The following discussion should be read in conjunction with our unaudited
consolidated financial statements and notes thereto included herein. In
connection with, and because we desire to take advantage of, the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, we caution
readers regarding certain forward-looking statements in the following discussion
and elsewhere in this report and in any other statement made by, or on our
behalf, whether or not in future filings with the
1. Executive Overview and Outlook
Based on the Company's own internal assessments developed without any external or professional evaluation, the Company believes that global tequila market has significant future growth potential. Some have projected that growth may continue for an extended period of time however the Company has relied upon other sources that it believes are reliable.
We employ what we call a 'ground to glass' strategy with the goal of controlling sales and assets along every level of the tequila sales chain; from the agave plants in the ground to the cocktail at the bar. We believe that on a long-term basis this will best serve our interests however, our business plan and our strategy has been evaluated internally only by our Board of Directors without the benefit of any third-party evaluation.
As an integral part of this strategy and if circumstances allow, we seek to build a foundation through investment, acquisition, and relationships at each level. If we are to implement this strategy, we anticipate that we will need to raise a significant amount of additional capital. We cannot assure you that we will be successful in these efforts or if we are successful in implementing our business plans, that we will also achieve and sustain profitability or even sales growth for any period of time. In many respects we are attempting to implement and grow a new business and, in that respect, there can be assurance that, like any new business, that we will.
Operationally, the Company is organized along geographic lines with management
teams having responsibility for the business and financial results in each
region, the United Mexican States and
We believe that having a licensed import company allows our Subsidiary to not only bring in its own products, but it may, if circumstances allow, also include others. Based on our own internal management assessments, undertaken without the benefit of any professional third-party evaluation, this may give our us another layer of potential sales revenue generating opportunities.
Currently, CapCity imports and sells, or has the right to sell, Shinju Japanese
Whisky,
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A large portion of CapCity's current focus is on Shinju. Shinju has gained
significant traction in the
[[Image Removed: Text Box:]]The 'ground' level of the Subsidiary's foundation is agave plants. Tequila cannot be made without the agave plant. Part of our strategy is to plant and own as many agave plants as possible. We believe that the dramatic increase in demand for tequila has made the supply of agave plants more valuable. By our own informal assessment, the price of agave has increased roughly 338% since 2016. However, there can be no assurance that these trends will continue or if they do continue, that they can be sustained or otherwise result in any benefit to our business.
Source: Development of a Predictive Model for Agave Prices Employing
Environmental, Economic, and Social Factors: Towards a Planned Supply Chain for
Agave-Tequila Industry,
Through the Subsidiary, we currently own or manage an aggregate of approximately 400,000 agave plants and we hope that if circumstances allow, we may be able to plant or manage more agave plants in coming years. Once the plants mature the Company will harvest them. Our strategy is to sell t
he plants creating significant revenue for the Company or to use in our bulk production to produce tequila which may allow us, if favorable market conditions allow, an ability to better manage our costs.
The next level is the bulk tequila production level. This is the most
significant piece of our business. We currently have a production partnership
and ownership interest in Hacienda Capellania, a top 15 rated tequila
distillery. Their distillery is located at the global epicenter of the tequila
industry in the highly regarded highlands region of
Our partnership with Capellania includes supply contracts with well-known and award-winning tequila brands, large distilleries, celebrities, athletes, restaurant groups, and retailers. This partnership, under ideal conditions, produces 100,000 to 250,000liters of 100% tequila monthly and if market conditions and our cash resources allow, we hope that we may be able to grow to one (1) million liters of production per month. The timing and extent that these plans may be achieved is subject to significant external risks and our ability to fully implement our business and financial plans.
We are aware that there are roughly only 150 tequila distilleries in the world. As worldwide demand for tequila increases, the distillery supply and value of that supply will continue to increase. However, we face significant competition from many well-established competitors who possess significantly greater financial and managerial resources than we currently have and likely will have in the foreseeable future.
Our third level involves our control and sale of assets is the brand level. Our Subsidiary owns multiple brands including, Tequila Armero, Fervor Mezcal, Profano Mezcal, 88 West Rum, and Nevele. We believe that our ability to "brand" our products may allow us to achieve at least a modest level of marketing control in the future.
