ITEM 1. BUSINESS
Overview:
Hangover Joe’s Holding Corporation and its wholly-owned subsidiary Hangover Joe’s Inc. (collectively the “Company”) sell an all-natural two-ounce beverage shot formulated to help relieve the symptoms associated with alcohol induced hangovers – the
Hangover Recovery Shot
. The
Hangover Recovery Shot
is an officially licensed product of
The Hangover
movie series from Warner Brothers. The Company sells its products primarily to convenience stores, liquor stores, and grocery stores through distribution agreements, as well as through online internet sales. The Company began selling an original hangover recovery shot in February 2011 and later, with the signing of the Hangover movie license, began selling the licensed
Hangover Joe’s Recovery Shot
in July 2011.
In January, 2014, Hangover Joe’s signed a license deal with Git-R-Done Productions, Inc ® (Larry the Cable Guy), launching our new healthy, all natural energy drink shot. We saw a need in the market for an all-natural, non-caffeinated health & wellness energy product that provides hours of long lasting energy without caffeine and sugar. The energy drink market has come under fire in the last year or so because these energy drinks usually have a high concentration of sugar and/or caffeine. This product has over 20 key ingredients that provide the body long lasting energy and helps to fight against fatigue as well as aids the body cell building abilities; it also helps to fight against disease and oxidation stress. Git-R-Done Energy is the first energy drink of its type on the market to be powered with Astaxanthin in combination with D-Ribose, which acts in the body like a natural sugar.
Organization and Merger/Reorganization:
Hangover Joe’s Holding Corporation (“HJHC” or the “Company”) was originally incorporated in the State of Colorado in December 2005 as Across American Real Estate Exchange, Inc. (“AAEX”) to facilitate the exchange of real estate properties between individuals under Section 1031 of the Internal Revenue Code. In February 2010, Accredited Members, Inc. (“AMI”), a provider of investor research and management services, was merged with and into a wholly-owned subsidiary of AAEX, and AMI became a wholly-owned subsidiary of the Company. In May 2010, AAEX changed its name to Accredited Members Holding Corporation (“AMHC”).
On July 25, 2012, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Hangover Joe’s, Inc., a privately-held Colorado corporation (“HOJ”), whereby on July 25, 2012, AMHC acquired HOJ in a reverse triangular merger (the “Acquisition”). Upon closing the Acquisition the AMHC issued 83,514,827 common shares to the HOJ shareholders in exchange for all of their ownership interests in HOJ such that the former owners of HOJ owned approximately 69% of the Company post Acquisition. The shareholders of the AMHC prior to the Acquisition owned approximately 31% of the Company post Acquisition. In connection with the Acquisition on July 25, 2012, AMHC changed its name to Hangover Joe’s Holding Corporation.
The Merger Agreement further provided that within five business days after the closing of the Acquisition, the Company would sell to Accredited Members Acquisition Corporation (“Buyer”) all of the equity interests in three of the Company’s subsidiaries (the “Sale”), being AMI, AMHC Managed Services, Inc. and World Wide Premium Packers, Inc. (collectively, the “Subsidiaries”). Buyer is a privately-held Colorado corporation owned by two former directors of the Company, JW Roth and David Lavigne. The parties closed the Sale on July 27, 2012. The Buyer paid $10,044 and assumed all liabilities related to the business of the Subsidiaries in exchange for all of the shares in the Subsidiaries owned by the Company.
HOJ is a Colorado corporation formed on March 5, 2012. HOJ was formed for the purpose of acquiring all of the assets of both Hangover Joe’s Products LLC (“HOJ LLC”) and Hangover Joe’s Joint Venture (“HOJ JV”). HOJ LLC had conducted operations through HOJ JV, with the owner of HOJ LLC being one of the same owners and control persons of HOJ JV. Effective March 30, 2012, HOJ acquired the net assets of HOJ LLC and HOJ JV through the issuance of common stock of HOJ. Because HOJ had no significant assets or business operations prior to the merger and each of these entities were owned by the same control group, this transaction was accounted for as a reorganization of entities under common control. Accordingly, the historical results of operations of HOJ LLC and HOJ JV prior to March 30, 2012 are included in the results of operations of the Company.
Because all of the operating businesses of AMHC were sold within five business days after the Acquisition, the transaction has been accounted for as a recapitalization of HOJ. Accordingly, the accompanying consolidated financial statements include the financial position, results of operations and cash flows of HOJ and its predecessor entities, HOJ LLC and HOJ JV, prior to the date of the Acquisition. The historical results of operations and cash flows of AMHC and the Subsidiaries prior to the date of the Acquisition have been excluded from the accompanying consolidated financial statements. The historical stockholders’ equity of HOJ prior to the Acquisition has been retroactively restated for the equivalent number of shares received in the exchange after giving effect to any differences in the par value of the AMHC and HOJ common stock, with an offset to additional paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer (HOJ) has been carried forward after the exchange.
On July 25th 2012, Hangover Joe's became a publicly traded company and is trading on the OTCBB as HJOE. For more information, visit www.hangoverjoes.com, or check us out on Facebook and YouTube.
Product:
Our flagship product,
The Hangover Recovery Shot
is a patent pending liquid 2 ounce shot that contains several essential vitamins, supplements and antioxidants and was specifically designed by a laboratory chemist to help relieve the symptoms associated with an alcohol induced hangover.
The Hangover Recovery Shot
was designed to be taken the morning after to rapidly replace some of the key nutrients necessary to relieve the symptoms associated with a hangover and promote recovery. It contains a blend of B-vitamins including Vitamin B6, Vitamin B12, Niacin (B3) and Folic acid (B9). Other key supplements and antioxidants include Taurine, Kudzu, Caffeine, Green tea leaf extract, Black pepper extract, and Picamilon. The combination of acai fruit extract, mangosteen fruit extract, goji berry concentrate gives
The Hangover Recovery Shot
its unique fruit punch flavor that is considered superior to other energy shots and recovery drinks.
