Item 1. Business
This annual report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors”, which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this annual report, unless otherwise specified, all dollar amounts are expressed in United States Dollars and all references to “common shares” refer to the common shares in our capital stock.
As used in this annual report, the terms “we”, “us”, and “our company”, refer to Armeau Brands Inc., a Nevada corporation, unless otherwise indicated.
Corporate Overview
Our company was incorporated in the State of Nevada on March 15, 2011. Our business objectives are to produce and market our own brand of ice wine made from grapes harvested in Armenia, a ice wine to China and Russia. We seek to significantly expand the production of our icewine, which we believe is the first ice wine produced in Armenia or its neighboring regions.
Our offices are currently located at 1805-141 Lyon Court, Toronto, Ontario, Canada, M6B 3H2. Our telephone number is (647) 640-3625. We have a website at www.armeaubrands.com.
Activities to Date
In the summer of 2011, our company sought proposals from various icewine experts in Canada with the objective of producing icewine in Armenia.
On August 2, 2011, we accepted an icewine consultation proposal from Mr. Tilman Hainle of IMBIBEdesign. Mr. Hainle, along with his father, had produced the first icewine in Canada in 1978. Pursuant to this proposal, IMBIBEdesign outlined the scope of work, schedule, deliverables, and terms of agreement for the icewine design and production process in Armenia. Fees due to IMBIBEdesign under this proposal were approximately $9,700 which was initially estimated at $8,000 and comprised of billings at an hourly rate of $135/hour.
In September 2011, Mr. Hainle accompanied our company to Armenia. In Armenia, we contracted Mr. Gagik Melyan, the deputy director of the Scientific Centre of Viticulture for Armenia, Fruit-Growing and Wine-Making, to accompany our team to various grape growing regions in Armenia and to provide us with his scientific and expert guidance and supervision of vineyard activities in Armenia for the 2012 season. The Scientific Centre of Viticulture for Armenia was founded in 1927 and is a research institute engaged in plant breeding since its inception, and in plant biotechnology since 1990. Activities concern grapes and other fruits. 60% of its budget is directed to germplasm enhancement. The 40% remaining is equally shared between line development and line evaluation.
On October 11, 2011, we entered into a contractor agreement with Mr. Melyan where we would compensate him $500 per month in exchange for his expertise. With the help of our experts, our company identified a village near the town of Areni in the province of Vayots Dzor that had the right climatic and soil conditions for Icewine production. Two indigenous Armenian grapes, one red and one white, were chosen to create our first vintage.
Our company then began negotiations with various local wine companies in Armenia, On October 11, 2011, our company and EDVAG Group entered into a wine services agreement (the “Wine Services Agreement”) whereas EDVAG Group agreed to provide wine-making services to produce a Canadian-style icewine under the tutelage of Mr. Hainle.
Under this agreement, EDVAG shall manage and realize the entire winemaking process under the guidance and direction of our company and our technical contractor(s).
We will also reimburse EDVAG for the following items procured for or on behalf of Armeau in the winemaking process at landed cost plus taxes. This Agreement will continue in force for a minimum period of 10 years. EDVAG is a wholly managed winemaking company duly registered in Armenia and operating in the CIS and international markets.
On October 15, 2011, 7000 m2 (0.7 hectares) of vineyard was reserved in a village in the province of Vayots Dzor Armenia. To reserve the vineyard, the vineyard owner was paid in advance on an estimated yield. EDVAG paid this advance on our behalf and we paid EDVAG back with an extra 10% service fee as per our agreement. On January 23, 2012, six tons of white (Voskehat) and three tons of red (Areni) were harvested at a temperature of -10°C (14°F).
On February 6, 2012, we accepted a proposal by IMBIBEdesign to travel to Armenia again, this time to oversee the fermentation of our icewine. Pursuant to this proposal, IMBIBEdesign outlined the scope of work, schedule, deliverables, and terms of agreement for the icewine winemaking in Armenia. Fees due to IMBIBEdesign under this proposal were approximately $5,200 which included a lump sum of $3,600 and additional services, such as change in the scope of work by us that was billed at an hourly billing rate of $135/hour.
