This form 10-K contains forward-looking statements.
Forward-looking statements are projections of events, revenues, income, future
economic performance or management's plans and objectives for our future
operations. In some cases, you can identify forward-looking statements by
terminology such as "may", "should", "expects", "plans", "anticipates",
"believes", "estimates", "predicts", "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions and involve known and unknown risks, uncertainties and other
factors, including the risks in the section entitled "Risk Factors" and the
risks set out below, any of which may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. These
risks include, by way of example and not in limitation:
This list is not an exhaustive list of the factors that may affect
any of our forward-looking statements. These and other factors should be
considered carefully and readers should not place undue reliance on our forward-looking
statements. Forward looking statements are made based on management's beliefs,
estimates and opinions on the date the statements are made and we undertake no
obligation to update forward-looking statements if these beliefs, estimates and
opinions or other circumstances should change. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Except as required by applicable law, including the securities
laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States dollars (US$)
and are prepared in accordance with United States Generally Accepted Accounting
Principles. All references to "common stock" refer to the common shares in our
capital stock.
ITEM 1. BUSINESS.
GENERAL
The following is a summary of some of the information contained in
this document. Unless the context requires otherwise, references in this
document to "our Company," "us," "we," "our," "Rich Cigars," or the "Company"
are to Rich Cigars, Inc.
DESCRIPTION OF BUSINESS
We were incorporated on July 29, 2013 under the laws of the state
of Florida. Rich Cigars was established to manufacture and distribute cigars
under the Rich Cigars brand name. The Company's continually seek to create
cigars that appeal to aficionados of high-quality, hand-rolled, premium cigars.
One of the founders, Alfred Rushing, has been involved with the cigar industry
for more than 20 years. The Company intends to introduce new styles of premium
cigars to build sales of private label cigars. The Company intends to conduct
its business principally in the U.S. through its sales and marketing team. We maintain a
website at www.richcigars.com. Such website
is not incorporated into or a part of this filing.
-4-
COMPANY OVERVIEW
We contract with a Nicaraguan supplier for the manufacture of hand
rolled cigars and to market in the US in both units and dollars sales of brand
name premium cigars (imported, hand-made or hand-rolled cigars made with Cuban
seed long leaf filler and all natural tobacco leaf).
The Company's activities include producing and selling cigars, and
promoting the brand by attending and sponsoring various events such as the
Derek Jeter Celebrity Invitational. The Company also frequently reaches out to
celebrities and sports stars, to provide cigars to individuals and gatherings.
The goal of the sponsorships and outreach is to promote the brand with high
profile individuals in order to broaden the name recognition in the sports and
entertainment industries and attract new customers. Rich Cigars' first sale
occurred in an online transaction on May 10, 2016.
We believe that increasing demand for cigars will offer us growth
opportunities. In recent years, cigar smoking has experienced a resurgence
resulting in an increase in consumption and retail sales of cigars, especially
in the premium cigar segment. This growth produced overall retail sales in the
U.S. cigar market of approximately $1.0 billion in 2013. The gain comes despite
an increasingly unfriendly environment for smokers as a myriad of states enact
smoking bans.
We believe that this increase in cigar consumption and retail
sales is the result of a number of factors, including: (i) the improving image
of cigar smoking resulting from increased publicity plus social media,
including the success of cigar publications and the visibility of cigar smoking
by celebrities; (ii) the emergence of an expanding base of younger, highly
educated, affluent adults age 25 to 45 and the growing interest of this group
in luxury goods, including premium cigars; (iii) the increase in the number of
adults over the age of 40 (a demographic group believed to smoke more cigars
than any other demographic group); and (iv) the opening of establishments, such
as restaurants and clubs, and "cigar bars" where cigar smoking is encouraged,
as well as other special events for cigar smokers.
CORPORATE STRATEGY
Build market share in the U.S. premium segment.
We hope to penetrate the premium cigar market by:
(i) Creating market awareness and recognition of its cigar brands
through advertising through social media and campaign marketing with twitter,
Facebook, product placement ads, increased penetration of targeted retail
outlets and professional sales management; (ii) developing and selling new
premium cigars that carry well our brand name "Rich"; (iii)
developing line extensions in higher price categories that leverage the premium
brands. (iv) Employing a sales force and distribution channel of distribution
to increase sales of the products.
Develop "premium" cigar business
.
Our intentions are to seek to increase revenues in cigar business
by focusing on higher price categories. We believe that the higher-end mass-market
segment can experience growth. We are attempting to capitalize on market growth
by expanding our products such as our "Rich Cigar" and by developing
similar higher-end flavor infused cigars under our "Rich" name.
Implement production capacity and tobacco inventory
.
We intend to expand manufacturing relationships if volume demand
occurs while maintaining high quality standards. Our intended contract supplier
indicates it can absorb an increase in volume.
-5-
Selectively broaden cigar distribution channels.
We intend to actively develop new channels and methods of
distribution. With respect to premium cigars, we are pursuing opportunities in
a number of developing distribution channels, including cigar bars and clubs,
hotel shops, wine shops, restaurants and upscale specialty retail tobacco
stores . With respect to mass-market cigars, we are seeking to establish relations
with new retailers by acting as the tobacco "category manager,"
assisting such retailers in increasing their sales of tobacco products.
MARKET OVERVIEW
Cigars
have a long history in the US, with the public image of cigars tending to be of
premium hand-rolled products, often from the Dominican Republic, Nicaragua or
Cuba (although the latter have been illegal in the US since the 1960s), smoked
by powerful, wealthy and usually older men. This perception changed somewhat in
the 1990s, as the cigar industry attracted women and younger adults alike to
try higher quality cigars.
Currently,
machine-made cigars and cigarillos account for the bulk of the category volume
sales, and tend to be purchased by a younger, less affluent demographic, and do
not achieve the same status as their premium counterparts. Overall, cigar
smoking is still more popular among men than women, although women have shown
some growing interest in recent years.
Our
management believes principal changes that can lead to growth in the premium
cigar market cigar market are (1) the emergence of an expanding base of younger
new cigar smokers, both male and female, a(5) increasing popularity of cigars
among celebrities who are viewed as trend-setters, (3) continued media interest,
especially through Cigar Aficionado magazine, (4) promotion of "cigar
friendly" locations and (5) the increase in the population of people over
50 years in age, a group that has traditionally been viewed as consuming more
luxury goods, including cigars.
PRODUCTS
The
Vendetta line will consist of a Connecticut (Ecuador) wrapper, a Mexican
binder and a Nicaraguan filler. The KingPin line will consist of a Sumatra
wrapper along with a Mexican binder and a Nicaraguan filler. The God Father
line will consist of a Broad Leaf Maduro wrapper, a Mexican binder and a
Nicaraguan filler. The Billionaire line will consist of a Habano Rosado wrapper
with a Mexican binder and a Nicaraguan filler.
We
currently have taken time to perfect four different blends over the last year. We
have produced 4,000 cigars, some of which are in the aging process to cure for
the next 3-4 months while others are ready for sale. We have also produced
bands for each cigar and boxes as well. Once cigars are aged they will be
packaged and sold online for resale and in retail stores. We need funds as
follows to implement the business plan over the next twelve months: $12,000 for
storage of cigars and a retail location with a warehouse that we have
prospected; and $10,000 for the production of 10,000 additional cigars at $1
each.
SALES AND MARKETING
We
have signed agreements with two independent sales representatives that will
call on retail cigar outlets commencing on the east coast. We plan to sign on
two additional sales representatives by the end of the first year of operation.
COMPETITION, MARKETS,
REGULATION AND TAXATION
COMPETITION
We
will be in competition with many large, well-financed competitors in the market
for premium cigars. Each of these better known companies enjoys strong brand
names and a history of successful product launches. These companies compete
directly with us for consumer sales, as well for supplies of tobacco and
marketing resources.
-6-
All
of these companies have substantially greater capital resources, manufacturing,
sales and marketing experience, and substantially longer and more extensive
relationships with growers and long-standing brand recognition and market
acceptance than we do. See "RISK FACTORS". We believe, however, that
the market for premium cigars is growing rapidly enough to support the entry of
new brands such as ours and that the inability of the entrenched competitors to
meet current demand supports this position.
