Item 1. Business
Company Overview
On April 4, 2014 we announced a new direction for the Company. We intend to become a service provider to the expanding Colorado marijuana industry. DC Brands, through its newly formed, 80% owned subsidiary, DC Brands Green Investments, LLC intends to provide accounting, security, compliance, payroll processing and tax payment services to fully licensed Colorado medical and recreational marijuana businesses.
Due to current banking restrictions many fully licensed Colorado marijuana growers and sellers are forced to do business in only cash. This creates many challenges in banking, paying employees, paying taxes, etc. The Company currently has a $1.0 million funding commitment from one of our existing debt partners and is in discussions with several others for additional commitments to fund this new business opportunity. During most of 2013 the Company was in a restructuring mode. We previously had been engaged in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body and the sale of our products under our H.A.R.D Nutrition label. To date, a substantial portion of our revenue has been derived from the sale of our products under this label.
We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our acquisition of DC Brands, LLC. Our principal offices are located at 1685 South Colorado Blvd, Suite S291, Denver, Colorado 80222. Our telephone number is (720)281-7143. Information about our products can be obtained from our website www.hardnutrition.com.
We, together with our 80% owned subsidiary DC Brands Green Investments, LLC intend to specialize in providing financing, accounting, security, compliance, payroll processing and tax payment services to fully licensed Colorado medical and recreational marijuana businesses. In the past, we had been engaged in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements aimed at maximizing the full potential of the body and more recently specialized tea products. In May 2013 we entered into the tea business when we purchased 15% of Village Tea Company Distribution, Inc. (“Village Tea”) , a manufacturer and distributor of premium blends of loose leaf tea. We believed that there was synergy between us and Village Tea and we had intended to provide various services to Village Tea such as aiding Village Tea with their manufacturing and bottling needs. Prior to May 2013, our focus had been on the sale of two distinct types of products under our H.A.R.D Nutrition label (our Functional Water Systems and nutritional supplements). To date, our revenue has been derived substantially from the sale of our Functional Water Systems. Due to our limited capital resources we had suspended the sale of our nutritional supplements in 2013 and focused solely on the sale of Functional Water Systems tailored to different health and daily needs, namely, our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. However, due to limited resources we have temporarily discontinued manufacturing and marketing of our H.A.R.D. Nutrition products.
The H.A.R.D. Nutrition Functional Water Systems provide consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water Systems are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle. The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top cap compartment. During the year ended December 31, 2013, we derived $10,460 representing 100% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2012, we derived $85,966, representing 79% of our revenue, from sales of our Functional Water Systems.
The other products previously sold under our H.A.R.D. Nutrition label are traditional supplements “not in the cap on top of the Water Systems” which are made from a mixture of herbs and have been formulated to help maintain good health by providing the supplements that we believe are needed by our body which cannot be directly obtained from foods. Our sale of nutritional supplements has not generated as much revenue as the sale of our Functional Water Systems. During the year ended December 31, 2012, we derived $34,927 representing 21% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2010, we derived $0 representing 0% of our revenue from sales of our H.A.R.D. Nutritional Supplement products.
Until recently, our primary market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain as well as a few health and fitness and gym locations. Since 2013, to conserve costs our primary focus has been on sales of our products through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to expand our marketing efforts in the United States beyond the local Colorado area.
Our principal offices are located at 1685 South Colorado Blvd, Suite S291, Denver, Colorado 80222. Our telephone number is (720)281-7143.
History
We were incorporated under the laws of the State of Colorado on April 29, 1998 as Telamerge Holding Corp. (“Telamerge”). Telamerge was originally formed for the purpose of, and engaged in the business of providing telemarketing services. Telamerge did not have meaningful business activity prior to its acquisition of DC Brands, LLC, a Florida limited liability company in 2004.
In 2002, DC Brands, LLC began the development and distribution of energy drinks under the labels “Dickens Energy Cider” and “Turn Left Energy Drink”. In August 2004, in connection with our new business plan and the anticipated acquisition of DC Brands, LLC, Telamerge changed its name to DC Brands International, Inc. DC Brands, LLC became our wholly owned subsidiary which is now inactive. In November 2004, DC Brands International, Inc. acquired all of the outstanding membership interests of DC Brands, LLC in exchange for the assumption of certain debt of DC Brands, LLC. On December 3, 2004, we effectuated a 120:1 forward split of our issued and outstanding shares of common stock. In 2006, we acquired the assets of Health Advantage Research and Development, Inc., a sports and fitness-based nutraceutical and supplement company.