1250 litres of icewine were produced. The icewine produced consisted of 950 litres of white icewine (Voskehat grape) and 300 litres of red icewine (Areni grape). The red icewine was ultimately judged of insufficient quality and rejected. Due to technical problems, the bottling of the white icewine was delayed until December 2015 when the wine was deemed ready to drink. 4,500 bottles of white icewine were bottled and 200 bottles were sent to Canada in December 2015 for sampling and evaluation. We are using the remaining 4,300 bottles for tasting and sampling by potential customers and distributors.
On February 1, 2016, we entered into a distribution agreement with Alpha Food Services. Pursuant to this agreement, we agreed to grant to Alpha Food Services, for a term of three years, the exclusive right to sell and distribute our icewine products in Armenia, Russia, and the Commonwealth of Independent States. The agreement does not apply to our first vintage, which is being used for sample and marketing purposes.
The purchase price of icewine to Alpha Food includes delivery to Alpha Food’s warehouse. The delivery cost component of the purchase price shall be mutually negotiated and adjusted between the parties from time to time in response to account for any changes to the delivery requirements. Our company and Alpha Food shall negotiate any price increases for any icewine products at least 60 days prior to the effective date of any such increase. Alpha Food shall have the right to order one month of supply of the icewine products at the current price prior to any increase.
Our company and Alpha Food shall agree on our price to Alpha Food and Alpha Food’s price to its customers. All parties shall agree on an annual basis, or more frequently if required, as to the prices at which Alpha Food shall sell the icewine products to its customers.
In the event that our company and Alpha Food cannot agree on either price within 30 days of commencement of the negotiations, the prices then in effect for each of said prices will be increased by an amount equal to the change in the Consumer Price Index-All US over a period of months equal to the number of months since the last price increase for each price. This Agreement shall continue in full force and effect for a period of three years.
Our Recent Business
During fiscal 2016, we were unable to raise the necessary funds to achieve our objectives of buying and equipping a wine-making facility in Armeia. We did not earn any revenues from March 15, 2011 (date of inception) to January 31, 2017. However, we did produce 4,500 bottles of icewine which will be used for product sampling and marketing to potential customers and distributors. We intend to apply any proceeds from the sale of our current icewine reserves toward the production of a second vintage. We have not commenced the marketing stage of our business, other than the review of data and online research, the development of a logo and label, selection of a bottle, mini-product brochure and the development of a website www.armeaubrands.com, and can provide no assurance that we will generate revenue from the proposed sale of our beverages.
Competition and Market Position
Canada is the world’s largest manufacturer of icewine and makes much more than all the other countries put together. In 2014, Canada produced 2.5 million bottles worth on average approximately $70 million retail. People relate to Canada as a top icewine producer due to the well-known cold Canadian winters. Canada’s top international awards are dominated by icewine.
While Germany and Austria also makes icewine, their winters are not cold enough to consistently produce icewine every year.
Counterfeit icewines made by cryoextraction (the process by which grapes are frozen with refrigeration and pressed) have become prominent items in retail stores across Asia bearing false labels. These “freezer wines” lack the intensity and complexity of authentic icewines. Freezer-frozen grapes will usually not have hung on the vines as long, undergoing the physical and chemical changes that give authentic icewines their unique aromas and flavors. Even more of a problem are artificially sweetened icewines. Some estimate that as much as 50% of icewines sold in China are fake.
Icewine has proven particularly popular in Asia Pacific and Southeast Asian markets in recent years, as the fascination with icewine’s unique production (i.e. handpicked frozen grapes during winter months) is widespread among these regions’ consumers. In fact, icewine is a “sought after/exclusive” product and is often purchased when visiting Canada as gifts or investments. The growth of Canadian Icewine in Asian markets is realized firsthand in export data; approximately 74% of Canadian icewine is exported to Asian markets. Furthermore, seven of the top ten Canadian icewine export destinations are Asian countries, signifying the popularity of the dessert wine in this region.