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Armero and Fervor were recently launched into the U.S. market with an initial
focus on the
If market conditions are favorable and if sufficient financial resources are available, we may launch new products, namely, Profano, 88 West, and Nevele under the same strategy in the future. These branded products may provide us with some degree of diversification and possibly profit potential.
We are also employing a strategy of taking ownership interest in brands to make the tequila for third parties. With the growth and profile of tequila intensifying, the demand for private-label production is increasing, especially from celebrities and influencers. Currently, a significant part of the Subsidiary's business is producing and developing brands for third parties. If circumstances allow, we may seek to retain partial ownership in those brands.
We are aware that launching a product brand is an intensely competitive and difficult strategy and there can be no guarantee of success or, if it later becomes successful, that it is not preceded by heavy losses and negative cash flow for an extended period of time. But we believe that such efforts may be entirely worthwhile. We have noted that in recent years some have sold their branded product lines to other, larger market competitors.
The fourth level of our Subsidiary's business is the import/export level. In
general, for a brand of liquor to be imported and be sold in
2. Discussion on Results of Operations
Worldwide Net sales were
It is important to include into the considerations on commercial activities in the US that, more than 110,000[1] eating and drinking establishments closed in 2020 and additional 80,000[2] have temporarily or permanently closed in 2021.
3. Discussion of Segment Results
The Company markets its products in two countries,
Alcoholic beverages and finished bulk lot tequila
54 For the Nine-Months ended on September 30, 2021 Mexico Wholesale market $ 1,081,871 Retail market 11,208 USA Wholesale market 105,354 Total: $ 1,198,434 Operating profits 178,755 % of Net Sales 14.92 % 4. Non-GAAP Financial Measure
Generally, the Company uses non-GAAP measures for internal budgeting, segment
evaluation and understanding of overall performances. However, related to Sales
the Company adopted ASC 605 and ASC 606 for all measurement and analysis,
therefore the Company believes that no reconciliation of
5. Liquidity and Capital Resources
The Company expects cash flow from operations and debt issuances will be not
enough to meet foreseeable business operating and recurring cash needs
(including costs emerging from the
Cash Flow
Net cash provided by operations as of the nine-month period ended on
6. Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated special purpose entities.
7. Managing Foreign Currency, Interest Rate, Commodity Prices and Credit Risk Exposure
The Company is exposed to market risk from foreign currency exchange rates,
interest rates and commodity price fluctuations. Volatility relating to these
exposures is managed in both countries (
The sensitivity of our financial instruments to market fluctuations is discussed hereto, see Note 1 Sub-Section Basis of Presentation and Disclosure of accounting policies and Fair Value of Financial Instruments and Note 8 Fair Value Measurements.
55 8. Critical Accounting Policies and Use of Estimates
In certain instances, accounting principles generally accepted in
The Company accounts for inventories on ready-to-market products using the
first-in-, first-out ("FIFO") method. There would have been no material impact
on reported earnings for the nine-month period ended on
As of
The Company's subsidiaries acquired plants, or planted agave, between the years
of 2018-2020. The Company will look to harvest and sell much of the agave
planted in 2018 and early 2019 in the 2022 calendar year. The Company intends to
do this not only as a source of revenue, but primarily to help pay down a
majority of its liability owed to its agave partner in its subsidiary of
When valuing our agave plants, we take into account multiple factors:
• When the plant was planted - the age
• The size (based on its age)
• The average price per kilogram in the market
The price, or value of an agave plant, is based on its weight - a cost per kilogram. As a plant is in the ground it continues to grow, increasing in weight and value. This is a factor we take into consideration when placing a value on our plants.
The growth of a plant can vary over its lifecycle. Once harvested the weight of a plant can be anywhere from 36kgs to 136kgs. Many factors play into this - the soil, climate, how they are farmed, etc.
