The
Pulse Beverage Corporation
Condensed
Consolidated Balance Sheets
As
of September 30, 2017 (Unaudited) and December 31, 2016 (Audited)
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|
September
30, 2017
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December
31, 2016
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ASSETS
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Current Assets:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
79,907
|
|
|
$
|
159,660
|
|
Accounts receivable,
net (Note 3)
|
|
|
267,090
|
|
|
|
146,324
|
|
Inventories (Note
4)
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|
|
510,320
|
|
|
|
781,468
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|
Prepaid
expenses
|
|
|
8,050
|
|
|
|
21,585
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|
|
|
|
|
|
|
|
|
|
Total Current
Assets
|
|
|
865,367
|
|
|
|
1,109,038
|
|
Property and equipment,
net of accumulated depreciation of $356,310 and $310,604, respectively (Note 5)
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|
|
85,278
|
|
|
|
151,235
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|
Intangible
assets, net of accumulated amortization of $62,675 and $61,927, respectively (Note 5)
|
|
|
85,891
|
|
|
|
86,640
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,036,536
|
|
|
$
|
1,346,913
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
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Current Liabilities:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Accounts payable
and accrued expenses
|
|
$
|
636,150
|
|
|
$
|
816,974
|
|
Credit card indebtedness
|
|
|
22,003
|
|
|
|
21,057
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|
Promissory notes
payable (Note 6)
|
|
|
15,114
|
|
|
|
71,587
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|
Loans payable
(Note 7)
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|
|
1,321,068
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|
|
|
1,792,384
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|
Convertible debentures
(Note 8)
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|
|
260,025
|
|
|
|
2,025
|
|
Derivative
liabilities (Note 9)
|
|
|
1,223,928
|
|
|
|
93,206
|
|
|
|
|
|
|
|
|
|
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Total Current
Liabilities
|
|
|
3,478,288
|
|
|
|
2,797,233
|
|
|
|
|
|
|
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|
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Stockholders’ Equity (Deficit)
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Preferred stock, 1,000,000 shares
authorized, $0.001 par value, 300,000 Series “A” preferred shares issued (Note 12)
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|
|
300
|
|
|
|
100
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|
Common stock, 5,000,000,000 shares
authorized (See Note 10), $0.00001 par value 694,258,030 and 70,924,980 issued and outstanding, respectively
|
|
|
6,943
|
|
|
|
709
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Additional paid-in capital
|
|
|
17,711,099
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|
|
|
15,243,587
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Deficit
|
|
|
(20,160,094
|
)
|
|
|
(16,694,716
|
)
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|
|
|
|
|
|
|
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|
Total Stockholders’
Equity (Deficit)
|
|
|
(2,441,752
|
)
|
|
|
(1,450,320
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Stockholders’ Equity
|
|
$
|
1,036,536
|
|
|
$
|
1,346,913
|
|
(See
accompanying notes to these unaudited condensed consolidated financial statements)
The
Pulse Beverage Corporation
Condensed
Consolidated Statements of Operations
Three
Months and Nine Months Ended September 30, 2017 and 2016
(Unaudited)
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|
Three
Months Ended September 30, 2017
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Three
Months Ended September 30, 2016
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|
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Nine
Months Ended
September
30, 2017
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|
|
Nine
Months Ended
September
30, 2016
