Statement
s
of Operations
|
|
Q2-201
6
|
|
|
Q2-2
01
5
|
|
|
Effect on
Profitability
+ (-)
|
|
Gross Sales
|
|
$
|
1,003,780
|
|
|
$
|
1,276,066
|
|
|
$
|
(272,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Promotional allowances and slotting fees
|
|
|
(50,416
|
)
|
|
|
(76,765
|
)
|
|
|
26,349
|
|
Net Sales
|
|
|
953,364
|
|
|
|
1,199,301
|
|
|
|
(245,937
|
)
|
Cost of Sales
|
|
|
619,630
|
|
|
|
790,753
|
|
|
|
171,123
|
|
Gross Profit
|
|
|
333,735
|
|
|
|
408,548
|
|
|
|
(74,813
|
)
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, samples and displays
|
|
|
16,912
|
|
|
|
20,376
|
|
|
|
3,464
|
|
Asset impairment
|
|
|
3,183
|
|
|
|
13,741
|
|
|
|
10,558
|
|
Freight-out
|
|
|
101,853
|
|
|
|
120,297
|
|
|
|
18,444
|
|
General and administration
|
|
|
324,656
|
|
|
|
298,706
|
|
|
|
(25,950
|
)
|
Salaries and benefits and broker/agent’s fees
|
|
|
221,634
|
|
|
|
333,300
|
|
|
|
111,666
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Operating Expenses
|
|
|
668,238
|
|
|
|
786,420
|
|
|
|
118,182
|
|
Net Operating Loss
|
|
|
(334,503
|
)
|
|
|
(377,872
|
)
|
|
|
43,369
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(42,016
|
)
|
|
|
21
|
|
|
|
(42,037
|
)
|
Interest expense - amortization of debt issuance costs
|
|
|
(170,964
|
)
|
|
|
-
|
|
|
|
(170,964
|
)
|
Loss from discontinued operations
|
|
|
(28,784
|
)
|
|
|
-
|
|
|
|
(28,784
|
)
|
Total Other Income (Expense)
|
|
|
(241,764
|
)
|
|
|
21
|
|
|
|
(241,785
|
)
|
Net Loss
|
|
$
|
(576,267
|
)
|
|
$
|
(377,851
|
)
|
|
$
|
(198,416
|
)
|
Net Sales
We
introduced Natural Cabana® Lemonade in 2012 and since then have developed a multi-national comprehensive distribution system in 47 States, Canada, Mexico, and China. From a high of 150 distributors we have
eliminated a number of weaker, non-performing and slow-paying distributors and now have more than 70 distributors and 20 wholesalers. This was a strategic decision as we moved our sales model concentration from direct store delivery through distributors to warehouse direct to retail. This strategic decision was to reduce overall fixed expenses associated with direct store delivery distributors. The decrease in net sales was expected in order to grow net sales from a more profitable fixed expense base and to increase sales prices, reduce promotional programs, reduce freight-out which will dramatically increase our contribution margin. Although we expected sales to decline, as discussed above, our net revenue declined over and above our expectations due to timing of new store sets and deliveries to these stores. We expect this timing difference to reverse during Q3-2016.
Some of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway, Walmart, Kroger/Fred Meyer/Ralphs, Kmart, Circle K, Walgreens, 7-Eleven, Whole Foods, H-E-B, Hy-Vee Supermarket, Save Mart Supermarkets, Hannaford, Food City, Raley's Supermarkets, Price Chopper Supermarkets, WinCo Foods, and Gelson’s Supermarket.
We have been in operation with our first product, Natural Cabana® Lemonade, for almost four years. We expanded this brand into Limeade, which started selling in January, 2014, and into Coconut Water, which started selling in March, 2014.
We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes over 85% Class “A” distributors and wholesalers such as Sysco, The Sygma Network, UNFI and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.
During Q2-2016 our aggregate gross revenues compared to Q2-2015 decreased by $272,286 to $1,003,780 (Q2-2015 - $1,276,066).
During Q2-2016 gross revenues, on sale of 69,408 cases (Q2-2015 – 91,404 cases) of Natural Cabana® Lemonade/Limeade, declined by $251,731 to $824,517 (Q2-2015 - $1,076,248).
During Q2-2016 we introduced our Lemonade/Limeade formula in a 16.9oz glass bottle package under a control brand label “Citrus tree”. During Q2-2016 we sold 1,152 cases for net sales of $14,918.
