Underweight Deal: Another Hangover Cure

$1.6M

Key Stats:

Raise to Date

$0

Investment Minimum

$40

Minimum Raise

$80,000

Valuation Cap

$1.6M

Raising Platform

Razitall

Security Type

CAFES

Target Summary

$107,000


Summary

The Intox-Detox team has been selected as an “Underweighted Deal” by KingsCrowd. This distinction is reserved for deals not selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

 

Intox-Detox is an early-stage company devoted to the production, marketing, and sale of its namesake “all-natural” anti-hangover herbal dietary supplement. Its blend also protects the liver from the potential damage associated with alcohol consumption.  

 

Since developing its product and launching in 2014, the firm has been testing consumer reception at beer fests across the US, but as 2019 opened up, management elected to begin e-commerce operations.  In order to expand its business, the company has decided to raise up to $107,000, most of which will be allocated toward inventory buildup and marketing initiatives. Though the company operates in an interesting and growing market, its financial condition leaves a great deal to be desired. 

The Problem

Hangovers and liver damage don’t just affect drinkers but their friends and loved ones.  They also have a negative impact on the economy. One study performed by the CDC (Centers for Disease Control) in 2010 found that the economic cost of excessive drinking totaled $249 billion per year, or a little over $2 per drink consumed.  Of this, about 72%, or $179.3 billion, came from lost productivity associated with hangovers alone.  

 

This is not just a US-based phenomenon.  In a more recent study conducted in Britain, the London-based Institute for Alcohol Studies found that in their country alone, the cost associated directly with hangovers was $2.5 billion per year, but when all aspects were taken into consideration, this figure for the nation might rise to as much as $15.8 billion per year.  The impact associated with alcohol is not limited to the financial side only. In some data taken from the CDC for 2017, it was discovered that 22,246 people die in the US every year from alcoholic liver disease.  

The Solution

To address these problems, the founders of Intox-Detox created their namesake product: Intox-Detox.  Pegged as an all-natural herbal dietary supplement founded on a mix of scientific principles and traditional Chinese medicine, the product can be taken either before a night of drinking or mixed in with the drink in question.  Management’s claim is that the mixture can eliminate ALD (Acetaldehyde) up to 65% faster than if a user does not take the product. It accomplishes this by combining L-Glutathione with ALDH2 enzyme in the liver, turning ALD into acetic acid.  The product also allegedly keeps its users hydrated and helps to fight certain types of inflammation.

 

Though the company was founded in 2014, plans for going to market only recently began. Much of the past five years have been dedicated to visiting beer fests in order to test the product out.  Management claims that over that time it has been “battle-tested” by more than 100,000 samplers. A review on Amazon for the product showed only 26 people have rated it so far, but the small sample size shows a strong reception from customers, with a total rating of 4.6 out of 5 stars.  

 

While e-commerce operations have only begun starting in 2019, and therefore the company’s financial condition might have changed, what we do know from its financials last year is that the company is not in great shape.  

 

In 2018, the firm generated sales of $19,606 and its net loss was $98,209.  Total debt listed by the firm is nearly $600K, despite management personally having invested around $319k into the business, on top of other funding received.  Of its listed liabilities, the largest is for $433,507 payable to Moira Lormel, the firm’s CFO and largest shareholder with a 37.5% equity stake in the firm.  

 

Specific terms associated with these liabilities are not well understood, but they can potentially leave investors exposed.  Not only could they theoretically push the company into bankruptcy (even in spite of this raise), they could be used as leverage for Lormel to further dilute existing (or future) investors in exchange for a sizable equity position in order to be made whole again.  

 

The same applies to more than $53k in additional liabilities associated with other individuals tied to the firm.  It is worth mentioning that last year most of the company’s costs, including $95,184 attributable to Lormel, were non-cash in nature.  Typically, founders don’t book significant amounts of liabilities for themselves, preferring instead to opt for additional equity. This is because incoming investors frown on firms that they see as having large future payouts to worry about. 

 

One claim made by management is that, within one year of closing its current capital raise, it will generate revenue of around $480,000.  This is entirely possible — but far from guaranteed. Without more data to support these assertions, we have a hard time giving such predictions weight. 

Market Opportunity

Covering the hangover cure market in any major detail is a difficult task because of how ‘grey’ it is.  For instance, one source indicated that the broader OTC (over-the-counter) pain relievers space could be around $4 billion in size, and that would certainly include solutions to the hangover issue.  The smaller dietary and herbal supplement market that includes hangover solutions is estimated to be about $1.9 billion.  

 

The best data we could find suggests that in 2018 the market that caters specifically to hangovers was around $785 million.  This represents an increase of 12.9% over the $695 million calculated in 2013 for an annualized growth rate of about 2.5%.  Another source suggested the market could be larger at up to $1.6 billion.  Of course, this data covers only the US. In other countries, there are opportunities as well.  In Japan, for instance, where all-natural remedies are the norm for treating the malady, it’s estimated the market is valued at about $178 million.  

 

As might be expected, there are already a large number of competing firms in this space, which will make Intox-Detox’s challenges that much greater to overcome.  According to Harvard Health Publishing at Harvard Medical School, the most common treatment for hangovers are typical OTC medicines like aspirin, ibuprofen, and naproxen.  Some consumers also focus on herbal remedies like ginkgo, sometimes mixed with other remedies such as garlic, but the FDA does not regulate these solutions and findings on their efficacy are mixed.  

 

Other competitors still include firms like NutriDrip.  Targeted at a more affluent kind of consumer, NutriDrip offers IV drips centered around detoxing and individual sessions in a discreet setting can cost its clients several hundred dollars.  Still in the works is another solution, being pioneered by multiple firms: hangover-free alcohol that poses no risk to the liver.  That alone, if it becomes a success and catches on, could displace all of the firms like Intox-Detox that operate in this space.  

Deal Terms

Unlike many of the deals in this space, this transaction is a bit unique.  Instead of receiving a direct equity stake in the company or some form of note, investors will receive CAFES (Contract and Future Equity Stake).  This document gives its owners the right to receive a 5% ownership stake in the company upon its sale or some other triggering event.  A conversion would be into whatever types of units guarantee the ownership stipulation and that the next equity investors in the firm would receive.  The minimum management is hoping to raise in this transaction is $80,000, while the maximum is $107,000. Investors may start with a bid of as low as $40 apiece and management has assigned a current value to the enterprise of $1.60 million. 

Management

There are two core members of the Intox-Detox team: CEO Andrew Bennett and CFO Moira Lormel.  Bennet has served as the company’s CEO since its founding in 2014. Prior to that, he worked as a “Digital Marketing Expert” at Michael Todd True Organics from 2013 through part of 2014.  

Before that, he was a freelance writer for LIVESTRONG for about five years.  Lormel, like Bennett, has been with the company since its founding. Formerly, she was CFO of DML Associates LLC, a consulting firm, for around four years, and she has also served as an Executive Assistant for Idirect from 2006 through to today.  

The Rating: Underweight Deal

Having weighed the evidence, we are assigning Intox-Detox the rating of Underweight

 

Management appears to have made an impressive product. But that alone doesn’t mean a business will be a success. The detox industry itself is fragmented and, in our estimation, it’s difficult for any individual player to stand out. This, coupled with the company’s questionable financial results and balance sheet all add together to give us pause at this juncture. 

 

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About: Daniel jones

Daniel Jones is a graduate of Case Western University with a degree in Economics. He has spent several years as an equity analyst writer for The Motley Fool where he focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics, in addition to contributing equity research to publications such as Seeking Alpha.

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