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|
Gross Sales
|
|
$
|
467,966
|
|
|
$
|
709,754
|
|
|
$
|
1,264,672
|
|
|
$
|
2,450,949
|
|
Less: Promotional
Allowances and Slotting Fees
|
|
|
(31,298
|
)
|
|
|
(53,005
|
)
|
|
|
(80,362
|
)
|
|
|
(151,192
|
)
|
Net Sales
|
|
|
436,668
|
|
|
|
656,749
|
|
|
|
1,184,310
|
|
|
|
2,299,757
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|
Cost of Sales
|
|
|
355,185
|
|
|
|
434,158
|
|
|
|
926,661
|
|
|
|
1,517,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross Profit
|
|
|
81,482
|
|
|
|
222,591
|
|
|
|
257,649
|
|
|
|
782,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, samples
and displays
|
|
|
7,857
|
|
|
|
16,672
|
|
|
|
32,701
|
|
|
|
53,911
|
|
Asset impairment
|
|
|
2,691
|
|
|
|
-
|
|
|
|
2,691
|
|
|
|
8,268
|
|
Freight-out
|
|
|
55,226
|
|
|
|
67,965
|
|
|
|
151,897
|
|
|
|
227,218
|
|
General and administration
|
|
|
252,022
|
|
|
|
349,931
|
|
|
|
767,851
|
|
|
|
904,713
|
|
Salaries and benefits
and broker/agent’s fees
|
|
|
140,788
|
|
|
|
211,069
|
|
|
|
419,132
|
|
|
|
713,922
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
458,584
|
|
|
|
645,637
|
|
|
|
1,374,272
|
|
|
|
1,911,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating
Loss
|
|
|
(377,102
|
)
|
|
|
(423,046
|
)
|
|
|
(1,116,623
|
)
|
|
|
(1,129,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expense
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
-
|
|
|
|
(40,000
|
)
|
Interest expense
|
|
|
(70,519
|
)
|
|
|
(48,143
|
)
|
|
|
(252,281
|
)
|
|
|
(120,530
|
)
|
Accretion of discount
on convertible debentures
|
|
|
(405,020
|
)
|
|
|
(172,073
|
)
|
|
|
(1,124,763
|
)
|
|
|
(423,007
|
)
|
Gain on extinguishment
of convertible debentures
|
|
|
403,531
|
|
|
|
-
|
|
|
|
403,531
|
|
|
|
-
|
|
Loss
in fair value of derivatives
|
|
|
(473,027
|
)
|
|
|
-
|
|
|
|
(1,375,241
|
)
|
|
|
-
|
|
Total Other Income
(Expense)
|
|
|
(545,035
|
)
|
|
|
(260,216
|
)
|
|
|
(2,348,754
|
)
|
|
|
(583,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Continuing Operations
|
|
|
(922,137
|
)
|
|
|
(683,262
|
)
|
|
|
(3,465,377
|
)
|
|
|
(1,713,121
|
)
|
Loss from Discontinued
Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(103,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(
922,137
|
)
|
|
$
|
(
683,262
|
)
|
|
$
|
(
3,465,377
|
)
|
|
$
|
(
1,816,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss per Share from Continuing Operations
– Basic and Diluted
|
|
$
|
(
0.00
|
)
|
|
$
|
(
0.01
|
)
|
|
$
|
(
0.01
|
)
|
|
$
|
(
0.03
|
)
|
Net Loss per
Share from Discontinued Operations – Basic and Diluted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Loss per
Share – Basic and Diluted
|
|
|
*($0.00
|
)
|
|
$
|
(
0.01
|
)
|
|
$
|
(
0.01
|
)
|
|
$
|
(
0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Shares Outstanding – Basic and Diluted
|
|
|
537,794,000
|
|
|
|
70,764,000
|
|
|
|
303,180,000
|
|
|
|
69,749,000
|
|
*Less
than $0.01
(See
accompanying notes to these unaudited condensed consolidated financial statements)
The
Pulse Beverage Corporation
Condensed
Consolidated Statements of Cash Flows
For
the Nine Months ended September 30, 2017 and 2016
(Unaudited)
|
|
September
30, 2017
|
|
|
September
30, 2016
|
|
Cash Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,465,377
|
)
|
|
$
|
(1,816,801
|
)
|
Adjustments to
reconcile net loss to net cash used in operations:
|
|
|
|
|
|
|
|
|
Amortization
and depreciation
|
|
|
66,706
|
|
|
|
88,265
|
|
Asset impairment
|
|
|
-
|
|
|
|
8,268
|
|
Bad debt allowance
|
|
|
10,616
|
|
|
|
164,161
|
|
Interest paid
through debt swap and shares
|
|
|
143,449
|
|
|
|
-
|
|
Default interest
added to convertible notes
|
|
|
71,750
|
|
|
|
-
|
|
Amortization
of deferred debt issuances costs
|
|
|
9,500
|
|
|
|
-
|
|
Gain on extinguishment
of convertible notes
|
|
|
(403,531
|
)
|
|
|
-
|
|
Loss in fair
value of derivative liability
|
|
|
1,375,241
|
|
|
|
-
|
|
Accretion of
discount on convertible debenture
|
|
|
1,124,763
|
|
|
|
423,005
|
|
Shares and options
issued for services
|
|
|
11,700
|
|
|
|
140,122
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase in accounts
receivable
|
|
|
(131,382
|
)
|
|
|
(159,291
|
)
|
Decrease (increase)
in prepaid expenses
|