The argument for 'when' the agave should be harvested is a much-debated topic in the tequila industry. It has been a generally accepted opinion that the agave used in tequila should not be harvested until it has been in the ground for 6 - 8 years. However, because of the growth in demand for tequila, and the lack of supply to keep up, many farmers are now harvesting the plants at 4 - 5 years.
In our calculations, we factor in an average growth rate per year and subsequently per quarter. We derived this rate by taking the average weight of the plant at harvest (32kgs) and divided it by the 'standard' number of years the agave is in the ground (7 years).
Using a seven-year standard, along with the average weight, we calculate that our agave plants grow at an average of 4.5kgs per year. The 4.5kgs per year is used in our calculations, which breaks down to 1.125kgs per quarter.
The final piece in our value calculation, and the key piece, is the price per kilogram. Prices can fluctuate due to the supply/demand economic forces. In making our value calculations we generally use a per year average price, using the most conservative price based on what the industry pays on an average basis.
Through multiple industry data points the current price per kilogram average sits at MX$29/kg.
Depending on having the proper funding, the Company will look to continue to plant agave each year to backfill the plants being sold. If proper capital is not available, the Company may hold off on making new investment in plants and put its time and capital on quicker revenue generating opportunities like bulk tequila production.
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With the continued growth in the demand for tequila, the Company foresees a continuing need for supply of agave, which should maintain the higher prices paid by customers for the plants. The Company sees this as a very valuable opportunity, but sufficient capital will be needed to sustain this model.
9. Goodwill Impairment
To comply with the requirements of S-K303(a)(3)(ii), the Company understand that shareholders may requires a description of, at the time this filing is made, some known uncertainties, and at the same time ensuring that investors are provided with information that allows for an assessment of the probability of a future material impairment charge.
While best efforts were made to move forward with both "Tequila Copter" to
develop a re-launch the Museo project in
Based on the foregoing the Company understand that a
10. The Company's Performance and Goals
With limited funding the Company must rely on partnerships with active distilleries to produce and supply its bulk tequila turns. The downside to having to rely on a partnership is the distillery partner receives a majority of the profit from a turn. The Company's long-term goal, with adequate funding, is to eventually own a distillery outright. This would provide the Company with more control over the production timing and give the Company 100% of the margin/profit on a bulk sale.
In 2021, in order to diversify and expand its production capabilities, the
Company partnered with a second distillery,
On one bulk production turn, roughly 25,000 liters, the cost to produce that
turn is on average
On a 25,000 liter turn it generally takes on average 30-45 days from start to
sale. This timeline can vary, quicker or longer, based on some factors out of
our control. For example, the CRT (
To date the Company has been funding its bulk turns through private financing. With limited funding available the Company has averaged 1-3 turns per month. The Company has the availability to do more turns, but additional financing is needed. The Company's goal, with additional financing, would be to have 5-6 turns producing each month.
Although the profit margins are small, the sales can happen quickly and on a large scale. If additional funding is available the Company will look to increase its production to a consistent number of turns per month which would generate significant revenue for the Company.
Going forward, the Company has a goal of establishing its own distillery. This
would allow the Company to take 100% of the profits from each bulk sale.
Currently, based on market prices, the net profit is roughly
In Q3 Armero and Fervor were well-received in the market as the Company's limited inventory sold out within two months. With its initial success the Company sees a greater opportunity with these brands, but additional funding is needed to continue sales of these brands in the market. The first production run of Amero and Fervor was limited as it was seen as a 'market test'. A much larger production run will be needed to fill the initial demand in the market and additional capital is needed to do the production. Along with that, more marketing dollars will be needed to support the brands. If the Company cannot obtain the necessary funding for the brands, the Company will have to put further expansion and sales of these brands on hold.
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The Company understands that margins as an importer are slim. An importer must rely heavily on moving a large volume of product through its level for it to be profitable. Currently CapCity is only importing Shinju on a larger scale and Armero and Fervor on a smaller scale. The volume is still not at the levels for CapCity to be consistently profitable.
The Company understands this and if in the future the model is not sustainable
the Company will look to close CapCity. However, having a Federal Import License
is valuable and gives the Company additional control over the full process on
the sale of liquor into
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