In 2014, the Canadian Vintners Association (“
CVA
”) stated that icewine export value was $19.4 million and volume 228,500 litres. Furthermore, the CVA stated that China is the number one export market for Canada, with over $8 million of icewine (103,566 L) exported in 2014. The top 10 icewine export markets in 2014 were China, South Korea, Singapore, Hong Kong, Taiwan, Japan, United States, United Kingdom, Malaysia and France, representing 96.8% of icewine export sales volume.
Chinese consumers are attracted to the taste profile of the concentrated, rich icewine. They are impressed with the international awards and the prestige that accompanies icewine and they have a much stronger gifting culture.
Rising incomes, especially in urban areas, have led to greater demand for high quality prestige products that can demonstrate wealth and convey status. In urban areas, there is also greater receptiveness to new types of alcoholic beverages, niche products and imported drinks like icewine.
Russia being a trade partner to Armenia is also a major potential market for our company. Canadian icewine has not yet made inroads in Russia. However, sweet wines do dominate this market. Russians, like the Chinese, generally have a sweeter taste preference for wines than in the Western world. Also the taste for premium, and prestigious material possession and status remain important to Russians. We believe icewine has the potential to capture these trends.
Suppliers
We signed a formal, long-term agreement with EDVAG Group to produce our icewine in Armenia. The contract is based on an à la carte pricing menu whereas we can purchase services as needed. Our intellectual property rights, which include our trade secrets in icewine making, are protected in the agreement.
Distribution Methods
Our winemaker, EDVAG Group, provides warehousing and distribution services from their location in Yerevan, Armenia. They will bill us on a monthly basis for these services.
Intellectual Property
Previously, we were granted an Armenian trademark registration for “Armeau”. In 2012, we started the process of a US trademark. Unfortunately, after spending a considerable amount of money on legal services, the trademark registration lapsed due to our inability to demonstrate use of the trademark, which is a requirement in registering a trademark, because of our delays in production of our icewine. Once we have the funds and are in a position to register our trademark, we will begin the process again.
Government Regulations
Our operations are subject to numerous federal, state and local laws and regulations in areas such as food and beverage, alcohol, consumer protection, government contracts, trade, environmental protection, labor and employment, tax, licensing and others. For example, in the Canada and U.S., most federal and local governments have alcohol laws and regulations directed specifically toward our industry, including even environmental laws. In certain jurisdictions, we will have to obtain licenses or permits in order to comply with standards governing environmental regulations and the sale of alcoholic beverages.
The alcoholic beverage industry is also subject to requirements, codes and standards imposed by various insurance, approval and listing and standards organizations. Depending upon the type of alcoholic beverage and requirements of the applicable local governmental jurisdiction, adherence to the requirements, codes and standards of such organizations is mandatory in some instances and voluntary in others.
We do not believe that compliance with government regulation will have a material impact on the way we conduct our business. Given the alcohol related content that will be available on our website, we will implement appropriate safeguards and electronic warnings to ensure that visitors to our site are aware of any age related restrictions that may be applicable to them while visiting our site and are abiding by applicable laws regarding alcohol (such as age verification and ensure that all applicable duties and taxes are paid). Furthermore, our distributors will be contractors who are experienced in alcoholic beverage distribution and product sold over the internet can be verified by either credit card information and limited by internet proxy information.
The effects of material regulations on wine businesses are:
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Limitations of sales to specific jurisdictions/geographic areas;
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Limitation of sales to specific consumers;
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Compliance of food and beverage qualitative standards and measures;
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Increased cost due to compliance with duties, permitting and regulation; and
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Compliance and limitation of means of marketing sales and advertising of products.
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Employees and Employment Agreements
We have no employees other than our sole director and officer. Management and office administration services are provided by Cassandra Tavukciyan. We do not expect any material changes in the number of employees over the next 12 month period. We do and will continue to outsource contract employment as needed.
