Registration No. 333-255356
We are distributing, at no charge, non-transferable Subscription Rights entitling holders of common stock as of the record date of 5:00 p.m. (Eastern time) on May 18, 2021, one Subscription Right to
purchase one share of common stock for every four shares of common stock owned. The per share exercise price (the “Actual Subscription Price”) of the Subscription Right will be a 25% discount to the volume-wehe trading prices (“VWAP”) of our common
stock on the OTC Pink Sheets for the five consecutive trading days ending on the expiration date of the offering. For purposes of this prospectus, the estimated subscription price is $0.001425 (the “Estimated Subscription Price”), subject to change
when calculated on such expiration date of this offering.
The holders of our Series D convertible preferred stock will also receive Subscription Rights based on the number of shares of common stock that would be received upon conversion in full of such
preferred stock. The maximum aggregate amount of subscriptions that will be accepted by the Company will be $100 million (“Maximum Offering Amount”).
Pursuant to your Subscription Rights, you will have the right, which we refer to as your basic right, to purchase a number of shares based on the number of shares of common stock you held as of the
record date. If you exercise your basic right in full, you will also have the right, or over-subscription right, to purchase additional shares for which other rights holders do not subscribe. If you wish to exercise your over-subscription right,
you may request to purchase any number of shares of common stock. These requests for the exercise of the basic right or the over-subscription right, however, will be subject to a pro-rata reduction in the event that the Maximum Offering Amount is
reached, in which case you will only pay for the shares that you are able to purchase and a refund will be issued to you for the unapplied subscription payment. Once made, all exercises of your basic rights and over-subscription rights are
irrevocable.
Your basic rights and over-subscription right will expire if not exercised by 5:00 p.m. (Eastern time) on June 3, 2021 (the “Expiration Date”), unless we extend or terminate this offering. We may
extend this offering for one or more additional periods in our sole discretion. We will announce any extension in a press release issued no later than 9 a.m. (Eastern time) on the business day after the most recently announced Expiration Date.
There is no minimum number of shares that we must sell in order to complete the rights offering. Stockholders who subscribe for their full basic right will not be diluted as they will continue to
own at least the same percentage of the total shares of common stock outstanding. Stockholders who do not participate in the rights offering will continue to own the same number of shares, but will own a smaller percentage of the total shares
outstanding to the extent that other stockholders participate in the rights offering. One way a rights offering differs from a reverse stock split is that a stockholder’s actual number of shares owned are not reduced in a rigighted average of thts
offering. Subscription Rights that are not exercised by the Expiration Date will expire and have no value. The Subscription Rights are not transferable.
The purpose of this rights offering is to raise equity capital in a cost-effective and potentially non-dilutive manner that provides all of our existing stockholders the opportunity to participate
and purchase up to approximately an additional 22.8% of the Company’s common stock. The net proceeds will be used for general working capital purposes, including the protection of our intellectual property rights through litigation and other
methods, funding future research and development for both our intellectual property suite and products, and funding for growth initiatives for both our grocery and vape segments.
Investing in our securities involves risks. See “Risk Factors” beginning on page 12 of this prospectus. We and our board of directors are not making any recommendation regarding
the exercise of your rights.
We have engaged Maxim Group LLC, or Maxim, to act as dealer-manager for this offering.
Our offering is being conducted on a best-efforts basis, and we do not need to receive any minimum amount of proceeds in order to complete the offering. We have not entered into any standby purchase
agreement, backstop commitment or similar arrangement in connection with this offering.
Broadridge Corporate Issuer Solutions, Inc. will serve as the subscription agent for this offering and will hold in escrow funds received from subscribers until we complete or terminate the offering.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
It is anticipated that delivery of shares purchased in this offering will be made on or about June 10, 2021.
Use of Proceeds
Assuming this offering is fully subscribed, we estimate our net proceeds from the offering will total approximately $92.0 million, after deducting fees and expenses of Maxim, as dealer-manager, and
our other estimated offering expenses. We intend to use the net proceeds for general working capital purposes, including the protection of our intellectual property rights through litigation and other methods, funding future research and development
of our intellectual property and products, and funding for growth initiatives for both our grocery and vape segments. See “Use of Proceeds.”
Issuance of Our Common Stock
If you purchase shares of common stock through the rights offering, we will issue those shares to you in book-entry, or uncertificated, form as soon as practicable after the completion of the rights
offering. Stock certificates will not be issued for shares of our common stock purchased in the rights offering.
Subscription
Information
In order to obtain subscription information, you should contact:
• Broadridge Corporate Issuer Solutions, Inc., which will act as
the subscription agent and the information agent in connection with this offering, by telephone at (855) 793-5068 or by email at shareholder@broadridge.com; or
• your broker-dealer, trust company or other nominee (including any
mobile investment platform) where your Subscription Rights are held.
Subscription
Procedures
In order to exercise your Subscription Rights, including your over-subscription right, you should deliver a completed subscription certificate and the required payment to Broadridge Corporate Issuer
Solutions, Inc., the subscription agent for this offering, by the Expiration Date.
Important
Dates
Set forth below are important dates for this offering, which generally are subject to extension:
Record date
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May 18, 2021
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Commencement date
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May 19, 2021
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Expiration Date
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June 3, 2021
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Deadline for delivery of subscription certificates and payment of subscription prices
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June 3, 2021
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Dealer-manager
Maxim Group LLC will act as the dealer-manager for the
rights offering.
QUESTIONS AND ANSWERS RELATING TO THIS OFFERING
The following are examples of what we anticipate will be common questions about this offering. The answers are based on selected information included elsewhere in this prospectus.
The following questions and answers do not contain all of the information that may be important to you and may not address all of the questions that you may have about this offering. This prospectus, including the documents we incorporate by
reference, contains more detailed descriptions of the terms and conditions of this offering and provides additional information about our company and our business, including potential risks related to our business, the Rights Offering and common
stock.
What is the Rights Offering?
We are issuing to each holder of common stock and the holders of our Series D convertible preferred stock (“Series D Preferred Stock”) as of the record date, whom we refer to as a rights holder or you, one
non-transferable subscription right for every four shares of common stock then owned by the holder as of the Record Date. Each basic right entitles the holder to purchase one share at the Actual Subscription Price. For purposes of submitting
subscription payments, the Estimated Subscription Price will be $0.001425. The Actual Subscription Price is equal to 75% of the VWAP of our common stock on the OTC Pink Sheets for the five consecutive trading days ending on the Expiration Date. In
effect, the participants in the rights offering will be purchasing their shares at a 25% discount to such VWAP.
What is the Subscription Price?
The Actual Subscription Price for the shares to be issued pursuant to the offer will equal 75% of the VWAP of our common stock on the OTC Pink Sheets for the five consecutive trading days ending on the Expiration
Date. Because the subscription price will be determined on the Expiration Date, rights holders will not know the subscription price at the time of exercise and will be required initially to pay for both the shares subscribed for pursuant to their
basic Subscription Rights and, if eligible, any additional shares subscribed for pursuant to the over-subscription right at the Estimated Subscription Price of $0.001425 per share. The Estimated Subscription Price reflects what the Actual
Subscription Price would be if it was calculated using May 12, 2021 as the end date for the VWAP. Stockholders exercising their Subscription Rights are in effect investing a fixed amount in the Company to receive the maximum number of shares of
Common Stock issuable at the Actual Subscription Price. Regardless of the Actual Subscription Price, Stockholders who exercise their rights will have no right to rescind their subscriptions after receipt of their completed subscription certificates
together with payment for shares by the subscription agent.
By way of example, if you wish to purchase 1,000,000 shares (assuming 500,000 shares pursuant to your basic rights and 500,000 shares pursuant to your over-subscription rights) at the Estimated Subscription Price of
$0.001425, you would be investing $1,425. The amount of shares that you receive for your $1,425 will be adjusted based on the Actual Subscription Price. Using the previous example, if the Actual Subscription Price is $0.00135, you will receive
1,055,556 shares for your same $1,425 investment. Conversely, if the Actual Subscription Price is increased to $0.0015 you will receive 950,000 shares for your $1,425 investment. However, in both cases you will be receiving a 25% discount to the
VWAP for the common stock over the five consecutive trading days ending on the Expiration Date. This example assumes the shares in excess of 500,000 were available pursuant to Over-Subscription Rights.
What are the basic rights?