In 2007, we changed the focus of our business away from carbonated energy drinks that contained sugar and caffeine to developing, marketing, distributing and selling health related products that are natural-based and contain vitamins. In July 2007, we acquired the assets of Hard Nutrition, Inc. and commenced production and marketing of our health drink/supplement combination under our current HARD Nutrition label. In September 2007, we effectuated a 10:1 reverse split of our issued and outstanding shares of common stock. Since we have outsourced our manufacturing and have no prior or future commitment for any specified quantity of products, we did not incur any manufacturing costs when we terminated production of the carbonated energy drinks; however as a result of such termination in 2008 we wrote off $2,924,000 of intellectual property related to formulas and other intangibles used in the carbonated energy drink business. Also in 2008 we wrote off an additional $8,541,669 of intellectual property related to the formulas and other intellectual property used in the carbonated energy drinks business and we incurred in excess of $200,000 in capital expenditures related to production and manufacturing expenses incurred in connection with our new line of business. In 2009, we commenced sales of our Functional Water Systems.
All common shares have been retroactively adjusted for the 100 for 1 reverse stock split authorized by the board on August 23, 2013 and effective October 3, 2013.
All common shares have been retroactively adjusted for the 100 for 1 reverse stock split authorized by the board on March 8, 2013 and effective April 30, 2013.
All common shares have been retroactively adjusted for the 200 for 1 reverse stock split authorized by the board on May 21, 2012 and effective June 28, 2012.
Existing Products
During 2013, we sold one distinct type of product under our H.A.R.D. Nutrition label, our Functional Water Systems. Until recently, we also sold our Nutritional Supplements under such label. Each product line is further divided into similar categories based upon its targeted results, namely our performance, strength and training products, wellness products, energy products and weight loss and diet products. Each product was developed to attain its desired result based upon our research of third party documented studies as to which vitamins and herbs are likely to produce our desired results. After establishing what we believe the general consensus is regarding a particular nutraceutical’s typical effects, we then create mixtures of products to help achieve the desired result. We don’t use any “secret” ingredients or seek to include any particularly unusual vitamins and herbs in our products but rather seek to rely on established expectations regarding the intended effects of such nutraceuticals, recognizing that such intended effects have not been confirmed in any respect by the U.S. Food and Drug Administration or any other governmental agency, and as such may, in fact, not be effective. We do not engage in formal testing of the achievement of desired results of our products but do receive feedback from existing customers which is recorded and referred to when modifying or creating new products. We believe what makes us unique is not necessarily the vitamin and herb combinations chosen by our herbalist in our products themselves, but rather delivering those chosen nutraceuticals in our patented flip-top cap together with each product in our Functional Water System rather than relying on delivering the vitamins and herbs in only liquid form as part of the actual drink, as our competitors do.
Our Functional Water Systems
Our Functional Water Systems are a unique combination of a functional beverage and a nutraceutical. Due to our unique bottle design we are able to provide consumers with a combination of a beverage and a nutraceutical supplement all in one convenient bottle. We currently manufacture nine unique water systems, each of which is designed to provide a specific functional benefit for the body and can be further categorized into one of our four subcategories based upon the functional benefit desired (performance, strength and training- fitness- wellness and beauty- weight loss and diet and energy). Each system includes supplements, vitamins and minerals that are enclosed in our proprietary licensed cap which is attached to our bottle filled with a lightly flavored water specially formulated to act as a catalyst for the enclosed supplements. When the supplements and flavored water are combined they provide the body with the nutrients believed needed to achieve the desired result. Wrapped around each bottle is a rubber bracelet with our message “Your life won’t change until you change your life” which we believe creates a unique brand loyalty and identification tool. The Functional Water Systems have a shelf life of one year, which is the shelf life in the industry for most of the products stored in PET bottles that contain vitamin additives. We conduct periodic tests of the color, flavor and desired results of our products in house. Each product contains a label with a date stamp that specifies the shelf life.
Our nine different systems are Health +, Fat Fighter, Get Over It, Whacked Energy, Think!, Win, Fix It, Cleanse +, and Rebuild and Recover. The Daily Basics is a wellness product that includes vitamins and supplements. The Fat Fighter falls under the diet and weight loss category. The Get Over It-Feel Better Now is a wellness product that is a blend of vitamins, herbs and minerals. The Get Over It water system is being marketed to combat hangovers. Whacked Energy and Wide Awake are part of our energy line. Win is geared towards athletes for use when conducting fitness training. Fix It! is a combination of herbs and supplements. Cleanse+ is a 12 day total body cleansing system intended to be taken once every 90 days and Rebuild and Recover is a very potent combination of products targeted towards the serious athlete. All of our products contain ingredients that are intended to provide health related benefits.
