FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT

Commission file number: 000-52533

 

 (Exact name of the registrant as specified in its charter)

 

 

Nine Music Square South #284

(Address of principal executive offices)

Telephone number, including

Area code

 

9457 S. University Blvd.#349

Highlands Ranch, CO 80126

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer o       Accelerated filer o       Non-accelerated filer o       Smaller reporting Company x

There were 331,077,877 shares of the registrant's $0.001 par value common stock outstanding as of November 12, 2014.

 

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HANGOVER JOE’S HOLDING CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2014

 

CONTENTS

 

 

 

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The accompanying notes are an integral part of these financial statements.

 

 

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The accompanying notes are an integral part of these financial statements.

 

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NOTE 1 – ORGANIZATION, DESCRIPTION OF BUSINESS, GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying consolidated financial statement of Hangover Joe’s Holding Corporation and its subsidiary Hangover Joe’s, Inc.  (collectively referred to as, the “Company”, “we”, or “our”) have been prepared in accordance with the instructions to quarterly reports on Form 10-Q. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position at September 30, 2014, and for all periods presented, have been made. Certain information and footnote data necessary for a fair presentation of financial position and results of operations in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted. It is therefore suggested that these financial statements be read in conjunction with the summary of significant accounting policies and notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the periods ended September 30, 2014 are not necessarily an indication of operating results for the full year.

Description of Business

The Company is in the business of selling two-ounce beverage shots, typically to retailers who place them near the cash registers in convenience stores and other retail outlets.  Historically the Company’s sole product was 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 an officially licensed product of The Hangover movie series from Warner Brothers. In 2014, we added an all-natural caffeine and sugar free energy shot licensed through Larry the Cable Guy’s Git-R-Done Productions marketed as the Git-R-Done Energy Shot, and sales in 2014 have primarily consisted of the Git-R-Done Energy Shots.  The Company has sold its products primarily to convenience stores, liquor stores, and grocery stores through distribution agreements, as well as through online internet sales.

 

Going Concern and Management’s plans

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company reported a net loss of approximately $592,000 for the quarter ended September 30, 2014, and a working capital deficiency and accumulated deficit of approximately $2,704,000 and $6,284,000, respectively, at September 30, 2014. The Company has a limited operating history and has had only limited sales since the end of the second quarter of 2013, and it has relied primarily on debt financing and private placements of its common stock to fund its operations. In addition, there have been no significant 2014 sales of Hangover Recovery Shots in 2014; 2014 sales have primarily consisted of Git R Done Energy Shots.  Due to a lack of liquidity, the Company has had difficulty in paying its obligations and has defaulted on certain debt agreements (Note 3), and the Warner Brothers Licensing Agreement (Note 6).  The Company cannot provide any assurance it will be able to be able to raise funds through a future issuance of debt or equity to carry out its business plan and/or meet its remaining obligations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts or classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

Management has pursued and intends to continue to pursue debt and/or equity financing arrangements with potential investors in order to obtain sufficient working capital necessary to carry out its business plan (Notes 3 and 9).  The Company has also taken steps to minimize costs, and has continued to explore various business opportunities.

 

The Company has raised approximately $653,000 in 2014 promissory notes through November 14, 2014, that are convertible into common stock at average discount rates of approximately 50% or more. These notes depend on the willingness of investors in the public markets to buy stock both now and in the future. Those investors ultimately look to the success of our products in the market place, including our new product (see Notes 2 and 6). From the period from mid - June 2014 through mid -November 2014,  $450,000 of debt was converted into approximately 180,000,000 common shares. This conversion process was a factor in our stock price declining to under $.01 cent for a 30-day period which resulted in our stock listing changing to the OTCBB Pink Sheets. Since we have scheduled approximately $650,000 of further conversions over the next six months, the Company will need either a significant price increase in our stock through either a large sales contract or other significant business success, a significant capital raise to payoff the remaining convertible debt or an increase in our authorized shares to have adequate shares to meet our commitments under these convertible debt instruments. Management believes that as of September 30, 2014, the Company had sufficient common shares authorized and unissued necessary to cover the number of shares for which convertible securities existing at September 30, 2014 may be converted into.  Without a successful increase in authorized shares, the Company may be unable to raise additional capital, and further stock price declines also may have a similar effect.  We remain optimistic that we can and will develop a successful and profitable market for our product, and although initial distribution and test data are promising, we believe it is premature to offer an assessment as to how well we will perform in future periods.

 

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The Company is also pursuing additional opportunities particularly with the EB-5 program (see Note 9), but there can be no assurance that any existing or contemplated plans will materialize, and fulfilling any such existing or contemplated contracts will require significant marketing support and additional capital, of which there can be no assurance the Company will be able to raise funds sufficient to continue with the Company’s business plan.