During Q2-2016 gross revenues, on sale of 14,656 cases (Q2-2015 – 14,200 cases) of Natural Cabana® Coconut Water, decreased by $6,747 to $164,345 (Q2-2015 - $171,092). We introduced a smaller 11.2oz six-pack coconut water which some big box retailers find easier to sell; this should increase net sales during the remainder of 2016.
During Q2-2016 gross revenues, on sale of nil cases (Q2-2015 – 1,448 cases) of PULSE® Heart & Body Health, decreased by $28,725 to $nil (Q2-2015 - $28,725). We are planning to repackage PULSE Heart & Body Health into a more attractive package and re-introducing this brand into the Southern California marketplace. As the cost to re-introduce is high we are timing it with a large equity financing to ensure we have enough funding to successfully re-introduce this product.
During Q2-2016 our aggregate net sales, after promotional allowances and slotting fees, decreased by $245,937 to $953,364 (Q2-2015 - $1,199,301). During Q2-2016, promotional allowances and slotting fees, decreased by $26,349 to $50,416 (Q2-2015 - $76,765). As a percentage of gross sales, promotional allowances and slotting fees decreased to 5% (Q2-2015 – 6%).
Due to changes in food laws in Mexico during the process of shipping product from Asia, we spent Q2-2016 overlaying the existing label with a new information label. This has delayed the reorder in Mexico until Q3-2016. As at June 30, 2016 the relabeling was completed by our distributor, Café El Marino, who began distribution of Natural Cabana® Coconut Water to more than 3,000 stores in Mexico including: Soriana, 7-Eleven, Calimax, Circlulo K, Dax, Smart & Final, and Farmacia Roma. We are planning to introduce a Natural Cabana® Lemonade/Limeade (“Limonada”) in a 16.9oz glass “PULSE bottle” format for the Mexico market later in 2016 once our relationship with Café El Marino is solidified.
Due to seasonality, net revenue fluctuates from quarter to quarter.
Cost of Sales
During Q2-2016 cost of sales decreased by $171,123 to $619,630 (Q2-2015 – $790,753). As a percentage of net revenue, cost of sales for Q2-2016 decreased 1% to 65% (Q2-2015 – 66%). The decrease in cost of sales was due to the decrease in net revenue. We expect cost of sales for the production of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable raw material costs. We expect cost of sales for Natural Cabana® Coconut Water to significantly reduce due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs.
Gross Profit
During Q2-2016 gross profit decreased by $74,813 to $333,735 (Q2-2015 - $408,548). Gross profit for Q2-2016, as a percent of net sales, increased 1% to 35% (Q2-2015 – 34%). Gross profit decreased due to lower sales which was expected due to eliminating a number of weaker distributors and our strategic decision to concentrate on warehouse direct to retail. We expect gross profit for the sale of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable sales prices, promotional programs and raw material costs. We expect gross profit for Natural Cabana® Coconut Water to significantly increase due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs. We also expect an increase in gross profit as we re-introduce PULSE®, a higher margin brand. We expect all of these factors to have a positive effect on our gross profit.
Expenses
Advertising, samples and displays
This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. During Q2-2016 advertising, samples and displays expense decreased by $3,464 to $16,912 (Q2-2015 - $20,376). As a percentage of net sales, this expense remained the same at 1.7%. We expect this variable expense to increase in proportion to increases in sales mainly due to the expansion of Natural Cabana® Coconut Water and the re-introduction of PULSE® Heart & Body Health functional beverages and due to an overall increase in distribution reach both in the United States and internationally.
Freight-out
During Q2-2016, freight-out decreased by $18,444 to $101,853 (Q2-2015 - $120,297). On a per case basis freight-out increased by $0.08 per case to $1.20 (Q2-2015 - $1.12). This increase is due to the location of shipping points which is sometimes outside of our control. We expect freight-out, on a per case basis, to decrease due to lower transportation costs in the United States and due to shipping directly to warehouses versus to numerous distributors. Additionally, there will be limited freight-out charges associated with delivering our products to our Mexico distributor at the ports of entry in Mexico and our China distributor receiving our products at the port of exit in the United States.
