|1||#1 Fastest-Growing US Single-Serve Wine Product (by Cases, Dollars, and Velocities).|
|2||$6.8M T12 revenue and 98% YoY growth for FY2019.|
|3||Raised $1M from Mark Cuban on Shark Tank.|
|4||Currently in over 10,000 stores incl. Walmart, Kroger, 7 Eleven, and many more in 25 states.|
|5||Other investors: MTV's Rob Dyrdek, DJ's Party Favor, Louis The Child, G.T.A and more.|
|6||Record 2020 sales with more than 250,000 BeatBox 12-pack cases sold to stores YTD.|
|7||Major gross margin improvement in 2020 to an industry-leading 55%|
When we met the Future Proof Founders and saw the vision they had we knew we had to invest. This company is really scratching an itch of an entire generation. With a powerful brand and marketing, coupled with a product that consumers really enjoy- Future Proof has an extremely promising- dare i say Future. With new products on the horizon and the power of their flagship product Beatbox Beverage, we truly believe this company has just scratched the surface of their industry domination potential.
We love the leadership team that has been assembled at Future Proof. With a number of pivots and “near company death” experiences, it’s clear that they are poised for massive growth. They have an uncanny knack to draw in top advisors and investors, which has given them the capital and runway they need to weather the rocky road that is the beverage industry. I think one of the most amazing things is that Future Proof was built for the millennial festival life culture- but since Covid festivals have closed their doors. That hasn’t stopped this team, they actually saw their first profitable month and are going to see their strongest year to date.
Honestly- the biggest challenge this team faces is keeping up with demand- which as an investor, that’s a great problem to have. Their margins are outstanding and the marketing is world class. All these pieces combined make this a very exciting partnership. We are honored to walk alongside Future Proof as their lead investor for this round.
We founded BeatBox Beverages in 2012 with the mission of bringing people together and having fun. Because of the disruptive nature of BeatBox and the excitement from our wholesaler partners about our profits, we repositioned ourselves in late 2019 as Future Proof Brands. It's been a crazy journey so far — and this is just the beginning.
As of October 2020, our brands generated over $6.8 million on a trailing 12-month basis, with depletions of BeatBox Beverages now over 250,000 cases. In October alone more than $1M of BeatBox Beverages shipped from our warehouse. Nielsen recently named us the fastest-growing, single-serve wine product by cases, dollars, and velocities.
Our forecast is based on the current rate of sales and velocities and forecasted growth of new stores due to retail expansion planned for 2021 and beyond.
The below chart contains future projections that cannot be guaranteed.
Just a year ago, BeatBox was found in fewer than 100 chain locations. Now, we have 11,300+ accounts purchased over the last 6 months and 150+ wholesale partners. BeatBox itself is available in 1,200 Circle K locations, 300+ QuickTrips, 225+ Krogers, 200+ H-E-Bs, 215+ 7-Elevens, 150 Speedways, and many more.
We received a $1M investment from Mark Cuban on Shark Tank who said, "You guys don't sell wine. You sell FUN." Which is what we're going for. Other investors include MTV's Rob Dyrdek, and DJs such as Party Favor, Louis the Child, G.T.A, and more.
NOTABLE EXITS IN THE ALCOHOL INDUSTRY
With $6.8M in T12 revenue, growing at a fast pace, Future Proof's valuation is in line with typical multiples for high-growth alcohol beverage brands.
In recent years, hard seltzer and single-serve wine have been a huge part of the growth of the alcohol beverage industry. With our experienced team and world-class distribution partners, we are able to launch innovative products Brizzy and Corkless to compete in these exciting and fast-growing categories. Your investment in Future/Proof is an investment in all three brands.
BeatBox Beverages is The World's Tastiest Portable Party Punch, an 11.1% wine-based party punch in classic flavors with a kick. They are low sugar, low calorie, and gluten-free and served in eco-friendly and portable Tetra Pak containers.