 

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

The consolidated financial statements include the accounts of Hangover Joe’s Holding Corporation and its 100%-owned subsidiary, Hangover Joe’s, Inc. All intercompany accounts, transactions, and profits are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with Generally Accepted Accounting Principles  require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant estimates are used in accounting for certain items such as the allowance for doubtful accounts, revenue recognition, and stock-based compensation. Estimates are based on historical experience, where applicable, and assumptions that management believes are reasonable under the circumstances. Due to the inherent uncertainty involved with estimates, actual results may differ.

 

License and Royalties

The Company has a license with Warner Bros. Consumer Products, Inc. (“WBCP”) that allows the Company the use of the costumes, artwork, logos and other elements depicted in the 2009 movie, The Hangover. This license, as amended, expires January 31, 2016. This agreement is in default, as we have not paid the required minimum guarantee payment due September 30, 2014. 

 

In January 2014, the Company entered into an initial two-year license agreement with Git-R-Done Productions, Inc. (the “Larry the Cable Guy” license), which  allows the Company the rights to the use of certain artwork, logos and other elements used by the Comedian known as “Larry the Cable Guy”. The terms of the WBCP and Larry the Cable Guy licenses provide for royalties based on a percentage of products sold, as defined, subject to agreed-upon guaranteed minimum royalties (Note 6). Guaranteed minimum royalty payments are made periodically over the term of the license and are recorded when paid as an asset in the balance sheet. The asset is amortized to expense as revenues from related products are sold. If management determines that all or any part of the minimum guaranteed amounts appear unlikely to be recovered through future product sales, the non-recoverable portion is charged to the period in which such determination is made. For the three and nine months ended September 30, 2014, minimum guaranteed amounts have been expensed.

 

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Revenue Recognition

 

The Company sells its product primarily through third-party distributors. The Company is not guaranteed any minimum level of sales or transactions. The Company also offers its products for sale through its website at www.hangoverjoes.com. All sales in the first two quarters of 2014 were through the website, after which the Company was able to resume its traditional model of selling its product to distributors and chains.

The Company recognizes revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists; (2) delivery to third party distributors and consumers via the Company’s website has occurred; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. Delivery is not considered to have occurred until the title and the risk of loss passes to the customer according to the terms of the contract between the Company and the customer. For sales to distributors, revenue is usually recognized at the time of delivery. The Company defers revenues on products sold to distributors for which there is a lack of credit history or if the distribution may be in a new market in which the Company has no prior experience. The Company defers revenue in these situations until cash is received. For sales through the Company’s website, revenue is recognized at time of shipment.

Management evaluates the terms of its sales in consideration of the criteria outlined in Principal Agent Consideration with regards to its determination of gross versus net reporting of revenue for transactions with customers. The Company sells, through its website, Hangover Joe’s Recovery Shots. In these transactions, management has determined that the Company (i) acts as principal; (ii) has the risks and rewards of ownership, including the risk of loss for collection, delivery or returns; and (iii) has latitude in establishing price with the customer. For these transactions, the Company recognizes revenue on a gross basis.

Cost of Goods Sold

Cost of goods sold consists of the costs of raw materials utilized in the production of its product, co-packing fees, and in-bound freight charges. Raw material costs generally account for the largest portion of the cost of goods sold. Raw materials include bottles, ingredients and packaging materials. The manufacturer is responsible for the ingredients. Costs of goods sold also include license and royalty expenses. Cost of goods sold for the first six months of 2014 consisted solely of royalty-related expense, as the inventory sold during the periods represented remaining product held for samples, which had been fully allowed for in 2013. Cost of goods sold for the quarter ended September 30, 2014 includes inventory product costs.

 

Accounts Receivable and Concentration of Credit Risk

The Company is subject to credit risk through trade receivables. This credit risk is mitigated by the diversification of the Company’s operations, as well as its customer base. The Company grants varying payment terms to its customers. Payment terms for customers can vary from due upon receipt up to net 45 days.

Four customers comprise approximately 75% of trade accounts receivable at September 30, 2014; each of these individual customer balances represents approximately 60% of the net trade accounts receivable. The Company had fully allowed for its accounts receivable at December 31, 2013.

Three customers accounted for 45% of net sales for the nine months ended September 30, 2014. Four customers accounted for 67% of net sales for the three months ended September 30, 2014.  No single customer accounted for 10% or more of net sales for the quarter or nine months ended September 30, 2013.

 

 

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NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

 

Ongoing credit evaluations of customers’ financial condition are performed. Collateral is not required. The Company maintains an allowance when necessary for doubtful accounts that is the Company’s best estimate of potentially uncollectible trade receivables. Provisions are made based upon a specific review of all significant outstanding invoices that are considered potentially uncollectible in whole or in part. For those invoices not specifically reviewed or considered uncollectible, general provisions are provided at different rates, based upon the age of the receivable, historical experience, and other currently available evidence. The allowance estimates are adjusted as additional information becomes known or as payments are made. As of September 30, 2014, there was an allowance for doubtful accounts of $8,000, and at December 31, 2013, the allowance for doubtful accounts was approximately $147,000.