We intend to engage contractors from time to time to consult with us on specific corporate affairs or to perform specific tasks in connection with our business objectives .
Research and Development
We have not spent any amounts on that which has been classified as research and development activities in our financial statements during the last two fiscal years.
REPORTS TO SECURITY HOLDERS
We are required to file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission and our filings are available to the public over the internet at the Securities and Exchange Commission’s website at http://www.sec.gov. The public may read and copy any materials filed by us with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street N.E. Washington D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-732-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.
Item 1A. Risk Factors
Risks Related to our Business
We have a formal long-term agreement with a winemaker in Armenia but it can be terminated on a 90-day notice
Currently, we have a formal agreement with a winemaker in Armenia to produce icewine. If we cannot continue to secure an agreement, our current business will be severely impaired. There can be no assurance that the agreement can continue indefinitely on terms that management deems sufficiently favorable. If we are unable to obtain a new agreement for icewine production upon terms that management deems sufficiently favorable, or at all, it would have a material adverse impact upon our ability to conduct our business operations. Further, we have confidentiality agreements with our suppliers in Armenia protecting our icewine-making knowledge and a non-compete clause that extends even after the termination of the agreements. However, we cannot assure that it can indefinitely protect that competitive knowledge.
We require capital in order to take the necessary steps to grow our business
Currently, we do not have available funds to produce a new icewine vintage or fund other operating and general and administrative expenses necessary to grow our business. Further, we do not have the funds available to hire independent contractors. If we cannot secure additional financing, our growth and operations could be impaired by limitations on our access to capital. There can be no assurance that capital from outside sources will be available, or if such financing is available, that it will be on terms that management deems sufficiently favorable. If we are unable to obtain additional financing upon terms that management deems sufficiently favorable, or at all, it would have a material adverse impact upon our ability to conduct our business operations and pursue our expansion strategy. As of the date of this filing, we have minimal operations and did not generate any revenues during the year ended January 31, 2017. In the event we do not raise additional capital from conventional sources, it is likely that we may need to scale back or curtail implementing our business plan, which could cause any securities in our company to be worthless.
We have generated no revenues and have a limited operation to date
We generated no revenues since our inception on March 15, 2011, and currently have minimal operations. Furthermore, we anticipate our expenses increasing in the future especially when we commence production of our next vintage of ice wines. We can make no assurances that we will be able to generate any revenues in the future, that we will have sufficient funding to support our operations and pay our expenses and/or that we will be able to gain customers in the future to build our business operations. In the event we are unable to generate revenues and/or support our operations, we will be forced to curtail and/or abandon our current business plan and any investment in our company could become worthless.
We are exposed to market risk from changes in foreign currency exchange rates which could negatively impact profitability.
Although we intend to sell our products in US Dollars pursuant to our distribution agreement with Alpha Food Services, we have, and may be required in the future, to conduct transactions in foreign currencies but report in US dollars. As a result, there is exposure to foreign currency risk as we enter into transactions denominated in foreign currencies. Our predominant exposures are to the Canadian dollar, Armenian Dram, Russian Ruble and the Chinese Renminbi (“
RMB
”). With respect to the effects on earnings, if the US currency strengthens relative to other currencies, our earnings could be negatively impacted. The translation impact may be more material in the future. We have not utilized risk management tools such as hedging.
We acquire many products from our suppliers that are manufactured in Armenia. To the extent the DRAM or other currencies appreciate with respect to the U.S. dollar, we may experience cost increases on such purchases. We may not be successful at implementing customer pricing or other actions in an effort to mitigate the related cost increases and thus its profitability may be adversely impacted.
Our business is subject to risks associated with sourcing and manufacturing in Armenia.
Our future operations could be adversely affected by various factors including changes in Armenia’s political or economic conditions. The political system of Armenia is currently stable with four political parties populating its emerging democratic landscape. Armenia has a functioning market economy.
Armenia has joined numerous international organizations including the United Nations, World Trade Organization, the Council of Europe, La Francophonie and many others. It is also part of the post-Soviet trade agreement, the Eurasian Union, with Russia, Kazakhstan and Belarus.