Contribution to fixed expenses
Beverage companies are often compared on a contribution to fixed expense basis which is calculated as gross profit less variable costs such as advertising, samples and displays and freight-out. This line item is not GAAP and therefore it is not disclosed separately in our financial statements. During Q2-2016 contribution to fixed expense decreased by $52,904 to $214,970 (Q2-2015 - $267,874). As a percentage of net sales, contribution margin increased by .21% to 22.55% (Q2-2015 – 22.34%). Contribution margin has steadily increased quarter over quarter as we move from direct store delivery to warehouse direct to retail and we expect contribution to fixed expenses to increase as we complete our strategic decision to move towards warehouse direct to retail.
Asset impairment
During Q2-2016 asset impairment expense decreased by $10,558 to $3,183 goods (Q2-2015 - $13,741). During Q2-2016 we incurred an impairment due to the expiry of finished goods
.
General and administrative
General and administration expenses for Q2-2016 and Q2-2015 consist of the following:
|
|
Q2-2016
|
|
|
Q2-2015
|
|
|
Effect on Profitability + (-)
|
|
Advisory and consulting fees
|
|
$
|
30,125
|
|
|
$
|
27,500
|
|
|
$
|
(2,625
|
)
|
Amortization and depreciation
|
|
|
29,587
|
|
|
|
27,141
|
|
|
|
(2,446
|
)
|
Bad debts
|
|
|
40,000
|
|
|
|
1,035
|
|
|
|
(38,965
|
)
|
Legal, professional and regulatory fees
|
|
|
52,151
|
|
|
|
13,707
|
|
|
|
(38,444
|
)
|
Office, rent and telephone
|
|
|
68,701
|
|
|
|
73,167
|
|
|
|
4,466
|
|
Shareholder, broker and investor relations
|
|
|
56,244
|
|
|
|
68,076
|
|
|
|
11,832
|
|
Travel, meals and trade shows
|
|
|
47,848
|
|
|
|
88,080
|
|
|
|
40,232
|
|
|
|
$
|
324,656
|
|
|
$
|
298,706
|
|
|
$
|
(25,950
|
)
|
During Q2-2016, general and administrative expenses increased by $25,950 to $324,656 (Q2-2015 - $298,706). Shareholder, broker and investor relations decreased by $11,832 to $56,244 (Q2-2015 - $68,076). During Q2-2015 we incurred an expense of $57,500 attributable to the value of common shares issued to a consultant in a prior period. Starting in April, 2016 we hired an investor relations consultant and paid them $12,000 cash and 250,000 shares (valued at $29,792) during the period. Legal, professional and regulatory fees increased by $38,444 to $52,151 (Q2-2015 - $13,707) due to the timing of an audit fee of $22,000 and due to increased use of our SEC counsel during the period. Travel, meals and trade shows decreased by $40,232 to $47,848 (Q2-2015 - $88,080) due to a strategic reduction. Office, rent and telephone decreased by $4,466 to $68,701 (Q2-2015 - $73,167) a strategic reduction of $23,297 in office costs offset by administration/collection fees of $18,831 incurred associated with the TCA loan. During Q2-2016 we provided $40,000 as an allowance for a doubtful account in Mexico.
Salaries and benefits and broker/agent’s fees
During Q2-2016 salaries and benefits and broker/agent’s fees decreased by $111,666 to $221,634 (Q2-2015 - $333,300). We rationalized the number and placement of salespeople in the field as we moved our business concentration from direct store delivery through distributors to warehouse direct to retailers
.
This reduced the number of salespeople needed. We concentrated on warehouse direct sales, chain store listings and international expansion which is where we see the majority of our growth coming from. These areas of future growth are generally handled by our two senior officers. Going into the remainder of 2016 we expect this cost to be less than $200,000 per quarter.
Stock-based compensation
We have no further unrecognized stock-based compensation cost to record.
Net
Operating
Loss
Net operating loss for Q2-2016 decreased by $43,369 to $334,503 (Q2-2015 - $377,872). Offsetting the $74,813 decline in gross profit was an overall reduction of expenses of $118,182. We made a strategic decision to stream-line our operations as discussed under net sales above in order for us to reach profitability sooner and grow from a more solid base of business.
Other Income (Expense)
Interest Income (Expense), net
During Q2-2016 we incurred interest expense of $42,016 (Q2-2015 - interest income, net of expense of $21). During Q2-2016 we incurred interest expense of $3,625 on short-term loans
,
$730 on credit card debt, and $37,661 on our revolving TCA loan balance.