 

 

Net Loss per Share

Basic net loss per share is computed by dividing the net loss applicable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, unless the effect of such inclusion would reduce a loss or increase earnings per share. For each of the periods presented in the accompanying consolidated financial statements, the effect of the inclusion of dilutive shares would have resulted in a decrease in loss per share. Stock options, warrants, common shares underlying convertible preferred stock and convertible notes payable in the aggregate of 339,615,032 and 24,457,845 shares as of September 30, 2014 and 2013 , respectively, were not included in the calculation of diluted net loss per common share because the effect would have been anti-dilutive.

  

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board, or FASB issued Accounting Standards Update (ASU) 2014-15, “Presentation of Financial Statements - Going Concern - Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern.” ASU 2014-15 provides new guidance related to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards and to provide related footnote disclosures. This new guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is currently assessing the impact that adopting this new accounting guidance may have on its consolidated financial statements and footnote disclosures.

In June 2014, the FASB, issued ASU No. 2014-12, "Compensation - Stock Compensation (Topic 718): Accounting for Share- Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period." ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The updated guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company does not anticipate that the adoption of this standard will have a material impact on its consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts from Customers, which supersedes the revenue recognition requirements in Revenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early adoption not permitted. The Company is currently evaluating this new standard and the potential impact this standard may have upon adoption.

We have considered other recently issued accounting pronouncements and do not believe the adoption of such pronouncements will have a material impact on our consolidated financial statements.

 

 

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NOTE 3 – DEBT

 

Revolving Credit Facility

On January 10, 2013, the Company entered into a senior secured lending arrangement with TCA Global Credit Master Fund, LP (“TCA”) for up to a maximum borrowing of $6,000,000. The credit facility provided for an initial line of credit of $425,000 based upon accounts receivable and projected sales and was to be used only as permitted under the specified use of proceeds for working capital purposes. The initial line of credit had a nine month term from the date of closing with a nine month renewal option. The lending arrangement is secured by all of the assets of the Company. As a partial guaranty under the TCA lending arrangement, the Company’s CEO personally guaranteed certain representations made by the Company to TCA. At closing, the Company was advanced $425,000 less fees and closing costs.

In connection with the agreement above, TCA charged an investment banking fee consisting of 125,000 shares of newly authorized Series B Preferred Shares of the Company equating to an aggregate of $125,000 in the Company’s capital stock. The shares are mandatorily redeemable and were scheduled to be repaid in 2013. Also in connection with the TCA agreement, the Company issued 194,954 shares of common stock to a consulting firm as consideration for a finder’s fee for this transaction.

 

Mandatorily Redeemable Series B Preferred Stock

 

On January 10, 2013, the Board of Directors approved the authorization of 125,000 shares of Series B Preferred Stock (the “Series B Preferred Stock”). In connection with the TCA transaction, the Company issued 125,000 shares of Series B Preferred Stock to TCA. The Series B Preferred Stock ranks pari passu to the Company’s common stock. The holder of outstanding shares of Series B Preferred Stock shall be entitled to notice of any shareholders’ meeting and to vote as a single class with the Common Stock upon any matter submitted for approval by the holders of common stock. Each share of Series B Preferred Stock shall have one vote per share. All outstanding shares of Series B Preferred Stock will be entitled to be paid the “Liquidation Preference,” which is defined and calculated as follows: $125,000 in the aggregate (not on a per share basis), payable monthly at various amounts, and due in full by virtue of the TCA default discussed above. In 2013, $57,500 was paid on the mandatorily redeemable Series B preferred stock, and the remaining balance of $67,500 is presented as a current liability in the accompanying December 31, 2013 balance sheet. The remaining balance was settled on August 12, 2014, as more fully described in Note 9.

TCA Settlement

On August 12, 2014, the Company entered into a $513,000 Settlement Agreement with TCA whereby GEL Properties LLC and Union Capital LLC each entered into Assignment and Assumption Agreements with TCA in the amount of $230,000 each.  Pursuant to the settlement agreement, Gel and Union are to assume a total of $460,000 (to be purchased  from TCA and assumed by Gel and Union) in four equal monthly installments and the Company agreed to pay TCA $53,000 ninety days after the final installments are paid under the Assignment and Assumption Agreements (Notes 3 and 9).

