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Cheers Investor "House Rules"

How we plan to conduct investor reporting for all who invested in our recent 2021 Regulation CF fundraising round.

Brooks Powell

November 3, 2021

KEY TAKEAWAYS

Dear Cheers Community,

The last few weeks here at the Cheers HQ have been a flurry of excitement. We have been working to close out the final details on this Reg CF raise, wrap up the year on a healthy foot with the upcoming  holiday season, and continue our focus on setting roots for retail expansion.

Beyond that, we have some interesting ideas in expanding the category of alcohol-related health, as you have seen from our recent customer/investor blog post & survey about new potential Cheers products.

We’re happy to report that the ideas our management team are most excited about are shared with similar enthusiasm by those that filled out the survey. While I believe our management team has both the duty and the discretion to pursue anything we believe will help generate the best return for our shareholders, it’s always refreshing to see strong alignment between our ranks of shareholders and management. Alignment isn’t necessary, but it sure does make the road more enjoyable! The future of alcohol-related health is innovative & expansive, and we’re excited to roll up our sleeves and get to work on it.

In the meantime, as your CEO, I wanted to share some things I’ve been thinking through regarding investor communications. This will include how we plan to conduct investor reporting for all who invested in our recent 2021 Regulation CF fundraising round.

When it comes to discussing investor reporting, I have to invoke the words of Marcus Tullius Cicero, a famous philosopher and statesman during an important period of Roman history: “If I had more time, I would have written a shorter letter.”

Propino! 🍷 (“Cheers” in Latin)

Brooks

Overview of Reg CF Investor Reporting:

Background

To understand how we arrived at our currently planned reporting decisions, it’s important to understand the logic behind them. We believe that these decisions are in the best interest of the company and hope you align with our thought process.

I always had trouble respecting the school teachers I had growing up that demanded kids do something “because [the teacher] said so.” And so now, long into my adulthood, I always strive to give my “why” behind the “what” whenever possible. In the ways that my teachers didn’t, I want to give our shareholders the respect of giving these “whys” behind our current reporting policies.

In an ideal world with unlimited time and resources, I would wish to provide as much reporting as theoretically possible. Unfortunately, in the real world, both time and resources are limited. Answering questions and providing financial reporting with commentary to our investors inevitably requires a significant amount of time and resources — as it rightfully should. We will always lean towards erring on the side of caution rather than speed when it comes to reporting by taking all of the necessary steps to ensure to the best of our ability that everything is materially accurate and above reproach.

The fact of the matter is that reporting is expensive, both in terms of direct and indirect expenses. In an illiquid investment, where information is often hard to act upon anyways, I believe that too much reporting can actually hinder management’s goal of generating a return for shareholders –so, we must fight the altruistic temptation to spend too much time on these activities.

To give an example, in terms of direct financial cost, just listing on StartEngine directly cost Cheers over $50k. In addition to our standard accounting firm and general counsel lawyers we use regularly in our business, we were required to present two years of audited financials from another accounting firm. We also needed to use two different law firms specializing in selling securities to aid in the process and pay some money to StartEngine, which covered similar legal work on their side.

Now that Cheers has sold securities through an “online public offering” — or “Regulation Crowdfunding” — the stakes are even higher in regards to providing materially accurate information and complying with relevant securities laws. All of this means that the process must be upgraded for this new level of reporting in Cheers’ business. Each time we provide material updates, such as by posting our financials, we typically decide to get this information reviewed by both accounting and legal firms to ensure the accuracy of our information. While we don’t yet fully know this cost of ongoing reporting, we know that the amount is not insignificant.

The general principle is rather simple and can be explained through an easy question: Would you rather investment go towards salary for management to prepare and for a law firm to review multiple financial updates a year… or would you rather it be spent on something that could directly impact the long-term earning position of the business? We ought to provide helpful and accurate reporting, but not go so overboard that it begins taking too much time or resources away from trying to increase the fundamental value of the company. There is a delicate balance at play here that we must be good stewards of.

Beyond the direct expenses (legal fees, accounting fees, salaries paid for the shared duty of reporting duties, etc.), there are indirect expenses to reporting too. This is generally in the form of “opportunity cost” — i.e., time spent on reporting is time not spent on something else, such as pitching retailers.

At the end of the day, we believe that there is often an inherent trade-off between focusing resources on building fundamental business value and reporting. Reporting is necessary and is the cost of raising capital through the method of Regulation CF—and we want our shareholders to be informed and excited about the business, so it is of its own value and something that we want to share. Therefore, we must find a good balance in our reporting processes that prioritize building fundamental business value over reporting, but also satisfies the needs of our shareholders and ensures everyone is excited about the road that we are collectively on with all the ups-and-downs that inevitably come with these types of journeys.

Requirements

The SEC requires that Cheers “must file with the Commission and post on the issuer’s Web site an annual report along with the financial statements of the issuer certified by the principal executive officer of the issuer to be true and complete in all material respects and a description of the financial condition of the issuer as described in § 227.201(s).” It goes on to say that: “If, however, an issuer has available financial statements that have either been reviewed or audited by a public accountant that is independent of the issuer, those financial statements must be provided and the certification by the principal executive officer will not be required.” And further that: “The report must be filed in accordance with the requirements of § 227.203 and Form C (§ 239.900 of this chapter) and no later than 120 days after the end of the fiscal year covered by the report.”

