Form 10-Q for HANGOVER JOE'S HOLDING CORP
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19-Dec-2013
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Cautionary Statement about Forward-Looking Statements
This Form 10-Q contains forward-looking statements regarding future events and the Company's future results that are subject to the safe harbors created under the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). These statements are based on current expectations, estimates, forecasts, and projections about the industry in which the Company operates and the beliefs and assumptions of the Company's management. Words such as "hopes," "expects," "anticipates," "targets," "goals," "projects," "intends," "plans," "believes," "seeks," "estimates," "continues," "may," variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of the Company's future financial performance, including projections under our licensing and distribution arrangements, the Company's anticipated growth potential in its business, and other characterizations of future events or circumstances are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including those identified under "Risk Factors" in our Form 10-K for the year ended December 31, 2012. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
The Company is under no duty to update any of these forward-looking statements after the date of this report. You should not place undue reliance on these forward-looking statements.
Background
Hangover Joe's Holding Corporation ("HJHC" or the "Company") was originally incorporated in the State of Colorado in December 2005 as Across American Real Estate Exchange, Inc. ("AAEX"). In February 2010, Accredited Members, Inc. ("AMI"), a provider of investor research and management services, was merged with and into a wholly-owned subsidiary of AAEX, and AMI became a wholly-owned subsidiary of the Company. In May 2010, AAEX changed its name to Accredited Members Holding Corporation.
On July 25, 2012, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with Hangover Joe's, Inc., a privately-held Colorado corporation ("HOJ"), whereby on July 25, 2012, the Company acquired HOJ in a reverse triangular merger (the "Acquisition"). Upon closing the Acquisition, the Company issued 83,514,827 common shares to the HOJ shareholders in exchange for all of their ownership interests in HOJ such that the former owners of HOJ owned approximately 69% of the Company post Acquisition. The shareholders of the Company prior to the Acquisition owned approximately 31% of the Company post Acquisition. As a result of the Acquisition on July 25, 2012, the Company changed its name to Hangover Joe's Holding Corporation.
The Merger Agreement further provided that, within five business days after the closing of the Acquisition the Company would sell to Accredited Members Acquisition Corporation ("Buyer") all of the equity interests in three of the Company's subsidiaries (the "Sale"), being Accredited Members, Inc., AMHC Managed Services, Inc. and World Wide Premium Packers, Inc. (collectively, the "Subsidiaries"). Buyer is a privately-held Colorado corporation owned by two former directors of the Company, JW Roth and David Lavigne. The parties closed the Sale on July 27, 2012. Buyer paid $10,000 and assumed all liabilities of the Subsidiaries in exchange for all of the shares in the Subsidiaries owned by the Company.
HOJ is a Colorado corporation formed on March 5, 2012. HOJ was formed for the purpose of acquiring all of the assets of both Hangover Joe's Products LLC ("HOJ LLC") and Hangover Joe's Joint Venture ("HOJ JV"). HOJ LLC had conducted operations through HOJ JV, with the owner of HOJ LLC being one of the same owners and control persons of HOJ JV. Effective March 30, 2012, HOJ acquired the net assets of HOJ LLC and HOJ JV through the issuance of common stock of HOJ. Because HOJ had no significant assets or business operations prior to the merger and each of these entities were owned by the same control group, this transaction was accounted for as a reorganization of entities under common control. Accordingly, the historical results of operations of HOJ LLC and HOJ JV are included in the results of operations of the Company.
Because all of the operating businesses of AMHC were contemporaneously sold within five business days after the Acquisition, the transaction has been accounted for as a recapitalization of HOJ. Accordingly, the accompanying consolidated financial statements include the financial position, results of operations and cash flows of HOJ and its predecessor entities, HOJ LLC and HOJ JV, prior to the date of Acquisition. The historical results of operations and cash flows of AMHC and the Subsidiaries prior to the date of the Acquisition have been excluded from the accompanying consolidated financial statements. The historical stockholders' equity of HOJ prior to the exchange was retroactively restated (a recapitalization) for the equivalent number of shares received in the exchange after giving effect to any differences in the par value of the AMHC and HOJ common stock, with an offset to additional paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer (HOJ) has been carried forward after the exchange.
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The term the "Company" as used herein is intended to refer to the Hangover Joes Holding Corporation and its wholly owned subsidiary, Hangover Joes Inc. The Company has a limited operating history and there will be limited continuing impact regarding these operations, and the Company cannot provide any assurance it will be able to raise funds through a future issuance of equity or debt to carry out its business plan.
Plan of Operation
The Company sells an all-natural, two-ounce beverage, formulated to help relieve the symptoms associated with alcohol induced hangovers - the Hangover Recovery Shot. The Hangover Recovery Shot is also an officially licensed product of The Hangover movie series from Warner Brothers. The Company has registered the trademark "Hangover Joe's Get Up & Go" with the U.S. Patent and Trademark office. The assets consist of intellectual property relating to Hangover Joe's Recovery Shot, including but not limited to a license agreement dated July 19, 2011, between the LLC and Warner Bros. Consumer Products, Inc. The license agreement permits HOJ to use the costumes, artwork logos, and other elements depicted in the 2009 movie "The Hangover" during the term of the license agreement, as amended, which expired January 31, 2016.