The Hangover Recovery Shot
is an officially licensed product of The Hangover movie series from Warner Brothers and each two ounce bottle contains special images, quotes and logos from
The Hangover
motion picture released in 2009 and/or
The Hangover Part II
motion picture released in 2011.
Our product is primarily sold to distributors in either a 12-pack display carton or 2-pack carton. The 12-pack display carton can be positioned at the check-out counter using a company provided two-tier display unit or on a standard retail shelving unit. The 2-pack carton comes attached to a clip strip which can be attached to a shelving unit or attached to the front of cooler door.
Our other product, Git-R-Done Energy shot in Berry Blast ™ flavor includes Astaxanthin, which is a powerful antioxidant and helps increase energy by protecting mitochondria, in which food is turned into energy. Astaxanthin is a red pigment that occurs naturally in various marine animals, including shrimp, salmon, crabs and lobster. This antioxidant is believed to help give salmon the endurance needed to swim upstream. This ingredient helps to increase strength, stamina and endurance by removing free radicals from muscle tissue, lessening soreness and helping the body rebound from the stress of exercise and labor. One of the other major ingredients in Git-R-Done Energy is Ribose, which is used to improve performance and the ability to exercise by boosting muscle energy. Ribose has also has been used to improve symptoms of chronic fatigue syndrome because it creates energy in the body. The product in Berry Blast ™flavor uses the natural sweetener Stevia, which has gained national attention as an all-natural alternative to sugar and artificial sweeteners.
Industry Overview
The hangover recovery drink category is a new and emerging category within the energy drink and shot market. The hangover recovery segment is relatively new and is primarily composed of a number of smaller manufacturers of recovery shots and drinks including NOHO, GTOX, Hangover Gone, Last Call, Mercy, and Last Round.
The energy drink and shot market is a larger more established market segment and is currently dominated by well-known companies such as, Red Bull, Monster Energy, and Rockstar Energy Drinks. According to Mintel International, sales of energy drinks and shots in 2011 totaled about $7 billion. Sales of energy shots are expected to grow 98% between 2011 ($1.3 billion) and 2016 ($2.5 billion), representing a compounded annual growth rate of approximately 15 percent.
The energy shot market is primarily dominated by 5-Hour Energy with Stacker 2 6-Hour Power, and Red Bull Energy Shots all competing for a smaller stake in this market. Beverage Digest reported that 5-hour Energy, which overwhelmingly dominates the energy shots category, grew about 23% in 2011 across all four channels: convenience stores, drug stores, mass merchandisers and supermarkets.
The Company’s plan is to try to ride this significant growth trend in the energy shot market and to lead a new $200+ million recovery drink category, separate and distinct from energy shots. The Company believes our license with the Hangover movie series provides us with a significant branding advantage. Further, we believe our taste profile is superior to the taste profile of other energy shots and hangover recovery products.
The energy drink category is estimated to increase according to the “Energy Drinks and Shots: Market Trends in the U.S." report dated January 2013, which states that sales of energy drinks and shots will grow to a value of $21.5 billion by 2017, driven by continued economic recovery, expansion in retail distribution, and strong potential in new product development. Baby boomers are large consumers of energy shots along with millennials, and these two groups are trending towards more healthy choices in beverages. Git-R-Done Energy potentially meets this demand. Overall, energy drinks are now the fastest-growing segment of the beverage market, and the timing is perfect for Hangover Joes.
Manufacturing and Packaging
We do not directly manufacture our products, but instead outsource the manufacturing process to third party laboratory and co-packing facility. Our co-packaging arrangements are terminable upon notice and do not obligate us to produce any minimum quantities of products within specified periods.
Manufacturing, Laboratory, and Co-Packing Arrangement
Our Hangover Joe’s Recovery Shot formula is currently manufactured by a third party laboratory in Texas. The third party laboratory is responsible for purchasing all raw material ingredients for our product including flavors, dietary ingredients, special herbs and supplements. The product is blended to our formula using specially filtered water. Once blended, the liquid is then shipped to a third-party co-packing facility.
At the same facility, the liquid is then bottled and packaged at their co-packing facility.. We generally are responsible for arranging for the purchase and delivery of labels and packaging materials to our third party co-packers. The co-packing facility provides bottles and caps, and packages the product according to our specifications. Finished goods are maintained at the co-packing facility until shipment to our customers.
Our ability to estimate demand for our products is imprecise and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products and/or are unable to secure sufficient ingredients or raw materials including, but not limited to plastic shot bottles, caps, labels, flavors, dietary ingredients, and other ingredients we might not be able to satisfy demand on a short-term basis.
We believe a short disruption or delay in production would not significantly affect our revenues; however if alternative co-packing facilities are not available for our products at commercially reasonable rates or within a reasonably short time period, if at all, a lengthy disruption or delay in production of our products could significantly affect our revenues. As we grow, we will continue to actively seek alternative and/or additional advantageously located co-packing facilities in the United States with adequate capacity and capability for the production of our various products to minimize transportation costs and transportation-related damages as well as to mitigate the risk of a disruption in production.
Distribution
While we have had a major disruption in our distribution in 2013 due to our financial condition, the Company has determined that convenience store distributors provide a solid foundation for building our distribution network within the United States. In addition, liquor and tobacco distributors also provide an advantage as two distinct groups facing general volume decline in their core products (beer and tobacco), hence the need for new products which can quickly ramp sales. Concurrently, we also are pursuing relationships with mass merchandisers such as Walmart, Target, CVS, Walgreens, Kmart and national /regional supermarket chains.