For each basic right held, each rights holder has the opportunity to purchase one share at the Actual Subscription Price, provided that (1) basic rights must be exercised for a whole share (cannot exercise 0.5
Subscription Rights), and (2) the total subscription price payable upon any exercise of Subscription Rights will be rounded to the nearest whole cent. Any fractional basic rights will be rounded up to one Subscription Right. We have granted to you,
as a holder of common stock as of the record date, one basic right for each four shares of common stock you then owned. For example, if you owned 4,000 shares of common stock as of the record date, you would receive 1,000 basic rights and would have
the right to purchase, for an aggregate Subscription Price, 1,000 shares of common stock. You may exercise all, a portion or none of your basic rights. If you exercise fewer than all of your basic rights, however, you will not be entitled to
purchase any additional shares pursuant to the over-subscription right. See “—What is the over-subscription right?” below.
What is the over-subscription right?
If you exercise all of your basic rights, you will have the right, which we refer to as the over-subscription right, to purchase additional shares that remain unsubscribed as a result of any unexercised basic rights.
We refer to the basic rights and over-subscription right collectively as Subscription Rights. You should indicate on your subscription certificate, or the form provided by your nominee if your shares are held in the name of a nominee, how many
additional shares you would like to purchase pursuant to your over-subscription right. You are entitled to exercise your over-subscription right only if you exercise your basic rights in full. If over-subscription requests exceed the number of
shares available, however, we will allocate the available shares pro rata among rights holders who over-subscribe based on their percentage ownership in the Company. See “The Rights Offering—Over-Subscription Right.”
May the Subscription Rights that I exercise be reduced for any reason?
Yes. While we are distributing to holders of our common stock and Series D preferred stock one subscription right for every four shares of common stock owned or deemed owned on the Record Date, we are only seeking to
raise $100 million dollars in gross proceeds in this offering. As a result, based on (1) 307,926,082,074 shares of common stock outstanding as of the date of the preliminary prospectus and (2) 2,083,333,333 shares of common stock deemed to be owned
by the Series D holders that have a contractual right to participate in this offering and deemed to be outstanding as of the Record Date, we would grant subscription rights to acquire 77,502,353,852 shares of common stock but will only accept
subscriptions for 70,175,438,596 shares of common stock based on the Estimated Subscription Amount. Accordingly, sufficient shares may not be available to fulfill all of the subscriptions rights that have been exercised. In the event the Company is
not able fulfill the subscriptions entirely, the Company will reduce the subscriptions pro rata based on your number of basic rights exercised in relation to the total subscription amounts and return any remaining funds to the subscriber.
In addition, sufficient shares may not be available to honor your exercise of the over-subscription right. If exercises of over-subscription rights exceed the number of shares available, we will allocate the available
shares pro rata among rights holders who over-subscribe based on the number of over-subscription shares for which the rights holders have subscribed.
Why are we conducting this offering?
In accordance with our strategic plan, we are conducting this offering primarily to raise funds to facilitate the enforcement of our patent rights through litigation and other methods, research and development of our
intellectual property suite and products, to accelerate our growth efforts in the health food, vitamin and vape sectors, to improve our overall liquidity, and for other general corporate purposes. Our board of directors has approved this offering
and believes it will allow us to raise equity capital in a cost-effective manner that provides all of our existing stockholders the opportunity to participate in a non-dilutive manner. Based on information available to the board, as well as
subsequent analyses of the board, the board believes that this offering is in the best interests of our company and stockholders. Our board is not, however, making any recommendation regarding your exercise of the Subscription Rights.
Our board considered and evaluated a number of factors relating to this offering, including:
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the fact that existing stockholders would have the opportunity to purchase additional shares;
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•
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our current capital resources and indebtedness, and our future need for additional liquidity and capital;
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•
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our need for increased financial flexibility in order to enable us to achieve our business plan;
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•
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the size and timing of the offering and alternative securities to be offered;
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•
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the potential dilution to our current stockholders if they choose not to participate in the offering;
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•
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the non-transferability of the Subscription Rights; and
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•
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alternatives available for raising capital.
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Am I required to exercise the Subscription Rights I receive in this offering?
No. You may exercise any number of your Subscription Rights, or you may choose not to exercise any of your Subscription Rights. If, however, you choose not to exercise your Subscription Rights or you exercise less than your full amount of
Subscription Rights and other stockholders fully exercise their Subscription Rights, the percentage of common stock owned by other stockholders will increase relative to your ownership percentage and your voting and other rights in our company will
likewise be diluted due to your reduced ownership in HCMC ― see “Description of Securities” for a description of the voting and liquidation rights of our common stock. However, your amount of shares you own will in no instance be reduced.
May I sell, transfer or assign my Subscription Rights?
No. You may not transfer, sell or assign any of the Subscription Rights distributed to you, except that Subscription Rights will be transferable by operation of law (e.g., by
death). The Subscription Rights are non-transferable and will not be listed on any securities exchange or included in any automated quotation system. Therefore, there will be no market for the Subscription Rights.
How do I exercise my Subscription Rights if my shares of common stock are held in my name?
If you hold your shares of common stock in your name and you wish to participate in this offering, you must deliver a properly completed and duly executed subscription certificate and all other required subscription
documents, together with payment of the full subscription price, to the subscription agent before 5:00 p.m. (Eastern time) on the Expiration Date.
If you send an uncertified check, payment will not be deemed to have been delivered to the subscription agent until the check has cleared. In certain cases, you may be required to provide signature guarantees. If you
send an uncertified check, please send it as early as possible to have the best chance of it clearing before the Expiration Date.
Please follow the delivery instructions on the subscription certificate. Please DO NOT deliver documents to HCMC. You are solely responsible for completing delivery of your subscription certificate, all other
required subscription documents and subscription payment to the subscription agent. You should allow sufficient time for delivery of your subscription materials to the subscription agent so that the subscription agent receives them by 5:00 p.m.
(Eastern time) on the Expiration Date. See “—To whom should I send my forms and payment?” below.
If you send a payment that is insufficient to purchase the shares you requested, or if the number of shares you requested is not specified in the forms, the payment received will be applied to exercise your
Subscription Rights to the fullest extent possible based on the amount of the payment received pursuant to your Subscription Rights. Any payment that is received but not so applied will be refunded to you without interest (subject to the rounding of
the amount so applied to the nearest whole cent).
What form of payment is required to purchase shares in the offering?
As described in the instructions accompanying the subscription certificate, payments submitted to the subscription agent must be made in U.S. dollars. Checks or bank drafts drawn on U.S. banks should be payable to the
order of “Broadridge Corporate Issuer Solutions, Inc., as Subscription Agent for Healthier Choices Management Corp.” Payments by uncertified check will be deemed to have been received upon clearance. Please note that funds paid by uncertified check
may take five or more business days to clear. Accordingly, rights holders who wish to pay the subscription price by means of uncertified check are urged to make payment sufficiently in advance of the expiration time to ensure that such payment is
received and clears by such date. If you hold your shares of common stock in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform), separate payment instructions may apply. Please contact your
nominee, if applicable, for further payment instructions.
How do I exercise my Subscription Rights if my shares of common stock are held in the name of a broker, dealer, custodian bank or other nominee?
If you hold shares of common stock in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform) that uses the services of Depository Trust Company (DTC), then Depository Trust Company will credit one basic
right to your nominee record holder for every four shares of common stock that you beneficially owned as of the record date. If you are not contacted by your nominee (including any mobile investment platform), you should contact your nominee as soon
as possible.
How soon must I act to exercise my Subscription Rights?
If your shares of common stock are registered in your name and you elect to exercise any of your Subscription Rights, the subscription agent must receive your properly completed and duly executed subscription certificate, all other required
subscription documents and full subscription payment, including final clearance of any uncertified check, before 5:00 p.m. (Eastern time) on the Expiration Date on June 3, 2021. If you hold shares in the name of a broker, dealer, custodian bank or
other nominee, your nominee (including any mobile investment platform) may establish an earlier deadline before the expiration of this offering by which time you must provide the nominee with your instructions and payment to exercise your Subscription
Rights.
Although we will make reasonable attempts to provide this prospectus to our stockholders to whom rights are distributed, this offering and all related Subscription Rights will expire at 5:00 p.m. (Eastern time) on the Expiration Date, whether or not we
have been able to locate and deliver this prospectus to you or any other stockholder.
After I exercise my Subscription Rights, can I change my mind?
No. Once made, all exercises of Subscription Rights are irrevocable, even if you later learn information that you consider to be unfavorable to the exercise of your Subscription Right or if the offering is extended by
the board of directors. You should not exercise your subscription right unless you are certain that you wish to purchase shares at the Estimated Subscription Price.
