the suit is somewhat "old" news if anyone was digging for info on the company and understands any of the systems like "pacer".
first - there is simply no such thing as a "slam dunk" in our court system and if you believe that - you have NEVER, EVER, EVER been in a courtroom in this country. i have personally watched judges brick an uncontested lay up and then proceed to brick the ensuing, uncontested put back. there is simply no such thing. that being said - it appears to be a very solid case.
second - durand - i dont know if you have been simply jaded by the financials/public filings and are hell bent on relying strictly on the tangibles and not the intangibles - or if you have an agenda. regardless, QA/QC is expected and implied under third party agreements such as this. when an issue is found, the third party is contacted, product quarantined, problems found, corrective actions made, and procedures changed to ensure the same issue does not happen again. the way i have read the filings, HJOE made several attempts to get this corrected and the third party falsely assured them the issues were corrected. HJOE can not be faulted for these misrepresentations. once they issued continued and they confirmed the company was indeed, misrepresenting - they then changed course. with less than 5 employees - are they supposed to fly half way around the world to inspect every pallet...?
this case also sheds considerable light on where the wheels fell off in 2013. with one packing house screwing up the majority of the fills in a short time period - the limited capital they had was tied up in bad inventory and without revenues from that product to fund existing orders - they ended up coming to a grinding halt. i posted several times that there was a disconnect between the brand and what i was hearing from retailers/distributors and what we were seeing in the numbers. now we know where the issue ended up.
as far as year end numbers - of course they ended up with little to no inventory year end 2013. all of their capital was tied up in unsaleable product and all of the product/inventory they did have was being kept for the larger contractual obligations (such as 7/11). it also provides a little more credence to why they were taking the bad financing they did. they had zero leverage throughout this but would not be able to discuss anything in terms of the case/reasons to explain their financial position.
i tend to go by the numbers/filings as the primary basis for any of my investments but i certainly look at the intangibles as well in small companies/growth companies. here i consider:
1. mgmt/founders were very naive when it came to running a public company and got taken advantage of when it came to financing. while they accepted poor terms and i critized them for it - it now seems reasonable that they never considered they would become detrimental. if they continued supplying product and increasing revenues at the rate they were in 2012 and based on increased demand - they would have been self funding (which i posted about in early 2013).
2. there has been ZERO inside selling from current mgmt/founders since they went public.
3. mgmt is paid very modestly ($100K for founders adamson and jaynes) and $180K for Veal.
4. if anyone is reading the filings closely - you will notice a substantial difference sicne Veal has taken over in the scope and numbers in the filings. he is tweaking these to long term investors by providing more expansive numbers (for example - margin information on product)
5. jaynes has foregone a majority of his salary in the form of a no interest loan from the company
6. LTCG and HJOEs are both actively promoting the June launch. while HJOE would have a vested interest even if they were on the verge of failure - why would LTCG?
if the founders are/were running a scam - where are they profiting from it? it certainly isnt from selling stock and if they are only working for $100K a year and doing that kind of traveling to do it - more power to them. i certainly wouldnt.
when looking at the financials, the timelines, the intangibles and then putting those in context with being virtually shut down by their only supplier - the failures in 2013 on the heals of a $1MM revenue 2012 make more sense. it wasnt a failure of the brand. the other lawsuits by the printer becomes obvious as well. they had no money to pay them as it was tied up in bad inventory and loan/interest payments.
when you consider the systematic chain of events the supply chain interruption caused - it becomes objective and explainable. they took risky money on the assumption that they would have sales to cover the loans before they became toxic/dilutive. the revenues stopped as the product wasnt able to be resold. they tied up capital redoing product which again was defective. now their entire business plan is thwarted as they have to start robbing peter to pay paul to stay afloat instead of being self funded through aggressively growing revenues.
is that a slam dunk on the progression of events? absolutely not just in the same way it isnt an open and shut case against the third party. however, it certainly fills in the gap/disconnect between what i was gathering on the street and what i was reading in the financials.
while this company remains a very high risk, it has been dramatically reduced relative to the potential reward (for me). they have publicly claimed they are shipping product and filling orders. they are actively promoting a June launch of the energy shot. if this turns out to be false - they are committing a very public fraud. they took more short term money on bad terms. however, if one is to assume that the brand is viable (and was derailed in 2013 due to the supply chain issue), then it is certainly an objective assumption to think they will be self funding shortly with revenues coming from both product lines (regardless of settlements).
if they get blindsided by a judge/jury on the case/settlement - than lights out. right now they are somewhat at the mercy of rational minds. if they lose that case - there is no reason to throw good money after bad. they declare bankruptcy and have some 3rd party that is connected by the remains from bankruptcy and start over fresh. if rational minds prevail and accept the series of misrepresentations lead to the cataclysmic change of events that did substantial, material harm to the company -then they could be looking at a substantial settlement that will make future capital offerings somewhat of a moot point.
again, for me, the LTCG relationship that was started and being actively promoted in light of all of the issues - makes me believe they have the means and leverage to be successful and get back, in short order, to the growth curve they were experiencing in 2012.