Hangover Joe's sells The Hangover Recovery Shot to retail locations in 24-bottle cases. The average revenue per case is $27.55, with bottles typically retailing for $2.99 per bottle. The Cost of ingredients to produce our products is expected to average 35 cents per bottle in 2014, or $8.31 for 24-pack. Fully absorbed product cost is expected to be $.47 per bottle in 2014. However, we cannot assure that such expectations will be met, and our costs of sales have been negatively impacted in 2013 and prior periods due to unforseen inventory write downs and other charges related to sales. Our product is contract bottled in Dallas, Texas. We expect to have similar costs and unit revenues for our Larry the Cable Guy Git-R-Done Energy Drink.
Raw Materials and Suppliers
The principal raw materials used in the manufacturing of our products are plastic shot bottles, dietary ingredients and other packaging materials, the costs of which are subject to fluctuations. Most of our raw materials are purchased by our manufacturing laboratory and co-packing facilities and included as part of the cost billed to the Company. Overall, the Company did not experience any significant increase in costs charged by the manufacturing and co-packing facilities.
Generally, raw materials utilized by us in our business are readily available from numerous sources. However, the Company’s third-party manufacturer acquires some ingredients from suppliers outside of the United States. Purchasing these ingredients is subject to the risks generally associated with importing raw materials from other countries, including, among other factors, delays in shipments, changes in economic and political conditions, quality assurance, tariffs, trade disputes and foreign currency fluctuations. These factors could result in a delay in or disruption of the supply of certain raw materials. Any significant delay in or disruption of the supply of raw materials could have a material adverse effect on the Company’s business.
Competition
The energy drink and energy shot market are highly competitive and the energy shot market in particular is dominated by 5-Hour Energy. The key areas of competition are pricing, packaging, development of new products and flavors as well as promotional and marketing strategies. Our product competes directly with other emerging recovery shot products. Currently these products are produced by smaller less established manufacturers. Our Hangover Recovery Shot also indirectly competes with other energy shot products from much larger well-known companies such as 5-Hour Energy, Stacker 2, and Red Bull. These more established energy shot companies have substantially greater financial, marketing and distribution resources than we do. We are targeting to a functional lifestyle category which continues to be an emerging sector of the beverage category.
Important factors affecting our ability to compete successfully include taste and flavor of products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, brand exposure and marketing as well as pricing. We also compete for distributors who will give our products more focus than those of our competitors, provide stable and reliable distribution and secure adequate shelf space in retail outlets. Competitive pressures could cause our products to be unable to gain or to lose market share or we could experience price erosion, which could have a material adverse effect on our business and results of operations.
We believe that our product compares favorably with other energy shot products because of our superior taste profile and powerful branding relationship with the Hangover movie series. In addition, we are one of the few recovery shots taken next day. Our new Git-R-Done-Energy Shot is revolutionary as it is a healthy all natural energy shot that is driven by other ingredients beside caffeine and sugar to give consumers a boost of energy. We feel that this growing sector and public demand for more healthy beverages gives us a very strong competitive edge in the emerging category.
We have experienced and continue to experience competition from new entrants in the hangover recovery and energy shot categories. Healthy energy with our new Git-R-Done-Energy shot will provide a continued growth area in the market place. We feel we are on the cutting edge of the industry and the market trend in providing consumers with a healthy choice that is not only good for them but provides hours of long lasting energy without all the sugar and caffeine of current market drinks which have over the last few years had many negatives associated with them as being health risk.
Many of our competitors in the functional lifestyle beverage market have been reluctant to target hangover recovery specifically due to the perceived risk it poses to their brand to align themselves too explicitly with alcohol and over-indulgence. Alka Seltzer made a well-funded effort with its targeted hangover relief product, but awareness for their product is minimal, since it represents such a small portion of Alka Seltzer's overall brand. 5 Hour Energy and Red Bull pursue a market that tacitly includes hangover recovery, but these products address only certain hangover symptoms, specifically tiredness and headache, and do not provide a comprehensive hangover recovery solution, nor do they explicitly market themselves as a hangover recovery product. In recent months, Goody's released a new headache relief product, but again this treats just one of the several symptoms commonly associated with hangovers. Hangover Joe's has several unique advantages over our competitors that position. We believe the Hangover Recovery Shot is perfectly positioned to become the go-to hangover recovery solution. Our independence means that we don't have a larger brand to protect from association with alcohol and over-indulgence and makes us free to target the hangover recovery market head-on. Our exclusive hangover recovery focus makes our product a comprehensive solution treating all the symptoms of hangovers, instead of just one or two. Hangover Recovery is estimated to be a billion dollar category worldwide and is a growing and emerging category. We believe that our hangover recovery shot has global reach as a brand.
Our Git-R-Done Energy shot is all natural and non-caffeinated, and no other product like it is being marketed or has a licensing agreement with a celebrity such as Larry the Cable Guy. Larry The Cable Guy is a household name and brings product awareness to the brand. Git-R-Done-Energy we believe will reach a large market segment of the every growing energy market and allow it to gain market share and with Larry The Cable Guy helping promote it we believe it can become successful in the energy shot space and help increase the category and yet provide consumers another option that is good for them by providing a health and wellness and energy shot combined.
Sales and Marketing
Our sales and marketing strategy is to focus our efforts on developing brand awareness through industry and distributor trade shows, marketing at special events, and product sampling. We utilize “push-pull” methods to enhance shelf and display space exposure in sales outlets (including advertising, in-store promotions and in-store placement of point-of-sale materials, racks, and coolers) to increase demand from consumers for our products.
Our sales and marketing efforts are primarily focused on major metropolitan areas with strong entertainment cultures including New York, Miami, San Francisco, Los Angeles, San Diego, Las Vegas, New Orleans, and Chicago. We also are focused on leveraging the marketing and sales value of
The Hangover III
movie released on Memorial Day weekend 2013.