Interest Expense – amortization of debt issuance costs
A total of $542,870 of debt issuance costs were incurred associated with the closing of the Credit Facility discussed in Note 7 to our financial statements. Pursuant to ASU 2015-3 these costs are being amortized to interest expense over the term of the loan to November 6, 2016. A total of $170,964 was charged to interest expense during Q2-2016.
Loss from Discontinued Operations
During February, 2016 we began our own Southern California distributorship, Natural Cabana Distribution Inc. Through this subsidiary we began selling Natural Cabana® Lemonades/Limeades and Coconut Waters to existing accounts in Southern California while we searched for a suitable independent large distributorship in the area to replace our former distributor. We made this strategic decision in order to maintain existing regional retail accounts in the area. On May 31, 2016 we discontinued this temporary operation and moved our ongoing business to a large independent distributor. During Q2-2016 we received $20,838 of net revenue. Cost of sales was $15,400 for a gross profit of $5,438. We incurred expenses of $11,153 and recorded a bad debt of $23,069. Our net loss from discontinued operations for Q2-2016 was $28,784.
Net Loss
Net loss, after interest expense and loss from discontinued operations, for Q2-2016 increased by $198,416 to $576,267 ($0.01 per share), compared with a net loss for Q2-2015 of $377,851 ($0.01 per share). This increase was due to TCA interest and amortization of debt issuance costs totalling $170,964 (Q2-2015 - $nil). We also incurred a loss from discontinued operations of $28,784 (2015 - $nil).
Non-GAAP financial information not disclosed in the financial statements
During Q2-2016 our net loss, after adjustments to bring GAAP to net loss before corporation income taxes, depreciation and amortization, stock-based compensation and one-time charges (Adjusted EBITDA), increased by $77,348 to $694,357 (Q2-2015 - $615,674).
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
The discussion that follows is derived from our interim unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2016 (“YTD-2016”) and 2015 (“YTD-2015”).
Statement
s
of Operations
|
|
YTD-
201
6
|
|
|
YTD-2
01
5
|
|
|
Effect on
Profitability
+ (-)
|
|
Gross Sales
|
|
$
|
1,741,195
|
|
|
$
|
2,021,222
|
|
|
$
|
(280,027
|
)
|
Less: Promotional allowances and slotting fees
|
|
|
(98,187
|
)
|
|
|
(117,350
|
)
|
|
|
19,163
|
|
Net Sales
|
|
|
1,643,008
|
|
|
|
1,903,872
|
|
|
|
(260,864
|
)
|
Cost of Sales
|
|
|
1,083,213
|
|
|
|
1,281,794
|
|
|
|
198,581
|
|
Gross Profit
|
|
|
559,795
|
|
|
|
622,078
|
|
|
|
(62,283
|
)
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, samples and displays
|
|
|
37,239
|
|
|
|
39,369
|
|
|
|
2,130
|
|
Asset impairment
|
|
|
8,268
|
|
|
|
17,846
|
|
|
|
9,578
|
|
Freight-out
|
|
|
159,253
|
|
|
|
195,142
|
|
|
|
35,889
|
|
General and administration
|
|
|
554,781
|
|
|
|
604,425
|
|
|
|
49,644
|
|
Salaries and benefits and broker/agent’s fees
|
|
|
502,854
|
|
|
|
649,563
|
|
|
|
146,709
|
|
Stock-based compensation
|
|
|
3,939
|
|
|
|
-
|
|
|
|
(3,939
|
)
|
Total Operating Expenses
|
|
|
1,266,334
|
|
|
|
1,506,345
|
|
|
|
240,011
|
|
Net Operating Loss
|
|
|
(706,539
|
)
|
|
|
(884,267
|
)
|
|
|
177,728
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(72,386
|
)
|
|
|
(421
|
)
|
|
|
(71,965
|
)
|
Interest expense – amortization of debt issuance costs
|
|
|
(250,934
|
)
|
|
|
-
|
|
|
|
(250,934
|
)
|
Loss from discontinued operations
|
|
|
(103,680
|
)
|
|
|
-
|
|
|
|
(103,680
|
)
|
Total Other Income (Expense)
|
|
|
(427,000
|
)
|
|
|
(421
|
)
|
|
|
(426,579
|
)
|
Net Loss
|
|
$
|
(1,133,539
|
)
|
|
$
|
(884,688
|
)
|
|
$
|
(248,851
|
)
|
Net Sales
We
introduced Natural Cabana® Lemonade in 2012 and since then have developed a multi-national comprehensive distribution system in 47 States, Canada, Mexico, and China. From a high of 150 distributors we have
eliminated a number of weaker, non-performing and slow-paying distributors and now have more than 70 distributors and 20 wholesalers. This was a strategic decision as we moved our sales model concentration from direct store delivery through distributors to warehouse direct to retail. This strategic decision was to reduce overall fixed expenses associated with direct store delivery distributors. The decrease in net sales was expected in order to grow net sales from a more profitable fixed expense base and to increase sales prices, reduce promotional programs, reduce freight-out which will dramatically increase our contribution margin. Although we expected sales to decline, as discussed above, our net revenue declined over and above our expectations due to timing of new store sets and deliveries to these stores. We expect this timing difference to reverse during the remainder of 2016.
