Traders jump in and out of Hangover Joes as the company uses social media to pump itself and create an irrational and unmaintainable frenzy.
Written by Janice Shell
May 15, 2015: Hangover Joe's Holding Corporation (HJOE) has had quite a week. On Monday 11 May, the company's stock opened at $0.0004 and closed at $0.001; on Thursday, it hit a heady intraday high of $0.0062 on 532 million shares, only to fall back to close at $0.0024. The increased interest in the issue seemingly came out of nowhere. Only a little less than three weeks ago, HJOE was trading in the low triple zeros on average volume not much greater than 10 million shares daily.
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| HJOE, intraday chart 05/14/2014 |
What on earth had happened?
Hangover Joe's
Hangover Joe's is the brainchild of Shawn Adamson and Michael Jaynes. Jaynes is a retired attorney from Jackson, Tennessee. Adamson is manager of Daimiel Global Resources, an unincorporated entity that is, according to Adamson himself, a "private investment organization." In a Schedule 13 filed with the SEC on 25 July 2012, Adamson noted that in 2008 he'd been convicted of fraudulent use of a credit card in Carroll County, Arkansas. He was sentenced to three years' probation, 90 days in jail, and a $1,000 fine.
HJOE's SEC filings do not explain how Adamson and Jaynes got into the hangover cure business. Initially the pair set up an LLC called Hangover Joe's Products. In 2012 they purchased a public shell incorporated in Colorado called Accredited Members Holding Corporation (ACCM). At the same time, they formed a new company called Hangover Joe's, Inc.; its purpose was to acquire the assets of the LLC and another entity named Hangover Joe's Joint Venture. In July 2012, a reverse triangular merger was effected. The ACCM shell became Hangover Joe's Holding Corporation, and Hangover Joe's, Inc. became a subsidiary of the holding company.
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| Matthew Veal |
Veal is a Floridian who describes himself as an "entrepreneurial accountant" with considerable experience raising money for startups and guiding them on their way to success or failure. "If I don't let anybody down, we will be fine," said Veal modestly. "I know I'm lucky to get to work on this opportunity and wish to thank Mike and Shawn for really setting things up and giving me the opportunity to help guide Hangover Joe's to the fore front of the functional lifestyle category of beverages."
The products
HJOE sells two products. The first is the much-touted Hangover Recovery Shot, "designed for those who like to responsibly enjoy alcohol, without the unpleasant side effects of a hangover." That may seem a contradiction in terms, but never mind. According to the company, the Recovery Shot is a "totally new approach to an age old problem" that was "formulated by a laboratory chemist who is an expert in the field." The chemist in question is nowhere identified in HJOE's filings.
This "revolutionary cure" is clearly based on Asian traditional medicine. At a web page dedicated to explaining how the product works, there's much talk of how alcohol is hot, and "makes you all warm and humid inside." One of the shot's principal ingredients, flowers of the familiar plant kudzu, is said to be "spicy, sweet [and] cool," and counteracts alcohol's unfortunate effects by making the "clear yang rise."
The company claims in successive Forms 10-K that the product is a patent pending liquid two-ounce shot. It's most certainly a shot, but a search of the United States Patent and Trademark Office and Google Patent websites doesn't turn up a patent application that can readily be associated with HJOE. In 2011, Applied Food Sciences, Inc., a Texas dietary supplements company sued what was then Hangover Joe's Products, LLC for patent infringement. Applied Food's patent, United States Patent No. 7,662,863, was issued on 16 February 2010, and is establishes the company's claim to a "therapeutic method and associated compound for ameliorating alcohol intoxication and preventing and/or reducing hangover symptoms."
The description of the compound makes no mention of kudzu; its active ingredient is glucarate or a glucarate derivative, glucuronolactone. HJOE said it believed the lawsuit to be without merit, but agreed to settle in order to save money, noting that it had removed the offending ingredients from its own formula "many years back." It coughed up $5,000 and Applied Food went away. The lawsuit was not Applied Foods' only patent infringement action. In 2010 it sued Dajomi Brands LLC (now NoHo, Inc.; DRNK) in connection with its own "hangover defense" shot, NOHO; and in 2013, it went after Monster Beverage Corp. (MNST) for its Rehab drinks, which are also designed as a "hangover aid." Applied Food Sciences itself doesn't sell directly to the public, but develops and markets proprietary ingredients used in foods, beverages, and nutritional supplements.