|
|
13,535
|
|
|
|
104
|
|
Decrease in inventories
|
|
|
271,149
|
|
|
|
(6,270
|
)
|
Increase
in accounts payable and accrued expenses
|
|
|
74,123
|
|
|
|
354,649
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used
in Operating Activities
|
|
|
(827,758
|
)
|
|
|
(803,784
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow to Investing Activities
|
|
|
|
|
|
|
|
|
Purchase of property
and equipment
|
|
|
-
|
|
|
|
(17,125
|
)
|
Acquisition
of intangible assets
|
|
|
-
|
|
|
|
(5,422
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used
in Investing Activities
|
|
|
-
|
|
|
|
(22,547
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from
sale of preferred shares
|
|
|
800
|
|
|
|
-
|
|
Proceeds from
loans
|
|
|
134,500
|
|
|
|
763,360
|
|
Repayment of
loans payable
|
|
|
(182,322
|
)
|
|
|
(286,877
|
)
|
Proceeds from
convertible notes
|
|
|
851,500
|
|
|
|
-
|
|
Repayment
of promissory notes
|
|
|
(56,473
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided
by Financing Activities
|
|
|
748,005
|
|
|
|
476,483
|
|
|
|
|
|
|
|
|
|
|
(Decrease) in Cash
|
|
|
(79,753
|
)
|
|
|
(349,848
|
)
|
|
|
|
|
|
|
|
|
|
Cash –
Beginning
|
|
|
159,660
|
|
|
|
431,270
|
|
|
|
|
|
|
|
|
|
|
Cash - Ending
|
|
$
|
79,907
|
|
|
$
|
81,422
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Financing and Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued
for services
|
|
$
|
11,700
|
|
|
$
|
37,500
|
|
Shares issued
to settle debt
|
|
$
|
2,000
|
|
|
$
|
100,000
|
|
Shares
issued upon conversion of convertible debt
|
|
$
|
942,347
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
48,100
|
|
|
$
|
123,077
|
|
Income
taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
(See
accompanying notes to these unaudited condensed consolidated financial statements)
The
Pulse Beverage Corporation
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Organizational
history
Darlington
Mines Ltd. (“Darlington”) was incorporated in the State of Nevada on August 23, 2006. On February 15, 2011 Darlington
Mines Ltd. closed a voluntary share exchange transaction with a private Colorado company, The Pulse Beverage Corporation, which
was formed on March 17, 2010, by and among us, The Pulse Beverage Corporation and the stockholders of The Pulse Beverage Corporation.
The Pulse Beverage Corporation became a wholly-owned subsidiary. On February 16, 2011 Darlington’s name was changed to “The
Pulse Beverage Corporation”.
Nature
of business
We
manufacture and distribute Natural Cabana® Lemonade, Limeade and Coconut Water. Our product line, PULSE® Heart & Body
Health functional beverage has been discontinued in the short-term. Our products are distributed nationwide primarily through
a series of distribution agreements with various independent local and regional distributors and on a warehouse direct basis with
major retail chain stores.
Going
concern
The
accompanying unaudited condensed consolidated interim financial statements have been prepared on a going concern basis of accounting,
which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business.
We have generated significant revenues but have sustained substantial losses since inception and have never paid any dividends
and are unlikely to pay dividends in the immediate or foreseeable future. Our continuation as a going concern is dependent upon
our ability to obtain necessary debt and/or equity financing to fund our growth strategy, pay debt when due, to continue operations,
and to attain profitability. As at September 30, 2017 we had a working capital deficit of $2,612,921, cumulative losses of $20,160,094
and a stockholders’ deficit of $2,441,752. All of these factors combined raises substantial doubt regarding our ability
to continue as a going concern within one year after the date that the consolidated financial statements are issued. These consolidated
financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should we be unable to continue as a going concern. Since our inception through September
30, 2017, we have obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue,
and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors
will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core
business.