What happens if the Actual Subscription Price is less than the Estimated Subscription Price?
If, on the Expiration Date, the Actual Subscription Price is lower than the Estimated Subscription Price paid by the subscriber, any Excess Subscription Amounts paid by a subscriber will be applied towards the purchase
of additional shares in the rights offering. For example, assume that the Estimated Initial Subscription Price is $0.001425 per share. If you want to exercise your rights to purchase 1,000,000 shares, you will promptly send payment to the
subscription agent in the amount of $1,425. If the Actual Subscription Price decreases to $0.00135 per share, you will be deemed to have exercised the over-subscription rights and will receive 1,055,556 shares rather than 1,000,000 shares and no
cash back. Detailed instructions to exercise your rights, including regarding payment of the subscription price, are also included on your rights certificate. For assistance you may contact the subscription agent, Broadridge Corporate Issuer
Solutions, Inc., toll free at 1-888-789-8409 or by e-mail at shareholder@broadridge.com.
What happens if the Actual Subscription Price is more than the Estimated Subscription Price?
If, on the Expiration Date, the Actual Subscription Price is greater than the Estimated Subscription Price paid by the subscriber, any payments made by a subscriber with respect to the over-subscription rights will
first be applied towards the purchase of shares subscribed for pursuant to the subscriber’s basic rights, and then towards shares subscribed for pursuant to the over-subscription rights, if any. If you did not exercise the over-subscription rights,
you will receive fewer shares than you elected to purchase pursuant to the basic rights. For example, assume that the Estimated Subscription Price is $0.001425 per share. If you want to exercise your rights to purchase 1,000,000 shares, you will
promptly send payment to the subscription agent in the amount of $1,425. If the Actual Subscription Price increases to $0.0015 per share, you will receive 950,000 shares rather than 1,000,000 shares for your payment with respect to your basic
rights. In addition, if you made a payment with respect to your over-subscription right, a portion of such payment will be used to fulfill your purchase request for the additional 500,000 shares related to your basic rights. Detailed instructions
to exercise your rights, including regarding payment of the subscription price, are also included on your rights certificate. Regardless of the Actual Subscription Price, Stockholders who exercise their rights will have no right to rescind their
subscriptions after receipt of their completed subscription certificates together with payment for shares by the subscription agent. For assistance you may contact the subscription agent, Broadridge Corporate Issuer Solutions, Inc., toll free at
1-888-789-8409 or by e-mail at shareholder@broadridge.com.
Does HCMC need to achieve a minimum participation level in order to complete the rights offering?
No. There is no minimum subscription requirement. We may consummate the offering regardless of the amount raised from the exercise of basic and over-subscription rights by the expiration date.
Can this offering be terminated or extended?
Yes. If we terminate this offering, neither we nor the subscription agent will have any obligation with respect to Subscription Rights that have been exercised except to promptly return, without interest or deduction,
any subscription payment the subscription agent received from you. If we were to terminate this offering, any money received from subscribing stockholders would be promptly returned, without interest or deduction, and we would not be obligated to
issue shares or shares of common stock to rights holders who have exercised their Subscription Rights prior to termination.
Is a rights offering similar to a reverse stock split?
No. These are completely different corporate actions. Among other differences between these actions, the numbers of shares owned by a stockholder is reduced in a reverse stock split. No reduction in shares owned by
any stockholder will occur as a result of the rights offering.
How was the subscription price determined?
The subscription price was set by our board of directors, considering, among other things, input from its dealer-manager for this offering. The factors considered by our board are discussed in “The Rights
Offering—Reasons for this Offering” and “Determination of the Subscription Price.”
Has the board of directors made a recommendation to stockholders regarding the exercise of rights under this offering?
No. Our board of directors has not made, nor will it make, any recommendation to stockholders regarding the exercise of Subscription Rights in this offering. We cannot predict the price at which shares of our
outstanding common stock will trade after this offering. You should make an independent investment decision about whether or not to exercise your Subscription Rights. Rights holders who exercise Subscription Rights risk investment loss on new money
invested. We cannot assure you that the market price for common stock will remain above the price payable per share of common stock, or that anyone purchasing shares of common stock at the exercise price will be able to sell those shares in the
future at the same price or a higher price. If you do not exercise your Subscription Rights, you will lose any value represented by your Subscription Rights, and if you do not exercise your rights in full, your percentage ownership interest and
related rights in our company will be diluted due to your reduced ownership in HCMC.
May I participate in this offering if I sell my common stock after the record date?
The record date for this offering is 5:00 p.m. (Eastern time) May 18, 2021. If you own common stock as of the record date, you will receive Subscription Rights and may participate in this offering even if you
subsequently sell your common stock.
Are there any risks associated with this offering?
Yes. The exercise of your Subscription Rights involves risks. Exercising your Subscription Rights involves the purchase of common stock and should be considered as carefully as you would consider any other equity
investment. Among other things, you should carefully consider the risks described under the heading “Risk Factors” in this prospectus and all other information contained in this prospectus.
Will the directors and executive officers participate in this offering?
No. To the extent they hold common stock as of the record date, our directors and executive officers are entitled to participate in this offering on the same terms and conditions applicable to all other stockholders.
Our directors and executive officers, however, have agreed with the Company not to participate in this offering, although they are not required to do so.
May stockholders in all jurisdictions participate in the rights offering?
Although we intend to distribute the rights to all stockholders, we reserve the right in some states to require stockholders, if they wish to participate, to state and agree upon exercise of their respective rights
that they are acquiring the shares for investment purposes only, and that they have no present intention to resell or transfer any shares acquired. Our securities are not being offered in any jurisdiction where the offer is not permitted under
applicable local laws.
When will I receive my shares of common stock?
If you purchase shares of common stock through the rights offering, we will issue those shares to you in book-entry, or uncertificated, form. Although we will endeavor to issue the appropriate book-entries as soon as
practicable after completion of this offering, there may be some delay between the Expiration Date and the time that we issue the new book-entries. Stock certificates will not be issued for shares of our common stock purchased in the rights
offering.
What effects will this offering have on our outstanding common stock?
Based on shares of common stock outstanding as of May 11, 2021, if this offering is fully subscribed at the Estimated Subscription Price, we will have 378,101,520,610 shares of common stock outstanding, representing an
increase of 22.8% in our outstanding shares as of the record date. If you fully exercise your basic rights, your proportional interest in our company will not change. If you exercise only a portion, or none, of your basic rights, your interest in
our company will be diluted and your proportional interest in our company will decrease.
The number of shares of common stock outstanding listed in each case above assumes that (1) all of the other shares of common stock issued and outstanding on the record date will remain issued and outstanding and owned by the same persons as of the
closing of this offering, and (2) we will not issue any shares of common stock in the period between the record date and the closing of this offering.
Can the holders of the Series D Preferred Stock Participate in the Rights Offering?
Yes. The holders of our Series D Preferred Stock will also receive Subscription Rights based on the number of shares of common stock that would be received upon conversion in full of such preferred stock. Pursuant to our Certificate of Incorporation,
the 5,000 shares of the Series D Preferred Stock outstanding may currently convert into 2,083,333,333 shares of our common stock in the aggregate.
How much will HCMC receive from this offering, and how will its proceeds be used?
If this offering is fully subscribed, we estimate our net proceeds from the offering will total approximately $92.0 million, after deducting fees and expenses of Maxim, as dealer-manager, and our other estimated
offering expenses. We intend to use the net proceeds to facilitate the enforcement of our intellectual property rights through litigation and other methods, research and development of our intellectual property suite and products, to accelerate our
growth efforts in the health food, vitamin and vape sectors, to improve our overall liquidity, and for other general corporate purposes.
If my exercise of Subscription Rights is cutback due to the offering being oversubscribed, is not valid or if this offering is not completed, will my subscription payment be refunded to me?
Yes. The subscription agent will hold all funds it receives in escrow until the completion or termination of this offering. If your exercise of Subscription Rights is deemed not to be valid or this offering is not
completed, all subscription payments received by the subscription agent will be promptly returned, without interest or deduction, following the expiration of the offering. If you own shares through a nominee (including any mobile investment
platform), it may take longer for you to receive your subscription price repayment because the subscription agent will return payments through your nominee.
What fees or charges apply if I purchase shares in this offering?
We are not charging any fee or sales commission to issue rights to you or, if you exercise any of your Subscription Rights, to issue shares to you. If you exercise your Subscription Rights through a broker, dealer,
custodian bank or other nominee (including any mobile investment platform), you are responsible for paying any fees your nominee may charge you.