Hangover Joes marketing approach is three-pronged: 1.“Bootleg” a brand name – win the “battle for the mind” in the wide-open hangover space. Starting from our name and our association with the billion dollar Hangover Movie Franchise, we aim to build the association in the mind of the public as being the method of choice for hangovers, as opposed to using products that are designed for other purposes such as Gatorade and Five Hour Energy, “Hair of the Dog” solutions, aspirin, Alka-Seltzer, and the like. We strive to do this by word of mouth – by getting a reputation for the product actually working. This process is well underway by exposure to various markets through retail, sampling in trade shows and in areas like New Orleans that feature a heavy vacation population, and supplement with favorable news media coverage and social media efforts. Once again, Hangover Joes has over 50,000 Facebook followers, and a small following that we believe will help pressure retailers to begin carrying our product. We do not pursue liquor stores at this time, and we strive to be sensitive to claims that we encourage alcohol consumption. 2.Successful placement in stores. We have been placed in retail outlets like Albertsons, convenience stores like 7-11, and are pursuing placement through our planned relationship with Larry the Cable Guy into Dollar General. This method is challenging, the stores require slotting fees, advertising support, commissions to distributors, and successful location within the store. 3.Alternative Methods - We intend to pursue direct response television and also specifically placed TV ads in programs that reach our market segment and demographic, internet web sales via many e-commerce websites limited direct mailing campaigns to supplement our internet sales and brand building. We also plan to target social media ads on both Facebook & Twitter once again at our specific demographic and the creation of video bases ads on YouTube, with success here we can continue to build up our cult following needed as a predecessor step to mass appeal and brand building and share of mind in the market place.
Hangover Joes is also pursuing an approach internationally; Hangover Joes has had success in Canada, New Zealand, Australia, with arrangements in Japan and Lebanon set for 2014. Warner Brothers helps us internationally as it provides the distributor names so we can shortcut some of the initial work and proceed with step 1 above.
Customers
As of the date of this Report, our products are available on a limited basis in the U. S. and in select international markets. Domestically, the Company sells its products primarily to convenience store, liquor store, and grocery store distributors, as well as through online internet sales. The Company plans to expand its domestic and international distribution networks during 2014 as opportunities and resources permit.
The CDC further estimates that there are 30 million hangovers in the United States every week. Hangovers cost the US economy approximately $148 billion each year in loss of productivity. All of these numbers taken together indicate that there is a clear and significant demand in the United States for an effective hangover solution that helps responsible adults to overcome their hangover symptoms and return to their lives quickly and effectively.
Hangover Joe's The Hangover Recovery Shot is a quick, easy, effective hangover recovery solution that treats hangover symptoms including headache, upset stomach and tiredness with a patent-pending, proprietary blend of all-natural ingredients that help restore the essential antioxidants and nutrients that are depleted by a night of heavy drinking. Hangover Joe's leverages innovative marketing strategies, encompassing both social and traditional media, as well as partnerships in the entertainment industry to build brand awareness both domestically and internationally. We have a strong social media following, with thousands of customers interacting with our brand online weekly, and we have been identified by numerous publications and beverage industry authorities as "the next big thing" in beverages. The Hangover Recovery Shot is an officially licensed product of Warner Bros. Entertainment and the Hangover movie franchise. Our partnership with this $1.5 billion franchise provides us with instant brand recognition unrivaled by other hangover recovery solutions. Hangover recovery is a booming category within the larger market of "functional lifestyle beverages", which also includes energy drinks and similar products. Hangover recovery is the fastest-growing category within this market, estimated to reach $200 million by 2015 in the USA. Estimated to be a 1 billion dollar market worldwide for hangover recovery. The brand lends itself to becoming a global brand. While binge alcohol consumption is commonly associated with college students, studies show that 70% of alcohol over-indulgence occurs among people 26 and older. For this reason, Hangover Joe's target customers are responsible, working adults between the ages of 25 and 55.
Seasonality
Sales of hangover recovery products are somewhat seasonal, with slightly higher sales volumes during the holiday season in the fourth quarter. Quarterly fluctuations may also be affected by other factors including the introduction of new products, the opening of new markets particularly international markets, the addition of new distributors, and increased or decreased advertising and promotional expenses.
Licenses & Royalties
Warner Bros. License Agreement
The Company’s original license with Warner Bros. Consumer Products, Inc. (“WBCP”) permits the Company to use the costumes, artwork, logos and other elements depicted in the 2009 movie,
The Hangover
. This license had an initial term through January 31, 2013 and provided for certain royalties based on a percentage of products sold subject to certain agreed-upon guaranteed minimum royalty payments over the term of the license.
In January 2013, the Company extended its product license agreement with WBCP to January 31, 2016. Further, the extension added certain channels of distribution and added the costumes, artwork, logos and other elements depicted in the 2011 movie
The Hangover Part II.
Similar to the initial agreement, the extension required certain agreed-upon minimum royalty payments over the next three years, the first of which was paid from the proceeds from the TCA revolving credit facility in January 2013.
We added an additional 3 year license to sell our product in Japan under similar terms and conditions in January, 2014.
Larry the Cable Guy Agreement
In January, 2014, Hangover Joe’s signed a license agreement with Git-R-Done Productions, Inc ® (“Larry the Cable Guy”), launching our new healthy, all natural energy drink shot. This arrangement permits the Company to use the costumes, artwork, logos and other elements associated with Larry the Cable Guy. This license has an initial term through January 31, 2016 and provided for certain royalties based on a percentage of products sold subject to certain agreed-upon guaranteed minimum royalty payments over the term of the license.
Royalty Agreements
The Company has a representative agreement with an individual who became a member of the Company’s board of directors in July 2012. Under this agreement, as amended, this individual is entitled to a commission of between 4% and 6% of sales made by this individual, based on the nature of the sales, and a royalty of 3% of all sales made by the Company, as defined.
