The holders of Preferred Stock hold Anti-Dilution Rights.
The Series A Preferred Stock has weighted average anti-dilution protection with respect to certain additional issuances of our securities for issue prices that are below the current conversion price of the Series A Preferred Stock which is $1.08 per share. The weighted anti-dilution calculation results in a reduction of the conversion price of the Series A Preferred Stock, thereby resulting in an increase in the number of shares of common stock into which the Series A Preferred Stock is convertible. If in the future, we issue securities at below the conversion price of the Series A Preferred Stock or below the conversion price of any additional series of Preferred Stock that may in the future be authorized and issued, the holders of such Preferred Stock will be entitled to the issuance of additional shares of common stock upon conversion of such Preferred Stock, through a reduction in the effective conversion price then in effect for such Preferred Stock, which would result in additional dilution to the holders of common stock, through an additional decrease in the holder’s relative percentage ownership of us.
Terms of subsequent financings may adversely impact your investment.
We may need to engage in common equity, debt, or preferred stock financing in the future, as a result of which your rights and the value of your investment in the common stock could be reduced. Interest on debt securities could increase costs and negatively impact operating results. Additional shares of preferred stock could be issued in series from time to time with such designation, rights, preferences, and limitations as needed to raise capital. The terms of preferred stock could be more advantageous to those investors than to the holders of common stock. In addition, if we need to raise more equity capital from the sale of common stock, institutional or other investors may negotiate terms at least as, and possibly more, favorable than the terms of your investment.
If our brand does not achieve more widespread consumer acceptance, our growth may be limited.
Our brand is early in its growth cycle and has not yet achieved extensive brand recognition. Accordingly, if consumers do not accept our brand, we will not be able to penetrate our markets and our growth may be limited.
We depend on a limited number of suppliers. Failure to obtain satisfactory performance from our suppliers or loss of our existing suppliers could cause us to lose sales, incur additional costs and lose credibility in the marketplace.
We depend on a limited number of third-party suppliers for the sourcing of our products. These suppliers consist of third-party distillers, bottlers and producers. We do not have long-term written agreements with all of our suppliers. The termination of our agreements or an adverse change in the terms of these agreements could have a negative impact on our business. If our suppliers increase their prices, we may not have alternative sources of supply and may not be able to raise the prices of our products to cover all or even a portion of the increased costs. Also, our suppliers’ failure to perform satisfactorily or handle increased orders, delays in shipments of products from suppliers or the loss of our existing suppliers, especially our key suppliers, could cause us to fail to meet orders for our products, lose sales, incur additional costs and/or expose us to product quality issues. In turn, this could cause us to lose credibility in the marketplace and damage our relationships with distributors, ultimately leading to a decline in our business and results of operations. If we are not able to renegotiate these contracts on acceptable terms or find suitable alternatives, our business could be negatively impacted.
We depend on our independent wholesale distributors to distribute our products. The failure or inability of even a few of our distributors to adequately distribute our products within their territories could harm our sales and result in a decline in our results of operations.
We are required by law to use state licensed distributors and state-owned agencies to sell our products to retail outlets, including liquor stores, bars, restaurants and national chains in the U.S. We have established relationships for our brands with wholesale distributors in many states; however, failure to maintain those relationships could significantly and adversely affect our business, sales and growth. Over the past decade there has been increasing consolidation, both intrastate and interstate, among distributors. As a result, many states now have only two or three significant distributors. Also, there are several distributors that now control distribution for several states. As a result, if we fail to maintain good relations with a distributor, our products could in some instances be frozen out of one or more markets entirely. The ultimate success of our products also depends in large part on our distributors’ ability and desire to distribute our products to our desired U.S. target markets, as we rely significantly on them for product placement and retail store penetration. We have no formal distribution agreements or minimum sales requirements with any of our distributors and they are under no obligation to place our products or market our brands. Moreover, all of them also distribute competitive brands and product lines. We cannot assure you that our U.S. alcohol distributors will continue to purchase our products, commit sufficient time and resources to promote and market our brand and product lines or that they can or will sell them to our desired or targeted markets. If they do not, our sales will be harmed, resulting in a decline in our results of operations.
Class action or other litigation relating to alcohol abuse or misuse could adversely affect our business.
Companies in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising, product liability, alcohol abuse problems or health consequences from the misuse of alcohol. It is also possible that governments could assert that the use of alcohol has significantly increased government funded health care costs. Litigation or assertions of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers, could be named in litigation of this type.
Also, lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend against, depleting our cash and diverting our personnel resources and, result in significant harm to our business.
Regulatory decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our margins.
Our business is subject to extensive regulation. This may include regulations regarding production, distribution, marketing, advertising and labeling of beverage alcohol products. We are required to comply with these regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm our business, as we could find it necessary to raise our prices in order to maintain profit margins, which could lower the demand for our products and reduce our sales and profit potential.
Also, the distribution of beverage alcohol products is subject to extensive taxation. An increase in taxation could significantly harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to lower-taxed categories of beverage alcohol.
Contamination of our products and/or counterfeit or confusingly similar products could harm the image and integrity of, or decrease customer support for, our brands and decrease our sales.
The success of our brand depends upon the positive image that consumers have of it. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brand, could affect the demand for our products. Contaminants in raw materials purchased from third parties and used in the production of our products or defects in the distillation, fermentation or bottling processes could lead to low beverage quality as well as illness among, or injury to, consumers of our products and could result in reduced sales. We may also be required to recall products in the event of contamination or damage. Also, to the extent that third parties sell products that are either counterfeit versions of our brand or brands that look like our brand, consumers of our brand could confuse our products with products that they consider inferior. This could cause them to refrain from purchasing our brand in the future and in turn could impair our brand equity and adversely affect our sales and operations.
