Item 1. Description of Business
Corporate Developments
Brisset Beer International, Inc. (the "Company") was incorporated under the laws of the State of Florida on May 11, 2010 under the name Benefit Solutions Outsourcing Corp. The Company was initially formed to offer small and medium-sized businesses services that reduced invoicing expenses, sped up receipt of monies, and allowed authorization and recovery of paper drafts.
On April 4, 2014, the Company entered into an asset purchase agreement (the "Asset Purchase Agreement") with Scenario A, a Quebec corporation ("Scenario A"), to purchase all of its assets relating to "Broken 7", a craft beer to be brewed in Montreal, Quebec, Canada, for a purchase price of $25,000. The Asset Purchase Agreement relates to the Broken 7 trademark and recipe only. No other assets were acquired. $12,500 was paid at closing and $12,500 was to be paid 60 business days after the closing date of April 7, 2014. By letter agreement dated July 16, 2014, the parties agreed to extend the date on which the second payment of $12,500 was due to August 15, 2014. The Company made the final installment of $12,500 to Scenario A on August 14, 2014.
Effective July 24, 2014, the Company changed its state of incorporation from Florida to Nevada and its name from "Buckeye Oil & Gas, Inc." to "Brisset Beer International, Inc." by the merger of Buckeye Oil & Gas, Inc. with and into its wholly-owned subsidiary, Brisset Beer International, Inc.
Until April 2014, the Company was engaged in the acquisition and exploration of oil and gas properties. Since its asset purchase in April 2014, the Company has abandoned its interests in its two oil and gas properties and is principally engaged in the development of a brewing, distribution and marketing of craft-brewed beer business in the province of Quebec, Canada. Our craft beer consists of a single brand known as Broken 7, which we distribute to private retail stores, grocery chains and on-premise accounts across Quebec, Canada.
On November 10, 2014, the Company entered into a Service Agreement with Sandberg International Limited to provide investor relations for the Company. For such services, Sandberg International receives $500 per month, and on November 10, 2014, was issued 125,000 shares of common stock of the Company, Class A warrants to purchase 125,000 shares of common stock exercisable at $0.15 per share and a Class B warrant to purchase 125,000 shares of common stock exercisable at $0.25 per share. The agreement shall continue until either party notifies the other that it desires to terminate the agreement on 30 days' written notice.
On December 2, 2014 Biere Brisset International Inc., a Canadian corporation wholly-owned subsidiary by Company ("BBII"), entered into a five-year Manufacturing and Distribution Agreement (the "Distribution Agreement") with 90127-2021 Quebec Inc., a Quebec company doing business as Breuvages Blue Spike ("Blue Spike") pursuant to which Blue Spike has the exclusive right to manufacture, distribute and sell BBII's Broken 7 beer in certain designated networks in the following Canadian provinces and U.S. states: Newfoundland, Prince-Edward Island, New Brunswick, Nova Scotia, Quebec, Ontario, Maine, New Hampshire, Vermont, New York, Massachusetts, Connecticut, Rhode Island, New Jersey, Pennsylvania, Ohio, Michigan, Illinois, Indiana, Kentucky, West Virginia, Virginia, Washington DC, Delaware, Maryland. The Company granted Blue Spike a right of first refusal to act as exclusive agent for the distribution and sale of its products in other new territories.
On April 1, 2016, BBII amended the Distribution agreement (the "Amendment") with Blue Spike to clarify certain of the business terms regarding the margins, pricing and distribution networks.
Subject to Blue Spike's approval, the Company may sell products manufactured by Blue Spike in the Company's own distribution network. Products sold within the Company's own distribution network are subject to higher margins for the Company. The Company is responsible, at its expense, for the marketing and promotion of Broken 7, and has agreed to invest 25% of the gross margin of its products for marketing and advertising.
The Company granted Blue Spike a right of first refusal if the Company sells or transfers all or a portion of its rights in its brands. If the Company is sold during the term of the agreement, the Company is obligated to pay Blue Spike 2.5% of the purchase price for every $250,000 of product sales, up to $5 million but not to exceed 50% of the sale price. The agreement also provides for various payment returns to Blue Spike if the Company is sold when the agreement is no longer in effect, depending on when and why the agreement is no longer in effect. The agreement will automatically renew for an additional five-year term unless either party notifies the other of its intention not to renew 180 days prior to the expiration of the initial term.
On March 1, 2015, BBII entered into a five-year manufacturing and distribution agreement (the "CBB Agreement") with La Compagnie de Biere Brisset, Inc. ("CBB"), a specialty brewer, to help bring to market and test new line extensions for beer brands owned by the Company. The CBB Agreement grants CBB the right to manufacture Broken 7 beer in accordance with certain minimum and production capacities set forth in the Agreement. Proceeds, if any, from the sale of BBI products will be retained by CBB as compensation for its services. Unless earlier terminated by BBII's bankruptcy, insolvency or sale of its business or assets or the gross misconduct or negligence of CBB, the Agreement will automatically renew for an additional five-year term unless either party notifies the other of its intention not to renew 180 days prior to the expiration of the initial term.
On April 1, 2016, BBII amended the manufacturing and distribution agreement (the "Amendment") with Blue Spike to clarify certain of the business terms regarding the margins, pricing and distribution networks.
The Distribution Agreement and the CBB Agreement were terminated on March 2, 2018.