Some of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway, Walmart, Kroger/Fred Meyer/Ralphs, Kmart, Circle K, Walgreens, 7-Eleven, Whole Foods, H-E-B, Hy-Vee Supermarket, Save Mart Supermarkets, Hannaford, Food City, Raley's Supermarkets, Price Chopper Supermarkets, WinCo Foods, and Gelson’s Supermarket.
We have been in operation with our first product, Natural Cabana® Lemonade, for almost four years. We expanded this brand into Limeade, which started selling in January, 2014, and into Coconut Water, which started selling in March, 2014.
We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes over 85% Class “A” distributors and wholesalers such as Sysco, The Sygma Network, UNFI and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.
During YTD-2016 our aggregate gross revenues decreased by $280,027 to $1,741,195 (YTD-2015 - $2,021,222).
During YTD-2016 gross revenues, on sale of 120,046 cases (YTD-2015 – 146,509 cases) of Natural Cabana® Lemonade/Limeade, declined by $283,980 to $1,430,288 (YTD-2015 - $1,714,268).
During YTD-2016 we introduced our Lemonade/Limeade formula in a 16.9oz glass bottle package under a control brand label “Citrus tree”. During YTD-2016 we sold 1,152 cases for net sales of $14,918.
During YTD-2016 gross revenues, on sale of 28,002 cases (YTD-2015 – 24,738 cases) of Natural Cabana® Coconut Water, increased by $17,759 to $295,988 (YTD-2015 - $278,229). We introduced a smaller 11.2oz six-pack coconut water which some big box retailers find easier to sell; this should increase net sales during the remainder of 2016.
During YTD-2016 gross revenues, on sale of nil cases (YTD-2015 – 1,465 cases) of PULSE® Heart & Body Health, decreased by $29,194 to $nil (YTD-2015 - $29,194). We are planning to repackage PULSE Heart & Body Health into a more attractive package and re-introducing this brand into the Southern California marketplace. As the cost to re-introduce is high we are timing it with a large equity financing to ensure we have enough funding to successfully re-introduce this product.
During YTD-2016 our aggregate net sales, after promotional allowances and slotting fees, decreased by $260,864 to $1,643,008 (YTD-2015 - $1,903,872). During YTD-2016, promotional allowances and slotting fees, decreased by $19,163 to $98,187 (YTD-2015 - $117,350). As a percentage of gross sales, promotional allowances and slotting fees decreased by .2% to 5.6% (YTD-2015 – 5.8%).
Due to changes in food laws in Mexico during the process of shipping product from Asia, we spent Q2-2016 overlaying the existing label with a new information label. This has delayed the reorder in Mexico until Q3-2016. As at June 30, 2016 the relabeling was completed by our distributor, Café El Marino, who began distribution of Natural Cabana® Coconut Water to more than 3,000 stores in Mexico including: Soriana, 7-Eleven, Calimax, Circlulo K, Dax, Smart & Final, and Farmacia Roma. We are planning to introduce a Natural Cabana® Lemonade/Limeade (“Limonada”) in a 16.9oz glass “PULSE bottle” format for the Mexico market later in 2016 once our relationship with Café El Marino is solidified.
Due to seasonality, net revenue fluctuates from quarter to quarter.
Cost of Sales
During YTD-2016 cost of sales decreased by $198,581 to $1,083,213 (YTD-2015 – $1,281,794). As a percentage of net revenue, cost of sales for YTD-2016 decreased 1.3% to 66% (YTD-2015 – 67.3%). The decrease in cost of sales was due to the decrease in net revenue. We expect cost of sales for the production of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable raw material costs. We expect cost of sales for Natural Cabana® Coconut Water to significantly reduce due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs.