Armenia is currently blockaded on two of its four borders by Azerbaijan and Turkey. This situation is a result of a territorial dispute between Armenia and Azerbaijan leading to the Nagorno-Karabakh War (1988–1994). Although Russia, France and the United States are currently attempting to broker an end to this crisis, we believe that this dispute may continue. We believe that this blockade has severely hurt the Armenian economy. If war restarts, our exports may be interrupted indefinitely. If we cannot export our product, we will be unable to implement our business plan.
Externally, the availability of only two export routes out of Armenia means the closing of borders or other trade restrictions imposed by Armenia’s neighbors are an operational risk. Although landlocked, Armenia maintains positive relations with Iran and Georgia through which many of its exports travel.
Icewine production is subject to many risks
Natural icewines require a minimum hard freeze (-8 °C [18 °F]) or colder), to occur sometime after the grapes are ripe, which means that the grapes may hang on the vine for several months following the normal harvest. If a freeze does not come quickly enough, the grapes may rot (
Botrytis cinerea
or noble rot) and the crop will be lost. If the freeze is too severe, no juice can be extracted. The longer the harvest is delayed, the more fruit will be lost to wild animals and dropped fruit. Theft is another concern in a poor country so the vineyard has to be constantly monitored and maintained. Since the fruit must be pressed while it is still frozen, pickers often must work at night or very early in the morning, harvesting the grapes within a few hours.
Also, the juice is very sweet and can be difficult to ferment. High sugars can create a hostile environment for the yeast, and fermentation stops early, leaving relatively low alcohol and high sugar levels in the finished wine.
We need to find distributors in China and Russia for the long-term success of our product.
China is the biggest potential market for our product followed by Russia. If we are unable to conclude an agreement with distributors in those countries, we will be unable to implement our business plan.
Our limited operating history makes it difficult to forecast our future results, making any investment in our company highly speculative.
We have a limited operating history, and our historical financial and operating information is of limited value in predicting our future operating results. We may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and estimates of future revenue. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could then force us to curtail or cease our business operations.
Our losses raise substantial doubt as to whether we can continue as a going concern.
We have not generated any revenues since our inception, have a working capital deficit of $52,395 as at January 31, 2017 and have had cumulative operating losses from our inception to the year ended January 31, 2017 of $106,495. These factors, among others, indicate that we may be unable to continue as a going concern, particularly in the event that we cannot generate future revenues, obtain additional financing and/or attain profitable operations. As such, our independent auditors have raised substantial doubt as to our ability to continue as a going concern in their audited financial statements attached hereto. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty and if we cannot continue as a going concern, your investment in us could become devalued or worthless.
We will sell and market a branded product which is an important asset. Violation of trademark rights by counterfeiters and imitators could negatively impact revenues and brand reputation.
Unauthorized use of our products’ trademark rights may not only erode sales of our products, but may also cause significant damage to our brand name and reputation, interfere with its ability to effectively represent us to our customers, contractors, suppliers, and increase litigation costs. Presently it is estimated that 50% of icewines in China are fake.
Our industry is competitive
The icewine industry is highly competitive and fragmented. Canada is the world leader in the production of icewine. Germany and Austria also have similar products. We will compete in its potential markets with numerous Canadian companies, many of which have substantially greater financial, managerial and other resources than those presently available to us. Numerous well-established companies are focusing significant resources on icewine that currently compete and will compete with our products in the future. In addition, we expect other copycat products to appear from Armenian competitors now that Armeau Brands successfully produced the first icewine in Armenia. We can make no assurance that it will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products, will not arise. In the event that we cannot effectively compete on a continuing basis or competitive pressures arise, such inability to compete or competitive pressures will have a material adverse effect on our business, results of operations and financial condition.