Industry Background
Based on the most recent data available from the Government of Canada's Department of Agriculture and Agri-food Canada, Canadian brewers today hold an 89% share of the domestic beer market. In 2012, 242 establishments were operating in Canada with the majority in Ontario (90), British Columbia (68) and Quebec (49). The industry generated revenues of $4.9 billion, and employed 9,081 people. Sales of beer in Canada totaled 2.3 billion liters in 2013, with 2.0 billion liters representing Canadian beer. The beer industry is dominated by three major multinational companies who control approximately 90% of retail sales. Given the growing consumer interest in international beer selection, the industry is a net importer of beer, with imports amounting to $671.2 million in 2014 and exports of $215.4 million in the same year. The United States accounts for 96% of exports and the majority of imports come from the United States (25%), followed by the Netherlands (19%), Mexico, Belgium, and the United Kingdom. Between 2004 and 2012, sales of goods manufactured by the Canadian beer industry increased 11.6% from $4.4 billion to $4.9 billion. During the same period, exports of beer declined at an average annual rate of 4.1%, imports had an average annual growth rate of 6.8%. Imports as a percentage of the domestic market increased slightly from 8% in 2004, up to 11.4% in 2012. In 2012, direct employment returned to 2004 levels with just over 9,000 employees. In recent years the craft beer industry has experienced resurgence. Even as per capita beer consumption dropped, sales and consumption of craft beers have been on the rise
According to the 2015 Annual Statistical Bulletin released from Beer Canada, a voluntary trade association based in Ottawa, Ontario, in 2014 Canadians enjoyed over 22 million hectoliters (hL) of beer. Canadian beer accounts for 84% of this figure, totaling 18,944,275 hL, a decrease of 1.2% compared to 2013. Imported beer sales increased by 3.7% in 2014 to a total of 3,571,558 hL. Since 2009 the Canadian beer category has declined by 795,295 hL or 3.4%. The number of licensed breweries in Canada has risen almost 70% over the past five years to 520 operating in 2014. Over half of these breweries make their products in Ontario and Québec. For years the Canadian beer industry has held an impressive environmental record in terms of brewing plant operations and control of packaging. An average of 99% of beer bottles are returned in Canada. Increasing can sales show the container rose to a 51.1% share of the domestic packaged beer market in 2014. Draught sales grew slightly by 0.20% and bottle sales fell 3.8%. Total (domestic + imported) wine sales increased by 2.2% between 2013 and 2014. Coolers and spirit sales increased by 0.5% and 0.2% respectively. Consumer Price Index figures from Statistics Canada show Canada's overall inflation in 2014 rose by 2.0%. In the beverage alcohol category, beer and spirits prices rose while wine prices fell. Retail prices for beer and spirits increased 1.1% and wine prices decreased 0.2%. Domestic consumption of Canadian and imported beer in 2014 stood at 64.35 liters per person based on total population. At the provincial level, per capita consumption is highest in Newfoundland at 79.39 liters. Québec and Alberta have the second and third highest per capita consumption at 72.27 and 68.15 liters respectively.
According to the latest statistics from the Brewers Association in the U.S., craft beer sales volume increased 12.8% to 24.1 million barrels of beer in 2015 over 2014, reaching 12.2% of the total market share of beer sales. The craft beer market reached $22.3 billion, which represents dollar sales growth of 16% in 2015 over 2014. In terms of U.S. beer production volume, craft beer increased 13% in 2015 over 2014, and the number of craft breweries increased 18.1% to 4,225 in 2015 over 2014.
Small and independent American craft brewers contributed $55.7 billion to the U.S. economy in 2014. The figure is derived from the total impact of beer brewed by craft brewers as it moves through the three-tier system (breweries, wholesalers and retailers), as well as all non-beer products like food and merchandise that brewpub restaurants and brewery taprooms sell.
The craft beer industry in the U.S. also provided more than 424,000 jobs, with more than 115,000 jobs directly at breweries and brewpubs, including serving staff at brewpubs.
Business Strategy
We brew, market and sell a craft beer brand called Broken 7, which is brewed in Quebec, Canada. Craft beer is defined as a beer with a distinctive flavor, produced in small quantities and distributed in a particular region. Current Broken 7 product lineup includes Blonde Ale 500ml bottles, Blonde Ale 30L kegs, Blonde Ale 50L kegs, IPA 500ml bottles, IPA 30L kegs, IPA 50L kegs.
Community events to date include: Adidas Montreal, St. Patrick's Day Prohibition, St. Patrick's Day BierMarkt, Lancement Atelier Le Gymnase, BierMarkt Staff Party, Les Houblonneries, Broken 7 Takeover, Meat the Street, Exposition Jake Bannon Neon Stores & Broken 7, Portes Ouvertes Enterprises, Vernissage David Bicari, Brasserie Biere Brisset Spring Cleaning, Kick Off Party Les Princes, Tournois Les Princes, Surf Swap, Degustation chez Les Technologies Seedbox, 1er Juillet - Chez Dallaire & Broken 7.
Beer Festivals to date include: Mondial de la Biere, Festibere de Gatineau.
Broken 7 is the official beer of Ca Va Brasser for the 2016 season. Ca Va Brasser is a TV show which profiles microbreweries in Quebec and is aired on the French-language television network, V. As a cross promotion with Ca Va Brasser, Broken 7 created an exclusive, limited edition flavor of beer (Pale Ale) for sale in participating Metro stores across Quebec.
The central elements of our business strategy include:
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Develop great tasting beers with vintage labels inspired by Kölsch Pilsners and American-style India Pale Ales.
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Engage our contract brewer to produce, bottle, distribute, and label our Broken 7 products, which allows us to focus on sales and marketing.
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Target retail chains, grocery outlets, independent craft beer stores, and on-premise accounts.
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Implement an aggressive retail distribution program focused on approximately 1,500 stores across Quebec.
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Display and promote Broken 7 in retail chains that make our products accessible to consumers.
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Access independent craft beer stores and negotiate premium fridge shelf position to attract consumer attention.
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Activate the brand in on-premise market campaigns.
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Promote the brand through social media.