MARKETS
The
user market for hemp oil products and other nutraceuticals is generally an
individual who has a specific health issue where a health advisor or
distributor has provided or directed that user to our product. The market for
nutraceuticals is subject to many influential factors, but the main issues
affecting the market are consumer spending and government regulation.
The
market for greenhouses includes household consumers and agricultural businesses
alike. The market for greenhouses may see increased demand amongst agricultural
businesses, particularly in states like Colorado, Oregon, and Washington, with
the legalization of cannabis.
REGULATION
AND LITIGATION IN THE TOBACCO INDUSTRY
Cigar manufacturers, like other
producers of tobacco products, are subject to regulation at the federal, state
and local levels. Since the early 1970's the trend has been for increasing
regulation, which when coupled with changing public attitudes toward smoking,
has had the effect of reducing overall consumption of tobacco products in the
United States. Federal law has required warning labels on cigarettes since
1965, though no such warnings have been required for cigars. Recent federal law
enacted by Congress has required states applying for certain federal grants for
substance abuse programs to adopt a minimum age of 18 for purchase of tobacco products
and to establish elaborate enforcement programs to support this requirement.
Legislation proposed but not enacted by Congress has sought to impose (1) bans
on advertising of tobacco products or on the deductibility of such advertising
expenses for federal tax purposes, (2) additional labeling, warnings or
listings of additives, (3) preemption of state law to impose civil liabilities
on manufacturers and distributors of tobacco products, (4) reimbursement to the
federal government for health care costs incurred in connection with
tobacco-related conditions and (5) regulation of tobacco products by the Food
and Drug Administration as a possibly addictive "drug." Moreover, the
Environmental Protection Agency has concluded that widespread exposure to so-called
"secondary smoke" may present a serious and substantial public health
concern. The impact of this finding and the EPA's authority to regulate
"secondary smoke" are the subject of ongoing litigation.
Many states and local governments have
passed statutes or ordinances severely limiting the types of establishments
(such as restaurants and office buildings), and the areas within such
establishments, in which persons may smoke, or have banned smoking.
We cannot predict the outcome of these
legislative and regulatory initiatives or of litigation in the future.
Presumably, the trend toward increased regulation will continue at all levels.
Depending on these outcomes, there may be a materially adverse effect on the
tobacco products industry in general and our Company in particular. See
"RISK FACTORS."
EXCISE
TAXES
Cigars have long been subject to
federal, state and local excise taxes and it is frequently suggested that
additional excise taxes be levied on such products to support various
legislative programs. We are unable to predict whether significant increases in
excise taxes on its products will be enacted in the future. Such increases were
proposed by the Clinton Administration in 1993 to fund that administration's
health care reform initiatives, but were not enacted by Congress. Imposition of
significant increases in excise taxes could have a material adverse impact on
the large cigar industry in general and our efforts in particular.
-7-
RESEARCH
AND DEVELOPMENT ACTIVITIES
Other
than time spent researching our proposed business and selecting blends for
cigars, we have not spent any funds on research and development activities to
date. We do not currently plan to spend any funds on research and development
activities in the future.
EMPLOYEES
We
presently have five consultants including Messrs. Davis, Alfred Rushing, and
Michael Rushing, our officers and directors, under hourly oral consulting
agreements, and Reginald Saunders, a director, under a written consulting
agreement. There are no employees at this time. Our officers and directors are
responsible for planning, development and operational duties, and will continue
to do so throughout the early stages of our growth. We have no intention of
hiring additional employees until we have sufficient, reliable revenue from our
operations. We do not have written employment agreements with any of our
officers or directors at this time.
REPORTS TO SECURITIES HOLDERS
We
provide an annual report that includes audited financial information to our shareholders.
We will make our financial information equally available to any interested
parties or investors through compliance with the disclosure rules for a small
business issuer under the Securities Exchange Act of 1934. We are subject to
disclosure filing requirements including filing Form 10K annually and Form 10Q
quarterly. In addition, we will file Form 8K and other proxy and information
statements from time to time as required. We do not intend to voluntarily file
the above reports in the event that our obligation to file such reports is
suspended under the Exchange Act. The public may read and copy any materials
that we file with the Securities and Exchange Commission, ("SEC"), at
the SEC's Public Reference Room at 100 F Street NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
Item 1A. Risk Factors.
FORWARD LOOKING STATEMENTS
THIS DOCUMENT INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS RELATING TO RICH CIGARS' PLANS, STRATEGIES, OBJECTIVES, EXPECTATIONS,
INTENTIONS AND ADEQUACY OF RESOURCES. THESE FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT MAY CAUSE OUR COMPANY'S
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
OUR ABILITY OF TO IMPLEMENT OUR BUSINESS STRATEGY; ABILITY TO OBTAIN ADDITIONAL
FINANCING; RICH CIGARS' LIMITED OPERATING HISTORY; UNKNOWN LIABILITIES ASSOCIATED
WITH FUTURE ACQUISITIONS; ABILITY TO MANAGE GROWTH; SIGNIFICANT COMPETITION; ABILITY
TO ATTRACT AND RETAIN TALENTED EMPLOYEES; AND FUTURE GOVERNMENT REGULATIONS; AND
OTHER FACTORS DESCRIBED IN THIS FILING OR IN OTHER OF RICH CIGARS' FILINGS WITH
THE SECURITIES AND EXCHANGE COMMISSION. RICH CIGARS IS UNDER NO OBLIGATION, TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
RISKS
RELATED TO OUR COMPANY AND THE BUSINESS
LIMITED
OPERATING HISTORY
There
can be no assurance that our management will be successful in its attempts to
implement the our business plan, build the corporate infrastructure required to
support operations at the levels called for by our business plan or that we will
generate sufficient revenues to meet expenses or to achieve or maintain
profitability.
-8-
We
will encounter risks and difficulties that companies at a similar stage of
development frequently experience, including the potential failure to:
Obtain
sufficient working capital to support our establishment and expansion;
Find
and realize the asset management opportunities required to generate revenue;
Maintain
adequate control of our expenses allowing us to realize anticipated income
growth; and
Anticipate
and adapt to changing conditions in the tobacco products industry resulting
from changes in government regulations, mergers and acquisitions involving our
competitors, technological developments and other significant competitive and
market dynamics.
OUR MANAGEMENT TEAM
HAS NO EXPERIENCE OPERATING A PUBLIC COMPANY. ANY FAILURE TO COMPLY OR
ADEQUATELY COMPLY WITH FEDERAL AND STATE SECURITIES LAWS, RULES OR REGULATIONS
COULD SUBJECT US TO FINES OR REGULATORY ACTIONS, WHICH MAY MATERIALLY ADVERSELY
AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Members of our
management team have no experience managing and operating a public company and
may rely in many instances on the professional experience and advice of third
parties including its attorneys and accountants. Failure to comply or
adequately comply with any federal or state securities laws, rules, or
regulations may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial condition and
could result in delays in achieving either the effectiveness of a registration
statement relating to the Securities being sold in this Offering or the
development of an active and liquid trading market for our common stock.
OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM HAS EXPRESSED SUBSTANTIAL DOUBT AS TO OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
The audited
financial statements included in the registration statement have been prepared
assuming that we will continue as a going concern and do not include any
adjustments that might result if we cease to continue as a going concern. We
have incurred significant losses since our inception. We have funded these
losses primarily through the sale of securities.
Based on our
financial history since inception, in their report on the financial statements
for the period ended December 31, 2016, our independent registered public
accounting firm has expressed substantial doubt as to our ability to continue
as a going concern. We are a development stage company that has not commenced
revenue. There is no assurance that any revenue will be realized in the future.
There can be no
assurance that we will have adequate capital resources to fund planned
operations or that any additional funds will be available to us when needed or
at all, or, if available, will be available on favorable terms or in amounts
required by us. If we are unable to obtain adequate capital resources to fund
operations, we may be required to delay, scale back or eliminate some or all of
our operations, which may have a material adverse effect on our business,
results of operations and ability to operate as a going concern.