Gross Profit
During YTD-2016 gross profit decreased by $62,283 to $559,795 (YTD-2015 - $622,078). Gross profit for YTD-2016, as a percent of net sales, increased 1.3% to 34% (YTD-2015 – 32.7%). Gross profit decreased due to lower sales which was expected due to eliminating a number of weaker distributors and our strategic decision to concentrate on warehouse direct to retail. We expect gross profit for the sale of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable sales prices, promotional programs and raw material costs. We expect gross profit for Natural Cabana® Coconut Water to significantly increase due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs. We also expect an increase in gross profit as we re-introduce PULSE®, a higher margin brand. We expect all of these factors to have a positive effect on our gross profit.
Expenses
Advertising, samples and displays
This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. During YTD-2016 advertising, samples and displays expense decreased by $2,130 to $37,239 (YTD-2015 - $39,369). As a percentage of net sales, this expense remained the same at 2%. We expect this variable expense to increase in proportion to increases in sales mainly due to the expansion of Natural Cabana® Coconut Water and the re-introduction of PULSE® Heart & Body Health functional beverages and due to an overall increase in distribution reach both in the United States and internationally.
Freight-out
During YTD-2016, freight-out decreased by $35,889 to $159,253 (YTD-2015 - $195,142). On a per case basis freight-out decreased by $0.06 per case to $1.07 (YTD-2015 - $1.13). This decrease is due to the location of shipping points which is sometimes outside of our control. We expect freight-out, on a per case basis, to decrease due to lower transportation costs in the United States and due to shipping directly to warehouses versus to numerous distributors. Additionally, there will be limited freight-out charges associated with delivering our products to our Mexico distributor at the ports of entry in Mexico and our China distributor receiving our products at the port of exit in the United States.
Contribution to fixed expenses
Beverage companies are often compared on a contribution to fixed expense basis which is calculated as gross profit less variable costs such as advertising, samples and displays and freight-out. This line item is not GAAP and therefore it is not disclosed separately in our financial statements. During YTD-2016 contribution to fixed expense decreased by $24,264 to $363,303 (YTD-2015 - $387,567). As a percentage of net sales, contribution margin increased by 2% to 22% (YTD-2015 – 20%). Contribution margin has steadily increased quarter over quarter as we move from direct store delivery to warehouse direct to retail and we expect contribution to fixed expenses to increase as we complete our strategic decision to move towards warehouse direct to retail.
Asset impairment
During YTD-2016 asset impairment expense decreased by $9,578 to $8,268 (YTD-2015 - $17,846) During YTD-2016 we incurred an impairment due to the expiry of finished goods
.
General and administrative
General and administration expenses for YTD-2016 and YTD-2015 consist of the following:
|
|
YTD-2016
|
|
|
YTD-2015
|
|
|
Effect on
Profitability
+ (-)
|
|
Advisory and consulting fees
|
|
$
|
56,375
|
|
|
$
|
57,500
|
|
|
$
|
1,125
|
|
Amortization and depreciation
|
|
|
58,608
|
|
|
|
52,333
|
|
|
|
(6,275
|
)
|
Bad debts
|
|
|
40,000
|
|
|
|
1,035
|
|
|
|
(39,965
|
)
|
Legal, professional and regulatory fees
|
|
|
103,575
|
|
|
|
81,179
|
|
|
|
(22,396
|
)
|
Office, rent and telephone
|
|
|
141,264
|
|
|
|
132,964
|
|
|
|
(8,300
|
)
|
Shareholder, broker and investor relations
|
|
|
54,245
|
|
|
|
124,331
|
|
|
|
70,086
|
|
Travel, meals and trade shows
|
|
|
100,714
|
|
|
|
155,083
|
|
|
|
54,369
|
|
|
|
$
|
554,781
|
|
|
$
|
604,425
|
|
|
$
|
49,644
|
|
During YTD-2016, general and administrative expenses decreased by $49,644 to $554,781 (YTD-2015 - $604,425). Shareholder, broker and investor relations decreased by $70,086 to $54,245 (YTD-2015 - $124,331). During YTD-2015 we incurred an expense of $115,000 attributable to the value of common shares issued to a consultant in a prior period. Starting in April, 2016 we hired an investor relations consultant and paid them $12,000 cash and 250,000 shares (valued at $29,792) during the period. Legal, professional and regulatory fees increased by $22,396 to $103,575 (YTD-2015 - $81,179) due to increased use of our SEC counsel during the period and the cost of our OTCQX listing. Travel, meals and trade shows decreased by $54,369 to $100,714 (YTD-2015 - $155,083) due to a strategic reduction. Office, rent and telephone increased by $8,300 to $141,264 (YTD-2015 - $132,964) a strategic reduction of $39,495 in office costs offset by administration/collection fees of $31,195 incurred associated with the TCA loan.