Craft cocktails meet refreshing hard seltzer. Brizzy is pushing the hard seltzer category forward with a premium brand promise. With mixology inspired recipes, Brizzy Seltzer Cocktails deliver a one-of-a-kind taste profile and has already won recognition for being a top-tasting seltzer. Brizzy is available now in Texas.
Premium wine, beautifully designed. CORKLESS is a wine made to go wherever, whenever. Every case of CORKLESS sold contributes to planting trees with One Tree Planted. Our goal is to help keep our planet vibrant, so that we can continue exploring it.
Corkless is now available in North Carolina, South Carolina, and Texas.
Future Proof brands are distributed across 25 states in the US — and growing! Our goal is to achieve nationwide and then international distribution.
BEVERAGES BUILT FOR EXPERIENCE
The BeatBox brand was built to capture the feeling of listening to music with your best friends, not having a care in the world. Before the pandemic, BeatBox was a party staple at more than 60 major music festivals across the nation. While COVID-19 has put music festivals on hold, we are continuing to bring people together through digital music experiences. Our "#BEATBORING House Party" featured an awesome streaming experience with a diverse line-up of DJs and reached more than 1M viewers. We can't wait to party with everyone again in-person when music festivals finally return!
The foundation is in place and the white space is there for continued exponential growth. Much like our DJ and music partners who perform all over the world, we feel the opportunity for Future Proof to create global brands is there. There is a lot of work to be done and we are incredibly excited for the next chapter. Join us!
PARTY BETTER TOGETHER. DRINK RESPONSIBLY.
BeatBox / Future Proof has financial statements ending December 31 2019. Our cash in hand is $851,536, as of August 2020. Over the three months prior, revenues averaged $655,904/month, cost of goods sold has averaged $324,211/month, and operational expenses have averaged $352,891/month.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this offering. Some of the information contained in this discussion and analysis, including information regarding the strategy and plans for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
We are millennial entrepreneurs and industry veterans disrupting the $1.5T global alcohol beverage industry.
We founded BeatBox Beverages in 2012 with the mission of bringing people together and having fun. Because of the disruptive nature of BeatBox and the excitement from our wholesaler partners about our profits, we repositioned ourselves in late 2019 as Future Proof Brands. It's been a crazy journey so far — and this is just the beginning.
Future Proof Brands LLC was formed in the State of Delaware in November 2011.
Since then, we have:
Historical Results of Operations
Related Party Transaction
Refer to Question 26 of this Form C for disclosure of all related party transactions.
Liquidity & Capital Resources
To-date, the company has been financed with $2,350,000 in debt, $11,554,749 in equity, and $220,000 in convertibles.
After the conclusion of this Offering, should we hit our minimum funding target, our projected runway is 18 months before we need to raise further capital.
We plan to use the proceeds as set forth in this Form C under "Use of Funds". We don’t have any other sources of capital in the immediate future.
We will likely require additional financing in excess of the proceeds from the Offering in order to perform operations over the lifetime of the Company. We plan to raise capital in 6 months. Except as otherwise described in this Form C, we do not have additional sources of capital other than the proceeds from the offering. Because of the complexities and uncertainties in establishing a new business strategy, it is not possible to adequately project whether the proceeds of this offering will be sufficient to enable us to implement our strategy. This complexity and uncertainty will be increased if less than the maximum amount of securities offered in this offering is sold. The Company intends to raise additional capital in the future from investors. Although capital may be available for early-stage companies, there is no guarantee that the Company will receive any investments from investors.
Runway & Short/Mid Term Expenses
Future Proof Brands LLC cash in hand is $851,536, as of August 2020. Over the last three months, revenues have averaged $655,904/month, cost of goods sold has averaged $324,211/month, and operational expenses have averaged $352,891/month, for an average burn rate of $21,198 per month.
Due to margin improvement trend and increasing scale, we achieved our first profitable month ever in August 2020.
October - December 2020 Forecast
Operating Expenses: $1,269,381
We currently have a credit facility in place with two private investors. After maintaining profitability for more time we can also begin to utilize bank financing.