 

 

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NOTE 3 – DEBT (CONTINUED)

 

 

Convertible Promissory Notes

Convertible promissory notes at September 30, 2014 and December 31, 2013, consisted of the following:

		September 30, 2014				December 31, 2013
JMJ Financial [A]		$	59,262			$	138,889
JSJ Investments Inc. [B]			96,548				25,000
Asher Enterprises [C]			-				-
LG Capital Funding, LLC [D]			70,500				-
Adar Bays, LLC [E]			26,500				-
KBM Worldwide, Inc. [F]			121,500				-
Auctus Private Equity Fund, LLC [G]			61,250				-
Eastmore Capital, LLC [H]			35,000				-
GEL Properties [I]			109,000				-
Union Capital, LLC [J]			109,840				-
Black Mountain Equities, Inc.  [K]			50,000
Tangiers Investment Group, LLC [L]			40,000				-
			779,400				163,889
Less debt discounts			(248,108	)			(33,740	)
Convertible notes payable		$	531,292			$	130,149

 

JMJ Note [A]

 

In June 2013, the Company closed on a 12%, 12-month convertible promissory note with JMJ Financial (“JMJ”) (the “JMJ Note”). The face amount of the JMJ Note reflects a principal sum of $500,000, with total borrowings that may be available of $450,000 (which is net of a 10% original issue discount). Upon closing of the JMJ Note, the Company received $100,000 from JMJ. In September 2013, the Company received an additional $25,000 from JMJ, and in September, 2014, the Company received an additional $30,000 from JMJ.

JMJ has the right, at its election, to convert all or part of the outstanding and unpaid principal sum and accrued interest (and any other fees) into shares of fully paid and non-assessable shares of common stock of the Company. The conversion price is the lesser of $0.05 or 70% of the average of the three lowest closing prices in the 25 trading days previous to the conversion.

 

The Note is subject to various default provisions, and the occurrence of such an event of default will cause the outstanding principal amount under the JMJ Note, together with accrued and unpaid interest, and all other amounts payable under the JMJ Note, to become, at JMJ’s election, immediately due and payable to JMJ.

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NOTE 3 – DEBT (CONTINUED)

 

 

The Company determined beneficial conversion features existed at the commitment dates. A beneficial conversion feature of approximately $32,000 was recorded as a discount to the note in 2013, and has been amortized over the term of the loan. A beneficial conversion feature of approximately $10,100 was recorded as a discount to the note in September, 2014, and is being amortized over the term of the loan.  The unamortized debt discount recorded at September 30, 2014 and December 31, 2013, was approximately $9,000 and $14,800, respectively. The JMJ note has an effective interest rate of approximately 34%. 

On June 30, 2014, JMJ exercised its option to convert approximately $47,000 of the obligation into 6,000,000 common shares of the Company.

Between July and September 2014, JMJ converted $72,879 of their promissory note and accrued interest for 14,700,000 shares.

 

In October 2014, JMJ converted $35,453 of their promissory note and accrued interest  for 18,416,795 shares.

  

JSJ Notes[B]

In December 2013, the Company received $25,000 from JSJ Investments Inc. (“JSJ”) in exchange for a $25,000 convertible note (the “JSJ Note 1”). This note bears interest at 12% per annum and matured on May 19, 2014. On or after the maturity date, any unpaid amounts and accrued interest are convertible by the holder, at the holder’s discretion, into shares of the Company’s common stock. The conversion price is at 50% discount of the average of the three lowest closing prices on the previous ten days, with a maximum conversion price equal to the price if determined on the note execution date.

The JSJ notes are subject to various default provisions, and the occurrence of such an event of default will cause the outstanding principal and interest to become immediately due and payable to JSJ.

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The Company determined a beneficial conversion feature existed at the commitment date for all three notes. A beneficial conversion feature of approximately $10,000 was recorded as a discount to the first note, a beneficial conversion feature of $22,500 was recorded as a discount to the second note and a beneficial conversion of $25,000 was recorded as a discount to the third note and these are being amortized over the term of the loans. The unamortized debt discount recorded at September 30, 2014 and December 31, 2013 was approximately $6,300 and $10,000, respectively. The JSJ notes have an effective interest rate of approximately 55%, 51% and 56%, respectively.

On July 2, 2014, JSJ converted their entire $25,000 (including $1,000 of interest) promissory note dated December, 2013 for 4,230,652 shares.

On September 29, 2014, JSJ converted $18,968 of their $50,000 promissory note dated March 31, 2013 for 9,727,251 shares.

In October 2014, JSJ converted $49,172 of their $50,000 promissory note dated March 31, 2013 for 33,911,321 shares.

 

 

Asher Notes[C]

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The Company determined a beneficial conversion feature existed at the commitment date for both notes. A beneficial conversion feature of approximately $26,000 was recorded as a discount to the first note and a beneficial conversion feature of $10,000 was recorded as a discount to the second note and both are being amortized over the term of the loans. The unamortized debt discount recorded at September 30, 2014 for both notes totaled $-0-. The Asher notes have an effective interest rate of approximately 51%.

 

On April 15, 2014, the Company received a notice of default demanding immediate payment of a sum representing 150% of the outstanding principal plus default interest on both notes.

 

In July and August 2014, Asher converted $87,500 of their promissory note (and $2,320 of interest) dated January 14, 2014 for 5,629,809 shares.