We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009. During the year ended December 31, 2013, we derived $10,460 representing 100% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2012, we derived $128,905 representing 79% of our revenue from sales of our Functional Water Systems
Our Nutritional Supplements
In early 2013 and until such time as additional funding is received, we suspended the sales of our Nutritional Supplement products.
Our H.A.R.D. Nutrition Supplements have been sold primarily though our wholly owned subsidiary DC Nutrition, Inc. and are aimed at athletes and improving performance. We currently have approximately 300 products in this product line which we divide into the four categories previously discussed: performance and strength supplements, wellness products, energy supplements and the weight loss and diet products.
Our second largest product line in terms of sales revenue was our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2013, we derived $0 representing 0% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2012, we derived $34,927 representing 21% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. The H.A.R.D. Nutritional Supplement products are primarily sold to retailers or by orders placed at our corporate headquarters, website and certain smaller retail establishments such as gyms and fitness centers.
During the last two years we did not spend any funds on research and development activities.
Marketing
Our new line of business is anticipated to be marketed solely in Colorado due to favorable local and state regulations
.
We have suspended our marketing efforts for our H.A.R.D. Nutrition
Supplement
products pending receipt of financing for these efforts. During 2013, our marketing efforts for our Hard Nutrition
Supplement
products were as primarily through the sale of our products through the internet. During 2012, our marketing efforts had been focused on the expansion of both our Functional Beverage and Nutritional Supplement lines into locations in Southern California. In September 2012, we signed an agreement with LA Libations for the expansion of the marketing of our products both in other states as well as with national retailers. In December 2012, we signed a distribution agreement with LA Distribution for the County of Los Angeles. Prior thereto, our marketing focus had exclusively been concentrated in the Colorado area. We have used various forms of advertising as part of our marketing campaigns, including associations with well known public figures in the Colorado area and the promotion of our products on Denver’s local 850 KOA radio station by Dave Logan, a former NFL player and one of the KOA announcers. Our promotional agreement with Mr. Logan terminated in 2011.
Funding
To date, we have met substantially all of our financing needs through private sale of shares of our common stock and other equity securities and loans from investors.
On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman and Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. In early 2013, HARDSave LLC, terminated the Securities Purchase Agreement.
On February 27, 2013, we received proposed terms from a creditor, as well as other creditors, to provide funding for us in the form of convertible debt. We received funding from such creditor that has been used to continue our current operations. In an effort to preserve cash, we liquidated our raw material inventory and warehouse assets and moved the functional beverage inventory into a much smaller location. As a cost savings measure, we intend to subcontract the manufacture of the supplements that are included in the Functional Beverage systems as opposed to manufacturing them ourselves.
We have raised a total of approximately $16,000,000 from our equity and debt financings subsequent to our acquisition of DC Brands, LLC in 2004. Our continued operations in the beverage business and our new line of business are dependent upon our receipt of additional financing. Although we have received funding from one creditor and have oral commitments from others, we cannot guarantee that the funding provided will be sufficient to continue our current operations or our intended operations and we cannot guarantee that we will receive enough funding to allow us to recontinue our nutritional supplement product sales. The oral commitment is solely for our new line of business and therefore we will be unable to recontinue our H.A.R.D. Nutrition or (tea) business without commitments for funding for those business lines.
MANUFACTURING AND QUALITY CONTROL
Due to limited resources we have temporarily ceased manufacturing of our Hard Nutrition products. In the past, our Hard Nutrition products are manufactured by third parties and we are reliant upon these third parties to maintain proper quality control. Our manufacturer is required to maintain good manufacturing compliance. We also do our own random testing of our products to ensure that they meet our specific quality standards. Inasmuch as we do not manufacture the products, we are not subject to good manufacturing regulations, however we are subject to inspection of our corporate headquarters where the raw materials of our products are kept in inventory.