General economic conditions could affect the Company’s business. The Company’s results of operations are affected by overall economic trends, the level of consumer spending, the rate of taxes levied on alcoholic beverages and consumer confidence in future economic conditions. In periods of economic slowdown, consumer purchase decisions may be increasingly affected by price considerations, thus creating negative pressure on the sales volume and margins of the products sold by the Company. Reduced consumer confidence and spending may result in reduced demand for the products sold by the Company and limitations on our ability to increase prices and finance marketing and promotional activities. A shift in consumer preferences or a reduction in sales of alcoholic beverages generally could have a material adverse effect on the products sold by the Company.
Pandemics, such as the current global COVID-19 virus, outbreaks of communicable infections or diseases, or other public health concerns in the markets in which our consumers or employees live and/or in which we or our distributors, retailers, and suppliers operate. Disease outbreaks and other public health conditions could result in disruptions and damage to our business caused by potential negative consumer purchasing behavior as well as disruption to our supply chains, production processes, and operations. Consumer purchasing behavior may be impacted by reduced consumption by consumers who may not be able to leave home or otherwise shop in a normal manner as a result of quarantines or other cancellations of public events and other opportunities to purchase our products, from bar and restaurant closures, or from a reduction in consumer discretionary income due to reduced or limited work and layoffs. Supply disruption may result from restrictions on the ability of employees and others in the supply chain to travel and work, such as caused by quarantine or individual illness, or which may result from border closures imposed by governments to deter the spread of communicable infection or disease, or determinations by us or our suppliers or distributors to temporarily suspend operations in affected areas, or other actions which restrict the ability to distribute our products or which may otherwise negatively impact our ability to produce, package and ship our product, for our distributors to distribute our products, or for our suppliers to provide us our raw materials. Transportation of product within a region or country may be limited, if workers are unable to report to work due to travel restrictions or personal illness. Our operations and the operations of our suppliers may become less efficient or otherwise become negatively impacted if our executive leaders or other personnel critical to our operations are unable to work or if a significant percentage of the workforce is unable to work or is required to work from home. Our cyber-security could be compromised if persons who are forced to work from home do not maintain adequate information security. A prolonged quarantine or border closure could result in temporary or longer-term disruptions of sales patterns, consumption and trade patterns, supply chains, production processes, and operations. A widespread health crisis, such as the COVID-19 pandemic, could negatively affect the economies and financial markets of many countries resulting in a global economic downturn which could negatively impact demand for our products and our ability to borrow money. Any of these events could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Our Board of Managers is in the process of seeking certification as a “B corporation” in which case the Company will be required to consider the impact of its decisions on all stakeholders, not just its Members. “Certified B corporations” refers to companies that are certified by B Lab as meeting certain levels of social and environmental performance, accountability and transparency. B Lab sets the standards for Certified B Corporation certification and may change those standards over time. If the Company becomes a Certified B Corporation, the Company’s Board of Managers must consider the effects of any action or inaction on the Company’s members, employees, customers, community and societal factors, local and global environment, among others things, and is not required to regard any interest, or the interests of any particular group affected by an action or inaction, including the members, as a dominant or controlling interest or factor. This is not the default standard under Delaware law. Further, our reputation could be harmed if we are unable to become a Certified B Corporation or if we become a Certified B Corporation and subsequently lose that status.
We have incurred indebtedness to finance operations and expansion activities and a portion of the proceeds from new investments in the Company will be used to pay off some of the Company’s high-interest short term debt. In the future, we may continue to incur additional indebtedness for general corporate purposes. We cannot assure that our business will generate sufficient cash flow from operations to meet all our debt service requirements, return value to shareholders and fund our general corporate and capital requirements. Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following: our ability to obtain financing for future working capital needs or investments/acquisitions or other purposes may be limited; our funds available for operations, and expansion may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness; our ability to conduct our business could be limited by restrictive covenants; and our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited. If we fail to comply with the obligations contained in our current credit facilities or future loan agreements, we could be in default under such debt facilities or agreements. In the event of a default, the holders of our debt could elect to declare all amounts outstanding under such instrument to be due and payable. A default could also require the immediate repayment of outstanding obligations under other debt facilities or agreements that contain cross-acceleration or cross-default provisions. If that were to occur, we might not have available funds to satisfy such repayment obligations.