Salaries and benefits and broker/agent’s fees
During YTD-2016 salaries and benefits and broker/agent’s fees decreased by $146,709 to $502,854 (YTD-2015 - $649,563). We rationalized the number and placement of salespeople in the field as we moved our business concentration from direct store delivery through distributors to warehouse direct to retailers
.
This reduced the number of salespeople needed. We concentrated on warehouse direct sales, chain store listings and international expansion which is where we see the majority of our growth coming from. These areas of future growth are generally handled by our two senior officers. Going into the remainder of 2016 we expect this cost to be less than $200,000 per quarter.
Stock-based compensation
We have no further unrecognized stock-based compensation cost to record.
Net
Operating
Loss
Net operating loss for YTD-2016 decreased by $177,728 to $706,539 (YTD-2015 - $884,267). Offsetting the $62,283 decline in gross profit was an overall reduction of expenses of $240,011. We made a strategic decision to stream-line our operations as discussed under net sales above in order for us to reach profitability sooner and grow from a more solid base of business.
Other Income (Expense)
Interest Income (Expense), net
During YTD-2016 we incurred interest expense of $72,386 (YTD-2015 - $421). During YTD-2016 we incurred interest expense of $8,529 on short-term loans, $1,468 on credit card debt, and $62,389 on our revolving TCA loan balance.
Interest Expense – amortization of debt issuance costs
A total of $542,870 of debt issuance costs were incurred associated with the closing of the Credit Facility discussed in Note 7 to our financial statements. Pursuant to ASU 2015-3 these costs are being amortized to interest expense over the term of the loan to November 6, 2016. A total of $250,934 was charged to interest expense during YTD-2016.
Loss from Discontinued Operations
During February, 2016 we began our own Southern California distributorship, Natural Cabana Distribution Inc. Through this subsidiary we began selling Natural Cabana® Lemonades/Limeades and Coconut Waters to existing accounts in Southern California while we searched for a suitable independent large distributorship in the area to replace our former distributor. We made this strategic decision in order to maintain existing regional retail accounts in the area. On May 31, 2016 we discontinued this temporary operation and moved our ongoing business to a large independent distributor. During YTD-2016 we received $73,740 of net revenue. Cost of sales was $59,627 for a gross profit of $14,113. We incurred expenses of $94,724 and recorded a bad debt of $23,069. Our net loss from discontinued operations for YTD-2016 was $103,680.
Net Loss
Net loss, after interest expense and loss from discontinued operations, for YTD-2016 increased by $248,851 to $1,133,539 ($0.02 per share), compared with a net loss for YTD-2015 of $884,688 ($0.02 per share). This increase was due to TCA interest and amortization of debt issuance costs totaling $313,323 (YTD-2015 - $nil). We also incurred a loss from discontinued operations of $103,680 (2015 - $nil).
Non-GAAP financial information not disclosed in the financial statements
During YTD-2016 our net loss, after adjustments to bring GAAP to net loss before corporation income taxes, depreciation and amortization, stock-based compensation and one-time charges (Adjusted EBITDA), increased by $77,348 to $694,357 (YTD-2015 - $615,674).
LIQUIDITY AND CAPITAL RESOURCES
The discussion that follows is derived from our interim unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015 and the interim unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 (“2016”) and 2015 (“2015”).
Overview
During 2016 our cash position decreased by $100,821 to $330,449 and our working capital decreased by $878,603 to negative $624,953 from $253,650.
As at June 30, 2016, our working capital consisted of: cash of $330,449; accounts receivable, net of allowance for doubtful accounts, of $688,197; inventories of $897,746 (including finished product of $243,294, raw materials of $629,399 and inventory deposit of $25,053); and prepaid expenses of $57,080. Our current liabilities include accounts payable of $648,479, accrued expenses of $368,538, promissory notes of $109,386, credit card indebtedness of $22,022, and loans payable of $1,450,000.