Since 2013, the Company has been in a restructuring mode with limited sales. During 2012, the focus of our marketing had been the expansion of both our Functional Beverage and Nutritional Supplement lines into strategic locations in Southern California. We signed an agreement with LA Libations in September 2012 for the expansion of the marketing of our products both in other states as well as with national retailers. In December 2012, we signed a distribution agreement with LA Distribution for the County of Los Angeles. Prior to June 2012, our market focus had been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain. Until recently, our distribution efforts have been limited due to our oral agreement with King Soopers not to provide products to other grocery stores. Given sufficient capital and attractive commercial prospects, we intend to expand our distribution effort throughout the United States. However establishing a successful distribution network nationwide will require the expenditure of substantial amounts of capital.
Our future ability to establish a distribution network will be dependent upon our financial condition. Until such time as we have sufficient funding, either from product sales of fundraising, our planned distribution expansion will be suspended.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND SUPPLIERS
Our raw materials are obtained from a variety of suppliers, some of which are located in foreign countries. We use in excess of 150 ingredients in our nine different Functional Water Systems. No one supplier is responsible for supplying in excess of 10% of our vitamins and herbs and we are not dependent upon any one supplier for the supply of any of our vitamins and herbs. We have identified at least a primary, secondary and tertiary supplier for each ingredient and believe that other suppliers are available if needed. Therefore at this time we are not dependent upon any one supplier for any of our ingredients. We do not have any written agreements with any of our suppliers and therefore we have no guarantees of minimum supply quantities. Although there is ample availability of each type of herb used in our products from a variety of suppliers, there is a limited number of suppliers that can provide the premium herbs of the quality that we use in our products at a reasonable price. Several factors that can affect the availability of quality herbs or their prices include inclement weather in the countries where the herbs are grown, embargos imposed by our government or natural catastrophes.
We currently rely on one manufacturer, Ball Corporation, for the supply of the bottles that are used in our products. However, we believe that alternative suppliers are readily available. We have an existing relationship with three different co-packers/bottlers to manufacture our products. We have also reviewed and approved two other co-packers/bottlers that we intend to use as our sales volume increases. We supply the ingredients to the co-packers and they manufacture our products in accordance with our specifications in the bottles we obtain from Ball Corporation and supply to the co-packer and then our label is affixed to the bottles. The labels are purchased from an independent third party. We place orders for our bottles and finished goods based upon our estimates of our future sales volume and reserve line time with our co-packers a few weeks in advance of our anticipated order fulfillment date. We do not have any written agreement with the supplier of our bottles, the co-packer or the manufacturer of our patented cap and enter into purchase orders that are at negotiated prices at the time each order is placed. Typically the payment terms for the co-packers on these orders is net thirty days. The payment terms for our bottles and the manufacture of our caps is typically cash on delivery. We own the tool used in the manufacturing process of our caps. Although there are several other manufacturers of bottles that we could use as well as co-packers, due to the unique nature of our cap, we would incur substantial start up costs for the transfer of the equipment needed to produce our caps if we were to use an alternative cap manufacturer. Due to the unique shape of our patented bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers. Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps. In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.
Service Provider
In light of the regulatory challenges in the medical and recreational marijuana business it is difficult for us to assess the competition for service providers to that industry. We believe the market for service providers to medical marijuana companies is a highly fragmented and fractured marketplace. Some of the companies we compete with are much larger than us, and such companies have significantly greater resources than us, and therefore our ability to generate revenues, will be reduced.
Beverage and Supplement Line of Business
The industries in which we operate are highly competitive. Not only do we compete with other manufacturers of functional beverages but we also compete with manufacturers of nutraceutical supplements and dietary supplements.
Our competition in the beverage industry includes products owned by multinational corporations with significant financial resources, including products such as Vitamin Water and Gatorade which are owned by Coca-Cola and Pepsi. Our energy drinks also compete with products such as Monster, Red Bull and Rockstar. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever.
We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Joint Juice, Slimfast and Nutrisystem. The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. These markets include manufacturers, distributors and physicians. Numerous manufacturers and distributors compete with us for customers throughout the United States in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies and health food stores. Many of the competitors are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. In addition, we will compete with several large pharmaceutical companies for therapeutic and symptomatic relief of disease symptoms. Many of these drug companies are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. These drug companies also have substantially greater political influence and regulatory support for the use of their products in the treatment of diseases and wellness.
The market is highly sensitive to the introduction of new products. As a result, in order to remain competitive, we believe we will continually need to successfully introduce new products.
We are also subject to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can offer employees compensation packages that are difficult for us to compete with.
We regard our patent, trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, suppliers and others to protect our proprietary rights.