The federal and state “tied-house” laws governing ownership interests in alcoholic beverage licensees may impact your ability to invest in the company. Alcohol beverage licensees and their investors are subject to state and federal “tied-house” laws which restrict certain investments between the three tiers of the alcoholic beverage industry: the manufacturing or supply tier, the wholesale tier, and the retail tier. The rules regarding such investments are different in each state and change frequently. We cannot make any assurances that investments in the company by investors are permissible in Texas or any other state if an investor holds other interests in alcoholic beverage licensees. It is within the purview of the Texas Alcoholic Beverage Commission to investigate our compliance with state tied-house requirements regardless of such investors’ amount of investment in the company. If any regulatory authority notifies the Company that the Company will lose its alcoholic beverage permit(s) because a member or related party or affiliate thereof has violated federal and state “tied-house” laws, such member must transfer its units to another person that does not engage in any activity that presents a conflict with the Company’s alcoholic beverage permit(s). In the event that such member does not make a transfer within thirty (30) days from receipt of notice from the Company that a transfer is required to resolve a regulatory conflict, the Company will have the right to redeem that member’s units.
Changes in the prices of supplies and raw materials could have a materially adverse effect on the Company’s business. There have been changes in the cost of raw materials used in the production of alcoholic beverages in recent years. Increases in prices may also take place in the future and the Company’s inability to pass on increases to customers could reduce margins and profits and have a material adverse effect on the Company’s business. The Company cannot assure you that shortages or increases in the prices of supplies or raw materials will not have a material adverse effect on the Company’s financial condition and results of operations. The success of the Company’s business with suppliers is subject to numerous financial, legal and operating risks, such as enforcement of contract rights and compliance with existing and future laws, regulations and policies, including those related to tariffs, investments, taxation, trade controls, product content and performance.
Weather conditions may have a material adverse effect on sales. The Company will operate in an industry where performance is affected by the weather. Changes in weather conditions may result in lower consumption of alcoholic beverages than in comparable periods. In particular, unusually cold spells in winter or high temperatures in the summer can result in temporary shifts in customer preferences and decrease demand for the alcoholic beverages the Company will produce and distribute. Similar weather conditions in the future may have a material adverse effect on sales which could affect the Company’s financial condition and results of operations.
Risks with the Company’s brands. It is important that the Company have the ability to maintain and enhance the image of its existing products. The image and reputation of the Company’s products may be impacted for various reasons including litigation or complaints from customers/regulatory bodies resulting from the illegal consumption of the Company’s products, quality failure, illness or other health concerns. Such concerns, even when unsubstantiated, could be harmful to the Company’s image and the reputation of its products. Deterioration in the Company’s brand equity (brand image, reputation and product quality) may have a negative effect on its operating results, financial condition and prospects.
Adverse public opinion about alcohol may harm our business. While a number of research studies suggest that moderate alcohol consumption may provide various health benefits, other studies conclude or suggest that alcohol consumption has no health benefits and may be detrimental to one’s health. An unfavorable report on the health effects of alcohol consumption could significantly reduce the demand for alcohol beverages, which could harm our business by reducing sales and increasing expenses. In recent years, activist groups have used advertising and other methods to inform the public about the societal harms associated with the consumption of alcoholic beverages. These groups have also sought, and continue to seek, legislation to reduce the availability of alcoholic beverages, to increase the penalties associated with the misuse of alcoholic beverages, or to increase the costs associated with the production of alcoholic beverages. Over time, these efforts could cause a reduction in the consumption of alcoholic beverages generally, which could harm our business by reducing sales and increasing expenses.