The Company sells its products primarily to convenience stores, liquor stores and grocery stores through distribution agreements, as well as through online internet sales. The Company began selling its products in February 2011. HOJ is actively seeking to expand the distribution of its product, the Hangover Joe's Recovery Shot, and has recently entered into distribution agreements to expand its reach to Australia, New Zealand and Canada.
Management Changes
Effective March 1, 2013, the Board of Directors appointed Eric Skae to serve as interim Chief Operating Officer ("COO"). Mr. Skae was to be paid an annual salary of $100,000 in the same manner as other officers of the Company. Mr. Skae resigned on August 6, 2013. The Company also appointed Jeff Jonke as its Executive Vice President and General Manager on August 19, 2013. Mr. Jonke resigned effective October 31, 2013. Effective December 1, 2013, the Board of Directors appointed Shawn Adamson to serve as Chief Sales and Marketing Officer. Mr. Adamson will be paid an annual salary of $100,000, a royalty of one cent per bottle, a 12.5% bonus of the proceeds of sale in the event the Company is sold plus benefits and stock. Also, Effective December 1, 2013, the Board of Directors appointed Matthew Veal to serve as Chief Financial Officer ("CFO") and Interim Chief Executive Officer ("CEO") and added Mr. Veal to the board of directors. Mr. Veal will be paid an annual salary of $180,000, a royalty of one cent per bottle, a 5% bonus of the proceeds of sale in the event the Company is sold plus benefits and stock. Also, Effective December 1, 2013, the Board of Directors reappointed Michael Jaynes to serve as Chairman of the Board. Mr. Jaynes will be paid an annual salary of $100,000, a royalty of one cent per bottle, a 12.5% bonus of the proceeds of sale in the event the Company is sold plus benefits and stock.
Results of Operations
Through the second Quarter of 2013, the Company's operations have generally grown as the Company has expanded its marketing efforts. Although the Company's increased operations have resulted in greater net sales for the Company, the Company's costs of goods sold and operating costs have also increased.
Three Months Ended September 30, 2013 and September 30, 2012
For the three months ended September 30, 2013, we experienced a consolidated net loss of $400,000 compared to a consolidated net loss of $394,000 during the comparable period last year. Net Sales and gross profits decreased $382,000 and $142,000 or 99% and 99%, respectively from the comparable period last year. These decreases were offset by a $112,000 decrease in sales & marketing costs and a $75,000 decrease in general and administrative expenses from the comparable period last year.
Net Sales
During the three months ended September 30, 2013, the Company generated approximately $4,000 in net sales compared to $387,000 in net sales in the comparable period last year. The $382,000 or 99% decrease in net sales from the comparable period last year was primarily due to the lack of resources not only for sales and marketing but production and shipping and due to the deferral of revenue on certain sales (approximately $14,000) to distributors in which the Company determined that collectibility was not assured. The Company has reviewed its sales channels, and a concern exists due to the lack of resources we can devote to the necessary sales and marketing and brand building to ensure product success.
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Cost of Goods Sold
Cost of goods sold, which includes product costs and product royalties, decreased in the aggregate from $241,000 for the three months ended September 30, 2012 as compared to $3,000 for the same period this year. As a percentage of sales, cost of sales changed from 63% of sales for the quarter ended September 30, 2012 to 79% for the quarter ended September 30, 2013. This change was primarily due to increased costs related to instability - including change in contract bottler, change in materials, old inventory being cleared in prior year, initial fixed guaranteed royalty costs to Warner Brothers from our new marketing campaign (see net sales above) and financial challenges relating ability to negotiate lower costs.
Gross Profit
During the three months ended September 30, 2013, the Company realized a gross profit of $1,000 or 21% of net sales compared to a gross profit of $142,000 or 37% of net sales during the same period last year. Although average sales prices in 2013 were higher compared to the quarter ended September 30, 2012, lower product sales quantities, and higher product costs (described in cost of sales above) resulted in the overall decrease in gross profit in both dollar and percentage terms during the three months ended September 30, 2013.
Sales & Marketing Costs
Sales & marketing costs decreased $112,000 or 43% to $146,000 for the three months ended September 30, 2013 as compared to $258,000 for the comparable period last year. This decrease was primarily due to a reduction in resources available for sales salaries and consulting expense, trade shows, and graphic design costs in this area.
General & Administrative Expenses
General and administrative expenses decreased $76,000 or 27% to $202,000 for the three months ended September 30, 2013 as compared to $278,000 for the same period last year. The increase was due to several factors amortization of costs from our contract with the Bricktown Group, and higher investor relations costs during 2013 also contributed to the increase for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012.
Nine Months Ended September 30, 2013 and September 30, 2012
For the nine months ended September 30, 2013, we experienced a consolidated net loss of $1,692,000 compared to a consolidated net loss of $943,000 during the comparable period last year. Net Sales and gross profits each decreased $414,000 and $186,000 or 56% and 73%, respectively from the comparable period last year. These decreases were slightly offset by a $34,000 decrease in general and administrative expenses from the comparable period last year.