What are the U.S. federal income tax consequences of exercising my Subscription Rights?
For U.S. federal income tax purposes, a rights holder should not recognize income or loss in connection with the receipt or exercise of rights in this offering. You should consult your tax advisor as to your
particular tax consequences resulting from the offering. For a summary of certain U.S. federal income tax consequences of this offering, see “Material U.S. Federal Income Tax Considerations.”
To whom should I send my forms and payment?
If your shares of common stock are held in the name of a broker, dealer, custodian bank or other nominee (including any mobile investment platform), then you should deliver all required subscription documents and
subscription payments pursuant to the instructions provided by your nominee. If your shares of common stock are held in your name, then you should send your subscription certificate, all other required subscription documents and your subscription
payment by mail to:
Broadridge Corporate Issuer Solutions, Inc.
Attn: BCIS re-Organization Dept.
P.O. Box 1317
Brentwood, NY 11717-0718
or by hand delivery or overnight courier to:
Broadridge Corporate Issuer Solutions, Inc.
Attn: BCIS IWS
51 Mercedes Way
Edgewood, NY 11717
You and, if applicable, your nominee are solely responsible for completing delivery to the subscription agent of your subscription certificate, as well as for completing delivery of all other required subscription
documents and your subscription payment. You should allow sufficient time for delivery of your subscription materials to the subscription agent and for clearance of payments before the expiration of this offering. If you hold your common stock
through a broker, dealer, custodian bank or other nominee (including any mobile investment platform), your nominee may establish an earlier deadline before the Expiration Date of this offering.
Who is the dealer-manager?
Maxim will act as dealer-manager for this offering. Under the terms and subject to the conditions contained in the dealer-manager agreement, Maxim will act as an advisor for purposes of this offering. We have agreed
to pay Maxim certain fees for acting as dealer-manager and to reimburse it for certain expenses incurred in connection with this offering. Maxim is not underwriting, soliciting or placing any of the Subscription Rights or the shares of common stock
being issued in this offering and is not making any recommendation with respect to such Subscription Rights (including with respect to the exercise or expiration of such Subscription Rights) or shares of common stock.
Whom should I contact if I have other questions?
If you have any questions regarding this offering, completion of the subscription certificate or any other subscription documents or submitting payment in the offering, please contact Broadridge Corporate Issuer
Solutions, Inc. by telephone at (855) 793-5068 or by email at shareholder@broadridge.com.
RISK FACTORS
Investing in our securities involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information contained in this
prospectus, before making an investment decision with respect to our securities. The occurrence of any of the following risks or those incorporated by reference, or additional risks and uncertainties not presently known to us or that we currently
believe to be immaterial could materially and adversely affect our business, financial condition, results of operations or cash flows. In any such case, the trading price of common stock, could decline, and you may lose all or part of your
investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific
factors, including the risks and uncertainties described below and those incorporated by reference.
RISKS RELATED TO THE RIGHTS OFFERING
This offering may cause the price of common stock to decline, and the price may not recover for a substantial period of time, or at all.
The subscription price of shares in this offering, together with the number of shares of common stock we propose to issue and ultimately will issue in the offering, may result in an immediate decrease in the market
value of the common stock. If the market price of common stock falls, you may have irrevocably committed to buy shares of common stock in this offering at an effective price per share greater than the prevailing market price. Further, if a
substantial number of Subscription Rights are exercised and the exercising rights holders choose to sell some or all of the shares purchased directly, the resulting sales could depress the market price of common stock. We cannot assure you that the
market price of common stock will not decline prior to the expiration of this offering or that, after shares of common stock are issued upon exercise of Subscription Rights, you will be able to sell shares of common stock purchased in the offering at
a price greater than or equal to the effective price paid in the offering.
The subscription price determined for this offering may not be indicative of the fair value of common stock.
The subscription price was set by our board of directors, and you should not consider the subscription price as an indication of the fair value of common stock. The subscription price does not necessarily bear any
relationship to the book value of our assets, net worth, past operations, cash flows, earnings/losses, financial condition or any other established criteria for fair value. The market price of common stock could decline during or after this
offering, and you may not be able to sell shares of common stock purchased in the offering, at a price equal to or greater than the effective price paid in the offering, or at all.
Your interest in our company may be diluted as a result of this offering.
If you do not fully exercise your basic rights, you will, at the completion of this offering, own a smaller proportional interest in our company on a fully diluted basis than would have been the case if you had fully
exercised your basic rights. Based on shares outstanding as of May 11, 2021, after giving effect to this offering (assuming the offering is fully subscribed at the Estimated Subscription Price of $0.001425), we would have 378,101,520,610 shares of
common stock outstanding, representing an increase in outstanding shares of 22.8%.
The Subscription Rights are non-transferable.
You cannot transfer or sell your Subscription Rights to anyone else. We therefore do not intend to list the Subscription Rights on any securities exchange or include them in any automated quotation system and there
will be no market for the Subscription Rights.
We may have broad discretion in the use of a significant portion of the net proceeds from this offering and may not use those net proceeds effectively.
We intend to use the net proceeds to facilitate enforcement of our intellectual property rights through litigation and other methods, research and development of our intellectual property rights and products to
accelerate our growth rate in the health food, vitamin and vape segments to improve our overall liquidity and reduce our indebtedness, and for other general corporate purposes. We cannot specify with any certainty the particular uses of the net
proceeds, if any, that we receive from this offering. Our management will have broad discretion in the application of those additional net proceeds, and we may spend or invest those net proceeds in a way with which stockholders disagree. The
failure by management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds in a manner that does not produce income or that loses value.
Our common stock price may be more volatile as a result of this Rights Offering.
Historically, the market price of our common stock has fluctuated over a wide range for a variety of reasons, including company-specific factors and industry-wide conditions and events. The price of the common stock
that will prevail in the market after this Rights Offering may be higher or lower than the Actual Subscription Price depending on many factors, some of which are beyond our control and may not be directly related to our operating performance.
Financings that may be available to us under current market conditions frequently involve sales at prices below the prices at which our common stock currently trades on the OTC Pink Sheets, as well as the issuance of warrants or convertible equity
that require exercise or conversion prices that are calculated in the future at a discount to the then market price of our common stock.
We cannot assure you that the trading price of our common stock will not decline after you exercise your Subscription Rights. If that occurs, you may have bought shares of common stock in the rights offering at a
price greater than the prevailing market price and could have an immediate unrealized loss. Moreover, we cannot assure you that, following the purchase of common stock in the rights offering, you will be able to sell your common stock at a price
equal to or greater than the Actual Subscription Price, and you may lose all or part of your investment in our common stock. Until shares of common stock are delivered upon expiration of the Rights Offering, you will not be able to sell the shares
of our common stock that you purchase in the Rights Offering. Shares of our common stock purchased in the rights offering will be issued as soon as practicable after the rights offering has expired, payment for the shares subscribed for has cleared,
and all prorating calculations and reductions contemplated by the terms of the rights offering have been effected. We will not pay you interest on funds delivered to the Subscription Agent pursuant to your exercise of Subscription Rights.
We may amend or modify the terms of the Rights Offering at any time before the expiration of the Rights Offering in a way that could adversely affect your investment.
Our Board of Directors reserves the right to amend or modify the terms of the Rights Offering. The amendments or modifications may be made for any reason and may adversely affect your Subscription Rights. These
changes may include, for example, changes to the Subscription Price or other matters that may induce greater participation by our stockholders in the Rights Offering. If we make any fundamental change (such as subscription price or the shares
available to purchase pursuant to the basic right) to the terms of the Rights Offering after the date of effectiveness of this prospectus, we will file a post-effective amendment to the registration statement in which this prospectus is included and
offer subscribers the opportunity to cancel their subscriptions. In such event, we will issue subscription refunds to each stockholder subscribing to purchase shares in the rights offering and recirculate an amended prospectus after the
post-effective amendment is declared effective with the Commission. If we extend the Expiration Date in connection with any post-effective amendment, we will allow holders of Subscription Rights a reasonable period of additional time to make new
investment decisions on the basis of the new information set forth in the prospectus that will form a part of the post-effective amendment. In such event, we will issue a press release announcing the changes to the rights offering and the new
Expiration Date. Even if an amendment does not rise to the level that is fundamental and would thus require us to offer to return your subscription payment, the amendment may nonetheless adversely affect your rights and any prospective return on
your investment.