Richard Pearce, our former President & Chief Executive Officer, and Jeremy J Alcamo, our former Executive VP., have received a design patent in the United States (US D 576,877S) for the flip-top cap compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap. The Patent was issued on September 16, 2008 and has a term of 14 years, terminating on September 15, 2022. In addition, the Company owns several copyrights and trademarks that are used in connection with its H.A.R.D. Nutrition product line. See “Certain Relationships and Related Transactions.”
The steps we take to protect our proprietary rights in our intellectual property and brand name may not be adequate to prevent the misappropriation of our intellectual property and brand name in the United States or abroad. Existing patent and trademark laws afford only limited practical protection for our intellectual property and product lines. However, because of the rapid pace of the natural product industry's development, we believe that the legal protection for our product is less significant to our success than the knowledge, technical expertise and marketing skills of our personnel, the frequency of product expansion and pace of market penetration.
Marijuana Line of Business
Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business. In light of the regulatory issues it is difficult to assess the industry.
Beverage and Supplement Line of Business
As noted in a September 2011 article in the Natural Products Insider titled Postmodern Nutrition: Functional Foods, Beverages, it appears that the functional foods industry has not been negatively impacted by the recent volatile stock market.
Nutrition Business Journal reported functional foods grew 4.6 percent in 2010, pulling in $39 billion in sales, as compared to $37.3 in 2009. Global Industry Analysts (GIA) is predicting the global market to exceed $130 billion by 2015.
According to Steve French, managing partner at Natural Marketing Institute (NMI), Baby Boomers have been acute growth drivers of functional foods because of their uncertainty about the future of health care (seven out of 10 Boomers said they’re taking a more active role when it comes to health), and in an attempt to delay aging and prevent disease. Boomers are interested in health-condition-specific products.
As noted in a March 2012 article in the Natural Products Insider titled Supplement Use on the Rise, Sixty-nine percent of U.S. adults take dietary supplements according to a survey commissioned by the Council for Responsible Nutrition (CRN), a trade association for the dietary supplement industry. Conducted by Ipsos Public Affairs, the survey indicates an upward trend in dietary supplement consumption, as consumer usage is up from 66 percent in 2010, 65 percent in 2009 and 64 percent in 2008.
The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance and well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and their derivative compounds. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients. However, they are subject to many regulations regarding labeling and advertising of such products. See “Regulation” below.
REGULATION
Marijuana Line of Business
As of January 31, 2014, 21 states and the District of Columbia allow its citizens to use medical marijuana. Additionally, voters in the states of Colorado and Washington approved ballot measures last November to legalize cannabis for adult use. However, the state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. Marijuana is a schedule-I controlled substance and is illegal under federal law. Even in those states in which the use of marijuana has been legalized, its use remains a violation of federal law. Since federal law criminalizing the use of marijuana preempts state laws that legalize its use, strict enforcement of federal law regarding marijuana would likely result in our inability to proceed with our business plan. Continued development of the marijuana industry is dependent upon continued legislative authorization of marijuana at the state level. Any number of factors could slow or halt progress in this area. Further, progress, while encouraging, is not assured. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these factors could slow or halt use of marijuana, which would negatively impact our proposed business. Further, and while we do not intend to harvest, distribute or sell cannabis, by providing services to companies and people that are harvesting, distributing and selling cannabis, we could be deemed to be participating in marijuana cultivation, which remains illegal under federal law, and exposes us to potential criminal liability, with the additional risk that our equipment, systems and products could be subject to civil forfeiture proceedings.
Beverage and Supplement Line of Business
In the United States, we are subject to compliance with laws, governmental regulations, administrative determinations, court decisions and similar constraints. Although our products are not deemed to be drugs, they are deemed to be dietary supplements and therefore subject to all regulations regarding products and dietary supplements ingested by consumers. Such laws, regulations and other constraints exist at the federal, state and local levels in the United States and at all levels of government in foreign jurisdictions. These regulations include constraints pertaining to: (i) the manufacturing, processing, formulating, packaging, labeling, distributing and selling (ii) advertising of products and product claims (iii) transfer pricing, and (iv) method of use.
In the United States, the formulation, manufacturing, packaging, storing, labeling, advertising, distribution and sale of our Products are subject to regulation by various governmental agencies, which include, among others (i) the Food and Drug Administration (“FDA”), (ii) the Federal Trade Commission (“FTC”), and (iii) the Consumer Product Safety Commission. The most active regulation has been administered by the Food and Drug Administration, which regulates the formulation, manufacture and labeling of products pursuant to the Federal Food, Drug and Cosmetic Act (‘FDCA”) and regulations promulgated thereunder. Most importantly, the FDA has guidelines under the Dietary Supplement Health and Education Act (DSHEA) to enable the manufacturing, advertising, marketing, and sale of dietary supplements. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the interstate labeling, promotion, advertising and sale of dietary supplements, over the counter drugs, and foods.