Loss of distribution agreements or inability to enter into favorable distribution agreements may have a material adverse effect on the Company. Entering into distribution agreements on favorable terms with key distributors will be critical to the success of the Company. If the Company fails to enter into distribution agreements on favorable terms with key distributors, such failure could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, if any distributors were to breach, terminate or attempt to renegotiate their distribution agreements with the Company, such breach, termination or renegotiation could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company can give you no assurance that it will be successful in maintaining and entering into favorable distribution agreements with key distributors.
Risks associated with the regulatory framework applicable to the Company. The alcoholic beverage industry is highly regulated at both national and local levels. Alcoholic beverage related producing, distributing and reselling operations require licenses, permits and approvals. Delays and failures to obtain or the future loss of any required licenses, permits or approvals could negatively affect the Company’s operations. Government-sponsored campaigns against excessive drinking, licensing reforms relating to the sale of alcoholic beverages and changes in drinking laws may reduce demand for the Company’s products and any change in legislation could impact upon future products that the Company may produce. Also, new regulations or requirements or increases in excise taxes, customs duties, income taxes, or sales taxes could materially adversely affect the Company’s business, financial condition and results of operations.
The Company may not be able to adequately protect its intellectual property rights. The Company will rely on trademark and other intellectual property rights to protect its intellectual property. There can be no assurance that the Company’s intellectual property rights can be successfully asserted in the future or will not be invalidated, circumvented or challenged. The Company cannot assure you that the steps the Company have taken or will take will be sufficient to protect the Company’s intellectual property rights or to prevent others from seeking to invalidate the Company’s trademark or block sales of the Company’s products as a violation of the trademarks and intellectual property rights of others. In addition, the Company cannot assure you that third parties will not infringe on or misappropriate the Company’s rights, imitate the Company’s products, or assert rights in, or ownership of, trademarks and other intellectual property rights of the Company’s or in marks that are similar to the Company’s. In some cases, there may be trademark owners who have prior rights to the Company’s marks or to similar marks. Intellectual property litigation is costly, and, even if the Company prevails, the cost of such litigation could adversely affect its business, financial condition and results of operations. Failure to protect the Company’s proprietary information could have a material adverse effect on its business, results of operations and financial condition.
We are currently involved in a lawsuit. The Company filed a trademark infringement lawsuit against Molson Coors Beverage Co. (“Molson Coors”), which, if the outcome is not successful, could have a material adverse impact on our Brizzy hard seltzer product line (including abandoning this product line). The Company was unsuccessful in obtaining a preliminary injunction against Molson Coors from launching its hard seltzer product on account of a likelihood of confusion.
The Company has a limited operating history. The Company has a limited operating history and to date has not generated any amounts of revenue or net income. The Company will not realize any significant revenues, net income or capital appreciation unless it successfully executes its business plan. Because of the Company’s limited operating history, it is unable to accurately forecast revenues. The Company currently intends to increase operating expenses substantially in order to, among other things, ramp and scale production of product, support pricing strategy with distributors, deliver brand launch through field marketing, social marketing, targeted advertising and product sampling, and accelerate key hires of sales and distribution leadership. To the extent the Company is unsuccessful in achieving significant revenues, it may be unable to appropriately adjust spending in a timely manner to compensate for any unexpected revenue shortfall or will have to reduce operating expenses, causing the Company to forego potential revenue generating activities, either of which could cause a material adverse effect on its business, results of operations, and financial condition. In addition, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing or marketing decisions that may adversely affect its revenues. These factors add to the difficulty in accurately forecasting revenue.
Market acceptance of the Company’s brands and products is uncertain. It is possible that the Company may not be successful in introducing its brands and products to its target markets. The possibility exists that market acceptance of the Company’s brands and products may differ from management’s perceived expectations and that the Company may be forced to modify all or part of its business plans. Management may come to erroneous conclusions regarding the marketplace, which may result in the Company’s overstatement of the opportunity. The success of the Company will, to a large extent, rely on management’s ability to adjust or modify, if at all or in part, components of its business plan to reflect current market conditions as they may present themselves in the future.