The Company also has an agreement with a second individual for design services. Under this agreement, as amended, this individual is entitled to receive a royalty of 2% of net sales, as defined.
Intellectual Property
We have several registered trademarks and pending applications in various countries worldwide, and we apply for new trademarks on an ongoing basis. We regard our trademarks, service marks, copyrights, domain names, trade dress, and similar intellectual property as very important to our business. We consider Hangover Joe’s Get Up & Go® and Hangover Joe’s® to be our core trademarks.
We protect our trademarks by applying for registrations and registering our trademarks with the United States Patent and Trademark Office and with government agencies in other countries around the world, particularly where our products are distributed and sold. We assert copyright ownership of the statements, graphics and content appearing on the packaging of our products.
Depending upon the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can generally be renewed as long as the trademarks are in use.
We enforce and protect our trademark rights against third parties infringing or denigrating our trademarks by opposing registration of conflicting trademarks, and initiating litigation as necessary.
Government Regulation
The
Hangover Joe’s Recovery Shot
is categorized as a dietary supplement by the U.S. Food and Drug Administration (“FDA”) and are generally regulated under a different set of regulations than those covering "conventional" foods and drug products. Dietary supplements are regulated by the FDA under the Dietary Supplement Health and Education Act of 1994 (DSHEA). Under the DSHEA, manufacturers of dietary supplements or dietary ingredient are responsible for ensuring that the product is safe before it is marketed and making sure that product label information is truthful and not misleading.
Generally, manufacturers of dietary supplements do not need to register their products with FDA or get FDA approval before producing or selling these supplements. Under FDA regulations, all domestic and foreign companies that manufacture, package, label or hold dietary supplements, including those involved with testing, quality control, and dietary supplement distribution in the U.S., must comply with the Dietary Supplement Current Good Manufacturing Practices (CGMPs) for quality control.
Outside the United States, the production, distribution and sale of our product is also subject to numerous similar and other statutes and regulations.
Compliance with Environmental Laws
The manufacturing and co-packing facilities that we utilize in the United States are subject to federal, state and local environmental laws and regulations. Compliance with these provisions has not had, nor do we expect such compliance to have, any material adverse effect upon our capital expenditures, net income or competitive position.
Employees
As of December 31, 2013, we employed three employees of which two were employed on a full-time basis. One employee serves in administrative and operational capacities and two employees serve in sales and marketing capacities.
Available Information
As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). You may read and copy such material at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also find the Company’s SEC filings at the SEC’s website, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.
Our Internet address is www.hangoverjoes.com. Information contained on our website is not part of this annual report on Form 10-K. Our SEC filings (including any amendments) will be made available free of charge on www.hangoverjoes.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
Our future performance is subject to a variety of risks and uncertainties. Although the risks described below are the risks that we believe are material, there may also be risks of which we are currently unaware, or that we currently regard as immaterial based upon the information available to us that later may prove to be material. The Company’s securities are highly speculative and involve a high degree of risk, including among other items the risk factors described below.
RISKS RELATED TO OUR BUSINESS
General Company Risks
The Company has a limited operating history and limited revenues from operations.
The Company was formed in December 2005 and its wholly-owned subsidiary was formed in March 2012. The Company has engaged in active business operations in a limited capacity through its predecessor entities. Therefore, the Company is subject to many risks common to enterprises with limited operating history, including potential under-capitalization, limitations with respect to personnel, financial and other resources, and limited customers and revenue sources. The Company’s ability to successfully generate sufficient revenues from operations is dependent on a number of factors, including availability of funds to fund its current and anticipated operations, and to commercialize its business concept. There can be no assurance that the Company will not encounter setbacks with the on-going development and implementation of its business plan, or that funding will be sufficient to allow it to fully implement its business plan. In addition, the Company’s assumptions and projections may not prove to be accurate, and unexpected capital needs may arise. If such needs arise, the Company’s inability to raise additional funds, either through equity or debt financing, will materially impair its ability to implement its business plan and generate revenues. Further, as a result of the recent volatility of the global markets, a general tightening of lending standards, and a general decrease in equity financing and similar type transactions, it could be difficult for the Company to obtain funding to allow it to continue developing its business operations.
The independent auditors’ report on the Company’s financial statements reflects a “going concern” explanatory paragraph.
As a result of losses from operations and limited capital resources, the Company’s independent registered public accounting firm’s report on its consolidated financial statements as of, and for the year ended, December 31, 2013, includes an explanatory paragraph discussing that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. the Company’s ability to continue to pursue our plan of operations as described herein is dependent upon our ability to increase our revenues and/or raise the capital necessary to meet our financial requirements on a continuing basis.
We identified material weaknesses in our disclosure controls and procedures and our Internal Controls Over Financial Reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to assess our internal controls over financial reporting (“ICFR”) pursuant to a defined framework. In making that assessment, management identified a material weakness in our disclosure controls as a result of several material weaknesses identified in our ICFR as described in Item 9A below. There are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective ICFR can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements. Material weaknesses make it more likely that a material misstatement of annual or interim financial statements will not be prevented or detected. In addition, effective ICFR at any point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.
The Company’s success will depend, in large part, on its ability to hire qualified and experienced executive officers, managers, and other personnel.
The Company’s officers and directors do not have significant experience with early stage beverage companies and only limited experience in manufacturing and distributing products. Its success will depend largely on its ability to hire the necessary executive level and managerial level personnel to oversee its business operations. There can be no assurance that the Company will be able to successfully identify, attract, hire, train, and/or retain such executive level personnel or the necessary administrative, marketing and customer service personnel. Competition for such personnel can be intense and there is no certainty that the Company will be able to successfully attract, integrate or retain sufficiently qualified personnel. The failure to attract and retain the necessary personnel could have a materially adverse effect on the Company’s business, operations and financial condition.
