription funds of $678,500. The total number of shares of Series B Stock that the Company will issue and sell has not been finally determined.
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. In connection with the Offering, the Company has agreed to pay the Oak Ridge a cash fee equal to 8.0% of the gross proceeds received by the Company in the Offering, in addition to reimbursing Oak Ridge for its out-of-pocket expenses. In addition, the Company issued to Oak Ridge (or its designees) seven-year warrants to purchase up to a total of 300,000 shares of the Company’s common stock at an exercise price equal to $0.50 per share.
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The issuance and sale of the shares of Series B Stock in the Offering and pursuant to the Settlement Agreement, and the offer and issuance of common stock of the Company issuable upon conversion or exchange thereof, have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and therefore may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. For these offers and issuances, the Company has relied on the exemption from federal registration under Section 4(a)(2) of the Securities Act and/or Rule 506 promulgated thereunder, based on the Company’s belief that the offer and sale of such securities has not and will not involve a public offering.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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.
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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: May 14, 2024 | By: | /s/ Michael Pruitt |
| Michael Pruitt | ||
| Interim Chief Executive Officer | ||
| Date: May 14, 2024 | By: | /s/ Keith Johnson |
| Keith Johnson | ||
| Interim Chief Financial Officer | ||
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EXHIBIT INDEX
FRESH VINE WINE, INC.
FORM 10-Q
| Exhibit Number |
Description | |
| 31.1* | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2* | Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1* | Certifications of Principal Executive Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * | Filed herewith. |
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