You may not be able to immediately resell any shares of our common stock that you purchase upon the exercise of Subscription Rights immediately upon expiration of the Rights
Offering.
If you exercise your Subscription Rights, you may not be able to resell the common stock you purchase by exercising your Subscription Rights until you (or your broker or other nominee) have received a book-entry
representing those shares. Although we will endeavor to issue the appropriate book-entries as soon as practicable after completion of this offering, there may be some delay between the Expiration Date and the time that we issue the new
book-entries. Until shares of common stock are delivered upon expiration of the Rights Offering, you will not be able to sell or transfer the common stock that you purchase in the Rights Offering. The price of our common stock as quoted on the OTC
Pink Sheets may decrease in the time period between the Expiration Date when you purchase your shares and the date you access to such shares and may have the ability to sell them.
You may not revoke your exercise of rights.
Once you exercise your subscription rights, you may not revoke or change the exercise unless we are required by law to permit revocation. Accordingly, if you exercise your subscription rights and the market price of
our common stock increases above the Estimated Subscription Price or you later learn information about us or the rights offering that you consider unfavorable to the exercise of your subscription rights, you will be committed to buying shares and may
not revoke or change your exercise.
We do not know how many stockholders will participate in the Rights Offering.
We have no other agreements or understandings with any persons or entities with respect to their exercise of rights or their participation as an underwriter, broker or dealer in the rights offering. We therefore do
not know how many other stockholders, if any, will participate in our rights offering. If the rights offering is not otherwise fully subscribed, we will not have the capital necessary to fund our contemplated uses of the net proceeds of the rights
offering and might need to look to other sources of funding for these contemplated uses. There is no assurance that these alternative sources will be available and at what cost.
Exercising the Subscription Rights limits your ability to engage in certain hedging transactions that could provide you with financial benefits.
By exercising the Subscription Rights, you are representing to us that you have not entered into any short sale or similar transaction with respect to our common stock since the Record Date for the rights offering.
This requirement prevents you from pursuing certain investment strategies that could provide you greater financial benefits than you might have realized if the Subscription Rights did not contain these requirements.
If we terminate this offering, neither we, nor the subscription agent will have any obligation to you except to promptly return your subscription payments.
We may terminate this offering at any time. If we do, neither we, nor the subscription agent will have any obligation to you with respect to Subscription Rights that you have exercised, other than to promptly return,
without interest or deduction, the subscription payment you delivered to the subscription agent.
If you do not act on a timely basis and follow subscription instructions, your exercise of Subscription Rights may be rejected.
Holders of common stock who desire to purchase shares in this offering must act on a timely basis to ensure that all required forms and payments are actually received by the subscription agent prior to 5:00 p.m.
(Eastern Time) on the Expiration Date, unless extended. If you are a beneficial owner of shares of common stock and you wish to exercise your Subscription Rights, you must act promptly to ensure that your broker, custodian bank or other nominee
(including any mobile investment platform) acts for you and that all required forms and payments are actually received by your broker, custodian bank or other nominee (including any mobile investment platform) in sufficient time to deliver such forms
and payments to the subscription agent in order to exercise your Subscription Rights by 5:00 p.m. (Eastern time) on the Expiration Date, unless extended. We will not be responsible if your broker, custodian or nominee (including any mobile investment
platform) fails to ensure that all required forms and payments are actually received by the subscription agent in a timely manner.
If you fail to complete and sign the required subscription forms, send an incorrect payment amount, or otherwise fail to follow the subscription procedures that apply to your exercise of rights, the subscription agent
may, depending on the circumstances, reject your subscription or accept it only to the extent of the payment received. Neither we, nor the subscription agent undertakes to contact you concerning an incomplete or incorrect subscription form or
payment, nor are we or the subscription agent under any obligation to correct such forms or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.
If you pay the subscription price by uncertified check, your check may not clear in sufficient time to enable you to exercise your Subscription Rights.
Any uncertified check used to pay for the subscription price in this offering must clear prior to the Expiration Date of this offering. The clearing process may require five or more business days. If you choose to
pay the subscription price, in whole or in part, by uncertified check and your check does not clear prior to the Expiration Date of this offering, you will not have satisfied the conditions to exercise your rights and you will not receive the shares
you wish to purchase.
You may not receive all of the shares for which you subscribe pursuant to basic rights or the over-subscription right.
The Actual Subscription Price may be greater than the Estimated Subscription Price. If you sent in payment for only your maximum basic rights, the price increase will cause you to receive less than your maximum shares
subscribed for pursuant to the basic rights. For example, if you have basic rights to acquire 1,000,000 shares, you will send in $1,425 (based on the Estimated Subscription Price of $0.001425 to acquire 1,000,000 shares) as your subscription
payment. If the Actual Subscription Price is $0.0015, you will only receive 950,000 shares in the right offering. If you elected to exercise your over-subscription right, the remaining shares related to your basic rights will be purchased first
using these funds to the extent available.
Rights holders who fully exercise their basic rights will have the right, pursuant to their over-subscription rights, to purchase additional shares to the extent other rights holders do not exercise their basic rights
in full. Over-subscription rights will be allocated pro rata among rights holders who over-subscribe, based on the number of over-subscription shares for which the rights holders have subscribed. We cannot guarantee that you will receive all, or a
significant portion, of the shares for which you subscribe pursuant to your over-subscription right.
If the number of shares allocated to you is less than your subscription request, the excess funds held by the subscription agent on your behalf will be promptly returned to you, without interest or deduction, after
this offering has expired, and we will have no further obligations to you.
This offering may cause the market price of our common stock to decrease.
The subscription price, together with the number of shares of common stock we propose to issue and ultimately will issue in the rights offering, may result in an immediate decrease in the market price of our common
stock. This decrease may continue throughout and after the completion of the rights offering. If that occurs, you may have committed to buy common stock in the rights offering at a price greater than the prevailing market price of our common
stock. Further, if a substantial number of subscription rights are exercised and the subscribing holders choose to sell some or all of the shares of common stock received upon exercise of those rights, the resulting sales could depress the market
price of our common stock. There is no assurance that following the rights offering you will be able to sell your shares of common stock purchased in the rights offering at a price equal to or greater than the subscription price.
Because no minimum subscription is required and because we do not have formal commitments from our stockholders for the entire amount we seek to raise pursuant to the rights
offering, we cannot assure you of the amount of proceeds that we will receive from the rights offering.
No minimum subscription is required for consummation of the rights offering. We do not have formal commitments from our stockholders for the amount we seek to raise pursuant to the Rights Offering, and it is possible
that no other rights will be exercised in connection with the Rights Offering. As a result, we cannot assure you of the amount of proceeds that we will receive in the Rights Offering. Therefore, if you exercise all or any portion of your
subscription rights, but other stockholders do not, we may not raise the desired amount of capital in the Rights Offering, the market price of our common stock could be adversely impacted and we may find it necessary to pursue alternative means of
financing, which may be dilutive to your investment.
Your receipt of Subscription Rights may be treated as a taxable dividend to you.
The distribution of Subscription Rights in this offering should be a non-taxable stock dividend under Section 305(a) of the Internal Revenue Code of 1986. This position is not binding on the Internal Revenue Service
or the courts, however. If this offering is part of a “disproportionate distribution” under Section 305 of the Internal Revenue Code, your receipt of Subscription Rights may be treated as the receipt of a distribution equal to the fair market value
of the rights. Any such distribution treated as a disproportionate distribution would be treated as dividend income to the extent of our current and accumulated earnings and profits, with any excess being treated as a return of basis to the extent
thereof and then as capital gain. See “Material U.S. Federal Income Tax Considerations.”
Maxim, as dealer-manager, is not acting as an underwriter or placement agent of the Subscription Rights or the securities underlying the Subscription Rights.
Maxim will act as dealer-manager for this offering and, in that capacity, will provide marketing assistance in connection with the offering. Maxim is not underwriting, soliciting or placing any of the Subscription
Rights or the shares (or the common stock comprising the shares) and is not making any recommendation with respect to such Subscription Rights (including with respect to the exercise or expiration of such Subscription Rights) or shares. Maxim will
not be subject to any liability to us in rendering services to us except for an act involving bad faith, willful misconduct or gross negligence.
Because we do not have a standby purchase agreement, backstop commitment or similar arrangement in connection with this offering, the net proceeds we receive from the offering may
be less than we intend.