Net Sales
During the nine months ended September 30, 2013, the Company generated approximately $322,000 in net sales compared to $736,000 in net sales in the comparable period last year. The $414,000 or 56% decrease in net sales from the comparable period last year was primarily due to lower sales volume from new distribution partners in the United States related to the May 20 marketing campaign began from the movie Hangover III. The Company has reviewed its sales channels, and while we did incur drops in comparison to the second half of the prior year, we believe new channels can be opened to supplement what we have and replace some of the business we no longer have, but we believe additional marketing resources will be needed to build our customer base to its full potential.
Cost of Goods Sold
Cost of goods sold, which includes product costs, packaging materials, and product royalties, decreased in the aggregate from $480,000 for the nine months ended September 30, 2012 as compared to $252,000 for the same period this year. As a percentage of sales, cost of sales increased from 65% of sales for the nine months ended September 30, 2012 to 78% for the nine months ended September 30, 2013. This decrease was primarily due to higher costs, particularly royalty guaranteed amounts.
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Gross Profit
During the nine months ended September 30, 2013, the Company realized a gross profit of $70,000 or 22% of net sales compared to $256,000 or 35% of net sales during the same period last year. Although average sales prices in 2013 were substantially the same when compared to the nine months ended September 30, 2012, lower product sales quantities and higher product costs (described in cost of sales above) resulted in the overall decrease in gross profit in both dollar and percentage terms during the nine months ended September 30, 2013.
Sales & Marketing Costs
Sales & marketing costs decreased $34,000 or 6% for the nine months ended September 30, 2013 when the total was $573,000 as compared to $607,000 for the nine months ended September 30, 2012. This increase was due to increases in advertising and sales consulting expenses.
General & Administrative Expenses
General and administrative expenses increased $306,000 or 52% to $898,000 for the nine months ended September 30, 2013 as compared to $592,000 for the same period last year. The increase was due to several factors including higher accounting and ancillary costs associated with becoming a public entity such as $30,000 spent on public relations/awareness, amortization of approximately $278,000 of costs from our contract with the Bricktown Group, higher legal costs associated with negotiating financing transactions and licensing, higher salaries, and higher investor relations costs during 2013 also contributed to the increase for the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012.
Material Changes in Financial Condition; Liquidity and Capital Resources
The Company's consolidated financial statements for the three months ended September 30, 2013, have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Report of our Independent Registered Public Accounting Firm on the Company's consolidated financial statements as of and for the year ended December 31, 2012, includes a "going concern" explanatory paragraph which means that the auditors stated that conditions exist that raise doubt about the Company's ability to continue as a going concern.
Cash Flows
During the nine months ended September 30, 2013, we used proceeds from the borrowing of approximately $492,000 under our new credit facilities to fund our operations whereas during the comparable period in 2012, we used cash accumulated from prior periods to fund our operations. As described above, the company significantly increased its sales and marketing costs during 2012 to expand its distribution network in the United States, Canada, and Australia. Cash as of September 30, 2013 was $10,000 as compared to $9,000 at December 31, 2012.
Cash flows used in operating activities for the nine months ended September 30, 2013 was $576,000 as compared to $670,000 for the comparable period last year. This decrease in cash used in operations was primarily due to higher operating expenses during 2013 as compared to the same period last year, and was offset by increases in accounts payable.
Cash flow provided by financing activities for the nine months ended September 30, 2013 was $577,000 compared to $9,000 for the comparable period last year. This was due to the above referenced net borrowings under the credit facility in 2013 discussed above offset by amounts paid off on other inventory credit arrangement and cash raised from the sale of equity.
Capital Resources
As of September 30, 2013, we had cash of $10,000 and a working capital deficit of $2,151,000 as compared to cash of $9,000 and working capital deficit of $1,407,000 as of December 31, 2012. The improvement in our cash was due to our new credit facilities, however, due to our losses, our working capital deficit increased.
Although the Company has generated revenue through the sale of its products, the Company's cash flow has not been sufficient to cover its operating expenses and the Company has had to rely upon proceeds from borrowings under its credit facilities and from the sale of common stock through private placements to fund its operations. During the three months ended September 30, 2013, the Company received gross proceeds of $425,000 under its credit facility. We anticipate that we will need to rely on sales of our securities in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing stockholders. There is no assurance that we will be able to complete any additional sales of our equity securities or that we will be able arrange for other financing to fund our planned business activities. If we are unable to fund future operations by way of financing, including public or private offerings of equity or debt securities, our business, financial condition and operating activities will be adversely impacted.
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Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, net sales or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our shareholders.
Recently issued and adopted accounting pronouncements
In the third quarter of 2013, there was no new adopted or proposed accounting guidance that could have a material impact on the Company's financial statements.
Critical Accounting Policies
There have been no changes to the Company's critical accounting policies in the three months ended September 30, 2013, from those contained in the Company's 2012 Annual Report on Form 10-K.
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