Compliance with applicable FDA and any state or local statutes is crucial. Although we believe that we are in compliance with applicable statutes, should the FDA amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. As a marketer of a product that is ingested by consumers, we are always subject to the risk that one or more of our products that currently are not subject to regulatory action may become subject to regulatory action. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us, or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.
The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, generally when a company adds an ingredient to a food, the FDCA requires that the ingredient either be determined by the Company to be generally regarded as safe (“GRAS”) by qualified experts or go through FDA’s review and approval process as a food additive.
The FDCA has been amended with respect to dietary supplements by the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). The DSHEA provides a statutory framework governing the safety, composition and labeling of dietary supplements. It regulates the types of statements that can be made concerning the effect of a dietary supplement. The DSHEA generally defines the term “dietary supplement” to include products that contain a “dietary ingredient” which may include vitamins, minerals, herbs or other botanicals, amino acids, and metabolites. Our products contain herbs and supplements currently consumed as part of a healthy and regular diet of human beings and therefore are considered dietary supplements. Under the DSHEA, a dietary supplement manufacturer is responsible for ensuring that a dietary supplement is safe before it is marketed. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be sold without FDA pre-approval and without notifying the FDA. The ingredients in our products were on the market before October 15, 1994 and therefore may be sold without FDA pre-approval.
With respect to labeling, DSHEA permits “statements of nutritional support” for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well being (but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). This, therefore, severely limits the direct advertising of the healthcare benefits of our products. A company making a statement of nutritional support must possess substantiating evidence for the statement, and disclose on the label that the FDA has not reviewed that statement and that the product is not intended to diagnose, treat, cure or prevent a disease.
We intend to label our products with statements of nutritional support and believe that we have adequate substantiating evidence to support such statements. However, the FDA may determine that a given statement of nutritional support that we or our licensees decide to make is a drug claim rather than an acceptable nutritional support statement. Such a determination would require deletion or substantiating proof of the drug claim.
In addition, DSHEA allows the dissemination of “third party literature”, publications such as reprints of scientific articles linking particular dietary, ingredients with health benefits. Third party literature may be used in connection with the sale of dietary supplements to consumers. Such a publication may be so used if, among other things, it is not false or misleading, no particular brand of dietary supplement is promoted and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with our products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug or as a “misbranded” product, causing us to incur substantial fines and penalties.
Our products and product related activities may also be subject to regulation by other regulatory agencies, including but not limited to the Federal Trade Commission (“FTC”), the Consumer Products Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Advertising of dietary supplement products is subject to regulation by the FTC under the Federal Trade Commission Act (“FTCA”). The FTCA prohibits unfair methods of competition and unfair or deceptive trade acts or practices in or affecting commerce. Furthermore, the FTCA provides that the dissemination or the causing to be disseminated of any false advertising pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Pursuant to this FTC requirement, we are required to have adequate substantiation of all material advertising claims made for our products. Failure to adequately substantiate claims may be considered either deceptive or unfair practices.
The FTC has recently issued a guidance document to assist supplement marketers of dietary supplement products in understanding and complying with the substantiation requirement.
The FTC is authorized to use a variety of processes and remedies for enforcement, both administratively and judicially including compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. State and local authorities can also regulate advertising and labeling for dietary supplements and conventional foods.
Our activities are also regulated by various agencies of the states and localities in which our products are sold, including, the Colorado Department of Public Health and Environment which in March 2010
performed
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an inspection of our warehouse facility, which entailed an inspection of our plant and grounds, sanitary operations (general maintenance and pest control) and our equipment and utensils and did not result in any corrective action to our product or ingredients.
In September 2011 the Food and Drug Administration (FDA) conducted a regulatory inspection of our facilities, and reviewed our manufacturing processes, ingredients, and labeling. No violations were issued, and we continue to follow FDA guidelines in our manufacturing and marketing. We were given a list of areas to improve, and have addressed those issues and believe that we are now in compliance. We continue to always strive to be in full compliance with Good Manufacturing Practices (GMP) in anticipation of future random inspections by the FDA.
We believe that current and reasonably foreseeable governmental regulation will have minimal impact on our business.
Employees
As of December 31, 2013, we had 1 full time employee.