IF WE NEED
ADDITIONAL CAPITAL TO FUND OUR FUTURE OPERATIONS, WE MAY NOT BE ABLE TO OBTAIN
SUFFICIENT CAPITAL AND MAY BE FORCED TO LIMIT THE SCOPE OF OUR OPERATIONS.
If adequate
additional financing is not available on reasonable terms, we may not be able
to undertake sufficient sales and business development efforts required to
identify clients and assist them with asset acquisitions, development of their
real estate projects or management of existing stabilized assets, which may
result in a negative impact to our cash flow and we would have to modify our
business plans accordingly. There is no assurance that additional financing
will be available to us.
-9-
In connection
with our growth strategies, we may experience increased capital needs and
accordingly, we may not have sufficient capital to fund our future operations
without additional capital investments. Our capital needs will depend on
numerous factors, including (i) our profitability; (ii) the development of
similar products undertaken by our competition; (iii) the level of our
investment in sales and marketing; and (iv) the amount of our capital expenditures,
including corporate acquisitions. We cannot assure you that we will be able to
obtain capital in the future to meet our needs.
In recent years,
the securities markets in the United States have experienced a high level of
price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects
of such companies. For these reasons, our common stock can also be expected to
be subject to volatility resulting from purely market forces over which we will
have no control.
If we cannot
obtain additional funding, we may be required to: (i) limit our expansion; (ii)
limit our marketing efforts; and (iii) decrease or eliminate capital
expenditures. Such reductions could materially adversely affect our business
and our ability to compete.
Even if we do
find a source of additional capital, we may not be able to negotiate terms and
conditions for receiving the additional capital that are favorable to us. Any
future capital investments could dilute or otherwise materially and adversely
affect the holdings or rights of our existing shareholders. In addition, new
equity or convertible debt securities issued by us to obtain financing could
have rights, preferences and privileges senior to the Shares. We cannot give
you any assurance that any additional financing will be available to us, or if
available, will be on terms favorable to us.
SHAREHOLDERS
WILL EXPERIENCE DILUTION OF THEIR OWNERSHIP INTEREST BECAUSE OF THE FUTURE
ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
If we raise
additional capital subsequent to hereto through the issuance of equity or
convertible debt securities, the percentage ownership of our company held by
existing shareholders will be reduced and those shareholders may experience
significant dilution. In addition, we may also have to issue securities that
may have rights, preferences and privileges senior to our common stock. In the
event we seek to raise additional capital through the issuance of debt or its
equivalents, this will result in increased interest expense.
WE WILL DEPEND
UPON MANAGEMENT BUT WE MAY AT TIMES HAVE LIMITED PARTICIPATION OF MANAGEMENT
Our directors
are also acting as our officers. We will be heavily dependent upon their
skills, talents, and abilities, as well as several consultants to us, to
implement our business plan, and may, from time to time, find that the
inability of the officers, directors and consultants to devote their full-time
attention to our business results in a delay in progress toward implementing
our business plan. Consultants may be employed on a part-time basis under a
contract to be determined.
Our
directors and officers are, or may become, in their individual capacities,
officers, directors, controlling shareholder and/or partners of other entities
engaged in a variety of businesses. Thus, our officers and directors may have
potential conflicts including their time and efforts involved in participation
with other business entities. Each officer and director of our business, except
for Mr. Davis, is engaged in business activities outside of our business, and
the amount of time they devote as Officers and Directors to our business will be
up to 25 hours per week. Mr. Davis, President, CEO and a director, works full
time pursuing the business plan of the Company and has been working with retail
stores for product placement and distribution relationships, as well as spending
up to 30 hours a week on product event planning for the Company. He has also
been working with potential brand ambassadors of the Company, with the help of
Mr. Saunders. Mr. Al Rushing, Vice President, Secretary, COO and a director, is
an owner and operations manager at The Cigar Factory in New Orleans, LA, and
spends approximately 20 hours a
-10-
week
on our company's business. Mr. Michael Rushing, Vice President of Sales and a
director, is an Executive Team Leader at Target Corporation, and will spend
approximately 40 hours per week on our company's business. Mr. Saunders, Senior
Vice President of Marketing and Entertainment and a director, is Senior Director
of Entertainment Marketing at Jordan Brand, a division of Nike, and will spend
approximately 30 hours per week on our Company's business. Because investors
will not be able to manage our business, they should critically assess all of
the information concerning our officers and directors.
We do not know
of any reason other than outside business interests that would prevent them
from devoting full-time to our Company, when the business may demand such
full-time participation.
WE WILL BE
DEPENDENT UPON KEY PERSONNEL FOR THE FORESEEABLE FUTURE.
We will be
dependent on several key members of its management and operations teams for the
foreseeable future. In particular, we are dependent on Richard Davis as our
president Chief Executive Officer and Alfred Rushing, our Vice President,
Secretary and Chief Operations Officer. The loss of the services of either
executive could have a material adverse effect on our operations and prospects.
At this time, we have no employment agreements with any of these individuals,
though it is contemplated that the Company may enter into such agreements with
certain of its key employees on terms and conditions usual and customary for
its industry. We do not currently have any "key man" life insurance
on any employees or officers.
WE MAY FACE
DIFFICULTIES ESTABLISHING A NEW BRAND.
Our principal
business strategy is to develop the Rich Cigars brand name as a respected brand
associated with the highest quality premium cigars. The marketing of luxury
consumer goods such as high-quality, premium cigars is highly dependent on
creating favorable consumer perception through well-orchestrated advertising
and public relations. We will be expending a significant percentage of the
proceeds of any future cash raises for advertising and promotional activities.
The Company has little advertising experience, having spent only minimal
amounts on such activities to-date. The Company's competitors have
significantly greater advertising resources and experience and enjoy
well-established brand names. There can be no assurance that our initial
advertising and promotional activities will be successful in creating the
desired consumer perception.
WE MAY REQUIRE
ADDITIONAL FUNDING.
We are highly
dependent on the infusion of additional capital through other private
placements or loans supporting ongoing operations and expansion. If we are not
successful in obtaining subscriptions for this Offering it could be necessary
to seek additional financing elsewhere or to materially curtail our expansion
plans. There can be no assurance that such other financing would be available
to us on satisfactory terms or at all. Failure to obtain such financing could
materially impair our ability to increase sales and achieve profitability.
WE MAY BE
ADVERSELY AFFECTED BY CHANGES IN THE REGULATION OF TOBACCO PRODUCTS.
All
manufacturers of tobacco products are subject to extensive and increasing
regulation at the federal, state and local levels. These regulations have, for
example, imposed labeling requirements, limited advertising of tobacco
products, restricted smoking in public areas such as office buildings and
restaurants and prohibited sales of tobacco products to minors. Proposals have
been entertained to transfer regulation of tobacco products from the Federal
Trade Commission to the Food and Drug Administration, which has expressed the
intention to regulate tobacco products as an addictive "drug." There can be no
assurance as to the content, timing or effect of future regulations on the
federal, state or local levels or that such regulations would not have a
material adverse effect on our business.
WE MAY FACE
LITIGATION ISSUES SIMILAR TO THOSE IN THE CIGARETTE INDUSTRY.
Manufacturers
and distributors of tobacco products have been the subject of increasing
litigation seeking to extend product liability to such companies for allegedly
tobacco-related medical conditions of smokers. While such litigation has
primarily centered on cigarettes, there can be no assurance that the increased
popularity and visibility of cigars will not result in similar litigation
against manufacturers and distributors of cigars. If we were to become a party
to such litigation, either any finding of liability on our or the expense and
diversion of management time in defending such litigation could have a material
adverse effect on our Company.
-11-
WE MAY BE
SUBJECT TO INCREASING EXCISE TAXES.
Cigars (and
tobacco products generally) have long been subject to excise taxes on the
federal, state and local levels. From time to time proposals have been made to
increase such taxes to fund various legislative initiatives. Substantial
increases in excise taxes could have a material adverse impact on the cigar
industry in general and our Company in particular.
OUR COMPETITION
IS MUCH LARGER AND HAS BEEN IN THE MARKETPLACE MUCH LONGER.