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Participate in Quebec's beer festivals to promote the brand and connect with the target consumer.
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Strategically price Broken 7 products at a premium level to give the retailers stronger margins to push and create promotions.
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Brand Overview
The naming of our flagship brand Broken 7 is based on a sports analogy with the number 7 representing the seventh member of a sports team. We market Broken 7 to consumers by using the strong connections between the brewing and sports industries.
Broken 7 Blonde Ale is an ale inspired by the Kölsch beers of Cologne, Germany. It uses Pilsner toasted wheat, carafoam malt, and Halertau hops. We believe it is an easy drinking craft beer packaged with a vintage label that appeals to consumers.
Broken 7 IPA is an India Pale Ale brewed in the American style. It uses Cascade, Chinook, and Citra hops, and Canadian Two Row and Crystal 75 malts. We believe that the result is a smooth and bitter IPA that is well-balanced, and full of character. Like the Blonde Ale, it is packaged with a vintage label that we believe appeals to consumers.
Operations
Brewing Facilities
We do not intend to have our own brewery. Our strategy is to hire contract brewers.
On December 2, 2014, the Company entered into a manufacturing and distribution agreement with Blue Spike, which grants Blue Spike the exclusive right to manufacture and act as its agent to distribute and sell its Broken 7 bottled beer and keg products in certain designated Canadian provinces and nineteen states in the U.S.
On March 1, 2015, the Company entered into a manufacturing and distribution agreement with CBB to help bring to market and test new beer recipes. Proceeds, if any, from the sale of our beers are retained by CBB as compensation for its services.
On April 1, 2016, BBII amended the manufacturing and distribution agreement to clarify several sections of the agreement, include new Broken 7 products, and include the updated BBII Margins for new Broken 7 products.
We believe that by using contract brewers to produce, bottle, distribute, and label Broken 7 products, we have been able to reach initial sales much earlier and with less initial capital investment than if we had built our own brewing plant. Hiring contract brewers has also allowed us to focus our efforts on sales and marketing of our brand.
The Distribution Agreement was terminated on March 2, 2018.
Packaging
We currently sell Broken 7 Blonde Ale and Broken 7 IPA in 500 milliliter bottles, 30-liter kegs, and 50-liter kegs. We are also testing new Broken 7 recipes in 50-liter kegs. In the future, we have plans to distribute Broken 7 products in 473-milliliter cans.
Quality Control
Our quality control panel meets at the time each brew is complete. The panel tastes each batch to ensure we deliver the best beer we can. The panel consists of three experienced brewers, our president and a representative of the contract brewer.
Ingredients and Raw Materials
Broken 7 Blonde Ale is an ale inspired by the Kölsch beers of Cologne Germany, and uses Pilsner toasted wheat, carafoam malt, and Halertau hops. Broken 7 IPA is an American-style India Pale Ale that uses Cascade, Chinook, and Citra hops and Canadian Two Row and Crystal 75 malts. The Company has contracted out services to a contract brewer who is responsible for acquiring the ingredients and raw materials for the two beers we sell. The Company has also contracted out services to another contract brewer who is responsible for acquiring the ingredients and raw materials for the beer recipes that we test.
Distribution
In the province of Quebec, the distribution system is direct from the brewery to the retailer. With limited exceptions, all brewers in the United States are required to sell their beers to independent wholesalers, who then sell the beers to retailers. The Company contracts out services to Blue Spike for brewing, labeling and distribution of our bottled products and kegs. Blue Spike delivers beer to vendors on behalf of the Company, collects the proceeds from sale, and then pays the Company the respective commission. Broken 7 is currently sold in Quebec, Canada.
Sales and Marketing
We have five main marketing programs for Broken 7.
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Online.
We believe that our online communications program increases Broken 7's visibility to consumers. The purpose of the online communication program is to direct consumers to the Broken 7 website. The address of our website is www.brissetbeer.com. The website includes a store locator that informs consumers of the closest retailer that carries Broken 7. The web site also hosts an online shop that offers t-shirts, hats, glasses and many other branded materials. We also use social media to communicate information, events, pictures, videos and other brand relevant information to consumers.
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Events.
We promote Broken 7 at on-premise events such as "happy hour" where consumers and on-premise staff will have the opportunity to learn about and sample Broken 7 products. In addition, we participate in Quebec's major beer festivals in order to directly connect with consumers to build brand awareness and consumer relationships.
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Ambassador Program.
We have established relationships with key influencers in the province of Quebec to represent the spirit of the brand. Key influencers are individuals who attend industry events and promote the Broken 7 brand at on-premise locations.
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In-store promotion.
The Company has contracted out services to a contract brewer who is responsible for brewing, bottling, labelling and distributing Broken 7 bottled products and kegs. With the help of our contract brewer we distribute Broken 7 in retail stores, in Quebec, Canada. Such stores may have periodic promotions such as in-store displays, contest promotions, and price incentives.
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Test product promotion.
The Company has contracted out services to a contract brewer to help bring to market and test new recipes for Broken 7 in 50-liter kegs. With the help of our contract brewer we promote and test new recipes with our consumers to evaluate drinker interest.
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Seasonality
Our sales generally reflect a degree of seasonality, with the first and fourth quarters exhibiting low sales levels compared to the second and third quarters.
Competition
We compete in the craft brewing market as well as in the much larger alcoholic beverage market, which encompasses domestic and imported beers, flavored alcohol beverages, spirits, wine and ciders.