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| Larry the Cable guy promotes Git-R-Done |
HJOE boasts that Git-R-Done is different from other energy drinks because it's "healthy," containing no caffeine or refined sugar. It features a great many ingredients, among them green tea, yerba mate, and guarana extract, all of which contain caffeine. Interestingly, another ingredient is glucuronolactone. Perhaps Applied Food won't object, since Git-R-Done is not intended to treat or prevent hangovers.
Adding Git-R-Done to the product line seems to have been a good idea. In the most recent financial report HJOE filed with the SEC--a quarterly for the period ended 30 September 2014--it's stated that "there have been no significant 2014 sales of Hangover Recovery Shots in 2014 [sic]; 2014 sales have primarily consisted of Git R Done Energy Shots."
Toxic financing
The quarterly also makes clear that HJOE's financial condition leaves much to be desired. At the end of September, the company had a working capital deficiency of $2.704 million, and an accumulated deficit of $6.284 million. It reported a net loss of approximately $592,000 for the period, and relied on debt financing and private placements of its common stock to fund operations. Due to a lack of liquidity--another word for money--it had defaulted on some of its debt agreements and a licensing agreement struck with Warner Brothers for use of promotional materials having to do with the movie The Hangover.
The sales of convertible notes are particularly troubling. HJOE is in hock to nearly every major toxic funder out there, and to some minor ones as well. Though most of the individual loans are relatively small, as of early 2015, more than $700,000 in convertible notes was outstanding, and additional financing was needed. Some, but not nearly all, of that debt has been converted, but more has been incurred.
On 5 January 2015, the company filed a definitive proxy statement with the SEC. It was an informational filing only; the measures proposed in it had already been approved by shareholders with voting control on 1 December. As of that date, HJOE's authorized capital was 500 million shares, of which 347,706,881 were issued and outstanding. The proxy statement contained only two proposals. First, the authorized would be raised to 5 billion shares; second, the board of directors would be given discretionary authority to implement a reverse split of up to 1:200 at any time prior to 31 December 2015.
The proxy includes a list of all convertible promissory notes outstanding as of 30 September 2014. It reads like a rogue's gallery of cutthroat funders, featuring JMJ Financial, Asher Enterprises, LG Capital Funding, KBM Worldwide, Tangiers Investment Group and more. Asher's note had since been converted in full; other notes had been partially converted. But as we shall see, more debt has been undertaken since the proxy statement was filed.
The gigantic increase in the authorized was obviously necessary to accommodate conversions. On 23 February, HJOE followed through by amending its articles of incorporation in Colorado to reflect the change. No decision has yet been made about the reverse split; should the board decide it's necessary, a further amendment will be required.
The raise in authorized capital came just in the nick of time. On 20 March 2015, a new lender, Joshua Sason's Magna Asset Services, Ltd., entered the picture. In his Schedule 13G, Sason indicated that he potentially controlled 9.99% of the company's common stock, and reported that the current shares outstanding were 1,747,702,984. The outstanding had grown by a little more than 1.4 billions shares between the beginning of December and the end of March. That is dilution on a staggering scale. (Note that Magna, as a new lender, hasn't converted his note yet. His position "consists of Common Stock that the reporting person has the right to acquire by way of conversion of promissory note(s)." Typically, note holders don't convert until their stock can be issued free trading.)
Almost two months have passed since Sason filed his Schedule 13. What is the outstanding now? We don't know. Unusually, HJOE fails to identify its transfer agent in filings, or at its OTCMarkets profile page.
More problems
The company's 10-K for fiscal 2014 was due on 31 March, but it did not appear. On that day, a Form 12b-25--notice that the filing would be late--appeared, giving HJOE a 15-day extension. The filing is now delinquent. HJOE's inability to file is of its own doing, but isn't exactly its fault. As luck would have it, on 20 February 2015, the board fired GHP Horwath, P.C., its auditor. It did not report any disagreement with Horwath, and did not explain the reasons for its action. A replacement was found in the person of Terry L. Johnson, CPA.