Several large,
well-financed competitors with long-standing brand recognition, successful
histories of new product introductions and long-standing relationships dominate
the market for the distribution of premium cigars with tobacco growers and
distributors. We compete with well-established companies for sales to
distributors and to consumers. While we believe that the rapidly expanding
market for sales of premium cigars has created room for new competitors to
achieve substantial sales and profits, there can be no assurance that we can
compete successfully on price or in obtaining raw materials, building
facilities and attracting and keeping skilled labor, which could result in
material adverse effects on our business.
WE FACE RISKS
ASSOCIATED WITH INTERNATIONAL MANUFACTURING AND IMPORTATION.
Our operations
are in Ocala, Florida, but the sources of our products and tobacco are located
in Nicaragua. As such, we are subject to the risks of changes in social,
political and regulatory climate inherent in foreign trade, including potential
changes in either Nicaraguan or U.S. laws or regulations regarding foreign
investment in and transfers of capital from Nicaragua. While we are not aware
of any such social, political or regulatory changes, if such a change should
occur, it could materially impair our operations and its financial condition.
WE ARE AN
"EMERGING GROWTH COMPANY," AND ANY DECISION ON OUR PART TO COMPLY ONLY WITH
CERTAIN REDUCED DISCLOSURE REQUIREMENTS APPLICABLE TO "EMERGING GROWTH COMPANIES"
COULD MAKE OUR COMMON STOCK LESS ATTRACTIVE TO INVESTORS.
We are an
"emerging growth company," as defined in the JOBS Act, and, for as long as we
continue to be an "emerging growth company," we expect and fully intend to take
advantage of exemptions from various reporting requirements applicable to other
public companies but not to "emerging growth companies," including, but not
limited to, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced
disclosure obligations regarding executive compensation in our periodic reports
and proxy statements, and exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and shareholder approval of
any golden parachute payments not previously approved. We could be an "emerging
growth company" for up to five years, or until the earliest of (i) the last day
of the first fiscal year in which our annual gross revenues exceed $1 billion,
(ii) the date that we become a "large accelerated filer" as defined in Rule
12b-2 under the Exchange Act, which would occur if the market value of our
common stock that is held by non-affiliates exceeds $700 million as of the last
business day of our most recently completed second fiscal quarter, or (iii) the
date on which we have issued more than $1 billion in non-convertible debt
during the preceding three year period.
In addition,
Section 107 of the JOBS Act also provides that an "emerging growth company" can
take advantage of the extended transition period provided in Section 7(a)2(B)
of the Securities Act for complying with new or revised accounting standards.
In other words, an "emerging growth company" can delay the adoption of certain
accounting standards until those standards would otherwise apply to private
companies. We have elected to opt in to the extended transition period for
complying with the revised accounting standards. We have elected to rely on
these exemptions and reduced disclosure requirements applicable to "emerging
growth companies" and expect to continue to do so.
THE JOBS ACT
ALLOWS US TO DELAY THE ADOPTION OF NEW OR REVISED ACCOUNTING STANDARDS THAT
HAVE DIFFERENT EFFECTIVE DATES FOR PUBLIC AND PRIVATE COMPANIES.
Since, we have elected to use the extended transition period for complying with
new or revised accounting standards under Section 102(b)(1) of the JOBS Act,
this election allows us to delay the adoption of new or revised accounting
standards that have different effective dates for public and private companies
until those
-12-
standards apply to private companies. As a result of this election, our
financial statements may not be comparable to companies that comply with public
company effective dates.
OUR COMMON
SHARES WILL NOT INITIALLY BE REGISTERED UNDER THE EXCHANGE ACT AND AS A RESULT
WE WILL HAVE LIMITED REPORTING DUTIES WHICH COULD MAKE OUR COMMON STOCK LESS
ATTRACTIVE TO INVESTORS.
Our common
shares are not registered under the Exchange Act. As a result, we will not be
subject to the federal proxy rules and our directors, executive officers and
10% beneficial holders will not be subject to Section 16 of the Exchange Act.
In addition, our reporting obligations under Section 15(d) of the Exchange Act
may be suspended automatically if we have fewer than 300 shareholders of record
on the first day of our fiscal year. Our common shares are not registered under
the Securities Exchange Act of 1934, as amended, and we do not intend to
register our common shares under the Exchange Act for the foreseeable future,
provided that, we will register our common shares under the Exchange Act if we
have, after the last day of our fiscal year, more than either (i) 2000 persons;
or (ii) 500 shareholders of record who are not accredited investors, in
accordance with Section 12(g) of the Exchange Act. As a result, although, based
on the effectiveness of the registration statement, we are required to file
annual, quarterly, and current reports pursuant to Section 15(d) of the
Exchange Act, as long as our common shares are not registered under the
Exchange Act, we will not be subject to Section 14 of the Exchange Act, which,
among other things, prohibits companies that have securities registered under
the Exchange Act from soliciting proxies or consents from shareholders without
furnishing to shareholders and filing with the Securities and Exchange
Commission a proxy statement and form of proxy complying with the proxy rules.
In addition, so long as our common shares are not registered under the Exchange
Act, our directors and executive officers and beneficial holders of 10% or more
of our outstanding common shares will not be subject to Section 16 of the
Exchange Act. Section 16(a) of the Exchange Act requires executive officers and
directs, and persons who beneficially own more than 10% of a registered class
of equity securities to file with the SEC initial statements of beneficial
ownership, reports of changes in ownership and annual reports concerning their
ownership of common shares and other equity securities, on Forms 3, 4 and 5,
respectively. Such information about our directors, executive officers, and
beneficial holders will only be available through the Company's registration
statement and periodic reports we file thereunder. Furthermore, so long as our
common shares are not registered under the Exchange Act, our obligation to file
reports under Section 15(d) of the Exchange Act will be automatically suspended
if, on the first day of any fiscal year (other than a fiscal year in which a
registration statement under the Securities Act has gone effective), we have
fewer than 300 shareholders of record. This suspension is automatic and does
not require any filing with the SEC. In such an event, we may cease providing
periodic reports and current or periodic information, including operational and
financial information, may not be available with respect to our results of
operations.
BECAUSE OUR
COMMON STOCK IS NOT REGISTERED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, OUR REPORTING OBLIGATIONS UNDER SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, MAY BE SUSPENDED AUTOMATICALLY IF WE HAVE
FEWER THAN 300 SHAREHOLDERS OF RECORD ON THE FIRST DAY OF OUR FISCAL YEAR.
Our common stock
is not registered under the Exchange Act, and we do not intend to register our
common stock under the Exchange Act for the foreseeable future (provided that,
we will register our common stock under the Exchange Act if we have, after the
last day of our fiscal year, $10,000,000 in total assets and either more than
2,000 shareholders of record or 500 shareholders of record who are not
accredited investors (as such term is defined by the Securities and Exchange
Commission), in accordance with Section 12(g) of the Exchange Act). As long as
our common stock is not registered under the Exchange Act, our obligation to
file reports under Section 15(d) of the Exchange Act will be automatically suspended
if, on the first day of any fiscal year (other than a fiscal year in which a
registration statement under the Securities Act has gone effective), we have
fewer than 300 shareholders of record. This suspension is automatic and does
not require any filing with the SEC. In such an event, we may cease providing
periodic reports and current or periodic information, including operational and
financial information, may not be available with respect to our results of
operations.
-13-
OUR BYLAWS
PROVIDE FOR INDEMNIFICATION OF OFFICERS AND DIRECTORS AT OUR EXPENSE AND LIMIT
THEIR LIABILITY WHICH MAY RESULT IN A MAJOR COST TO US AND HURT THE INTERESTS
OF OUR SHAREHOLDERS BECAUSE CORPORATE RESOURCES MAY BE EXPENDED FOR THE BENEFIT
OF OFFICERS AND/OR DIRECTORS.
Our Bylaws
include provisions that eliminate the personal liability of the directors of
the Company for monetary damages to the fullest extent possible under the laws
of the State of Florida or other applicable law. These provisions eliminate the
liability of directors to the Company and its stockholders for monetary damages
arising out of any violation of a director of his fiduciary duty of due care.