The craft beer segment is increasingly competitive due to the proliferation of small craft brewers, including contract brewers, and the large number of products offered by such brewers. Craft brewers have also encountered more competition as their peers expand distribution. Competition also varies by regional market. Depending on the local market preferences and distribution, we expect to encounter strong competition from microbreweries, regional specialty brewers and several national craft brewers that include Sleeman, Unibroue, McAuslan and Brasseurs du Nord. Because of the large number of participants and number of different products offered in this segment, the competition for packaged product placements and especially for draft beer placements has intensified. Also, many brewers will have greater financial and other resources than we have. We believe our competitive advantages include attractive labeling and bottle design, social media communication, and promotional events where samples of Broken 7 are made available.
We also compete against imported brands, such as Heineken, Corona Extra and Guinness which have significantly greater financial resources than we have. Although imported beers currently account for a greater share of the Canadian and U.S. beer market than craft beers, we believe that craft brewers possess certain competitive advantages over some importers, including lower transportation costs, no importation costs, proximity to and familiarity with local consumers, product freshness, eligibility for lower federal excise taxes and absence of currency fluctuations.
In response to the growth of the craft beer segment, many domestic national brewers have introduced fuller-flavored beers, including well-funded significant product launches in the wheat category. While these product offerings are intended to compete with craft beers, many of them are brewed according to methods used by these brewers in their other product offerings. The major national brewers, Molson Coors, Labatt, and Sleeman Breweries Ltd. have significantly greater financial resources than us and have access to a greater array of advertising and marketing tools to create product awareness. Although increased participation by national brewers increases competition for market share and can heighten price sensitivity within the craft beer segment, we believe that their participation may tend to increase advertising, distribution and consumer education and awareness of craft beers, and thus may ultimately contribute to further growth of this industry segment.
In the past several years, many major distilled spirits producers and national brewers have introduced flavored alcohol beverages in the higher-priced end of the malt beverage industry such as Smirnoff Ice and Mike's Hard Lemonade. We believe sales of these products, along with strong growth in the imported and craft beer segments of the malt beverage industry, contributed to an increase in the overall Canada and U.S. alcohol market. We believe that these products are particularly popular in regions and markets where we hope to sell our products.
We also believe that the competitive environment in Canada and the U.S. is such that large domestic brewers are trying to grow market share by purchasing small craft breweries.
Regulation
Any craft brewed beer that we market and sell in Canada will be subject to government regulations in Canada.
Food and Drugs Act
Health Canada is responsible for establishing standards for the safety and nutritional quality of all foods sold in Canada. The department exercises this mandate under the authority of the Food and Drugs Act and pursues its regulatory mandate under the Food and Drug Regulations.
All health and safety standards under the
Food and Drug Regulations
are enforced by the Canadian Food Inspection Agency ("CFIA"). The CFIA is also responsible for the administration of non-health and safety regulations concerning food packaging, labeling and advertising.
The
Food and Drug Regulations
set out conditions regarding health, quality, composition and labeling requirements that would apply to breweries just as they would to other food and beverage manufacturers so that consumers will have confidence in the safety of the products they purchase.
The CFIA and the provincial liquor boards work together to ensure that alcoholic beverages, including beer, conform to Canadian safety standards (for alcohol content, toxins, etc.) under the
Food and Drugs Act
before being approved for sale in Canada.
Consumer Packaging and Labelling Act
The Consumer Packaging and Labelling Act, also enforced by the CFIA, requires that packaged foods either imported or made in Canada, must not bear any false or misleading information regarding their origin, quality, performance, net weight or quantity.
Mandatory Nutrition Labelling
On December 12, 2007, nutrition labelling became mandatory on most pre-packaged products. Exemptions (including beverages with an alcohol content of more than 0.5%) can be found in section [B.01.401(2)] of the
Food And Drug Regulations
. Products lose their exemption status if a health claim or nutrient content claim is made.
Agreement on Internal Trade
The Agreement on Internal Trade (under Chapter 10 - Alcoholic Beverages) has laid out a framework for non-discriminatory treatment of alcoholic beverages which has resulted in a number of inter-provincial trade barriers being addressed and efforts to avoid the creation of new barriers.
Importation of Intoxicating Liquors Act
Along with federal regulation, Canadian breweries are regulated provincially. This provincial authority stems from a federal statute, the Importation of Intoxicating Liquors Act, which requires that all liquor (including beer) imported into Canada be brought in through a provincial or territorial liquor board located within each province and territory in Canada. The provincial and territorial governments are also responsible for regulating and controlling the sale of liquor within their respective jurisdictions. Provincial and territorial governments, through their liquor control acts, issue licenses to brew or sell beer in their jurisdictions. Applications are available through provincial or territorial liquor control boards.
The provincial and territorial liquor boards collect federal and provincial duties and taxes on alcohol products, and then add their own mark-up prior to sale of the product. Advertising and marketing of beer are also closely controlled. However, these regulations vary between provinces and territories.
Most provinces in Canada have established minimum prices for all alcoholic beverages, including imports, to prevent the sale of alcohol at prices that would encourage over-consumption.
Excise Act
Taxes comprise both a federal excise duty, which is a federal levy imposed at the production stage on domestically-produced products such as spirits, beer and tobacco, and provincial ad valorem and volume taxes. These taxes and duties represent the single largest cost category to a brewing operation. Provincial sales tax and the federal goods and services tax are added at retail.
The federal excise tax system for alcoholic beverages presently in effect in Canada imposes duties on beer produced in Canada when it is shipped from the brewery to provincial liquor board warehouses or industry-owned stores. The excise duty on imported beer is calculated from the point where beer is imported and received into liquor board 'bonded' warehouses, but does not become due until the beer is shipped to the point of retail sale. This imposition point eliminates competitive distortions between domestic and imported beer, and between beer and other alcoholic beverages.
In Quebec, under the regulatory agency RACJ (regie d'alcool des courses et des jeux), a brewer's license includes the right to warehouse and distribute beer and to sell directly to licensed retailers such as on-premise accounts, retail and grocery chains.