 

In September 2014, Asher converted $40,750 (and $900 of interest) of their promissory note dated March 17, 2014 for 15,164,264 shares.

As a result of these conversions the Asher notes have been settled in full.

LG Note [D]

On March 19, 2014, the Company entered into a Securities Purchase Agreement with LG Capital Funding, LLC ("LG"), for the sale of an 8% convertible redeemable note in the principal amount of $26,500 (the "LG Note").  This financing closed on March 19, 2014.

The LG Note bears interest at the rate of 8% per annum.  All interest and principal must be repaid on March 19, 2015.  The LG Note is convertible into common stock, at LG’s option, at a 45% discount for 20 prior trading days including the notice of conversion date.  The LG Note is subject to prepayment penalties up to a 150% multiple of the principal, interest and other amounts owing, as defined.  After the expiration of 180 days following the date of the LG Note, the Company has no right of prepayment.   

 

The Company determined a beneficial conversion feature existed at the commitment date. A beneficial conversion feature of approximately $12,000 was recorded as a discount to the note and has been amortized over the term of the loan. The unamortized debt discount recorded at September 30, 2014 was approximately $4,700. The LG Note has an effective interest rate of approximately 53%.

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On July 3, 2014, the Company entered into a Securities Purchase Agreement with LG for the sale of two 8% convertible redeemable notes each in the principal amount of $52,500 (the "LG Notes") in consideration of $52,500 and the delivery by LG of a Collateralized Secured Promissory Note Back End Note payable to the Company in the principal amount of $52,500 (the "LG Back End Note").  The financing closed on July 10, 2014.

On September 30, 2014, LG converted $8,500 (and $352 of interest) of their $26,500 promissory note dated March 31, 2013 for 4,235,459 shares.

 

In October 2014, LG converted $18,000 (and $400 of interest) of their $26,500 promissory note dated March 31, 2013 for 11,386,102 shares.

 

Adar Bays LLC Note [E]

KBM Worldwide, Inc. Notes [F]

On May 14, 2014, the Company entered into a Securities Purchase Agreement with KBM Worldwide, Inc. ("KBM"), for the sale of an 8% convertible note in the principal amount of $29,000 (the "KBM Note 1"). This Note bears interest at the rate of 8% per annum. All interest and principal must be repaid on February 13, 2015. The Note is convertible into common stock, at KBM’s option, at a 45% discount to the average of the three lowest closing bid prices of the Company’s common stock during the 10 trading day period prior to conversion.

The KBM Note 1 is subject to prepayment penalties up to a 140% multiple of the principal, interest and other amounts owing, as defined. KBM has agreed to restrict its ability to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock. The total net proceeds the Company received from this Offering were $29,000, less financing costs of $500.

 

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NOTE 3 – DEBT (CONTINUED)

 

 

On May 29, 2014, the Company entered into a Securities Purchase Agreement with KBM Worldwide, Inc. for the sale of an 8% convertible note in the principal amount of $32,500 (the "KBM Note 2").  The financing closed on May 29, 2014.

The KBM Note 2 bears interest at the rate of 8% per annum.  All interest and principal must be repaid on March 27, 2015.  The KBM Note 2 is convertible into common stock, at KBM’s option, at a 45% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion.  In the event the Company prepays the KBM Note in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 115% if prepaid during the period commencing on the closing date through 30 days thereafter, (ii) 120% if prepaid 31 days following the closing through 60 days following the closing and (iii) 125% if prepaid 61 days following the closing through 90 days following the closing and (iv) 130% if prepaid 91 days following the closing through 120 days following the closing and (v) 135% if prepaid 121 days following the closing through 150 days following the closing and (vi) 140% if prepaid 151 days following the closing through 180 days following the closing.  After the expiration of 180 days following the date of the KBM Note, the Company has no right of prepayment.   

KBM has agreed to restrict its ability to convert the KBM Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.  The total net proceeds the Company received from this Offering was $32,500, less attorney’s fees.  

 

On July 27, 2014 Hangover Joe's Holding Corporation (the “Company”) entered into a Securities Purchase Agreement with KBM Worldwide, Inc. ("KBM"), for the sale of an 8% convertible note in the principal amount of $27,500 (the "KBM Note 3").  The financing closed on August 19, 2014.

The KBM Note 3 bears interest at the rate of 8% per annum.  All interest and principal must be repaid on April 28, 2015.  The KBM Note 3 is convertible into common stock, at KBM’s option, at a 45% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion.  In the event the Company prepays the KBM Note in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 115% if prepaid during the period commencing on the closing date through 30 days thereafter, (ii) 120% if prepaid 31 days following the closing through 60 days following the closing and (iii) 125% if prepaid 61 days following the closing through 90 days following the closing and (iv) 130% if prepaid 91 days following the closing through 120 days following the closing and (v) 135% if prepaid 121 days following the closing through 150 days following the closing and (vi) 140% if prepaid 151 days following the closing through 180 days following the closing.  After the expiration of 180 days following the date of the KBM Note, the Company has no right of prepayment.   