Our growth will place significant strains on our resources
Since inception on March 15, 2011, we had little to no operations. We are currently in the development stage, with no operations, and have not generated any revenues since inception. Our growth, if any, is expected to place a significant strain on our managerial, operational and financial resources as we currently have only one employee and will likely continue to have limited employees in the future. Furthermore, assuming we release our products and establish a customer base, it will be required to manage multiple relationships with various distributors and other third parties. These requirements will be exacerbated in the event of further growth of our company or in the number of its distribution contracts. There can be no assurance that our systems, procedures or controls will be adequate to support our operations or that we will be able to achieve the rapid execution necessary to successfully offer its services and implement its business plan. Our future operating results, if any, will also depend on its ability to add additional personnel commensurate with the growth of its business, if any. If we are unable to manage growth effectively, our business, results of operations and financial condition will be adversely affected.
Our Bylaws limit the liability of, and provide indemnification for, our officers and directors.
Our Bylaws, provide that every person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or a person of whom he is the legal representative is or was a Director or officer of our company is or was serving at the request of our company or for its benefit as a Director or officer of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise, shall be indemnified and held harmless to the fullest extent legally permissible under the general corporation law of the State of Nevada from time to time against all expenses, liability and loss (including attorneys’ fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by him in connection therewith. Thus, our company may be prevented from recovering damages for certain alleged errors or omissions by the officers and Directors for liabilities incurred in connection with their good faith acts for our company. Such an indemnification payment might deplete our assets. Stockholders who have questions respecting the fiduciary obligations of the officers and Directors of our company should consult with independent legal counsel. It is the position of the Securities and Exchange Commission that exculpation from and indemnification for liabilities arising under the 1933 Act and the rules and regulations thereunder is against public policy and therefore unenforceable.
Risks Related to Management, Stockholder Control and Regulatory Compliance
The success of our company depends heavily on Cassandra Tavukciyan and her contacts
The success of our company will depend on the abilities of Cassandra Tavukciyan, the President and Chief Executive Officer of our company, to generate business from her existing contacts and relationships within the alcoholic beverage industry in Armenia. The loss of Ms. Tavukciyan will have a material adverse effect on the business, results of operations (if any) and financial condition of our company. In addition, the loss of Ms. Tavukciyan may force our company to seek a replacement who may have less experience, fewer contacts, or less understanding of our business. Further, we can make no assurances that we will be able to find a suitable replacement for Ms. Tavukciyan, which could force our company to curtail its operations and/or cause any investment in our company to become worthless. Our company does not have an employment agreement with Ms. Tavukciyan nor any key person insurance on Ms. Tavukciyan
Our CEO and director has other interests outside of our company and may not be able to devote sufficient time to our operations
Cassandra Tavukciyan, our sole officer and director of our company, currently has interests outside of our company. Ms. Tavukciyan is currently our only executive officer and spends approximately 20 hours per week on matters relating to our company.
Risks Relating to Our Common
Shares
Investors may face significant restrictions on the resale of our common stock due to Federal regulations on penny stocks.
Our common stock will be subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
In addition, various state securities laws impose restrictions on transferring “penny stocks” and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.
There is no active trading market for our common stock and if a market for our common stock does not develop, our investors will be unable to sell their shares.
There has been no public market for our securities and there can be no assurance that an active trading market for the securities offered herein will develop or be sustained after this Offering. After the effective date of the registration statement of which this prospectus is a part, we intend to identify a market maker to file an application with FINRA to have our common stock quoted on the Over OTCQB. We must satisfy certain criteria in order for our application to be accepted. We do not currently have a market maker willing to participate in this application process, and even if we identify a market maker, there can be no assurance as to whether we will meet the requisite criteria or that our application will be accepted. Our common stock may never be quoted on the OTCQB or a public market for our common stock may not materialize if it becomes quoted.
If our securities are not eligible for initial or continued quotation on the OTCQB or if a public trading market does not develop, purchasers of the common stock in this Offering may have difficulty selling or be unable to sell their securities should they desire to do so, rendering their shares effectively worthless and resulting in a complete loss of their investment.