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| Terry Johnson |
Presumably Hangover Joe's has been unable to meet its filing obligations because of Johnson's shenanigans, but that won't cut any ice with the SEC. The company is now a delinquent filer, and that has serious consequences. The holding period for restricted stock issued by SEC registrants like HJOE is six months. That means note holders of such companies can convert and sell once half a year has passed; since converting and selling is how they profit on their investments, they want the process to go smoothly. But if the issuer becomes delinquent, Rule 144 is not available to those note holders, or to any other owners of restricted paper. The securities cannot be freed up until the delinquency is cured.
No doubt HJOE's lenders are unhappy with this situation. HJOE can't be too thrilled either, given that the delinquency has thrown it into technical default on most or all of its financing agreements. On 23 February, the company modified an earlier arrangement with Curt and Seth Kramer's KBM Worldwide. In the description of the promissory note, certain events that would cause default are specified. One is a failure to comply with the Securities Exchange Act of 1934, which mandates the filing of periodic financial reports with the SEC. The default event is described as follows: "The Borrower shall fail to comply with the reporting requirements of the Exchange Act; and/or the Borrower shall cease to be subject to the reporting requirements of the Exchange Act."
That clause is standard; HJOE isn't in difficulties with only a single creditor. Until the missing 10-K is filed, there will be no more conversions, but that will only delay the pain for shareholders concerned about dilution. The creditors won't demand their money back--they know Hangover Joe's can't pay up--but they'll likely want to renegotiate their financing agreements on terms more favorable to themselves.
Evil shorts and social media hype
In March, Matt Veal released two letters to his shareholders, explaining some of the company's problems and promising brighter days ahead. In the first, published at Facebook on 9 March, he succumbed to a temptation that bedevils many penny CEOs: he decided to take Shorty and "bashers" to task. He sternly--and inappropriately--warned that "bashers who try to harm this company with lies and disinformation we will have our attorneys monitoring for this and will be swift to take action in the future. Also our social media is for our customers and if someone bashes on our social media you will be banned. They have an agenda and they hate that this company has continued to survive and move forward with all the efforts they made to make this not possible."
We call that overkill. Every company has its critics. They aren't necessarily short, and their agenda is often merely to get at the truth.
In the second communication, from 18 March, Veal returned to the same theme. He began by acknowledging that shorting is not illegal, adding, "And Hangover Joes [sic] has seen [a] considerable amount of shorting recently!" While it's true that short interest increased between the end of February and mid-April, so did the stock's average daily volume. More importantly--and something Veal neglected to explain--the shares outstanding had by that time ballooned to 1.75 billion. The 16 million share short interest reported on 31 March is insignificant in comparison.
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| Kim Tae Ri |
Understanding that the SEC has given its blessing to companies that wish to use the social media to disseminate information to stockholders and the general public, Hangover Joe's makes liberal use of Facebook and Twitter. Whoever posts for the company is so enthusiastic that the account was for a time locked up in "Twitter Jail," a fate that evidently awaits those who tweet more than 100 times an hour, or 1000 times a day.
On the fateful Thursday, the tweets were upbeat--to say the very least--for much of the day. The poster confided at one point that a huge deal was in the works, one that would ensure the company's success worldwide.
More heavy hints were dropped, promising a national rollout and an announcement of clients in three new countries.
As the stock began to tank the chatter turned to over-the-top complaints about everyone's favorite whipping boy (after Shorty), the "bashers."
For awhile, the messages suggested news was imminent, but in the end, nothing official presented itself, and some tweets failed to make much sense.
As evening descended, the Twitter page fell silent and the company poster went off, he said, to a party in New Orleans where HJOE's energy shots and hangover cures would be promoted.
Hangover Joe's, and its stock's, dizzying ups and downs may continue into the coming days and weeks. Perhaps shareholders' spirits will be buoyed by the contents of the 10-K that will eventually appear, but more likely they'll be crushed by yet more massive dilution. One thing is guaranteed: the HJOE story will continue to be of interest, and new developments will be watched carefully.