KBM has agreed to restrict its ability to convert the KBM Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.  The total net proceeds the Company received from this Offering was $27,500, less attorney’s fees.  

 

On September 2, 2014, Hangover Joe's Holding Corporation (the "Company") entered into a Securities Purchase Agreement with KBM Worldwide, Inc. ("KBM"), for the sale of an 8% convertible note in the principal amount of $32,500 (the "KBM Note 4").  The financing closed on September 8, 2014.

The KBM Note 4 bears interest at the rate of 8% per annum.  All interest and principal must be repaid on June 4, 2015.  The KBM Note 4 is convertible into common stock, at KBM's option, at a 45% discount to the average of the three lowest closing bid prices of the common stock during the 10 trading day period prior to conversion.  In the event the Company prepays the KBM Note in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 115% if prepaid during the period commencing on the closing date through 30 days thereafter, (ii) 120% if prepaid 31 days following the closing through 60 days following the closing and (iii) 125% if prepaid 61 days following the closing through 90 days following the closing and (iv) 130% if prepaid 91 days following the closing through 120 days following the closing and (v) 135% if prepaid 121 days following the closing through 150 days following the closing and (vi) 140% if prepaid 151 days following the closing through 180 days following the closing.  After the expiration of 180 days following the date of the KBM Note, the Company has no right of prepayment.   

KBM has agreed to restrict its ability to convert the KBM Note 3 and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.  The total net proceeds the Company received from this Offering was $32,500, less attorney’s fees.

The Company determined a beneficial conversion feature existed at the commitment date for all KBM notes. A beneficial conversion feature of approximately $13,800 was recorded as a discount to the first note, approximately $15,500 was recorded as a discount to the second note, approximately $13,100 was recorded as a discount to the third note, and approximately $15,500 as a discount to the fourth note; all of these discounts are being amortized over the term of the loans. The unamortized debt discount recorded at September 30, 2014 for all KBM notes totaled approximately $39,100. The KBM notes have an effective interest rate of approximately 54%.

 

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NOTE 3 – DEBT (CONTINUED)

 

Auctus Private Equity Fund, LLC [G]

On July 24, 2014, the Company entered into a Securities Purchase Agreement with Auctus Private Equity Fund LLC ("Auctus"), for the sale of an 8% convertible redeemable note in the principal amount of $61,500 (the "Auctus Note").  

The Auctus Note bears interest at the rate of 8% per annum.  All interest and principal must be repaid on April 24, 2015.  The Auctus Note is convertible into common stock, at Auctus’s option, at a 45% discount to the average of the two lowest closing prices of the common stock during the 25 trading day period prior to conversion.  In the event the Company prepays the Auctus Note in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 125% if prepaid during the period commencing on the closing date through 60 days thereafter, (ii) 140% if prepaid 61 days following the closing through 120 days following the closing and (iii) 150% if prepaid 121 days following the closing through 180 days following the closing.  After the expiration of 180 days following the date of the Auctus Note, the Company has no right of prepayment.   

The Company determined a beneficial conversion feature existed at the commitment date. A beneficial conversion feature of approximately $29,200 was recorded as a discount to the note and is being amortized over the term of the loan. The unamortized debt discount recorded at September 30, 2014 was approximately $22,100. The Auctus Note has an effective interest rate of approximately 39%.

Eastmore Capital, LLC [H]

On July 24, 2014, the Company entered into a Securities Purchase Agreement with Eastmore Capital LLC ("Eastmore"), for the sale of an 8% convertible redeemable note in the principal amount of $35,000 (the "Eastmore Note").  The financing closed on August 12, 2014.

The Eastmore Note bears interest at the rate of 8% per annum.  All interest and principal must be repaid on August 5, 2015.  The Eastmore Note is convertible into common stock, at Eastmore’s option, at a 50% discount to the lowest closing price of the common stock during the 15 trading day period prior to conversion.  In the event the Company prepays the Eastmore Note in full, the Company is required to pay off all principal, interest and any other amounts owing multiplied by (i) 125% if prepaid during the period commencing on the closing date through 60 days thereafter, (ii) 140% if prepaid 61 days following the closing through 120 days following the closing and (iii) 150% if prepaid 121 days following the closing through 180 days following the closing.  After the expiration of 180 days following the date of the Eastmore Note, the Company has no right of prepayment.    

GEL Properties, LLC [I]

 

 

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Union Capital, LLC [J]

Tangiers Investment Group, LLC [L]

On September 3, 2014, the Company entered into a Note Purchase Agreement with Tangiers Investment Group, LLC ("Tangiers"), for the sale of a 10% convertible promissory note in the principal amount of $40,000 (the "Note").  $2,000 (the "Fee") of the financing amount was retained by Tangiers through an original issue discount for due diligence and legal bills related to the transaction.  The financing closed on September 14, 2014.