If we do not file a Registration Statement on Form 8-A to become a mandatory reporting company under Section 12(g) of the Securities Exchange Act of 1934, we will continue as a reporting company and will not be subject to the proxy statement requirements, and our officers, directors and 10% stockholders will not be required to submit reports to the SEC on their stock ownership and stock trading activity, all of which could reduce the value of your investment and the amount of publicly available information about us.
As a result of this offering as required under Section 15(d) of the Securities Exchange Act of 1934, we will file periodic reports with the Securities and Exchange Commission through January 31, 2017, including a Form 10-K for the year ended January 31, 2017, assuming this registration statement is declared effective before that date. At or prior to January 31, 2017, we intend voluntarily to file a registration statement on Form 8-A which will subject us to all of the reporting requirements of the 1934 Act. This will require us to file quarterly and annual reports with the SEC and will also subject us to the proxy rules of the SEC. In addition, our officers, directors and 10% stockholders will be required to submit reports to the SEC on their stock ownership and stock trading activity. We are not required under Section 12(g) or otherwise to become a mandatory 1934 Act filer unless we have more than 500 shareholders and total assets of more than $10 million on January 31, 2017. If we do not file a registration statement on Form 8-A at or prior to January 31, 2017, we will continue as a reporting company and will not be subject to the proxy statement requirements of the 1934 Act, and our officers, directors and 10% stockholders will not be required to submit reports to the SEC on their stock ownership and stock trading activity.
Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit your ability to buy and sell our stock, which could depress our share price.
FINRA rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares, depressing our share price.
State securities laws may limit secondary trading, which may restrict the states in which you can sell the shares offered by this prospectus.
If you purchase shares of our common stock sold pursuant to this Offering, you may not be able to resell the shares in a certain state unless and until the shares of our common stock are qualified for secondary trading under the applicable securities laws of such state or there is confirmation that an exemption, such as listing in certain recognized securities manuals, is available for secondary trading in such state. There can be no assurance that we will be successful in registering or qualifying our common stock for secondary trading, or identifying an available exemption for secondary trading in our common stock in every state. If we fail to register or qualify, or to obtain or verify an exemption for the secondary trading of, our common stock in any particular state, the shares of common stock could not be offered or sold to, or purchased by, a resident of that state. In the event that a significant number of states refuse to permit secondary trading in our common stock, the market for the common stock will be limited which could drive down the market price of our common stock and reduce the liquidity of the shares of our common stock and a stockholder’s ability to resell shares of our common stock at all or at current market prices, which could increase a stockholder’s risk of losing some or all of his investment.
If quoted, the price of our common stock may be volatile, which may substantially increase the risk that you may not be able to sell your shares at or above the price that you may pay for the shares.
Even if our shares are quoted for trading on the OTCQB following the Offering and a public market develops for our common stock, the market price of our common stock may be volatile. It may fluctuate significantly in response to the following factors:
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Variations in quarterly operating results;
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Our announcements of significant contracts and achievement of milestones;
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Our relationships with other companies or capital commitments;
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Additions or departures of key personnel
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Sales of common stock or termination of stock transfer restrictions;
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Changes in financial estimates by securities analysts, if any; and
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Fluctuations in stock market price and volume;
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Your inability to sell your shares during a decline in the price of our stock may increase losses that you may suffer as a result of your investment.
Because we do not intend to pay any dividends on our common stock; holders of our common stock must rely on stock appreciation for any return on their investment.
We have not declared or paid any dividends on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock.
The sale of our common stock pursuant to this prospectus or any future additional issuances of our common stock may result in immediate dilution to existing shareholders.
We are authorized to issue up to 200,000,000 shares of common stock, of which 9,450,000 shares are issued and outstanding as of the date of this annual report. Our Board of Directors has the authority, without the consent of any of our stockholders, to cause us to issue additional shares of common stock, and to determine the rights, preferences and privileges attached to such shares. The sale of our common stock pursuant to this prospectus, and any future additional issuances of our common stock will result in immediate dilution to our existing shareholders’ interests, which may have a dilutive impact on our existing shareholders, and could negatively affect the value of your shares.