Under Florida law, however, such provisions do not eliminate the personal
liability of a director for (i) breach of the director's duty of loyalty, (ii)
acts or omissions not in good faith or involving intentional misconduct or
knowing violation of law, (iii) payment of dividends or repurchases of stock
other than from lawfully available funds, or (iv) any transaction from which
the director derived an improper benefit. These provisions do not affect a
director's liabilities under the federal securities laws or the recovery of
damages by third parties.
REPORTING
REQUIREMENTS UNDER THE EXCHANGE ACT AND COMPLIANCE WITH THE SARBANES-OXLEY ACT
OF 2002, INCLUDING ESTABLISHING AND MAINTAINING ACCEPTABLE INTERNAL CONTROLS
OVER FINANCIAL REPORTING, ARE COSTLY AND MAY INCREASE SUBSTANTIALLY.
The rules and
regulations of the SEC require a public company to prepare and file periodic
reports under the Exchange Act, which will require that the Company engage
legal, accounting, auditing and other professional services. The engagement of
such services is costly. Additionally, the Sarbanes-Oxley Act of 2002 (the
"Sarbanes-Oxley Act") requires, among other things, that we design, implement
and maintain adequate internal controls and procedures over financial
reporting. The costs of complying with the Sarbanes-Oxley Act and the limited
technically qualified personnel we have may make it difficult for us to design,
implement and maintain adequate internal controls over financial reporting. In
the event that we fail to maintain an effective system of internal controls or
discover material weaknesses in our internal controls, we may not be able to
produce reliable financial reports or report fraud, which may harm our overall
financial condition and result in loss of investor confidence and a decline in
our share price.
As a public
company, we are subject to the reporting requirements of the Exchange Act, the
Sarbanes-Oxley Act, the Dodd-Frank Act of 2010 and other applicable securities
rules and regulations. Despite recent reforms made possible by the JOBS Act,
compliance with these rules and regulations will nonetheless increase our legal
and financial compliance costs, make some activities more difficult,
time-consuming or costly and increase demand on our systems and resources,
particularly after we are no longer an "emerging growth company." The Exchange
Act requires, among other things, that we file annual, quarterly, and current
reports with respect to our business and operating results.
We are working
with our legal, accounting and financial advisors to identify those areas in
which changes should be made to our financial and management control systems to
manage our growth and our obligations as a public company. These areas include
corporate governance, corporate control, disclosure controls and procedures and
financial reporting and accounting systems. We have made, and will continue to
make, changes in these and other areas. However, we anticipate that the
expenses that will be required in order to adequately prepare for being a
public company could be material. We estimate that the aggregate cost of
increased legal services; accounting and audit functions; personnel, such as a
chief financial officer familiar with the obligations of public company
reporting; consultants to design and implement internal controls; and financial
printing alone will be a few hundred thousand dollars per year and could be
several hundred thousand dollars per year. In addition, if and when we retain
independent directors and/or additional members of senior management, we may
incur additional expenses related to director compensation and/or premiums for
directors' and officers' liability insurance, the costs of which we cannot
estimate at this time. We may also incur additional expenses associated with
investor relations and similar functions, the cost of which we also cannot
estimate at this time. However, these additional expenses individually, or in
the aggregate, may also be material.
In
addition, being a public company could make it more difficult or more costly for
us to obtain certain types of insurance, including directors' and officers'
liability insurance, and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact
-14-
of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees or as
executive officers.
The increased
costs associated with operating as a public company may decrease our net income
or increase our net loss, and may cause us to reduce costs in other areas of
our business or increase the prices of our products or services to offset the
effect of such increased costs. Additionally, if these requirements divert our
management's attention from other business concerns, they could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY BE
SUBJECT TO LITIGATION, SPECIFICALLY TOBACCO RELATED LITIGATION, IN THE FUTURE
WHICH COULD IMPACT THE FINANCIAL HEALTH OF THE COMPANY.
Currently there
are
no
legal proceedings pending or threatened against the Company.
However, from time to time, we may become involved in various lawsuits and
legal proceedings that arise in the ordinary course of business. Litigation is
subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business.
Various types of
claims may be raised in tobacco-related litigation, including product
liability, consumer protection, antitrust, tax, contraband shipments, patent
infringement, employment matters, claims for contribution and claims of
competitors and distributors.
Litigation is
subject to uncertainty and it is possible that there could be adverse
developments in future cases. An unfavorable outcome or settlement of pending
tobacco-related or other litigation could encourage the commencement of
additional litigation. Damages claimed in some tobacco-related or other
litigation are significant and, in certain cases, range in the billions of
dollars. The variability in pleadings in multiple jurisdictions, together with
the actual experience of management in litigating claims, demonstrate that the
monetary relief that may be specified in a lawsuit bears little relevance to
the ultimate outcome. In certain cases, plaintiffs claim that defendants'
liability is joint and several. In such cases, Rich Cigars, Inc. may face the
risk that one or more co-defendants decline or otherwise fail to participate in
the bonding required for an appeal or to pay their proportionate or jury-allocated
share of a judgment. As a result, the Company under certain circumstances may
have to pay more than their proportionate share of any bonding- or
judgment-related amounts. This risk has been substantially reduced given that
45 states and Puerto Rico now limit the dollar amount of bonds or require no
bond at all. Tobacco litigation plaintiffs have challenged the
constitutionality of Florida's bond cap statute in several cases and plaintiffs
may challenge state bond cap statutes in other jurisdictions as well. Such
challenges may include the applicability of state bond caps in federal court.
Although we cannot predict the outcome of such challenges, it is possible that
the consolidated results of operations, cash flows or financial position of Rich
Cigars, Inc. could be materially affected in a particular fiscal quarter or
fiscal year by an unfavorable outcome of one or more such challenges.
TOBACCO
REGULATION AND CONTROL ACTION IN THE PUBLIC AND PRIVATE SECTORS.
Effective August
8, 2016, the Food and Drug Administration ("FDA") extended its regulatory
authority to all tobacco products, including cigars. Cigars, including premium
cigars, are now subject to the Federal Food, Drug, and Cosmetic Act (the
FD&C Act), as amended by the Family Smoking Prevention and Tobacco Control
Act (Tobacco Control Act). The Tobacco Control Act provides FDA authority to
regulate cigarettes, cigarette tobacco, roll-your-own tobacco, smokeless
tobacco, and any other tobacco products that the FDA by regulation deems to be
subject to the law. With this final rule, FDA is extending the their "tobacco
product" authorities in the FD&C Act to all other categories of products
that meet the statutory definition of "tobacco product" in the FD&C Act,
except accessories of such newly deemed tobacco products. This final rule also
prohibits the sale of "covered tobacco products" to individuals under the age
of 18 and requires the display of health warnings on cigarette tobacco,
roll-your own tobacco, and covered tobacco product packages and in
advertisements.
The new rule:
requires
health warnings on roll-your-own tobacco, cigarette tobacco, and certain newly
regulated tobacco products and also bans free samples;
-15-
requires
that manufacturers of newly regulated tobacco products that were not on the
market as of February 15, 2007, show that products meet the applicable public
health standard set by the law;
requires
that those manufacturers receive marketing authorization from the FDA;
restricts
youth access to newly regulated tobacco products by: 1) not allowing products
to be sold to those younger than 18 and requiring age verification via photo
ID; and 2) not allowing tobacco products to be sold in vending machines (unless
in an adult-only facility); and
gives
a foundation for future FDA actions related to tobacco.
As a result of
these newly implemented regulations, we may face further regulatory hurdles,
and will expend time, money, and resources complying with the product testing,
registration, and marketing approval processes required under these regulations.
The FDA expects that manufacturers will continue selling their products for up
to two years while they submit-and an additional year while the FDA reviews-a
new tobacco product application. The FDA will issue an order to give marketing
authorization where appropriate. Otherwise, the product will face FDA
enforcement.