We have a contract brewing agreement with a contract brewer. The contract brewers assume the responsibility to abide by all national and regional regulations. Our management works with the contract brewer to ensure we are in compliance with all regulations.
Intellectual Property
We have obtained Canadian trademark registration on our flagship brand Broken 7. We hope to obtain trademark registration for Broken 7 in other countries in the future.
We believe that our Broken 7 brand has substantial value and is an important factor in the marketing of our products. We are not currently aware of any infringing uses that will affect the development of our business or any prior claim to the trademarks that would prevent us from using our trademarks in our business.
Employees
We currently have two employees, Stephane Pilon, who is a full-time employee and one other, full-time promotional representative. Our other officer and director provides planning and organizational services for us on a part time basis.
Subsidiaries
We have two wholly-owned subsidiaries: Buckeye Oil & Gas (Canada), Inc., incorporated in the province of Alberta, Canada and Biere Brisset International, Inc., incorporated in the province of Quebec, Canada.
Subsequent Events
On March 2, 2018, BBII and Blue Spike entered into a Mutual Discharge Agreement (the "Termination Agreement"), pursuant to which the parties mutually agreed to terminate their Distribution Agreement, dated December 2, 2014, and amended on April 1, 2016 (the "Distribution Agreement"). The effective date of the Termination Agreement was March 2, 2018.
The parties chose to terminate the Distribution Agreement due to the Company's lack of sufficient sales Broken 7.
Pursuant to the Termination Agreement, the Company paid Blue Spike an aggregate of $5,979, including Blue Spike's outstanding invoices aggregating $3,700, sales commissions from September to December 2017 and applicable taxes.
There were no material early termination penalties incurred by the Company or BBII in connection with the termination of the Distribution Agreement.
Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. You should carefully consider the following factors and other information in this prospectus before deciding to invest in our company. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth would likely suffer. As a result, you could lose all or part of your investment.
Risk Factors Relating to Our Company
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Our independent auditor has issued a going concern opinion after auditing our May 31, 2017 financial statements. Our ability to continue is dependent on our ability to raise additional capital and our operations could be curtailed if we are unable to obtain required additional funding when needed.
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At May 31, 2017, we had only $1,885 in cash on hand, a net loss of $493,405 and a stockholders' deficit of $1,981,186. We will be required to expend substantial amounts of working capital in order to market, distribute and sell our Broken 7 brand of craft beer. Our operations were funded entirely from capital raised from our private offering of securities from May 2010 through May 2017.
Our current operations have been funded entirely from capital raised from our private offering of securities from February 2014 through December 2015, as well as additional funding received in 2017 through the issuance of convertible notes and stock issuances. We are entirely dependent on our ability to attract and receive additional funding from either the sale of securities or outside sources such as private investment or a strategic partner. We currently have no firm agreements or arrangements with respect to any such financing and there can be no assurance that any needed funds will be available to us on acceptable terms or at all. The inability to obtain sufficient funding of our operations in the future will restrict our ability to grow and reduce our ability to continue to conduct business operations. Our failure to raise additional funds will adversely affect our business operations, and may require us to suspend our operations, which in turn may result in a loss to the purchasers of our common stock. If we are unable to obtain necessary financing, we will likely be required to curtail our development plans which could cause us to become dormant. Any additional equity financing may involve substantial dilution to our then existing stockholders.
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We are an early stage company with limited operating history in craft brewing and to date we have focused primarily on establishing our operations, all of which raises substantial doubt as to our ability to successfully develop profitable business operations and makes an investment in our common shares very risky.
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We are an early stage company and we have produced and sold limited quantities of craft beer from our current operations. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a business in the craft brewing industry. We began generating revenues from operations in September 2014 and have been focused on start-up and fund raising activities. Since we have generated limited revenues, we will have to raise additional capital to fund our operations for the next twelve months, which we may do through loans from existing shareholders, the sale of our equity securities or a strategic arrangement with a third party in order to continue our business operations. However, we currently do not have any agreements with potential lenders or strategic arrangements in place. There is nothing at this time on which to base an assumption that our business operations will prove to be successful or that we will ever be able to operate profitably. Our future operating results will depend on many factors, including:
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our ability to raise adequate working capital;
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success of our production, sales and marketing efforts;
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demand for our product;
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the level of our competition;
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our ability to attract and maintain key management and employees; and
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our ability to efficiently produce, distribute and sell sufficient quantities of our beer to obtain profitable operations while maintaining quality and controlling costs.
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To achieve profitable operations, we must, alone or with others, successfully execute on the factors stated above. If we are not successful in executing any of the above stated factors, our business will not be profitable and may lose revenue, which makes our common stock a less attractive investment and may harm the trading of our common stock, if a market ever develops.
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We have only generated limited revenues to date. Unless and until our craft beer brewing, distribution and sales program is successful in achieving profitable operations, we will need to raise a substantial amount of additional capital in order to fund our operations for the next twelve months and in order to execute our business plan. If the prospects for our business plan are not favorable or the capital markets are tight, we would not be able to raise the necessary capital and we will not be able to execute our business plan, which would likely cause shares of our common stock to become worthless.
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As of May 31, 2017, our cash on hand was $1,885.
Our current operations have been funded entirely from capital raised from our private offering of securities from February 2014 through December 2015, as well as additional funding received in 2017 through the issuance of convertible notes and stock issuances.