The following table sets forth the major sources and uses of cash for the six months ended June 30, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
Net cash used in operating activities
|
|
$
|
(696,570
|
)
|
|
$
|
(794,971
|
)
|
Net cash used in investing activities
|
|
|
(22,547
|
)
|
|
|
(42,376
|
)
|
Net cash provided by financing activities
|
|
|
618,296
|
|
|
|
905,000
|
|
Net (decrease) increase in cash
|
|
$
|
(100,821
|
)
|
|
$
|
67,653
|
|
Cash Used in Operating Activities
During 2016 we used cash of $696,570 (2015 - $794,971) in operating activities. This was made up of the net loss of $1,133,539 less adjustments for non-cash items such as: asset impairment of $8,268 (2015 - $17,846), bad debt allowance of $40,000 (2015 - $1,035)), amortization of debt issuance costs of $250,933 (2015 - $nil), shares and options issued for services of $81,373 (2015 - $115,000), amortization and depreciation of $58,608 (2015 - $52,333), and reduction of note receivable for services of $nil (2015 - $82,800); all totaling $439,182 (2015 - $269,014). After non-cash items, the net loss was $694,357 (2015 - $617,009). Our net cash used in operating activities as a result of changes in operating assets and liabilities was $2,213 (2015 - $179,247) due to an increase in accounts receivable of $341,735 (2015 - $239,274), a decrease in inventories of $82,897 (2015 – increase of $59,710), an increase in prepaid expenses of $4,118 (2015 – decrease of $8,853) and an increase in accounts payable and accrued expenses of $260,743 (2015 – $103,797).
Cash Used in Investing Activities
During 2016 we used cash of $22,547 in investing activities. In 2016 a total of $17,125 was spent on moulds and die cuts and $5,422 was spent on trademarks.
During 2015 we used cash of $42,376 in investing activities. A total of $21,057 was spent on moulds and die cuts, $5,500 on a delivery van, $4,573 on trademarks, and $4,003 on formulation and testing associated with bringing our PULSE® Heart & Body Health brand into commercial production.
Cash Provided by Financing Activities
On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan having the same terms as the initial $900,000 loan. During the six months ended June 30, 2016 we received gross proceeds of $850,000 less transaction costs of $86,640 for net proceeds of $763,360.
On March 27, 2015 we sold 10,050,000 Units at $0.10 per Unit for cash proceeds of $1,005,000 of which $100,000 was received as at December 31, 2014, $860,000 was received in cash and $45,000 was shares issued for debt. On May 27, 2015 we sold 750,000 Units at $0.10 per Unit for cash proceeds of $45,000, and debt settlement of $30,000.
Additional Capital
As of June 30, 2016, we had cash of $330,449 and a working capital deficiency of $624,953. On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan under the Amended Credit Facility having the same terms as the initial $900,000 loan. The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. During the six months ended June 30, 2016 we received gross proceeds of $850,000 less transaction costs of $86,640 for net proceeds of $763,360. In connection with this additional loan, we agreed to issue 10,558,069 shares of our restricted common stock to the Lender as an Advisory Fee. Notwithstanding the above, the Lender is restricted from receiving these shares to the extent that, after giving effect to the receipt of the shares, the Lender would beneficially own more than 4.99% of our common stock. Any shares not issued as a result of this limitation will be issued at a later date, and from time to time, when the issuance of these will not result in the Lender beneficially owning more than 4.99% of our common stock. We have the right to repurchase these shares by paying $350,000 to the Lender on or before September 22, 2016.
We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. As of August 15, 2016 we believe our cash on hand, available working capital, credit facility and equity financing alternatives will be made available to us to support our working capital needs through to June 30, 2017 which we believe, is sufficient to alleviate the uncertainties relating to our ability to successfully execute on our business plan and finance our operations through June 30, 2017. These alternatives may require significant cash payments for interest and other costs which could be highly dilutive to our existing shareholders. Our financial statements for the periods presented were prepared assuming we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business.
OFF BALANCE-SHEET ARRANGEMENTS
We have not had, and at June 30, 2016, do not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Use of Estimates
The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates.
Intangible Assets
Intangible assets are comprised primarily of the cost of formulations of our products and trademarks that represent our exclusive ownership of Natural Cabana®, PULSE® and PULSE: Nutrition Made Simple®, all used in connection with the manufacture, sale and distribution of our beverages. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the quarter ended June 30, 2016, the estimated fair values of trademarks and other intangible assets exceeded their respective carrying values.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 to our unaudited interim condensed consolidated financial statements.