The Company likely will need additional capital in the future, which may not be available on acceptable terms.
The development of the Company’s business model will likely require significant additional capital in the future to, among other things, fund its operations and growth strategy. The Company may rely on bank financing and also may seek access to the debt and/or equity capital markets. There can be no assurance, however, that these sources of financing will be available on reasonable terms, or at all. If the Company is unable to raise additional capital, its growth could be significantly impeded and/or it may be unable to execute its business model.
As a new business venture, the Company’s start up and operational costs may be greater than projected.
The costs of new business start-ups in the Company’s industry are often underestimated and may increase because of factors beyond the Company’s control. Such factors may include legal costs, labor disputes, governmental regulations, equipment breakdowns, costs of raw materials, disputes with its manufacturers or distributors, governmental regulatory interference and other disruptions. While the Company intends to manage these costs diligently, the risk of running over budget is always significant and may have a substantial adverse impact on the Company’s profitability. In such event, additional sales of the Company stock or additional financing may be required to continue the Company’s business, and there can be no guaranty that the Company could successfully conclude such additional sales or obtain such additional financing at all or on terms acceptable to the Company, which could have a materially adverse effect on the Company and its operations and result in the loss of some or all of the investor’s investment in the Company.
Because the Company depends on outside suppliers with whom the Company does not have long-term agreements for raw materials, the Company may be unable to obtain adequate supplies of raw materials for its products at favorable prices or at all, which could result in product shortages and back orders for its products, with a resulting loss of net sales and profitability.
The Company purchases all of its raw materials for the manufacture of its products from third-party suppliers. It also relies on third-party co-packers for certain of its products. A number of the Company’s products contain one or more ingredients that may only be available from a single source or supplier. Any of those suppliers could discontinue selling to the Company at any time. Those suppliers or government regulators may interpret new regulations (including GMP regulations) in such a way as to cause a disruption in the Company’s supply chain as these parties undertake increased scrutiny of raw materials and components of raw materials and products, causing certain suppliers or the Company to discontinue, change or suspend the sale of certain ingredients or components. Although the Company believes that it could establish alternate sources for most of these materials, any delay in locating and establishing relationships with other sources could result in product shortages and back orders for the products, with a resulting loss of net sales and profitability. The Company is also subject to delays associated with raw materials. These can be caused by conditions not within its control. The Company acquires some ingredients from suppliers outside of the United States. Purchasing these ingredients is subject to the risks generally associated with importing raw materials from other countries, including, among other factors, delays in shipments, changes in economic and political conditions, quality assurance, tariffs, trade disputes and foreign currency fluctuations. These factors could result in a delay in or disruption of the supply of certain raw materials. Any significant delay in or disruption of the supply of raw materials could have a material adverse effect on the Company’s business.
The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, the Company faces an inherent risk of exposure to product liability claims if the use of its products results in illness or injury. The products that the Company sells in the U.S. are subject to laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on the Company’s business as existing insurance coverage may not be adequate. Distributors of vitamins, nutritional supplements and minerals, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of the Company’s insurance coverage would harm the Company by adding costs to its business and by diverting the attention of senior management from the operation of its business. The Company may also be subject to claims that its products contain contaminants, are improperly labeled, include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for the Company and reduce its revenue. In addition, the products the Company distributes, or certain components of those products, may be subject to product recalls or other deficiencies. Any negative publicity associated with these actions would adversely affect the Company’s brand and may result in decreased product sales and, as a result, lower revenues and profits.
Significant additional labeling or warning requirements may inhibit sales of affected products.
Various jurisdictions may seek to adopt significant additional product labeling or warning requirements relating to the content or perceived adverse health consequences of the Company’s product. If these types of requirements become applicable to the Company’s product under current or future environmental or health laws or regulations, they may inhibit sales of such products.
The Company is dependent on certain third party agreements for a percentage of revenue.
The Company has contractual agreements with certain third-party distributors. Under the agreements, these third parties control when and how often the Company’s products are offered and the Company is not guaranteed any minimum level of sales or transactions. Additionally, some agreements contain exclusive rights in specified locations to promote the Company’s products during the contract term and for specified years thereafter. If any third party elects not to renew their agreement or reduces the promotion of the Company’s products, the Company’s operating profits will suffer. Additionally, in certain instances, the Company could be prohibited from selling its products through competitors of these third parties for a specified time after the termination of the agreements.
As a new business enterprise, the Company likely will experience fluctuations in its operating results.
The Company's operating results may fluctuate significantly as a result of a variety of factors, many of which are outside its control. As a result of the Company's lack of operating history it is difficult for the Company to forecast its revenues or earnings accurately. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to the Company’s planned expenditures would have an immediate, adverse effect on its business, results of operations and financial condition.
If the Company fails to manage its growth effectively, its business could be harmed.
Failure to manage the Company’s growth effectively could harm its business. The Company’s business model anticipates that it will expand its sales and distribution network. To manage its growth effectively, the Company will have to develop and enhance its systems, procedures and controls and locate, hire, train and retain management and operating personnel. The Company cannot offer any assurance that it will be able to respond on a timely basis to all of the changing demands that its planned expansion will impose on its management and infrastructure. If the Company is unable to manage its growth effectively, its business and operating results could be materially adversely impacted.
Criticism of the Company’s product and/or the market generally could adversely affect its operating results
. Criticism of the Company’s product, including criticism by healthcare professionals and other criticism for a variety of reasons, could affect consumer opinions of its product and result in decreased demand, which in turn could have an adverse effect on its results of operations and business.
Changes in the business environment for the Company’s product could impact its financial results.
The business environment for the Company’s product is rapidly evolving as a result of, among other things, changes in consumer preferences, including changes based on health and nutrition considerations; shifting consumer tastes and needs; changes in consumer lifestyles; and competitive product and pricing pressures. If the Company is unable to successfully adapt to this rapidly changing environment, its business could be negatively affected.
