Risks Specific to Quila Maria's Tequila Ria, LLC
1. The distillation of tequila is highly regulated in Mexico, extensive permits and the Consejo Regulador del Tequila (CRT), the self-governing agency of the tequila industry, issues requisite approvals. The CRT may not approve the Company’s applications to build and operate a tequila distillery, nor approve the Company’s labels or quality of products. Additionally, mandatory fees by the CRT to operate a tequila distillery are required, and if not paid in a timely manner, may result in forced closure by the CRT.
2. The importation of tequila and margaritas into the United States is highly regulated and highly taxed. Once our tequila and margaritas are approved for bottling, and shipment into the United States, Federal Agencies FDA and DHS must approve the shipments and the Company meet guidelines required by such agencies. The Customs procedures are timely and expensive, and can cause extensive delays in our product being imported.
3. The Distribution of alcohol products in the United States is difficult and highly regulated. There are in excess of one-thousand tequila brands, all vying for distribution. Major suppliers of highly recognized brands have a tremendous advantage and can, and do, make it difficult for smaller brands to achieve distribution. Consequently, smaller brands must out market and out sell the larger competitors with tremendously smaller marketing budgets, an extremely difficult and risky task.
4. Retail shelf space is tight and difficult to obtain. Large chain retailers demand discounts to smaller and upstart brands, thereby shrinking margins. Smaller, independent retailers can be more difficult and demanding, requiring prices to match larger retailers, yet often demanding “free goods.” As an example, they may require a “free case of margaritas” if they purchase a case of tequila. Large distributors and major brands often use such marketing tactics by giving away “free goods,” as incentives to the retailer to purchase large volumes of a premium product.
5. The Company will target distribution of its tequila and margaritas by using smaller, independent distributors. Smaller distributors with limited brands must sell their portfolio at higher prices. This results in overall shelf price being much higher and therefore creating less opportunity to attract “value buyers,” those who purchase products with little concern for the products quality. Additionally, smaller distributors demand better terms regarding payment of inventory. Larger distributors usually accept thirty-day terms for payment while smaller distributors require sixty and ninety day terms. This can, and does, create cash flow problems for the Company causing the supply side of our business to slow.
6. The Company’s initial plan of distribution is in Florida and the Southeastern United States of Georgia, South Carolina, Tennessee, Louisiana and Arkansas. The Company’s tequila and margaritas will require the registration of the brands and get label approvals in each individual state. This is not particularly expensive, but slow, and could cause the Company’s distribution plans to be slower than we anticipate. As the Company expands into other states, each one will also require such approvals.
7. Initially, the Company will bottle Tequila Blue Head under contract with Tequilera Las Juntas in Amatitan, Mexico. Las Juntas currently produces several other brands of tequila, and the Company will be dependent upon Las Juntas to produce and bottle Tequila Blue Head in a timely manner. Distilling and bottling tequila is time consuming; consequently, the Company will be subject to having its orders fulfilled slower than needed, should Las Juntas be producing and bottling another brand.
8. Initially, the Company’s portfolio will include Tequila Blue Head and Quila Maria’s Tequila and Classic Lime Margaritas. Major liquor marketers and brands have several flavors of tequila, margaritas and other ready-to-drink products available creating a tremendous advantage on the retail shelf. Shelf space is difficult to obtain and a major brand with several flavors can, and does, demand that a retailer inventory all flavors, squeezing the small brand off the shelves or prime placement. The Company does plan to develop other flavors of ready-to-drink margaritas; however, development of flavors and getting the required approvals is time consuming and expensive and will require the Company to spend its resources.
The holders of the SAFEs may not have control over when the SAFEs are converted into preferred stock.
The SAFEs will be converted into shares of our preferred stock upon certain circumstances, with no action on the part of the holder. As a result, the SAFEs may be converted at times or under circumstances that are out of the control of the holders. In certain circumstances, such as the sale of the company, an initial public offering or dissolution or bankruptcy, holders may only have a right to receive cash to the extent available, rather than preferred stock or other securities. In addition, if the SAFEs are so converted, the holders will lose any rights and preferences of the SAFEs that are not included in the terms of our preferred stock.
We are under no obligation to convert the SAFEs into preferred stock. We may never receive a future equity financing or experience a liquidity event, in which case, the holders could be left holding the SAFEs indefinitely. Unlike convertible notes and other securities convertible into or exchangeable for preferred stock, the SAFEs do not have any “default” provisions permitting the holders to demand repayment. We have the discretion as to whether or not to enter into a transaction that causes the conversion of the SAFEs into preferred stock, and the holders have no right to demand such a conversion. Only in limited circumstances, such as a liquidity or dissolution event, may the holders demand payment and even then, such payment will be limited to the cash available to us to make such payments.