We will require additional funds to achieve our current business strategy and our inability to obtain additional financing will interfere with our ability to develop our business. Current cash on hand is insufficient to fund all of our anticipated operating needs for the next twelve months. As we have not yet generated enough revenues to successfully achieve profitable operations, we will require substantial additional capital to fund our operations for the next twelve months and in order to pursue our business plan. Because we currently generate limited cash flow from operations we need to raise additional capital, which may be in the form of loans from current shareholders and/or from public and private equity offerings. Our ability to access capital will depend on our success in implementing our business plan. It will also be dependent upon the status of the capital markets at the time such capital is sought. Any such financing may not be on favorable terms and may be dilutive to current shareholders. Should sufficient capital not be available, the development of our business plan could be delayed and, accordingly, the implementation of our business strategy would be adversely affected. In such event it would not be likely that investors would obtain a profitable return on their investments or a return of their investments at all.
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We are heavily dependent on contracted third parties. The inability to identify and obtain and maintain the services of third party contractors would harm our ability to execute our business plan and continue our operations until we found a suitable replacement.
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We do not have our own brewing facilities. We rely on third parties to contract brew and distribute our craft beer and to test new craft beer recipes. We are dependent on the continued services of third parties to brew our beer. Our success is also heavily dependent on our ability to attract and retain experienced sales and marketing staff. If we were unable to obtain and maintain the services of third party contractors to brew and distribute our craft beer, our ability to execute our business plan would be harmed and we may be forced to cease operations until such time as we could hire suitable contractors.
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Manufacturing prices of Broken 7 bottled products and kegs can increase significantly which could erode operating margins, and adversely impact financial results.
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The cost of producing Broken 7 bottled products and kegs by our contract brewer can increase significantly based on a number of factors which can include but are not limited to fermentation time, daily capacity, minimum orders and the equipment used by Blue Spike for the manufacturing of products, as well as the costs of raw materials and ingredients used for the brewing and bottling process. Our manufacturing and distribution agreement states that an increase in the cost of any raw material will be effective on the Company's products manufactured by Blue Spike from the date of implementation of the price change by Blue Spike's suppliers. This can result in a sudden increase in costs which could erode operating margins and adversely impact our financial results.
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Our third party contract brewer also produces beer for our competitors, which leads to conflict of interest.
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We do not have exclusivity with the brewer with which we contract and such brewer also produces beer for our competitors. As a result, there may be times in the future where our current or future contract brewers elect to brew our competitors' beer rather than ours. This situation may arise if our contract brewers are confronted with capacity issues. While we intend on monitoring our contract brewers' ability to fulfill their obligations to us we cannot guarantee that conflicts will not arise in the future. If such a conflict resulted in our contract brewers not supplying us with sufficient volume of our product to meet our sales obligations we would be faced with a number of operational tasks, including establishing and maintaining our own brewing facilities or sourcing another contract brewer. Such an undertaking would require significant effort and substantial time to complete, during which the distribution of our products could be impaired.
7.
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If we are unable to gauge trends and react to changing consumer preferences in a timely manner, our sales and market share will decrease.
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The costs and management attention involved in maintaining an innovative brand portfolio are expected to be significant. If we have not gauged consumer preferences correctly, or are unable to maintain consistently high quality beers as we develop new brands, our overall brand image may be damaged. If this were to occur, our future sales, results of operations and cash flows would be adversely affected.
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Increased competition could adversely affect sales and results of operations.
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The craft brewing market is highly competitive, as well as the much larger specialty beer category, which includes the imported beer segment and fuller-flavored beers offered by major national brewers. We will also face competition from producers of wine, spirits and flavored alcohol beverages offered by the larger spirit producers and national brewers. Increased competition could adversely affect sales and results of operations.
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Our business is sensitive to reductions in discretionary consumer spending.
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Consumer demand for luxury or perceived luxury goods, including craft beer, can be sensitive to downturns in the economy and the corresponding impact on discretionary spending. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general economic conditions, job losses and the resultant rising unemployment rate, perceived or actual disposable consumer income and wealth, and changes in consumer confidence in the economy, could significantly reduce customer demand for craft beer. Furthermore, our consumers may choose to replace our products with the fuller-flavored national brands or other more affordable, although we believe, lower quality, alternatives available in the market. Any such decline in consumption of products we may offer in the future would likely have a significant negative impact on our operating results.
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Changes in consumer preferences or public attitudes about alcohol could decrease demand for our products.
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If consumers were unwilling to accept our products or if general consumer trends caused a decrease in the demand for beer, including craft beer, it would adversely impact our sales and results of operations. There is no assurance that the craft brewing segment will continue to experience growth in future periods. If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could draw consumers away from the beer industry in general and our products specifically and have an adverse effect on our sales and results of operations. Further, the alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over alcohol-related social problems, including drunk driving, underage drinking and health consequences from the misuse of alcohol. As an outgrowth of these concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed or that there may be renewed efforts to impose, at either the federal or state level, increased excise or other taxes on beer sold in Canada and the United States. If beer in general were to fall out of favor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental regulation, it would likely have a significant adverse impact on our financial condition, operating results and cash flows.
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We are subject to governmental regulations affecting our business.
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Provincial and local laws and regulations govern the production and distribution of beer, including permitting, licensing, trade practices, labeling, advertising and marketing, distributor relationships and various other matters. A variety of provincial and local governmental authorities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Certain actions undertaken by us may cause governmental authorities to revoke its license or permit, restricting our ability to conduct business. One or more regulatory authorities could determine that we have not complied with applicable licensing or permitting regulations or have not maintained the approvals necessary for us to conduct business within our jurisdiction. If operations were unavailable or unduly delayed, or if any permits or licenses that we may obtain were to be revoked, our ability to conduct business may be disrupted, which would have a material adverse effect on our financial condition, results of operations and cash flows.
12.
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The craft beer business is seasonal in nature, and we are likely to experience fluctuations in results of operations and financial condition.