If the Company’s intellectual property rights under the license agreement decline in popularity, its financial condition may materially suffer.
The Company’s license agreement with Warner Bros. Consumer Products, Inc., described above, allows the use of the costumes, artwork logos and other elements depicted in the 2009 movie “The Hangover and the 2011 movie “The Hangover II.” Currently these movies enjoy a great deal of popularity. The Company’s strategy has been to capitalize on the movies popularity as a marketing vehicle to sell the Company’s products. If these movies should suffer a decline in popularity, the return on the Company’s marketing efforts will be significantly less than the Company has anticipated.
The Company may be unable to maintain or extend the license agreement upon expiration of the current term and its financial condition may materially suffer.
The Company’s license agreement with Warner Bros. Consumer Products, Inc., described above, expires January 31, 2016. The agreement may be extended upon agreement of the parties, but there is no assurance that the parties will be able to come to terms with an extension of the agreement, or that we may not default under the terms and conditions of the license, or have similar issues with new licenses we have or are pursuing. If the Company is required to rebuild its branding, it could negatively affect the Company’s cash flow and business.
If the Company is not able to effectively protect its intellectual property, its business may suffer a material, negative impact and may fail.
The Company believes that its brand is important to its success and competitive position. If the Company is unable to secure trademark protection for its intellectual property in the future or that protection is inadequate for future products, the Company’s business may be materially adversely affected. Further, the Company cannot be sure that its activities do not and will not infringe on the intellectual property rights of others. The Company’s predecessor, the LLC, experienced a patent infringement claim against the product formula it used, and the LLC quickly changed its formula in response to those claims prior to any significant product sales occurring, thereby minimizing any damage claims. If similar claims are made against the Company’s current product formula, the Company may not be able to effectively minimize damage claims due to its significant sales pipeline. If the Company is compelled to prosecute infringing parties, defend its intellectual property or defend itself from intellectual property claims made by others, it may face significant expenses and liability as well as the diversion of management’s attention from the Company’s business, any of which could negatively impact the Company’s business or financial condition.
We Face Intense Competition.
Our businesses are rapidly evolving and intensely competitive, and we have many competitors in different industries, including retail, e-commerce services, and consumer products both directly and indirectly associated with energy, focus, and hangover recovery. Many of our current and potential competitors have greater resources, longer histories, more customers, and greater brand recognition. They may secure better terms from vendors, adopt more aggressive pricing and devote more resources to technology, infrastructure, fulfillment, and marketing.
We May Not Be Successful in Our Efforts to Expand into International Market Segments.
Our international activities are significant to our revenues and profits, and we plan to further expand internationally. In certain international market segments, we have relatively little operating experience and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop and maintain international operations and websites and promote our brand internationally. Our international operations may not be profitable on a sustained basis.
In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:
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local economic and political conditions;
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government regulation of e-commerce, other online services and electronic devices, and competition, and restrictive governmental actions (such as trade protection measures, including export duties and quotas and custom duties and tariffs), nationalization and restrictions on foreign ownership;
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business licensing or certification requirements, such as for imports, exports , advertising, and health rules and regulations;
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limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
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limited fulfillment and technology infrastructure;
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shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
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laws and regulations regarding consumer and data protection, payments, and restrictions on pricing or discounts;
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lower levels of consumer spending and fewer opportunities for growth compared to the U.S.;
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lower levels of credit card usage and increased payment risk;
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difficulty in staffing, developing and managing foreign operations as a result of distance, language and cultural differences;
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different employee/employer relationships and the existence of works councils and labor unions;
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laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans and taxes; and
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geopolitical events, including war and terrorism.
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As international e-commerce and other online services grow, competition will intensify. Local companies may have a substantial competitive advantage because of their greater understanding of, and focus on, the local customer, as well as their more established local brand names. We may not be able to hire, train, retain, and manage required personnel, which may limit our international growth.
We May Have Foreign Exchange Risk in the Future.
The results of operations of, and certain of our intercompany balances associated with, our international websites may be exposed to foreign exchange rate fluctuations as we expand internationally. Upon translation, operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances.
The Loss of Key Senior Management Personnel Could Negatively Affect Our Business.
We depend on our senior management and other key personnel, our CEO, our sales people and our Chairman. We do not have “key person” life insurance policies. The loss of any of our executive officers or other key employees could harm our business.
We Face Significant Inventory Risk.
In addition to risks described elsewhere in this Item 1A relating to fulfillment center and inventory optimization by us and third parties, we are exposed to significant inventory risks that may adversely affect our operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand and consumer spending patterns, changes in consumer tastes with respect to our products and other factors. We endeavor to accurately predict these trends and avoid overstocking or understocking products we manufacture and/or sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when we begin selling or manufacturing a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. We carry a broad selection and significant inventory levels of certain products, such as consumer electronics, and we may be unable to sell products in sufficient quantities or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect our operating results.
We May Not Be Able to Adequately Protect Our Intellectual Property Rights or May Be Accused of Infringing Intellectual Property Rights of Third Parties.
We regard our trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, and similar intellectual property as critical to our success, and we rely on trademark, copyright, and patent law, trade secret protection, and confidentiality and/or license agreements with our employees, customers, and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our products and services are made available. We also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.
Government Regulation Is Evolving and Unfavorable Changes Could Harm Our Business.
We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet, e-commerce, and electronic devices. Existing and future laws and regulations may impede our growth. These regulations and laws may cover taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications, competition, consumer protection, web services, the provision of online payment services, unencumbered Internet access to our services, the design and operation of websites, and the characteristics and quality of products and services. It is not clear how existing laws governing issues such as property ownership, libel, and personal privacy apply to the Internet, e-commerce, and digital content and web services. Jurisdictions may regulate consumer-to-consumer online businesses, including certain aspects of our seller programs. Unfavorable regulations and laws could diminish the demand for our products and services and increase our cost of doing business.