The Note bears interest at the rate of 10% per annum.  All interest and principal must be repaid on September 3, 2015.  The Note is convertible into common stock, at Tangiers's option and will be equal to 60% of the lowest 15 daily VWAPs (Volume Weighted Average Price) of the Company's common stock prior to the date on which Tangiers elects to convert all or part of the Note.  If the Company is placed on "chilled" status with the Depository Trust Company, the discount will be increased by 10% until such chill is remedied. If the Company is not deposit and withdrawal eligible at custodian (DWAC) through their transfer agent and the DTC, the discount will be increased by 5%.  In the case of both, the discount shall be a cumulative 15%.  The Note may not be prepaid in whole or in part by the Company.   

Tangiers has agreed to restrict its ability to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 9.99% of the then issued and outstanding shares of common stock of the Company.  The total net proceeds the Company received from this Offering was $40,000, less the Fee.  

 

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NOTE 3 – DEBT (CONTINUED)

 

 

The Company determined a beneficial conversion feature existed at the commitment date. A beneficial conversion feature of approximately $16,700 was recorded as a discount to the note which is being amortized over the term of the loan. The unamortized debt discount recorded at September 30, 2014 for the note totaled approximately $15,500. The note has an effective interest rate of approximately 47%.

NOTE 4 – ACCRUED EXPENSES

Accrued expenses as of September 30, 2014 and December 31, 2013 consist of the following:

 

		September 30,				December 31,
		2014				2013
Accrued expenses		$	-			$	58,941
Deferred salaries			372,815				208,714
Accrued consulting costs – to be paid for in common stock			45,066				165,166
Minimum guaranteed royalty obligation			130,405				75,000
Deferred revenue			34,330				-
Accrued interest			40,655				20,806
		$	623,271			$	528,627

Investor Relations Agreement

In February 2013, the Company entered into an investor relations agreement with a firm which required the Company to pay a consulting fee of $2,500 per month and to provide 100,000 shares of the Company's common stock per month from March 31, 2013 to May 31, 2013 and warrants to purchase 100,000 shares of the Company’s common stock per month. Based on the terms of the agreement, the Company determined that the measurement date of the shares to be issued is on the dates that the shares are earned, which is monthly. Total compensation expense under this agreement for the year ended 2013 was $45,000 (none in the quarter ended September 30, 2014). As the shares of common stock issuable under this agreement have not been issued as of December 31, 2013 or September 30, 2014, the Company has recorded a liability (included within accrued expenses) of $45,000 on the consolidated balance sheet until such shares are issued.

 

NOTE 5 – RELATED PARTY TRANSACTIONS

Promissory Note Payable, Related Party

The Chairman of the Company’s board of directors has advanced funds to the Company from time to time for working capital. As of September 30, 2014 and December 31, 2013, amounts payable to this individual were $116,421 and $89,422, respectively. These advances were previously non-interest bearing, unsecured, and due on demand. On March 1, 2013, the Company converted the outstanding advance amount of $89,422 into a promissory note, and this individual advanced an additional $27,000 to the Company in January, 2014. Interest at the rate of 5.5% per annum is compounded and charged annually. Principal payments in the amount of $14,966 and accrued interest were to be paid in nine installments, with the first payment due on June 15, 2013. No payments have been made through September 30, 2014. Interest expense on this note as of and for the nine months and quarters ended September 30, 2014 and 2013 was approximately $4,100 and $1,600, respectively.

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NOTE 5 – RELATED PARTY TRANSACTIONS (CONTINUED)

 

 

Strategic Consulting Agreement, Related Party

In November 2012, the Company entered into a consulting agreement with The Bricktown Group (“Bricktown”) to provide beverage management and strategic advisory consulting services to the Company. The managing partner of Bricktown was appointed as the Company’s Chief Operating Officer (COO) in March 2013, and served as the Company’s COO until August 6, 2013. This consulting agreement had an initial term of nine months and was automatically extended through November 2013. The agreement required the Company to pay an upfront retainer of $10,000 and monthly consulting fees of $10,000 per month, which was to be deferred until the Company raised at least $300,000 in debt or equity. The Company was to issue 3,000,000 shares of the Company's common stock in two tranches, of which 1,500,000 shares were issuable upon request after January 4, 2013 and 1,500,000 shares were issuable on March l, 2013. The first 1,500,000 shares are non-forfeitable and fully vested on the date of the agreement.