We have currently not entered into any standby purchase agreement, backstop commitment or similar arrangement in connection with this offering. We therefore cannot assure you that any of our stockholders will exercise
all or any part of their Subscription Rights. We do not have arrangements under which Maxim or any other investment bank, financial advisor or other entity will be obligated to sell securities not purchased in this offering. If rights holders
subscribe for fewer shares than anticipated, the net proceeds we receive from this offering could be significantly reduced. Regardless of whether this offering is fully subscribed.
We have not paid dividends and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have not paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other
business and economic factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price
appreciates.
The Rights Offering May Result in the Reduction of the Conversion Price of the Series D Preferred Stock and Dilution to Existing Shareholders.
The conversion price for the Series D Preferred Stock is currently $0.0024. The conversion price will be lesser of $0.0024 and either (1) 85% of the average of the volume weighted average price (VWAP) during the 10
trading days immediately following the effective date and public announcement of the next reverse stock split of HCMC, (2) 80% of the lowest daily VWAP during the 5 trading days immediately preceding the date the conversion shares are either
registered for resale or may be sold pursuant to Rule 144 and (3) the per share price at which Company securities are sold in the future. If the Actual Subscription Price is less than $0.0024, the conversion price for the Series D Preferred Stock
will be reduced to such price, causing dilution to existing stockholders upon conversion of the Series D Preferred Stock.
Risks Related to Our Securities
The market price of our common stock has been and may continue to be volatile and investors could incur substantial losses.
The market price of our common stock has been volatile, and fluctuates widely in price in response to various factors, which are beyond our control. The price of our common stock is not necessarily indicative of our
operating performance or long-term business prospects. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These
market fluctuations may also materially and adversely affect the market price of our common stock. We may continue to incur rapid and substantial increases or decreases in our stock price in the foreseeable future that do not coincide in timing with
the disclosure of news or developments by us. Accordingly, the market price of our shares of common stock may fluctuate dramatically, and may decline rapidly, after you purchase shares in this offering, irrespective of any developments in our
business. Factors such as the following could cause the market price of our common stock to fluctuate substantially:
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our quarterly operating and financial results;
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government regulation of our industry;
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the introduction of new products by our competitors;
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changing conditions in the electronic cigarette and tobacco industries; as well as the grocery business
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developments concerning proprietary rights;
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factors in the public trading market for our stock that may produce price movements that may or may not comport with macro, industry or company-specific fundamentals, including, without limitation, the sentiment of retail investors
(including as may be expressed on financial trading and other social media sites and online forums), the direct access by retail investors to broadly available trading platforms, the amount and status of short interest in our securities,
access to margin debt, trading in options and other derivatives on our common stock and any related hedging and other trading factors;
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speculation in the press or investment community about our company or industry;
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the outcome of the pending patent infringement lawsuit against Phillip Morris USA, Inc. and Phillip Morris Products S.A.; or
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litigation or public concern about the safety of our products.
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The stock market in general experiences from time to time extreme price and volume fluctuations. Periodic and/or continuous market fluctuations could result in extreme volatility in the price of our common stock,
which could cause a decline in the value of our common stock. Price volatility may be worse if the trading volume of our common stock is low.
These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class
action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources, which could materially and adversely affect our
business, financial condition, results of operations and growth prospects.
Our common stock may become the target of a “short squeeze.”
In the past several weeks, securities of certain companies have increasingly experienced significant and extreme volatility in stock price due to short sellers of shares of common stock, known as a “short squeeze.”
These short squeezes have caused extreme volatility in those companies and in the market and have led to the price per share of those companies to trade at a significantly inflated rate that is disconnected from the underlying value of the company.
Many investors who have purchased shares in those companies at an inflated rate face the risk of losing a significant portion of their original investment as the price per share has declined steadily as interest in those stocks have abated. There can
be no assurance that we will not, in the future be, a target of a short squeeze, and you may lose a significant portion or all of your investment if you purchase our shares at a rate that is significantly disconnected from our underlying value.
Future sales of our common stock may depress our stock price.
As of May 11, 2021, we had 307,926,082,074 billion shares of our common stock outstanding. Approximately 285 billion of our outstanding shares are eligible for resale without restrictions. If any significant number
of these shares are sold, such sales could have a depressive effect on the market price of our stock. The remaining shares are eligible, and some of the shares underlying the restricted stock options upon issuance, will be eligible to be offered
from time to time in the public market pursuant to registration statements we have filed and Rule 144 Securities Act, and any such sale of these shares may have a depressive effect as well. We are unable to predict the effect, if any, that the sale
of shares, or the availability of shares for future sale, will have on the market price of the shares prevailing from time to time. Sales of substantial amounts of shares in the public market, or the perception that such sales could occur, could
depress prevailing market prices for the shares. Such sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price, which we deem appropriate.
Costs incurred because we are a public company may affect our profitability.
As a public company, we incur significant legal, accounting, and other expenses, and we are subject to the SEC’s rules and regulations relating to public disclosure that generally involve a substantial expenditure of
financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC, requires changes in corporate governance practices of public companies. We expect that full compliance with such rules and
regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly, which may negatively impact our financial results. To the extent our earnings suffer as a result of the
financial impact of our SEC reporting or compliance costs, our ability to develop an active trading market for our securities could be harmed.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends.
We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Our payment of any future dividends
will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to
realize certain returns on their investment.
Our common stock may become a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
Our common stock could be considered to be a “penny stock.” It may not qualify for one of the exemptions from the definition of “penny stock” under Section 3a51-1 of the Exchange Act. The principal result or effect
of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock are subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act. For
example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business
days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to
that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information,
that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written
statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial
situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in
the market or otherwise.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our common shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the
investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax
status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements
make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our Board of Directors’ ability to issue undesignated preferred stock and the existence of anti-takeover provisions may depress the value of our common stock.
Our authorized capital includes 1,000,000 shares of preferred stock. Of this amount, 5,000 of such shares have been designated as Series D Convertible Preferred Stock and all such shares are issued and outstanding.
Our Board of Directors has the power to issue any or all of the shares of undesignated preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series,
without seeking stockholder approval. Further, as a Delaware corporation, we are subject to provisions of the Delaware General Corporation Law regarding “business combinations.” We may, in the future, consider adopting additional anti-takeover
measures. The authority of our Board of Directors to issue undesignated stock and the anti-takeover provisions of Delaware law, as well as any future anti-takeover measures adopted by us, may, in certain circumstances, delay, deter or prevent
takeover attempts and other changes in control of the company not approved by our Board of Directors. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or
that may be available under a merger proposal and the market price, voting and other rights of the holders of common stock may also be affected.
Future sales and issuances of our common stock or rights to purchase common stock could result in additional dilution of the percentage ownership of our stockholders and could
cause our share price to fall.
We also expect that additional capital will be needed in the future to continue our planned operations. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience
substantial dilution. We may sell common stock, convertible securities, or other equity securities in one or more transactions at prices and in a manner, we determine from time to time. If we sell common stock, convertible securities or other
equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing
stockholders.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, we could
become subject to sanctions or investigations by regulatory authorities and/or stockholder litigation, which could harm our business and have an adverse effect on our stock price.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, including periodic reports, disclosures and more complex accounting rules.
As directed by Section 404 of Sarbanes-Oxley, the SEC adopted rules requiring public companies to include a report of management on a company’s internal control over financial reporting in their Annual Report on Form 10-K. Based on current rules, we
are required to report under Section 404(a) of Sarbanes-Oxley regarding the effectiveness of our internal control over financial reporting. If we were to determine that we have material weaknesses, it may be necessary to make restatements of our
consolidated financial statements and investors will not be able to rely on the completeness and accuracy of the financial information contained in our filings with the SEC and this could potentially subject us to sanctions or investigations by the
SEC or other regulatory authorities or stockholder litigation.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial
reporting was not effective as of December 31, 2020. If we fail to remediate these issues and maintain an effective system of internal control over financial reporting, we may not be able
to accurately report our financial results or prevent fraud.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2020 as
a result of material weaknesses. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of our company's financial statements will not be
prevented, or detected and corrected on a timely basis. The primary material weaknesses identified by management related to a lack of accounting personnel and the failure to have properly documented and designed controls and procedures.