We cannot
predict how the FDA will implement and enforce its statutory authority,
including by promulgating additional regulations and pursuing possible
investigatory or enforcement actions. Governmental actions, combined with the
diminishing social acceptance of smoking and private actions to restrict
smoking, have resulted in reduced cigarette industry volume, and we expect that
these factors will continue to reduce cigarette consumption levels, which could
negatively impact cigar industry volume as well. Actions by the FDA or other
federal, state or local governments or agencies may impact the consumer
acceptability of tobacco products, limit adult consumer choices, delay or
prevent the launch of new or modified tobacco products, restrict communications
to adult consumers, restrict the ability to differentiate tobacco products,
create a competitive advantage or disadvantage for certain tobacco companies,
impose additional manufacturing, labeling or packing requirements, require the
recall or removal of tobacco products from the marketplace or otherwise
significantly increase the cost of doing business, all or any of which may have
a material adverse impact on the business, results of operations, cash flows or
financial position of Rich Cigars, Inc.
WE
SELL OUR PRODUCTS AND SERVICES IN HIGHLY COMPETITIVE MARKETS, WHICH RESULTS IN
PRESSURE ON OUR PROFIT MARGINS AND LIMITS OUR ABILITY TO MAINTAIN OR INCREASE
THE MARKET SHARE OF OUR SERVICES.
The
tobacco industry is subject to significant competition and pricing pressures.
We will experience significant competitive pricing pressures as well as
competitive products. Several significant competitors offer products with
prices that may match or are lower than ours. We believe that the products we
offer are generally competitive with those offered by other cigar companies. It
is possible that one or more of our competitors could develop a significant advantage
over us that allows them to provide superior products or pricing, which could
put us at a competitive disadvantage. Continued pricing pressure or
improvements in raw materials and shifts in customer preferences away from tobacco
products could adversely impact our customer base or pricing structure and have
a material and adverse effect on our business, financial condition, results of
operations and cash flows. In the cigar category, additional competition has
resulted from increased imports of machine-made large cigars manufactured
offshore.
OUR
FUTURE GROWTH IS LARGELY DEPENDENT UPON OUR ABILITY TO SUCCESSFULLY COMPETE
WITH NEW AND EXISTING COMPETITORS BY DEVELOPING PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE WITH ACCEPTABLE MARGINS.
Our business operates in markets that are characterized by
legal and regulatory pressures and evolving industry standards. If similar
high-end tobacco companies gain market acceptance, our ability to grow our
business could be materially and adversely affected. Accordingly, our future
success depends upon a number of factors, including our ability to accomplish
the following: identify emerging trends in our target end-markets; develop and
maintain competitive products; enhance our products by increasing the associated
brand reputation that differentiate us from our competitors; and develop and
bring products to market quickly and cost-effectively. Our ability to develop
new products can affect our competitive position and requires the investment of
significant resources. These development efforts divert resources from other
potential investments in our businesses, and they may not lead to the
development of new products on a timely basis. New or enhanced products may not
satisfy consumer preferences and potential product failures may cause consumers
to reject these products. As a result, these products may not
-16-
achieve market acceptance and our brand image could suffer.
In addition, our competitors may introduce superior products or business
strategies, impairing our brand and the desirability of our products, which may
cause consumers to defer or forego purchases of our products or services. Also,
the markets for our products and services may not develop or grow as we
anticipate. The failure of our products to gain market acceptance, the potential
for lawsuits, or the obsolescence of our products could significantly reduce our
revenue, increase our operating costs or otherwise adversely affect our
business, financial condition, results of operations or cash flows.
ADVERSE
PUBLICITY OR CONSUMER PERCEPTION OF OUR PRODUCTS AND ANY SIMILAR PRODUCTS
DISTRIBUTED BY OTHERS COULD HARM OUR REPUTATION AND ADVERSELY AFFECT OUR SALES
AND REVENUES.
We
believe we are highly dependent upon positive consumer perceptions of the
quality of our products as well as similar products distributed by other tobacco
companies. Consumer perception of tobacco products can be substantially
influenced by scientific research or findings, national media attention and
other publicity about product use. Adverse publicity from these sources
regarding the safety or quality of tobacco and our products could harm our
reputation and results of operations. The mere publication of news articles or
reports asserting that such products may be harmful could have a material
adverse effect on our business, financial condition and results of operations,
regardless of whether such news articles or reports are scientifically
supported.
DEPENDENCE UPON
TRADEMARKS AND PROPRIETARY RIGHTS, FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY
RIGHTS.
Our future
success depends significantly on our ability to protect our current and future
brands and products and to defend our intellectual property rights. We intend
to seek trademark registrations covering our brands and products, and expect to
continue to file, trademark applications seeking to protect newly developed
brands and products. We cannot be sure that trademark registrations will be
issued with respect to any of our trademark applications. There is also a risk
that we could, by omission, fail to timely renew or protect a trademark or that
our competitors will challenge, invalidate or circumvent any existing or future
trademarks issued to or licensed by us.
OUR
INSURANCE COVERAGE OR THIRD PARTY INDEMNIFICATION RIGHTS MAY NOT BE SUFFICIENT
TO COVER OUR LEGAL CLAIMS OR OTHER LOSSES THAT WE MAY INCUR IN THE FUTURE.
In
the future, insurance coverage may not be available at adequate levels or on
adequate terms to cover potential losses, including on terms that meet our
customer's requirements. If insurance coverage is inadequate or unavailable, we
may face claims that exceed coverage limits or that are not covered, which
could increase our costs and adversely affect our operating results.
IF
DEVELOPED, OUR BRANDS MAY BECOME VALUABLE, AND ANY INABILITY TO PROTECT THEM
COULD REDUCE THE VALUE OF OUR PRODUCTS AND BRAND.
We
may invest significant resources to build and protect our brands. However, we
may be unable or unwilling to strictly enforce our rights, including our
trademarks, from infringement. Our failure to enforce our intellectual property
rights could diminish the value of our brands and product offerings and harm
our business and future growth prospects.
AN
INCREASE IN PRODUCT RETURNS COULD NEGATIVELY IMPACT OUR OPERATING RESULTS AND
PROFITABILITY.
We
will permit the return of damaged or defective products and accept limited
amounts of product returns in certain instances. While such returns are
expected to be nominal and within management's expectations and the provisions
established, future return rates may increase more than anticipated. Any significant
increase in damaged or defective products or expected returns could have a
material adverse effect on our operating results for the period or periods in
which such returns materialize.
-17-
WE
HAVE NO MANUFACTURING CAPACITY AND ANTICIPATE CONTINUED RELIANCE ON THIRD-PARTY
MANUFACTURERS FOR THE
DEVELOPMENT OF OUR PRODUCTS.
We
do not currently operate manufacturing facilities for production of our
products. We lack the resources and the capabilities to manufacture our
products. We do not intend to develop facilities for the manufacture of
products in the foreseeable future. We will rely on third-party manufacturers
to produce bulk products required to meet our sales needs. We plan to continue
to rely upon contract manufacturers to manufacture commercial quantities of our
products.
Our
contract manufacturers' failure to achieve and maintain high manufacturing
standards, in accordance with applicable regulatory requirements, or the
incidence of manufacturing errors, could result in consumer injury or death,
product shortages, product recalls or withdrawals, delays or failures in
product testing or delivery, cost overruns or other problems that could
seriously harm our business. Contract manufacturers often encounter
difficulties involving production yields, quality control and quality
assurance, as well as shortages of qualified personnel. Our existing
manufacturers and any future contract manufacturers may not perform as agreed
or may not remain in the contract manufacturing business. In the event of a natural
disaster, business failure, strike or other difficulty, we may be unable to
replace a third-party manufacturer in a timely manner and the production of our
products would be interrupted, resulting in delays, additional costs and
reduced revenues.
A
SHORTAGE IN THE SUPPLY OF KEY RAW MATERIALS COULD INCREASE OUR COSTS OR
ADVERSELY AFFECT OUR SALES AND REVENUES.
All
of the raw materials for our products are obtained from third-party suppliers.
Shortages in certain ingredients could result in materially higher raw material
prices or adversely affect our ability to have a product manufactured. Price
increases from a supplier would directly affect our profitability if we are not
able to pass price increases on to customers. Our inability to obtain adequate
supplies of raw materials in a timely manner or a material increase in the
price of our raw materials could have a material adverse effect on our
business, financial condition and results of operations.