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Sales of craft beer products are somewhat seasonal, with the first and fourth quarters historically being lower and the rest of the year generating stronger sales. Sales volume may also be affected by weather conditions and selling days within a particular period. If an adverse event such as a regional economic downturn or poor weather conditions should occur during the second and third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonal business.
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Changes in laws regarding distribution arrangements may adversely impact our operations.
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Governmental authorities may enact legislation that significantly alters the competitive environment for the beer distribution industry. Any such change in the competitive environment could have an adverse effect on our future sales and results of operations.
14.
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We may experience a shortage of kegs necessary to test recipes and distribute draft beer.
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We test recipes and distribute our draft beer in kegs that are owned by us as well as leased from a third-party vendor. During periods when we experience stronger sales, we may need to rely more on leased kegs from third-party vendors to address the additional demand. If shipments of draft beer increase, we may experience a shortage of available kegs to fill sales orders. If we cannot meet our keg requirements through either lease or purchase, we may be required to delay some draft shipments. Such delays could have an adverse impact on sales and our relationships with wholesalers.
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We are currently focused on the brewing, selling and marketing of a single brand of craft beer. Our advertising and promotional investments may not be effective.
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Our craft beer efforts are currently focused on a single brand of craft beer, Broken 7. The brewing, distributing and selling of a new craft beer is extremely risky. We can provide investors with no assurance that Broken 7 will ever establish itself in the marketplace nor can we provide any assurance that we will ever establish profitable operations. Few brands of craft beer are ever ultimately profitable and seldom result in successful brands. We have made, and expect to continue to make, significant advertising and promotional expenditures to enhance our brand. These expenditures may not result in higher sales volume and may adversely affect the Company's results of operations in a particular quarter or even for the full year. Furthermore, we can provide investors no guarantee that these expenditures will be effective in building brand equity or growing long-term sales. If our advertising and promotional investments fail, any money spent on brand development would be lost, which may have a material adverse effect on the Company's results of operations, cash flows and financial position.
16.
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We may fail in our efforts to develop, test, and bring to market new line extensions for Broken 7.
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We currently test brew different beer recipes to evaluate drinker interest through our manufacturing and distribution agreement with CBB. We can provide investors with no assurance that these recipes will appeal to consumers nor can we provide assurance that they will ever be produced commercially. Very few recipes of craft beer ever ultimately reach the commercial development stage. If we fail in our efforts to develop, test, and bring to market new line extensions for Broken 7, any money spent on development would be lost, which may have a material adverse effect on the Company's results of operations, cash flows and financial position.
17.
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We may not be able to compete with current and potential craft beer companies, most of whom have greater resources and experience than we do in developing craft beer brands. As a result, we may fail in our ability to develop our business.
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The craft beer business is intensely competitive, highly fragmented and subject to rapid change. We may be unable to compete successfully with established or new beer companies which may have significantly greater personnel, financial, managerial, and technical resources than we do. This competition from other companies with greater resources and reputations may result in our failure to establish, maintain or expand our business.
18.
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Both of our officers and directors own and operate competing craft beer businesses. Their other activities may involve a conflict of interest with regard to business opportunities for our company.
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Our officers and directors are not required to work exclusively for us. In fact, both of our officers and directors own and operate other craft beer companies. Therefore, it is possible that a conflict of interest with regard to them presenting business opportunities to our Company may occur. Also, due to the competitive nature of the craft beer business, the potential exists for conflicts of interest to occur from time to time that may adversely affect our business interests. Both of our officers and directors may have a conflict of interest in helping us identify and access to markets, personnel, investments or other business opportunities that the other companies they own may have an interest. As a result, a business opportunity that may benefit our business may not be brought to our attention as that opportunity may be presented to one of their other companies.
19.
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Since our officers and directors work part-time for other companies, their other activities for those other companies may involve a conflict of interest with regard to the amount of time they dedicate to our business.
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Our officers and directors are not required to work exclusively for us and do not devote all of their time to our operations. Therefore, it is possible that a conflict of interest with regard to their time may arise based on their work for such other companies. Their other activities may prevent them from devoting time to our operations, which could slow our operations and may reduce our financial results because of the slowdown in operations. It is expected our principal executive officer will devote approximately thirty hours per week to our operations on an ongoing basis, and when required will devote additional hours.
20.
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Because we have not yet adopted a code of ethics, our stockholders may have limited protections against wrongdoing and unethical conduct by our senior officers.
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We have not as yet adopted a code of ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions as required by the Sarbanes-Oxley Act of 2002 due to our small size and limited resources.
A "code of ethics" is a written standard that are reasonably designed to deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
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full, fair, accurate, timely and understandable disclosure in reports and documents that the public company files with, or submits to, the SEC and in other public communications made by the company;
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compliance with applicable governmental laws, rules and regulations;
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prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
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accountability for adherence to the code.
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The absence of such code of ethics may result in less protection against unethical conduct, conflicts of interest, compliance, reporting and similar matters that could adversely affect our business and operations.
21.
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Our principal shareholders own a controlling interest in our voting stock and investors will not have any voice in our management, which could result in decisions adverse to our general shareholders.
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Our principal shareholders who are also our only officers and directors beneficially own collectively approximately 89% of our outstanding common stock. As a result, these shareholders will have the ability to control substantially all matters submitted to our stockholders for approval including:
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election of our board of directors;
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removal of any of our directors;
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amendment of our Articles of Incorporation or bylaws; and
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adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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As a result of their ownership, our principal shareholders are able to influence all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. In addition, it is possible for our principal shareholders may sell or otherwise dispose of all or a part of their shareholdings which could affect the market price of our common stock if the marketplace does not orderly adjust to the increase in shares in the market and the value of your investment in the Company may decrease. The controlling shareholders' stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
22.