We have undertaken initiatives to improve our internal control over financial reporting and disclosure controls. However, the implementation of these initiatives may not fully address the material weaknesses in our
internal control over financial reporting. In addition, the process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and
regulatory environments and to expend significant resources to maintain a financial reporting system that satisfies our reporting obligations. Our failure to remediate the material weaknesses or our failure to discover and address any other material
weaknesses or deficiencies may result in inaccuracies in our financial statements, delay in the preparation of our financial statements, and the loss of investor confidence in the reliability of our financial statements, which in turn could
negatively influence the trading price of our common stock. Also, as a result, our business, financial condition, results of operations and prospects may be materially and adversely affected.
General Risks
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
Our future depends, in part, on our ability to attract and retain key personnel and the continued contributions of our executive officers, each of whom may be difficult to replace. In particular, Jeffrey Holman, our
Chief Executive Officer, is important to the management of our business and operations and the development of our strategic direction. The loss of the services of this officer, and the process to replace him would involve significant time and
expense and may significantly delay or prevent the achievement of our business objectives.
The COVID-19 Pandemic and related economic repercussions may affect our business.
The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in businesses globally. While these events have not yet had a material adverse effect on our
business and B2C platforms like ours have seen elevated sales levels from consumer shifts to online purchasing, we can offer no assurance that the COVID-19 pandemic will not have an adverse effect in the future, particularly if the pandemic worsens
or endures for an extended period of time.
At the onset of the pandemic we implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these included split shifts, temperature
scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs, and as a result, we instituted cost savings
programs to offset these increased costs. We also put a hold on new spending commitments as we cautiously manage through this environment.
The COVID-19 pandemic may adversely impact our results. Our supply chain has remained operational otherwise, but we can offer no assurance that it will not be adversely affected in the future, particularly as the
COVID-19 pandemic continues to worsen. If the impact of the COVID-19 pandemic continues for an extended period of time or worsens, it could have a material adverse effect on our supply chain or workforce, either of which could have a material
adverse effect on our business, financial condition and liquidity. In addition, if the impact of the COVID-19 pandemic continues it may heighten the other risks that could affect our business.
Reliance on information technology means a significant disruption could affect our communications and operations.
We increasingly rely on information technology systems for our internal communications, controls, reporting and relations with customers and suppliers and information technology is becoming a significantly important
tool for our sales staff. In addition, our reliance on information technology exposes us to cyber-security risks, which could have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and
cause us to lose customers or may disrupt our relationships and ongoing transactions with other entities with whom we contract throughout our supply chain. The failure of our information systems to function as intended, or the penetration by outside
parties’ intent on disrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.
Risks Relating to Our Vaporizer Business
We have incurred significant operating losses in the past and cannot assure you that we will achieve and/or maintain profitable operations or liquidity.
The Company reported a net loss allocable to common stockholders of approximately $2.799 million and $3.722 million for the years ended December 31, 2019 and 2020. Our operating losses are primarily due to, among
other reasons, increasing competition, in both our vape and grocery businesses.
The Company’s liquidity and capital resources have decreased significantly as a result of the net operating losses. We cannot assure you that we will be able to generate operating profits in the future on a
sustainable basis or at all as we continue to expand our infrastructure, further develop our marketing efforts and otherwise implement our growth initiatives. Future working capital limitations could impinge on our day-to-day operations, thus
contributing to continued operating losses.
If the FDA passed regulations to extend its authority to e-vapor products, including e-cigarettes, vaporizers and e-liquids, necessitating stringent and costly product review
requirements, such regulations could curtail or prevent our ability to sell e-vapor products and significantly reduce the number of e-vapor products available for sale to the public.
It is anticipated that the FDA’s prospective regulation of e-vapor products, including requiring costly formal product approvals, limiting the manufacture and distribution of e-vapor products will impact availability.
Any such regulations and approval process would make product development and manufacture cost prohibitive for the Company. A reduction in available e-vapor products would diminish the need for our dedicated retail stores.
The recent development of electronic cigarettes has not allowed the medical profession to study the long-term health effects of electronic cigarette use.
Because electronic cigarettes were recently developed the medical profession has not had a sufficient period of time to study the long-term health effects of electronic cigarette use. Currently, therefore, there is no
way of knowing whether or not electronic cigarettes are safe for their intended use. If the medical profession were to determine conclusively that electronic cigarette usage poses long-term health risks, electronic cigarette usage could decline,
which could have a material adverse effect on our business, results of operations and financial condition.
Our business, results of operations and financial condition could be adversely affected if our products are taxed like other tobacco products.
Presently the sale of electronic cigarettes and vaporizers is not subject to federal, state and local excise taxes like the sale of conventional cigarettes or other tobacco products, all of which have faced significant
increases in the amount of taxes collected on their sales. Should federal, state and local governments and or other taxing authorities impose excise taxes similar to those levied against conventional cigarettes and tobacco products on our products,
it may have a material adverse effect on the demand for our products, as consumers may be unwilling to pay the increased costs for our products.
Because we face intense competition from big tobacco companies and other competitors, our failure to compete effectively could have a material adverse effect on our business,
results of operations and financial condition.
Competition in the electronic cigarette and vaporizer industry is intense. The nature of our competitors is varied as the market is highly fragmented and the barriers to entry into the business are low.
We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The
competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette excise taxes, higher
absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.
Our principal competitors are “big tobacco,” U.S. cigarette manufacturers of both conventional tobacco cigarettes and electronic cigarettes like Altria Group, Inc., Lorillard, Inc. and Reynolds American Inc. We
compete against “big tobacco” which offers not only conventional tobacco cigarettes and electronic cigarettes but also smokeless tobacco products such as “snus” (a form of moist ground smokeless tobacco that is usually sold in sachet form that
resembles small tea bags), chewing tobacco and snuff, and now so called “heat not burn” (HNB) products such as “IQOS”. Furthermore, we believe that “big tobacco” will devote more attention and resources to developing and offering electronic
cigarettes (including vaporizers and HNB) as the market grows. Because of their well-established sales and distribution channels, marketing expertise and significant financial and marketing resources, “big tobacco” is better positioned than small
competitors like us to capture a larger share of the electronic cigarette market. We also compete against numerous other smaller manufacturers or importers of cigarettes. There can be no assurance that we will be able to compete successfully
against any of our competitors, some of whom have far greater resources, capital, experience, market penetration, sales and distribution channels than us. If our major competitors were, for example, to significantly increase the level of price
discounts offered to consumers, we could respond by offering price discounts, which could have a materially adverse effect on our business, results of operations and financial condition.
Sales of conventional tobacco cigarettes have been declining, which could have a material adverse effect on our business.
The overall U.S. market for conventional tobacco cigarettes has generally been declining in terms of volume of sales, as a result of restrictions on advertising and promotions, funding of smoking prevention campaigns,
increases in regulation and excise taxes, a decline in the social acceptability of smoking, and other factors, and such sales are expected to continue to decline. While the sales of vaporizers have been increasing over the last several years, the
vaporizer and electronic cigarettes market is only developing and is a fraction of the size of the conventional tobacco cigarette market. A continual decline in cigarette sales may adversely affect the growth of the vaporizer and electronic
cigarette market, which could have a material adverse effect on our business, results of operations and financial condition.
If we are subject to intellectual property litigation, we may incur substantial additional costs which will adversely affect our results of operations.
The cost to prosecute infringements of our intellectual property or the cost to defend our products against patent infringement or other intellectual property litigation by others could be substantial. We cannot assure you that:
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pending and future patent applications will result in issued patents;
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patents we own or which are licensed by us will not be challenged by competitors;
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the patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage;
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we will be successful in defending against patent infringement claims asserted against our products; and
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we will be successful in prosecuting patent infringement claims asserted.
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Both the patent application process and the process of managing patent disputes can be time consuming and expensive. In addition, changes in the U.S. patent laws could prevent or limit us from filing patent
applications or patent claims to protect our products and/or technologies or limit the exclusivity periods that are available to patent holders.
If a third-party asserts that we are infringing on its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us
to obtain expensive licenses, and our business may be adversely affected.
Although we have issued patents and patents pending, the vaporizer and electronic cigarette industry is nascent and third parties may claim patent rights over one or more types of vaporizers and electronic cigarettes.
Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could cause us to do one or more of the following:
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stop selling products or using technology that contains the allegedly infringing intellectual property;
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incur significant legal expenses;
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cause our management to divert substantial time to our defenses;
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing;
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indemnify distributors and customers;
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redesign those products that contain the allegedly infringing intellectual property; or
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be available to us on reasonable terms or at all.
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Third party lawsuits alleging our infringement of patents, trade secrets or other intellectual property rights could have a material adverse effect on our business, results of operations and financial condition.
If we cannot protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.