TOBACCO
PRICE, AVAILABILITY AND QUALITY.
Any
significant change in tobacco leaf prices, quality or availability could
adversely affect our profitability and business.
VARIOUS
DISEASES, PESTS AND CERTAIN WEATHER CONDITIONS.
Various
diseases, pests, fungi, viruses, drought, frosts and certain other weather
conditions could affect the quality and quantity of agricultural raw materials
available, decreasing the supply of our products and negatively impacting
profitability. We cannot guarantee that our suppliers of agricultural raw
materials will succeed in preventing contamination in existing fields. Future
government restrictions regarding the use of certain materials used in growing
agricultural raw materials may increase costs and/or reduce production of
crops. Growing agricultural raw materials also requires adequate water
supplies. A substantial reduction in water supplies could result in material
losses of crops, which could lead to a shortage of our product supply.
DAMAGE
TO OUR REPUTATION.
Maintaining a good reputation is critical to selling our
branded products. Product contamination or tampering or the failure to maintain
our standards for product quality, safety and integrity, including with respect
to raw materials, naturally occurring compounds, packaging materials or product
components obtained from suppliers, may reduce demand for our products or cause
production and delivery disruptions. Although our producer/distributors maintain
standards for the materials and product components received from suppliers, it
is possible that a supplier may not provide materials or product components that
meet the required standards or may falsify documentation associated with the
fulfillment of those requirements. If any of our products becomes unsafe or
unfit for consumption, is misbranded or causes injury, we may have to engage in
a product recall and/or be subject to liability and incur additional costs. A
widespread product recall, multiple product recalls, or a significant product
liability judgment could cause our products to be unavailable for a period of
time, which could further reduce
-18-
consumer demand and brand equity. Our reputation could be
impacted negatively by public perception, adverse publicity (whether or not
valid), negative comments in social media, or our responses relating to:
a
perceived failure to maintain high ethical, social and environmental standards
for all of our operations and activities;
a
perceived failure to address concerns relating to the quality, safety or
integrity of our products;
our
environmental impact, including use of agricultural materials, packaging, water
and energy use, and waste management; or
effects that are
perceived as insufficient to promote the responsible use of our products.
Failure
to comply with local laws and regulations, to maintain an effective system of
internal controls, to provide accurate and timely financial statement
information, or to protect our information systems against service
interruptions, misappropriation of data or breaches of security, could also
hurt our reputation. Damage to our reputation or loss of consumer confidence in
our products for any of these or other reasons could result in decreased demand
for our products and could have a material adverse effect on our business,
financial condition and results of operations, as well as require additional
resources to rebuild our reputation, competitive position and brand equity.
CONTAMINATION.
The
success of our brands depends upon the positive image that consumers have of
those brands. Contamination, whether arising accidentally or through deliberate
third-party action, or other events that harm the integrity or consumer support
for our brands, could adversely affect their sales. Contaminants in raw
materials, packaging materials or product components purchased from third parties
and used in the production of our products or defects in the process could lead
to low quality as well as illness among, or injury to, consumers of our
products and may result in reduced sales of the affected brand or all of our
brands.
CONFLICTS
OF INTEREST.
Certain
conflicts of interest may exist between our Company and our officers and
directors. They have other business interests to which they devote their
attention, and may be expected to continue to do so although management time
should be devoted to the business of our Company. As a result, conflicts of
interest may arise that can be resolved only through exercise of such judgment
as is consistent with fiduciary duties to our Company.
LIMITED REVENUE HISTORY.
Our
Company is considered in development stage. Our Company must be regarded as a
new or development venture with all of the unforeseen costs, expenses,
problems, risks and difficulties to which such ventures are subject.
NO
ASSURANCE OF SUCCESS OR PROFITABILITY.
There
is no assurance that our Company will ever operate profitably. There is no
assurance that we will generate profits, or that the value of our Company's
Shares will be increased thereby.
LACK
OF DIVERSIFICATION.
Because
of the limited financial resources that we have, it is unlikely that we will be
able to diversify our operations. Our probable inability to diversify our
activities into more than one area will subject us to economic fluctuations
within our business or industry and therefore increase the risks associated with
our operations.
DEPENDENCE
UPON MANAGEMENT. LIMITED PARTICIPATION OF MANAGEMENT.
Our
Company will be heavily dependent upon our management skills, talents, and
abilities, as well as our consultants, to implement our business plan, and may,
from time to time, find that their inability to devote full time attention to
the business of our Company results in a delay in progress toward implementing
our business plan.
-19-
DEPENDENCE
UPON OUTSIDE ADVISORS.
To
supplement the business experience of our officers and directors, we may be
required to employ accountants, technical experts, appraisers, attorneys, or
other consultants or advisors. Our Company's management, without any input from
stockholders, will make the selection of any such advisors. Furthermore, it is
anticipated that such persons may be engaged on an "as needed" basis without a
continuing fiduciary or other obligation to our Company. In the event our
Company considers it necessary to hire outside advisors, they may elect to hire
persons who are affiliates, if they are able to provide the required services.
Based
on our current cash reserves, we will have relatively small operational budget
for the operations that we cannot expand without additional raising capital.
If
we are unable to begin to generate enough revenue to cover our operational
costs, we will need to seek additional sources of funds. Currently, we have no
committed source for any funds as of date hereof. No representation is made
that any funds will be available when needed. In the event funds cannot be
raised if and when needed, we may not be able to carry out our business plan
and could fail in business as a result of these uncertainties.
We
cannot give any assurances that we will be able to raise enough capital to fund
acquisitions and product development.
We
will need to raise additional funds to support not only our budget, but also
our expansion operations. We cannot make any assurances that we will be able to
raise such funds or whether we would be able to raise such funds with terms
that are favorable to us. We may seek to borrow monies from lenders at
commercial rates, but such lenders will probably be at higher than bank rates,
which higher rates could, depending on the amount borrowed, make the net
operating income insufficient to cover the interest.
RISKS RELATED TO
OUR COMMON STOCK
WE MAY IN THE
FUTURE ISSUE MORE SHARES WHICH COULD CAUSE A LOSS OF CONTROL BY OUR PRESENT
MANAGEMENT AND CURRENT STOCKHOLDERS.
We
may issue further shares as consideration for the cash or assets or services
out of our authorized but unissued common stock that would, upon issuance,
represent a majority of the voting power and equity of our Company. The result
of such an issuance would be those new stockholders and management would
control our Company, and persons unknown could replace our management at this
time. Such an occurrence would result in a greatly reduced percentage of
ownership of our Company by our current shareholders, which could present
significant risks to investors.
WE HAVE NOT AND MAY
NEVER PAY ANY DIVIDENDS TO SHAREHOLDERS.
We have not paid
dividends on our common stock. We currently intend to retain any future
earnings for use in the operation and expansion of our business. Accordingly,
we do not expect to pay any dividends in the foreseeable future, but will
review this policy as circumstances dictate.
A LIMITED PUBLIC MARKET EXISTS FOR OUR
COMMON STOCK AT THIS TIME, AND THERE IS NO ASSURANCE OF A FUTURE MARKET.
Our
common stock has been quoted on the OTC Pink since November 16, 2016, under the
symbol "RCGR." There is a limited public market for our common stock, and
no assurance can be given that a market will continue or that a shareholder ever
will be able to liquidate his investment without considerable delay, if at all.
If a market should develop, the price may be highly volatile. Factors such as
those discussed in the "Risk Factors" section may have a significant impact upon
the market price of the shares offered hereby. Due to the low price of our
securities, many brokerage firms may not be willing to effect transactions in
our securities.
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Even if a purchaser finds a broker willing to effect a
transaction in our shares, the combination of brokerage commissions, state
transfer taxes, if any, and any other selling costs may exceed the selling
price. Further, many lending institutions will not permit the use of our shares
as collateral for any loans.
OUR COMMON STOCK
IS CONSIDERED A PENNY STOCK, WHICH MAY BE SUBJECT TO RESTRICTIONS ON
MARKETABILITY, SO YOU MAY NOT BE ABLE TO SELL YOUR SHARES.