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We have two employees, our principal executive officer, who will work approximately thirty hours per week on our business and a full-time promotional representative. Consequently, we may not be able to monitor our operations and respond to matters when they arise in a prompt or timely fashion. Until we have additional capital or generate more than limited revenue, we will have to rely on consultants and service providers, which will increase our expenses and increase our losses.
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We have two employees, our principal executive officer, who will work on our business thirty hours per week and a full-time promotional representative. We have a limited ability to monitor our operations, as well as a limited ability to respond to inquiries from third parties, such as regulatory authorities or potential business partners. Though we may rely on third party service providers, such as accountants and lawyers, to address some of our matters, until we raise additional capital or generate more than limited revenue, we will have to rely on consultants and third party service providers to monitor our operations, which will increase our expenses and may have a negative effect on our results of operations.
RISK FACTORS RELATING TO OUR COMMON STOCK
23.
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We may, in the future, issue additional common stock, which would reduce investors' percent of ownership and may dilute our share value.
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Our Articles of Incorporation authorizes the issuance of 500,000,000 shares of common stock, par value $0.0001 per share, of which 9,863,000 shares are currently issued and outstanding. The future issuance of common stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse effect on any trading market for our common stock.
24.
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Our principal shareholders may decide to sell their shares in the Company, reducing the price you may receive upon a sale.
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Our principal shareholders, who are also our only officers and directors, beneficially own approximately 89% of our outstanding common stock. If and when they sell their shares in the market, such sales by our principal shareholders within a short period of time could adversely affect the market price of our common stock if the marketplace does not orderly adjust to the increase in the number of shares in the market. This will result in a decrease in the value of your investment in the Company.
25.
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Our common stock is subject to the "penny stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
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The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: (i) obtain financial information and investment experience objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
26.
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Because we do not intend to pay any cash dividends on our shares of common stock, our stockholders will not be able to receive a return on their shares unless they sell them.
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We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them at a price higher than that which they initially paid for such shares.
27.
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Currently there is no public market for our securities, and there can be no assurances that any public market will ever develop and if a market develops it is likely to be subject to significant price fluctuations.
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There has not been any established trading market for our common stock, and there is currently no public market whatsoever for our securities. There can be no assurances as to whether:
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any market for our shares will develop;
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the prices at which our common stock will trade; or
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the extent to which investor interest in us will lead to the development of an active, liquid trading market. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors.
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In addition, our common stock is unlikely to be followed by any market analysts, and there may be few institutions acting as market makers for our common stock. Either of these factors could adversely affect the liquidity and trading price of our common stock. Prices for our common stock will be determined in the marketplace, are likely to fluctuate significantly and may be influenced by many factors, including the depth and liquidity of the market for shares of our common stock, developments affecting our business, including the impact of the factors referred to elsewhere in these Risk Factors, investor perception of our company and general economic and market conditions. No assurances can be given that an orderly or liquid market will ever develop for the shares of our common stock.
28.
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If a market develops for our shares, sales of our shares relying upon Rule 144 may depress prices in that market by a material amount.
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The majority of the outstanding shares of our common stock held by present stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted shares, these shares may be resold only pursuant to an effective registration statement, such as this one (for the shares registered hereunder) or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. On November 15, 2007, the SEC adopted changes to Rule 144, which, shortened the holding period for sales by non-affiliates to six months (subject to extension under certain circumstances) and removed the volume limitations for such persons. The changes became effective in February 2008. Rule 144 provides in essence that an affiliate who has held restricted securities for a prescribed period may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed 1% of a company's outstanding common stock. The alternative average weekly trading volume during the four calendar weeks prior to the sale is not available to our shareholders being that the Over-the-Counter Bulletin Board is not an "automated quotation system" and, accordingly, market based volume limitations are not available for securities quoted only over the Over-The-Counter Bulletin Board. As a result of the revisions to Rule 144 discussed above, there is no limit on the amount of restricted securities that may be sold by a non-affiliate (i.e., a stockholder who has not been an officer, director or control person for at least 90 consecutive days) after the restricted securities have been held by the owner for a period of six months, if we have filed our required reports. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to registration of shares of common stock of present stockholders, may have a depressive effect upon the price of our common stock in any market that may develop.
29.
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We may be exposed to potential risks resulting from requirements under Section 404 of the Sarbanes-Oxley Act of 2002.
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As a public company, we are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting We expect to incur significant continuing costs, including accounting fees and staffing costs, in order to maintain compliance with the internal control requirements of the Sarbanes-Oxley Act of 2002. Development of our business will necessitate ongoing changes to our internal control systems, processes and information systems. Currently, we have no employees, and two officers and directors. As we engage in the development of our business, hire employees and consultants, our current design for internal control over financial reporting may not be sufficient to enable management to determine that our internal controls are effective for any period, or on an ongoing basis. Accordingly, as we develop our business, such development and growth will necessitate changes to our internal control systems, processes and information systems, all of which will require additional costs and expenses.
In the future, if we fail to complete the annual Section 404 evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls. In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
30.
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Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protections against interested director transactions, conflicts of interest and similar matters.
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The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities which are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than necessary, we have not yet adopted these measures.
None of our directors are independent and we do not currently have audit or compensation committees. As a result, our directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
31.
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The costs to meet our reporting and other requirements as a public company subject to the Exchange Act of 1934 are substantial and may result in us having insufficient funds to expand our business or even to meet routine business obligations.
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As a public company subject to the reporting requirements of the Exchange Act of 1934, we incur ongoing expenses associated with professional fees including for accounting, legal and other expenses related to annual and quarterly reports and proxy statements and other SEC filings. We estimate that these costs will range up to $141,000 per year for the next few years and will be higher if our business activity increases. As a result, we may not have sufficient funds to grow our operations.