We believe that patents, trademarks, trade secrets and other intellectual property we use and are developing are important to sustaining and growing our business. We utilize third party manufacturers to manufacture
our products in China, where the validity, enforceability and scope of protection available under intellectual property laws are uncertain and still evolving. Implementation and enforcement of Chinese intellectual property-related laws have
historically been deficient, ineffective and hampered by corruption and local protectionism. Accordingly, we may not be able to adequately protect our intellectual property in China, which could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, policing unauthorized use of our intellectual property in China and elsewhere is difficult and expensive, and we may need to resort to litigation to enforce or defend our intellectual
property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation, if any, could result in substantial costs and diversion of resources
and management attention, which could harm our business and competitive position.
We may experience product liability claims in our business, which could adversely affect our business.
The tobacco industry in general has historically been subject to frequent product liability claims. As a result, we may experience product liability claims from the marketing and sale of electronic cigarettes or vaporizers. Any product liability
claim brought against us, with or without merit, could result in:
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liabilities that substantially exceed our product liability insurance, which we would then be required to pay from other sources, if available;
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an increase of our product liability insurance rates or the inability to maintain insurance coverage in the future on acceptable terms, or at all;
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damage to our reputation and the reputation of our products, resulting in lower sales;
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regulatory investigations that could require costly recalls or product modifications;
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the diversion of management’s attention from managing our business.
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Any one or more of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
If we experience product recalls, we may incur significant and unexpected costs and our business reputation could be adversely affected.
We may be exposed to product recalls and adverse public relations if our products are alleged to cause illness or injury, or if we are alleged to have violated governmental regulations. A product recall could result
in substantial and unexpected expenditures and could harm our reputation, which could have a material adverse effect on our business, results of operations and financial condition. In addition, a product recall may require significant management
time and attention and may adversely impact on the value of our brands. Product recalls may lead to greater scrutiny by federal or state regulatory agencies and increased litigation, which could have a material adverse effect on our business,
results of operations and financial condition.
If the economy declines, such decline may adversely affect the demand for our products.
Vaporizers and electronic cigarettes may be regarded by users as a novelty item and expendable as such demand for our products may be extra sensitive to economic conditions. When economic conditions are prosperous,
discretionary spending typically increases; conversely, when economic conditions are unfavorable, discretionary spending often declines. Any significant decline in economic conditions that affects consumer spending could have a material adverse
effect on our business, results of operations and financial condition.
Our future growth and profitability will depend in large part upon the effectiveness of our marketing and advertising expenditures.
Our future growth and profitability will depend in large part upon our media performance, including our ability to:
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create greater awareness of our products and stores;
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identify the most effective and efficient level of spending in each market and specific media vehicle;
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determine the appropriate creative message and media mix for advertising, marketing, and promotional expenditures; and
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effectively manage marketing costs (including creative and media).
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Our planned marketing expenditures may not result in increased revenue. If our media performance is not effective, our future results of operations and financial condition will be adversely affected.
If we are unable to promote and maintain our brands, our results of operations will be adversely affected.
We believe that establishing and maintaining the brand identities of our products is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of our brands will depend largely on
our success in continuing to provide high quality products. If our customers and end users do not perceive our products to be of high quality, or if we introduce new products or enter into new business ventures that are not favorably received by our
customers and end users, we will risk diluting our brand identities and decreasing their attractiveness to existing and potential customers.
Moreover, in order to attract and retain customers and to promote and maintain our brand equity in response to competitive pressures, we may have to increase substantially our financial commitment to creating and
maintaining a distinct brand loyalty among our customers. If we incur significant expenses in an attempt to promote and maintain our brands, our business, results of operations and financial condition could be adversely affected.
If we are unable to adapt to trends in our industry, our results of operations will be adversely affected.
We may not be able to adapt as the vaporizer and electronic cigarette industry and customer demand evolve, whether attributable to regulatory constraints or requirements, a lack of financial resources or our failure to
respond in a timely and/or effective manner to new technologies, customer preferences, changing market conditions or new developments in our industry. Any of the failures to adapt for the reasons cited herein or otherwise could make our products
obsolete and would have a material adverse effect on our business, financial condition and results of operations.
If our third-party manufacturers produce unacceptable or defective products or do not provide products in a timely manner, our business will be adversely affected.
We depend on third party manufacturers for our electronic cigarettes, vaporizers and accessories. Our customers associate certain characteristics of our products including the weight, feel, draw, unique flavor,
packaging and other attributes of our products to the brands we market, distribute and sell. Any interruption in supply, consistency of our products may adversely impact our ability to deliver our products to our wholesalers, distributors and
customers and otherwise harm our relationships and reputation with customers, and have a materially adverse effect on our business, results of operations and financial condition.
Although we believe that several alternative sources for the components, chemical constituents and manufacturing services necessary for the production of our products are available, any failure to obtain any of the
foregoing would have a material adverse effect on our business, results of operations and financial condition.
Because we rely on Chinese manufacturers to produce our products, we are subject to potential adverse safety and other issues.
The majority of our manufacturers are based in China. Certain Chinese factories and the products they export have recently been the source of safety concerns and recalls, which is generally attributed to lax
regulatory, quality control and safety standards. Should Chinese factories continue to draw public criticism for exporting unsafe products, whether those products relate to our products or not we may be adversely affected by the stigma associated
with Chinese production, which could have a material adverse effect on our business, results of operations and financial condition.
Our results of operations could be adversely affected by currency exchange rates and currency devaluations.
Our functional currency is the U.S. dollar; substantially all of our purchases and sales are currently generated in U.S. dollars. However, our manufacturers and suppliers of vape products are located in China. The
Chinese currency, the renminbi, has appreciated significantly against the U.S. dollar in recent years. Fluctuations in exchange rates between our respective currencies could result in higher production and supply costs to us which would have a
material adverse effect on our results of operations if we are not willing or able to pass those costs on to our customers.
Risks Related to Government Regulation
Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.
In addition to the anticipated regulation of our business by the FDA, our business, results of operations or financial condition could be adversely affected by new or future legal requirements imposed by legislative or
regulatory initiatives, including, but not limited to, those relating to health care, public health and welfare and environmental matters. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the
extent such requirements increase the prices of goods and services because of increased costs or reduced availability. We cannot predict whether such legislative or regulatory initiatives will result in significant changes to existing laws and
regulations and/or whether any changes in such laws or regulations will have a material adverse effect on our business, results of operations or financial condition.
Limitation by states on sales of vaporizers and electronic cigarettes may have a material adverse effect on our ability to sell our products.
If one or more states from which we generate or anticipate generating significant sales bring actions to prevent us from selling our products unless we obtain certain licenses, approvals or permits and if we are not
able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to us then we may be required to cease sales and distribution of our
products to those states, which would have a material adverse effect on our business, results of operations and financial condition.
The application of the Prevent All Cigarette Trafficking Act and/or the Federal Cigarette Labeling and Advertising Act to vaporizers and/or electronic cigarettes would have a
material adverse effect on our business.
The Prevent All Cigarette Trafficking Act (which prohibits the use of the U.S. Postal Service to mail most tobacco products and which amends the Jenkins Act, which would require individuals and businesses that make
interstate sales of cigarettes or smokeless tobacco to comply with state tax laws) and the Federal Cigarette Labeling and Advertising Act (which governs how cigarettes can be advertised and marketed) apply to vaporizers and/or electronic cigarettes.
These federal laws to either vaporizers and/or electronic cigarettes could result in additional expenses, could prohibit us from selling products through the Internet and require us to change our advertising and labeling and method of marketing our
products, any of which would have a material adverse effect on our business, results of operations and financial condition.
We may face the same governmental actions aimed at conventional cigarettes and other tobacco products.
The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the World Health Organization’s Framework Convention on Tobacco Control, or the FCTC. The
FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. Regulatory initiatives that
have been proposed, introduced or enacted include:
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the levying of substantial and increasing tax and duty charges;
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restrictions or bans on advertising, marketing and sponsorship;
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the display of larger health warnings, graphic health warnings and other labeling requirements;
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restrictions on packaging design, including the use of colors and generic packaging;
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restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
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requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituent’s levels;
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requirements regarding testing, disclosure and use of tobacco product ingredients;
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increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
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elimination of duty free allowances for travelers; and
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encouraging litigation against tobacco companies.
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If vaporizers and/or electronic cigarettes are subject to one or more significant regulatory initiatives enacted under the FCTC, our business, results of operations and financial condition could be materially and adversely affected.
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