There are a large number of shares underlying our convertible notes that may be available for future sale and the sale of these shares may depress the market price of our common stock.
We presently have convertible notes outstanding that may be converted into an estimated 20,000,000 shares of common stock at current market prices. The number of shares of common stock issuable upon conversion of the outstanding convertible notes may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the notes may be sold without restriction upon the six month anniversary of the sale of the notes. The sale of these shares may adversely affect the market price of our common stock.
The continuously adjustable conversion price feature of our convertible notes could require us to issue a substantially greater number of shares, which will cause dilution to our existing stockholders.
The convertible notes are convertible into such number of shares of common stock as is determined by dividing the principal amount thereof by the then current conversion price. The conversion price is discounted from the current market price in the range of 45%-50%. The number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of the common stock.
Purchasers of common stock could therefore experience substantial dilution of their investment upon conversion of the notes. Our obligation to issue shares upon conversion of our convertible notes is essentially limitless.
Continuously adjustable conversion price feature of our convertible debentures may encourage investors to make short sales in our common stock, which could have a depressive effect on the price of our common stock.
The convertible notes are convertible into shares of our common stock at a 45%-50% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion of notes, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock.
RISKS RELATED TO OUR SECURITIES
The Company does not intend to declare any dividends in the foreseeable future.
The Company intends to retain any of its profits to fund the Company’s business operations. Investors who require income from dividends should not purchase our common stock.
We Have a Rapidly Evolving Business Model and Our Stock Price Is Highly Volatile.
We have a rapidly evolving business model. The trading price of our common stock fluctuates significantly in response to, among other risks, the risks described elsewhere in this Item 1A, as well as:
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changes in interest rates;
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conditions or trends in the Internet and the e-commerce industry;
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quarterly variations in operating results;
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fluctuations in the stock market in general and market prices for Internet-related companies in particular;
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changes in financial estimates by us or securities analysts and recommendations by securities analysts;
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changes in our capital structure, including issuance of additional debt or equity to the public;
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changes in the valuation methodology of, or performance by, other e-commerce or technology companies; and
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transactions in our common stock by major investors and certain analyst reports, news, and speculation.
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Volatility in our stock price could adversely affect our business and financing opportunities and force us to increase our cash compensation to employees or grant larger stock awards than we have historically, which could hurt our operating results or reduce the percentage ownership of our existing stockholders, or both.
The lack of a broker or dealer to create or maintain a market in our stock could adversely impact the price and liquidity of our securities.
The Company has no agreement with any broker or dealer to act as a market maker for its securities and there is no assurance that it will be successful in obtaining any market makers. Thus, no broker or dealer will have an incentive to make a market for our stock. This in part, has resulted in very low trading volume of our common stock. The lack of a market maker for our securities could adversely influence the market for and price of our securities, as well as your ability to dispose of, or to obtain accurate information about, and/or quotations as to the price of, our securities.
As our stock is not listed on a national securities exchange, trading in our shares will be subject to rules governing "penny stocks," which will impair trading activity in our shares.
Our stock is not on a national securities exchange. Therefore, our stock is subject to rules adopted by the Commission regulating broker dealer practices in connection with transactions in "penny stocks." Those disclosure rules applicable to "penny stocks" require a broker dealer, prior to a transaction in a "penny stock" not otherwise exempt from the rules, to deliver a standardized list disclosure document prepared by the Commission. That disclosure document advises an investor that investment in "penny stocks" can be very risky and that the investor's salesperson or broker is not an impartial advisor but rather paid to sell the shares. The disclosure contains further warnings for the investor to exercise caution in connection with an investment in "penny stocks," to independently investigate the security, as well as the salesperson with which the investor is working and to understand the risky nature of an investment in this security. The broker dealer must also provide the customer with certain other information and 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. Further, the rules require that, following the proposed transaction, the broker provide the customer with monthly account statements containing market information about the prices of the securities.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for our common stock. Many brokers may be unwilling to engage in transactions in our common stock because of the added disclosure requirements, thereby making it more difficult for shareholders to dispose of their shares. You will also find it difficult to obtain accurate information about, and/or quotations as to the price of, our common stock. In general, buying low-priced penny stocks is very risky and speculative. The Company’s common stock is currently defined as a penny stock under the Securities and Exchange Act of 1934, and rules thereunder. You may not be able to sell your shares when you want to do so, if at all. Our shares are defined as a penny stock under the Securities and Exchange Act of 1934, and rules of the Commission. The Exchange Act and such penny stock rules generally impose additional sales practice and disclosure requirements on broker-dealers who sell our securities to persons other than certain accredited investors. Consequently, the penny stock rules may affect the ability of broker-dealers to make a market in or trade our common stock and may also affect your ability to resell any shares you may purchase in the public markets.
The over-the-counter market for stock such as ours is subject to extreme price and volume fluctuations.
You may not be able to resell your shares at or above the public sale price. The securities of companies such as ours have historically experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations and other factors, such as new product developments and trends in the our industry and in the investment markets generally, as well as economic conditions and quarterly variations in our operational results, may have a negative effect on the market price of our common stock.
As a company with a class of securities registered pursuant to the 1934 Act the Company has significant obligations under the 1934 Act.
Having a class of securities registered under the 1934 Act is a time consuming and expensive process and subjects the company to increased regulatory scrutiny and extensive and complex regulation. Complying with these regulations is expensive and requires a significant amount of management’s time. For example, public companies are obligated to institute and maintain financial accounting controls and for the accuracy and completeness of their books and records. These requirements necessitate additional corporate spending on procedures and personnel requiring us to reallocate funds from other business objectives.