We face substantial competition in our industry and many factors may prevent us from competing successfully.
We compete on the basis of product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences. The global spirits industry is highly competitive and is dominated by several large, well-funded international companies. It is possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort to price competition to sustain market share, which could adversely affect our sales and profitability.
One of our Majority Shareholders is entitled to a Substantial Payment Upon a Change of Control.
Pursuant to an agreement with one of our stockholders, who is also a director and an officer, we are required to pay a change of control bonus in the amount of $1,360,000, which shall be used to pay a portion of his stock option exercise price upon a change in control. The stock options were issued after the date he commenced employment with us, resulting in an increase in the stock option exercise price as a result of an increase in the market value of the stock. The bonus was therefore granted to compensate him for the higher exercise price.
The holders of our Class B Common Stock have no voting rights.
Because the Class B Common Stock have no voting rights, investors will not be able to participate in any stockholder votes, including, the election of any directors.
Our Success Is Highly Dependent On Our Current Management.
Our success depends in significant part on the continued services of our current management team. Our success also depends in significant part on our ability to attract and retain additional management and other personnel. The inability to attract and retain such key personnel, or losing one or more of our existing management team, would seriously impair our ability to, or could cause us to fail to, successfully implement our business plan. This would have a material adverse effect on our business, results of operations and financial condition and the investors could lose their investment.
Limited Transferability and Liquidity.
Certain conditions imposed by the Securities Act must be satisfied prior to any sale, transfer, conversion or other disposition of our common stock. No public market exists for our common stock and no market is expected to develop.
Projections: Forward Looking Information.
Any projections regarding our anticipated financial performance are hypothetical and are based on management’s best estimate of the probable results of our operations, and have not been reviewed by our independent accountants. Such projections are based on several assumptions which management believes are reasonable. Some assumptions invariably will not materialize due to unanticipated events and circumstances beyond management’s control. Therefore, actual results of operations will vary from the projections, and such variances may be material. The projected results cannot be guaranteed.
You should understand the potential for dilution. Each investor's stake in us, could be diluted due to our issuing additional shares. In other words, if we issue more shares, the percentage of the Company that you own will decrease, even though our value may increase. You will own a smaller piece of a larger company. This increase in the number of shares outstanding could result from a stock offering (such as an initial public offering, another crowdfunding round, a venture capital round or angel investment), employees exercising stock options, or by conversion of certain instruments (e.g., convertible notes, preferred shares or warrants) into stock.
If we decide to issue more shares, you could experience value dilution, with each share being worth less than before, and control dilution, with the total percentage an investor owns being less than before. There may also be earnings dilution, with a reduction in the amount earned per share (although this typically occurs only if we offer dividends, and most early stage companies are unlikely to offer dividends, referring to invest any earnings into the Company).
The type of dilution that hurts early-stage investors mostly occurs when the company sells more shares in a "down round," meaning at a lower valuation than in earlier offerings.
The Series A Preferred Stock has weighted average anti-dilution protection with respect to certain additional issuances of our securities for issue prices that are below the current conversion price of the Series A Preferred Stock which is $1.08. The weighted anti-dilution calculation results in a reduction of the conversion price of the Series A Preferred Stock, thereby resulting in an increase in the number of shares of common stock into which the Series A Preferred Stock is convertible. In addition, if in the future, we issue securities at below the conversion price of the Series A Preferred Stock or any other Series of Preferred Stock that we may issue with anti-dilution protection, the holders of the applicable series of Preferred Stock will be entitled to the issuance of additional shares of common stock upon conversion of such Preferred Stock, through a reduction in the effective conversion price then in effect for such Preferred Stock, which would result in additional dilution to the holders of common stock, through an additional decrease in the holder’s relative percentage ownership of us.
If you are making an investment expecting to own a certain percentage of the Company or expecting each share to hold a certain amount of value, it is important to realize how the value of those shares can decrease by actions taken by the Company. Dilution can make drastic changes to the value of each share, ownership percentage, voting control, and earnings per share.
Risks of Borrowing.
We have over $3,000,000 in debt outstanding to officers and directors. As of August 1, 2017, $366,866 was outstanding under the Promissory Note which is collateralized against our accounts receivables. We may have to seek loans from financial institutions or other Individuals in the future. Typical loan agreements might contain restrictive covenants which may impair our operating flexibility, and may require us to provide a security interest in our assets. A default under any loan agreement could result in the foreclosure of any security interst granted, including, but not limited to, the security interest granted to our director in connection with the loan referred to above.
Vince Serpico is a part-time officer. As such, it is likely that the company will not make the same progress as it would if that were not the case.
The holders of Series A Preferred Stock have preferential rights to dividends and distributions upon a liquidation, dissolution and certain acquisitions.
Upon a liquidation, dissolution or winding up of us, our sale of all or substantially all of our assets and certain acquisitions (a “Liquidation Event”), the holders of Series A Preferred Stock are entitled to receive $1.08 per share in distributions (subject to adjustments as described below), before any funds are distributed to the holders of common stock. As of the date hereof, upon a Liquidation Event, the holders of outstanding preferred stock would be entitled to receive the first $9,152,028 in distributions, with the remaining amounts being split pro rata amongst the holders of common stock.
In addition, if dividends are declared by our board of directors, dividends in an amount equal to $0.009 per share are required to be paid to the holders of Series A Preferred Stock prior to the payment of any dividends to the holders of common stock. Therefore, if our board of directors declares any dividends, there may not be any amounts remaining to be paid to the holders of common stock after distribution of the dividend preference to the holders of Series A Preferred Stock
In 2015, the Company signed an agreement which will take place upon the occurrence of a change of control in the company whereby one of the employees of the Company who is also shareholder will receive a bonus of $1,360,000.