The Company may be unable to manage rapid growth. Market acceptance of the Company’s brands and products may result in the rapid and accelerated growth of the Company and stress the talents and time requirements of management. Current management may experience difficulties adjusting and managing the growth of the Company, resulting in material operational or revenue issues or deficiencies.
The Company’s ability to compete effectively in the highly competitive alcoholic beverage industry may affect its operational performance and financial results. The Company may not be able to compete successfully in the highly competitive alcoholic beverage industry. The Company will face competition from large, national companies and smaller, regional operators. Some of the Company’s competitors are larger and have greater financial resources. The Company may experience price pressure as a result of competitors’ pricing practices as well as general market conditions. Failure to match or exceed competitors’ cost reductions through productivity gains and other improvements could weaken the Company’s competitive position. The Company may not be able to effectively compete with larger, more diversified companies. Increased competition may result in lower operating margins leading to unprofitable operations and loss of market share.
Additional funding may be necessary for future development. The funds raised in this Offering will be used, in part, to generate a track record of performance and success in the Company’s product offering. The Company may require additional financing, including venture capital financing, to complete the product roadmap and expand the business. The timing and amount of such capital needs cannot be precisely determined at this time and will depend upon a number of factors, including the pace of product development, customer demand and acceptance, changes in industry conditions and competitive factors.
The Company’s financial projections and assumptions may prove incorrect. The information presented to investors in meetings and otherwise (including any financial projections of the Company) contain forward looking information and has been prepared on the basis of a number of assumptions, variables, and hypotheticals, including third-party data believed to be reliable but not fully verified or verifiable by the Company. The information and financial projections are dependent on estimates and projections of circumstances and events that have not occurred and which may not occur or which may have different consequences from those now assumed or anticipated. No assurance can be given that all material assumptions have been considered. Future operating results are in fact impossible to predict. Therefore, the actual results achieved will vary from the forecasts and projections and the variations could be material. No representation or warranty of any kind is made by the Company or any of its affiliates, and none should be inferred, respecting the future accuracy or completeness of any projections or any other forward-looking information provided by the Company.
The Company may not be able to obtain adequate financing. The Company’s projections are based on raising $2,500,000. If the Company raises $2,500,000 in this Offering, it may still be unable to achieve its proposed business plan. The Company’s operations may require capital infusions on an ongoing basis. If the Company does not generate sufficient cash flow from its operations, or is unable to borrow or otherwise obtain additional funds to finance its operations, the Company’s financial condition and results of operations could be adversely affected.
The Company is dependent on key personnel. The Company’s success will depend, in large part, upon the contributions of key personnel, especially the Founders (as defined below). The loss of the service of several key people within a short period of time could have a material adverse effect upon the Company’s financial condition and operations. The Company’s future success is also dependent upon its ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and the Company’s inability to attract and retain additional key employees could have a material adverse effect on the Company’s financial condition and operations. The Company could lose key personnel, which could prevent the Company from executing its business plan.
Past performance of the Founders is not a guarantee of comparable future results. Pro forma financial information for the Company is based upon numerous assumptions, many of which may or may not prove accurate. Therefore, actual financial results will be different from the pro forma information and the results obtained by the Founders in prior business endeavors, and these differences could be material.
Investors will have limited control over decision making because the Founders and existing investors will have voting control of the Company. Initially, Justin Fenchel, Aimy Steadman, Brad Schultz, Jason Schieck and Daniel Singer (the “Founders”) and existing holders of Preferred Units of the Company will own and control a majority of the voting interests of the Company and the investors in this Offering will have very limited control over the management of the Company. As a result, the Founders and existing investors will have significant influence in determining the outcome of all corporate transactions. The interests of the Founders and existing investors may differ from the interests of the other members, and the Founders and existing investors may make decisions with which the other members may not agree. Additionally, the Founder’s and existing investors’ fiduciary duties are limited by the LLC Agreement.