Based upon the terms of the agreement, the Company determined that the measurement date for the initial 1,500,000 shares to be issued under the agreement is the contract date and calculated a fair value of $225,000 based upon the closing market price on this date. Accordingly, the Company recorded an accrued consulting cost liability of $225,000 on the consolidated balance sheet as of December 31, 2012 until such shares are issued. The stock-based compensation associated with the initial shares of $225,000 was recorded as prepaid consulting costs and was amortized over the initial three months of this agreement. For the year ended December 31, 2013, the Company recognized consulting expense of $278,616 related to this agreement. The measurement date for the second tranche of 1,500,000 shares was March 1, 2013. The fair value of these shares of $135,000 was determined based upon the closing market price of the Company’s common stock on this date and was amortized over the remaining term of the contract. On January 10, 2013, the Company issued the initial 1,500,000 shares of its common stock to Bricktown. The second tranche of shares was issued as of June 30, 2014.

As of September 30, 2014, the Company has an additional amount of approximately $55,100 to Bricktown in notes payable and other-related party.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

WBCP License Agreement

The Company has a license with WBCP that allows the Company the use of the costumes, artwork, logos and other elements depicted in the 2009 movie, The Hangover. This license provides for certain royalties based on a percentage of products sold subject to certain agreed-upon guaranteed minimum royalty payments over the term of the license.

In January 2013, the Company entered into an extension of its product license agreement with WBCP extending the term of the agreement to January 31, 2016. Further, the extension added certain channels of distribution and requires the Company to pay $200,000 of Guaranteed Consideration, as defined, over a period of time. Pursuant to the agreement, $75,000 of Guaranteed Consideration was paid in January 2013, and $50,000 was due on October 1, 2013, of which $20,000 was paid in 2013, and the remaining $30,000 was paid in January 2014. On or before October 1, 2014, the Company is to pay Guaranteed Consideration of $50,000, and the remaining $25,000 is to be paid on or before October 1, 2015. The Company defaulted on the $50,000 obligation due October 1, 2014.

 

The Company accrued the remaining guaranteed minimum royalty payments of $75,000 at December 31, 2013 in accrued liabilities.  Management evaluated the recoverability of prepaid guaranteed minimum royalty payments and determined that recoverability over the contract term was not likely, and expensed the full amount in selling and marketing expense as of December 31, 2013.

 

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On May 28, 2014, an entity believed to be formed by two former contractors of the Company, filed suit against the Company, two of its principles, and a former contractor for fraud in the inducement, fraud, rescission, unfair trade practices, civil rico, and authorized practice of law. The plaintiff is seeking approximately $450,000 from the Company. Discovery is not complete in these cases, and at this time, the Company cannot determine the likelihood of an outcome or a range of possible damages. The Company intends to vigorously defend the lawsuit as it believes the case is frivolous and prosecute its cause of action.

 

On September 27, 2014, a former contractor of the Company filed suit against the Company for an unpaid account. The plaintiff is seeking approximately $125,000 from the Company. the Company cannot determine the likelihood of an outcome or a range of possible damages. The Company intends to vigorously defend the lawsuit on the grounds that the contractor never performed any services under the contract and prosecute its cause of action.  

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NOTE 7 – STOCKHOLDERS’ DEFICIT (CONTINUED)

 

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NOTE 7 – STOCKHOLDERS’ DEFICIT (CONTINUED)

 

 

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NOTE 7 – STOCKHOLDERS’ DEFICIT (CONTINUED)

 

 

In April 2012, the Company granted a warrant to a sales consultant and director of the Company to purchase up to 6,129,528 shares of common stock in connection with a two-year service agreement. This warrant has a three-year term and an exercise price of $0.0326 per share with 3,064,764 shares vesting each on January 1, 2013 and January 1, 2014 if the Company’s sales exceeded certain thresholds in 2012 and 2013, respectively. On January 1, 2013, the board of directors concluded the sales target for 2012 was not met and warrants to purchase 3,064,764 shares of Company common stock were cancelled. In January, 2014, Management concluded that the performance criteria and sales thresholds for 2013 were not met and accordingly no stock-based compensation has been recognized and warrants to purchase 3,064,764 shares of Company common stock were cancelled.

In August, 2012, the Company issued a warrant for 100,000 shares. The warrants have a three year term and an exercise price of $.11 per share with immediate vesting.

In February and March 2013, the Company granted a warrant to an investor relations firm to purchase up to 150,000 shares of common stock that vested immediately. The warrants have a three-year term and an exercise price of $0.11 and $.09 per share, and $0 and $11,574 of stock based compensation related to this warrant and is recorded in general and administrative expenses during the quarter ended September 30, 2014 and 2013, respectively.

In January, 2014, the Company issued a warrant for 5,000,000 shares to an investor under a consulting arrangement. The warrants have a fifteen year term and an exercise price of $.02 per share with immediate vesting, and the services were valued at $100,000, accordingly.

In August, 2014, the Company issued 417,662 warrants to an investor in connection with the issuance of a note payable. The warrants have a three year term and an exercise price of $.08 per share, and are exercisable at any time on or after the note issuance date and on or before the note termination date of the note payable connected to this warrant, and the warrant was valued at $6,000.

 

On October 4, 2014, 10,000 warrants with an exercise price of $.40 per share expired.

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35

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

 

 

  

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