The relevant section can be seen here:

https://www.ecfr.gov/current/title-17/chapter-II/part-227/subpart-B/section-227.202

Legally, Cheers is only responsible to produce an “annual report along with financial statements” within “120 days after the end of the fiscal year covered by the report”, until it meets a specific threshold that no longer requires reporting. I currently believe that we can keep in better touch with our investors than this without sacrificing too much focus on building the business.

Current Reporting Plan


Our current reporting plan can be broken down into 3 sections: 1) Full-Length Reporting, 2) Answering Investor Questions or Comments, and 3) Regular Updates.

1) Full-Length Reporting

We will do yearly full-length reporting along with GAAP-formatted financial statements. We have board meetings once a quarter and so internally we look at the financials more frequently than this. In fact, we look at our most important business metrics daily. There is legal risk in not providing materially accurate information to the entirety of our shareholders and so we opt to have this information reviewed by accounting and legal firms for additional review, which of course, then creates additional reporting expense. Altogether, this means that we can reduce both expense and risk by isolating this large-scale reporting to once a year. One of my favorite CEOs of all time is Warren Buffett. He provides extensive yearly commentary in lieu of more frequent but less robust quarterly reporting. While I can’t promise to have the grace of Warren Buffett who has been at the helm of Berkshire Hathaway for 70 years, we would like to draw our inspiration from him in terms of investor reporting. This is a skill that we hope to further develop and sharpen over time through each iteration of reporting.

2) Answering Investor Questions or Comments

Throughout the active fundraising period, I did my best to respond to comments within 24–48 hours. However, this often came at the expense of rearranging my day or delaying something important. For example, if I had a series of meetings, but someone posted a thoughtful question, I would move those meetings so that I could respond right away. To protect our management team’s focus, we will make it a policy that we respond to all comments during the first week of the subsequent month. So for example, if we got 5 comments in January, then we would try to answer those 5 comments in the first week of February. The purpose of this is to prevent reactionary situations where we scrap our plans for the day to respond to a comment that just popped up. By scheduling it for a specific week, it allows us to be proactive about these relations rather than reactive, and thus helps preserve our focus.

We will do our best to provide as much color as we can when answering your questions or comments. There are times however when it makes sense to refrain from giving too much commentary.

We will typically refrain from providing too much detail when:

1. We can’t speak towards an issue without it potentially being legally risky to do so.
2. We believe that it could inform competition, who we believe are always looking to glean anything they can from our activities.

3. We believe it is distracting or inflammatory. Just like catcalling, not all comments or questions deserve answers.

3) Regular Updates

As you have seen, we enjoy frequently updating our investors about recent accomplishments, exciting company updates, information on current sales, and so forth. Because these are more informal, we generally don’t have to spend money having them reviewed by lawyers, and thus is something that we can do more frequently without it becoming problematic.

In these updates, we will cover all sorts of things. We have discretion here. For example, we recently posted an update with a survey that asked which types of products our investors would be excited to see Cheers make in the future.

Our goal is to keep you informed about things going on in the business, keep you engaged, and walk the narrow balance of sharing the news without doing it so frequently that it annoys you. If it ever gets to be too frequent, you could always disable notifications. One rule of life that I have learned so far in my tenure as CEO of a consumer-facing company is that it is impossible to please everyone… but, we try our best anyways!

Furthermore, one of the values that we saw in raising capital through crowdfunding is the value of the crowd itself. We believe that there is strength in numbers and we currently have around 1,500–1,600 investors. A common theme in our updates will be Cheers’ management team informing our shareholder base how they can help the company – so please be on the lookout for these requests!

Location of Information

For legal reasons, it’s easier to keep as much investor communication as possible in our funding portal page: startengine.com/cheers. If you ask us a question via email, there may be times where we ask you to ask the question on our StartEngine page so that everyone will be able to see the response. Many companies often have a page on their website that has investor information. Instead, we prefer to keep this on our startengine.com/cheers page. That said, there may be moments when it makes the most sense for us to converse with an investor via email, such as if an investor is asking what their discount code is from their tier of investor perks. This could change over time, but so far, we see keeping as much information on startengine.com/cheers rather than our website as the current best path.

House Rules Summary

We hope that these House Rules make sense to you and that you see them as proof that we want to be the best stewards of your investment as possible. Thank you for joining us on this journey!



References

About Cheers

Cheers is the leading alcohol-related health brand focused on developing products that support your liver and help you feel great the next day. As a student at Princeton, Cheers’ founder Brooks Powell discovered the potential advantage of incorporating the natural plant extract Dihydromyricetin (DHM) into an after-alcohol consumption regimen and began working with his professors to make products that addressed the unique challenges of alcohol-related health. . Since its official launch in 2017, Cheers has sold more than 13 million doses  to over 300 thousand customers. The research-backed line of products includes three versions of supplemental pills and powders – Restore, Hydrate and Protect. Cheers is now releasing read-to-drink versions of their products—starting with Cheers Restore. Each product is equipped to meet different health needs such as rehydration, liver support, and acetaldehyde exposure. Cheers places an equal emphasis on the responsibility and health aspects of its mission and vision. The brand’s mission is bringing people together by promoting fun, responsible, and health-conscious alcohol consumption. The vision is a world where everyone can enjoy alcohol throughout a long, healthy, and happy lifetime. For more information, visit cheershealth.com or join the social conversation at @cheershealth.

These statements have not been evaluated by the Food and Drug Administration.
These products are not intended to diagnose, treat, cure or prevent any disease.