The LLC Agreement places limits on transferability of the Series B-1 Preferred Units. Under the LLC Agreement, no member may sell, assign, mortgage, pledge, transfer, hypothecate, encumber or otherwise dispose of any membership interest in the Company without the prior approval of the Board, in the Board’s sole discretion. Thus, your ability to transfer the Series B-1 Preferred Units is severely limited. Also, any sale or other transfer of the Series B-1 Preferred Units will be subject to a right of first refusal in favor of the Company and the other members. In addition, you might be required to sell your Series B-1 Preferred Units in certain circumstances. If the Founders and the members holding a majority of the outstanding membership interests in the Company desire to sell all or a majority of the equity interests in the Company, you can be required to sell your Series B-1 Preferred Units in such sale transaction.
Your ownership interest in the Company is subject to dilution in the event that the Company requires issues additional equity interests or equity-like interests. The Company may require additional capital and could sell additional equity interests in the Company to raise such capital. The Company may also issue additional equity incentive interests (including equity-like incentive interests) in the Company as awards to certain individuals. The Company may issue additional equity interests without your approval. Even if you are given an opportunity to purchase additional equity interests to maintain your ownership percentage, the opportunity may not be on terms you accept. Your investment in the Company is therefore subject to substantial dilution.
While the Series B-1 Preferred Units are a preferred equity interest, they are on equal footing with other Preferred Units and rank junior to the debts and liabilities of the Company. In a liquidation, the Company’s assets are distributed as follows: (a) first, to the payment of the debts and liabilities of the Company and the expenses of liquidation; (b) second, to the setting up of any reserves for any contingent or unforeseen liabilities or obligations of the Company, as deemed reasonably necessary by the Company’s Board of Managers; (c) third, to the holders of Preferred Units (including the holders of Series B-1 Preferred Units), pro rata, in accordance with the aggregate unreturned capital contributions attributable to the Preferred Units until such unreturned capital contributions are zero; then (d) fourth, to the holders of Common Units, pro rata, in accordance with their percentage ownership of all Common Units then outstanding. In other words, in a liquidation, the holders of Series B-1 Preferred Units will receive (if anything) the greater of their contributed capital or the amount that they would receive if the Series B-1 Preferred Units are converted to Common Units (the Series B-1 Preferred Units initially convert on a one-to-one basis to Common Units). The terms of the Series B-1 Preferred Units will not limit the amount of debt or other obligations the Company may incur in the future or the issuance by the Company of additional Preferred Units (including Preferred Units that rank senior to the Series B-1 Preferred Units). Accordingly, the Company may incur substantial amounts of additional debt and other obligations that will rank senior to or be on equal footing with the Series B-1 Preferred Units in a liquidation.
The Company does not have any present intentions to make any operating distributions, and may not have available cash to make tax distributions. Other than distributions to permit its members to satisfy federal income tax obligations with respect to income allocated to the members during a taxable period (“Tax Distributions”), the Company does not anticipate paying any operating distributions for the foreseeable future. The Company currently intends to retain future earnings, if any, to repay indebtedness and to support its business. Tax Distributions are mandatory under the Company’s LLC Agreement but only to the extent that the Company has available cash as reasonably determined by the Company’s Board of Managers.
Limitations on Liability of Managers. Although the managers of the Company have contractual duties arising under the LLC Agreement, the LLC Agreement includes certain provisions that are intended to limit or eliminate the managers’ fiduciary duties and any liabilities associated therewith. Therefore, the members of the Company may have a more limited right of action against the managers of the Company than the members would have if there were no such limiting provisions.
Your purchase of Series B-1 Preferred Units is a long-term and illiquid investment. An investment in the Series B-1 Preferred Units may be long-term and illiquid. The offer and sale of the Series B-1 Preferred Units will not be registered under the Securities Act or any foreign or state securities laws by reason of exemptions from such registration. You are being required to represent in writing that you are purchasing the Series B-1 Preferred Units for your own account, for long-term investment, and not with a view towards resale or distribution. Accordingly, you must be willing and able to bear the economic risk of your investment for an indefinite period of time. It is likely that you will not be able to liquidate your investment, even in the event of a personal financial emergency.