We may be
subject now and in the future to the SEC's "penny stock" rules if our shares of
common stock sell below $5.00 per share. Penny stocks generally are equity
securities with a price of less than $5.00. The penny stock rules require
broker-dealers to deliver a standardized risk disclosure document prepared by
the SEC, which provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer must also provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson, and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in
writing before or with the customer's confirmation.
In addition, the
penny stock rules require that prior to a transaction, the broker dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. The penny stock rules are burdensome and may reduce purchases
of any offerings and reduce the trading activity for shares of our common stock.
As long as our shares of common stock are subject to the penny stock rules, the
holders of such shares of common stock may find it more difficult to sell their
securities.
In
addition, the Securities and Exchange Commission has adopted a number of rules
to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange
Act of 1934, as amended. Because our securities constitute "penny stocks"
within the meaning of the rules, the rules would apply to us and to our
securities. The rules will further affect the ability of owners of shares to
sell our securities in any market that might develop for them because it
imposes additional regulatory burdens on penny stock transactions.
Shareholders
should be aware that, according to Securities and Exchange Commission, the
market for penny stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the security by one
or a few broker-dealers that are often related to the promoter or issuer; (ii)
manipulation of prices through prearranged matching of purchases and sales and
false and misleading press releases; (iii) "boiler room" practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (iv) excessive and undisclosed bid-ask differentials and markups
by selling broker-dealers; and (v) the wholesale dumping of the same securities
by promoters and broker-dealers after prices have been manipulated to a desired
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to
be in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities.
RULE
144 SALES IN THE FUTURE MAY HAVE A DEPRESSIVE EFFECT ON OUR STOCK PRICE.
Our
shareholders may be able to use Rule 144 as an exemption for resale, but
resales under Rule 144 could have a depressive effect on the market-trading
price, if any. Investors will have no effective way to combat this.
OUR
SHARES ARE THINLY TRADED.
The
shares of our common stock may continue to be thinly-traded on the OTC Markets
under the symbol RCGR, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. This situation is attributable to a number of
factors, including the fact that we are a small company which is relatively
unknown to stock analysts, stock brokers, institutional investors and others in
the investment community that generate or influence sales volume, and that even
if we came to the attention of such persons, they tend to be risk-averse and
would be reluctant to follow an unproven, early stage company such as ours or
purchase or recommend the purchase of any of our Securities until such time as
we became more seasoned and viable. As a consequence, there may be periods of
several days or more when trading activity in our Securities is minimal or
non-existent, as compared to a seasoned issuer which has a large and steady
volume of trading activity that will generally support continuous sales without
an adverse effect on
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Securities price. We cannot give you any assurance that an
active public trading market for our common Securities will ever develop or be
sustained, or that any trading levels will be sustained. Due to these
conditions, we can give investors no assurance that they will be able to sell
their shares at or any prices or at all if they need money or otherwise desire
to liquidate their securities of our Company. Our common stock may not be able
to be liquidated at or near ask prices in any volume in the markets.
OUR
COMMON STOCK MARKET PRICES MAY BE VOLATILE, WHICH SUBSTANTIALLY INCREASES THE
RISK THAT INVESTORS MAY NOT BE ABLE TO SELL THEIR SECURITIES AT OR ABOVE THE
PRICE THAT WAS PAID FOR THE SECURITY.
Because
of the limited trading market for our common stock and because of the possible
price volatility, shareholders may not be able to sell their shares of common
stock when desired. The inability to sell common stock in a rapidly declining
market may substantially increase the risk of loss because of such illiquidity
and because the price for our common stock may suffer greater declines because
of our price volatility.
Certain
factors, some of which are beyond our control, that may cause our share price
to fluctuate significantly include, but are not limited to the following:
●
Variations
in our quarterly operating results;
●
Loss
of a key relationship or failure to complete significant transactions;
●
Additions
or departures of key personnel; and
●
Fluctuations
in stock market price and volume.
Additionally,
in recent years the stock market in general has experienced extreme price and
volume fluctuations. In some cases, these fluctuations are unrelated or
disproportionate to the operating performance of the underlying company. These
market factors may materially and adversely affect our stock price, regardless
of our operating performance. In the past, class action litigation often has
been brought against companies following periods of volatility in the market
price of those companies common stock. If we become involved in this type of
litigation in the future, it could result in substantial costs and diversion of
management attention and resources, which could have a further negative effect
on shareholders' investments in our stock.
FUTURE
DILUTION MAY OCCUR DUE TO ISSUANCES OF SHARES FOR VARIOUS CONSIDERATION IN THE
FUTURE.
There
may be substantial dilution to our shareholders as a result of future decisions
of the Board to issue shares without shareholder approval for cash, services,
acquisitions, or pursuant to any future Employee/Consultant Stock Option Plan.
OUR
NEW INVESTORS WILL SUFFER A DISPROPORTIONATE RISK AND THERE WILL BE IMMEDIATE
DILUTION OF PURCHASERS' INVESTMENTS.
Our
present shareholders have acquired their securities at a cost significantly
less than that which the investors purchasing pursuant to warrants will pay for
their stock holdings or at which future purchasers in the market may pay.
Therefore, new investors will bear most of the risk of loss.
OUR
BUSINESS IS HIGHLY SPECULATIVE AND THE INVESTMENT IS THEREFORE HIGHLY RISKY.
Due
to the speculative nature of our business, it is probable that the investment
in shares offered hereby will result in a total loss to the investor. Investors
should be able to financially bear the loss of their entire investment.
Investment should, therefore, be limited to that portion of discretionary funds
not needed for normal living purposes or for reserves for disability and
retirement.
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The
ongoing economic downturn and continued uncertainty in the financial markets
and other adverse changes in general economic or political conditions may
adversely affect our industry, business and results of operations.
The
global credit and financial markets have continued to experience disruptions,
including diminished liquidity and credit availability, declines in consumer
confidence, declines in economic growth, increases in unemployment rates, and
uncertainty about economic stability. There can be no assurance that there will
not be future deterioration in credit and financial markets and confidence in
economic conditions. These economic uncertainties affect businesses such as
ours in a number of ways, making it difficult to accurately forecast and plan
our future business activities. We are unable to predict the likely duration
and severity of the current disruptions in the credit and financial markets and
adverse global economic conditions, and if the current uncertain economic
conditions continue or further deteriorate, our business and results of
operations could be materially and adversely affected.
POTENTIAL
CHANGES IN ACCOUNTING PRACTICES AND/OR TAXATION MAY ADVERSELY AFFECT OUR
FINANCIAL RESULTS.
We
cannot predict the impact that future changes in accounting standards or
practices may have on our financial results. New accounting standards could be
issued that change the way we record revenues, expenses, assets and
liabilities. These changes in accounting standards could adversely affect our
reported earnings. Increases in direct and indirect income tax rates could
affect after tax income. Equally, increases in indirect taxes could affect our
products affordability and reduce our sales.
WE
WILL RELY ON THIRD PARTIES FOR SERVICES IN CONDUCTING OUR BUSINESS AND ANY
DISRUPTION OF THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR BUSINESS.
We
will have contracts with third parties. If these relationships are disrupted
for any reason our results of operation and financial condition could be
adversely affected.
REPORTING INFORMATION.
Our
Company is subject to the reporting requirements under the Securities and
Exchange Act of 1934. As a result, shareholders will have ready access to the
information required to be reported by publicly held companies under the
Securities and Exchange Act and the regulations thereunder. Our Company intends
to provide our shareholders with annual reports containing financial
information prepared in accordance with Generally Accepted Accounting
Principles as required by Sec. 13 of the Securities Exchange Act of 1934.
LIMITED
FINANCING - LACK OF LOAN AVAILABILITY.
The
monies currently on hand may not be sufficient for the continued expanded
operations of our Company. There is no assurance that additional monies or
financing will be available in the future or, if available, will be at terms
favorable to our Company. (See "Business Summary")
Our
Company may borrow money to finance its operations on terms to be determined.
Any such borrowing will increase the risk of loss to the investor in the event
our Company is unsuccessful in repaying such loans.
CAPITAL
RESOURCES.
The
only capital resources of our Company are our shares.
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