The purchase price for the Series B-1 Preferred Units may not be indicative of value. The purchase price for the Series B-1 Preferred Units has been arbitrarily established by the Company. The purchase price may not be indicative of the Series B-1 Preferred Units’ actual value or the value of the Company. No assurance is or can be given that the Series B-1 Preferred Units could be sold for the purchase price or for any amount.
Tax implications to your decision to purchase Series B-1 Preferred Units. As more fully described below, the Company is currently classified as a partnership for U.S. federal income tax purposes. Consequently, (i) the Company itself will not be subject to U.S. federal income tax, and (ii), instead, the members will be required to report on their respective U.S. federal income tax returns, and pay U.S. federal income tax (and any applicable state and local taxes) on, their allocable share of the Company’s income, gain, loss, deductions and/or credits, regardless of whether, or the extent to which, the members actually receive any distributions of cash or other property from the Company. The income tax consequences of an investment in the Company may be complex and may not be the same for all taxpayers. ACCORDINGLY, EACH POTENTIAL INVESTOR MUST DEPEND SOLELY UPON THE ADVICE OF ITS OWN PROFESSIONAL ADVISORS WITH RESPECT TO ITS INVESTMENT IN THE COMPANY AND THE POTENTIAL TAX CONSEQUENCES THEREOF.
Investors will have to subscribe to multiple agreements in order to invest in this offering. In order to invest in this offering, investors agree to become a party to the Subscription Agreement, Investors’ Rights Agreement and LLC Agreement with the Company, and the Custodian and Voting Agreement with XX Investments, LLC available here https://wefunder.com/legal/custodian (the “Custodian and Voting Agreement”), under which XX Investments, LLC (the “Custodian”) will hold title of the securities for the benefit of the investor. The company has chosen to participate in this program offered by Wefunder as a means of simplifying communications with investors and to help facilitate future liquidity. Further, transferees will be required to become parties to the Custodian and Voting Agreement.
As part of the Custodian and Voting Agreement, Investors will grant the Custodian the right to vote their shares purchased in this offering. The Custodian will vote the shares as directed by a “Lead Investor” appointed by the company who is supposed to represent the interests of investors. This means that investors in this offering will not have the right to vote for the things like the election of directors or amendments to the company’s Articles of Incorporation. Instead, that right will be granted to the Custodian, and its affiliate, XX Team LLC.
You will not hold title to the purchased securities, instead, title will be held by the Custodian. Under the terms of the Custodian and Voting Agreement, title to the shares in this offering will be held by the Custodian for your benefit. By holding custody of the title to the shares it means that the Custodian will be required to engage in business practices that protect your interests as the beneficial owner of the shares. The shares are not protected by insurance, and it is unclear what protections are available if the Custodian enters into bankruptcy proceedings in which creditors assert rights to shares for which you are the beneficial owner.
No regulator has given their approval of the form of the arrangement with the Custodian. The company has relied on representations by Wefunder regarding the legality of the arrangement with the Custodian. If during this offering, or in subsequent securities offerings by the company for which require regulatory review, the arrangement with the Custodian is challenged, the Company may incur costs to unwind the arrangement by either transferring title to the securities from the Custodian to investors, or by engaging a different custodian.
Additional risks and uncertainties are not presently known. In addition to the risks specifically identified in these Risk Factors, the Company may face additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial but which may later impair the Company’s business, results of operations and financial condition.
This discussion is only a summary of material U.S. federal income tax consequences of this offering.
Our future success depends on the efforts of a small management team. The loss of services of the members of the management team may have an adverse effect on the company. There can be no assurance that we will be successful in attracting and retaining other personnel we require to successfully grow our business.
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