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. We believe our debt and equity financing alternatives will be made available to us to support our working
capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be
highly dilutive to our existing shareholders.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of presentation
The
unaudited condensed consolidated interim financial statements for the three months and nine months ended September 30, 2017 and
2016 have been prepared in accordance with accounting principles generally accepted in the United States. Our fiscal year end
is December 31st.
The
foregoing unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information using the instructions for Form 10-Q and Regulation S-X as promulgated
by the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements
do not include all of the disclosures required by generally accepted accounting principles in the United States of America for
complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction
with our audited consolidated financial statements and the notes thereto included on Form 10-K for the year ended December 31,
2016. In our opinion, the unaudited condensed consolidated interim financial statements furnished herein include all adjustments,
all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.
Operating
results for the three months and nine months ended September 30, 2017, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2017.
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. To the extent there are material differences between
the estimates and the actual results, future results of operations will be affected.
Revenue
Recognition
Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable
and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products
to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership
of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors
when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales
have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50.
All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor
terminations, we may accept returned product. To date, such returns have been de minimis.
Seasonality
Our
sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. Historically, we have generated
a higher percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will
vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons
of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance
or results expected for the entire fiscal year.
Recent
Pronouncements
We
continually assess any new accounting pronouncements to determine their applicability to our operations and financial reporting.
Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine
the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that
our financial statements properly reflect the change.
In
April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement,” which provides guidance about whether a cloud computing arrangement
includes a software license. It also provides guidance related to a customer’s accounting for fees paid in a cloud computing
arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license.
If a cloud computing arrangement includes a software license, then the customer should account for the software license element
of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include
a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim
and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. We adopted this guidance on January
1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash
flows.
In
May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities
That Calculate Net Asset Value per Share (or Its Equivalent),” which removes the requirement to categorize within the fair
value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further,
the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair
value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods
within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied
on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance
did not have a material impact on our financial position, results of operations or cash flows.
In
September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.”
Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is
required to retrospectively adjust the balance sheet amounts of the acquired business recognized at the acquisition date with
a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquired business. The
measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized
for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make
such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period
they are determined. The new standard is effective for both public and private companies for periods beginning after December
15, 2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on
our financial position, results of operations or cash flows.
In
July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which applies
to inventory that is measured using first-in, first-out (“FIFO”) or average cost. Under the updated guidance, an entity
should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement
is unchanged for inventory that is measured using last-in, first-out (“LIFO”). This ASU is effective for annual and
interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning
of an interim or annual reporting period. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have
a material impact on our financial position, results of operations or cash flows.
In
February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,”
which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB
Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest
in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU
is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period.
We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position,
results of operations or cash flows.
In
January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20),”
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates
from GAAP the concept of extraordinary items. We adopted this guidance on January 1, 2016. The adoption of this guidance did not
have a material impact on our financial position, results of operations or cash flows.
In
November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (Topic 815).” Entities commonly raise capital
by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights
over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights,
and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition
of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments.
The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under
GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance on January 1,
2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
In
August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40),
effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application
is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance
is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. We adopted this guidance
on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations
or cash flows.
In
March 2016, the FASB issued an accounting standards update which simplifies the accounting for share-based payment transactions,
inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning
after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. We adopted
this guidance on January 1, 2017. The adoption of this guidance did not have a material impact on our financial position, results
of operations or cash flows.
Recent
Accounting Pronouncements Issued but Not Adopted as of September 30, 2017
In
May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” on revenue recognition.
This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance
was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance
must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of
the effective date. As a result, we expect to adopt this guidance on January 1, 2018. We have not yet determined our approach
to adoption or the impact the adoption of this guidance will have on our financial position, results of operations or cash flows,
if any.
In
January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01,
which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current
guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for
financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income.
We are currently evaluating the impact of adopting this guidance.
In
February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly
those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising
from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December
15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this
guidance may have on our financial statements.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”).
The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should
be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction
need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior
to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well
as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions.
Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU
2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test,
which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption
of ASU 2017-04 will have a material impact on our consolidated financial statements.
Accounts
receivable consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Trade accounts receivable
|
|
$
|
276,812
|
|
|
$
|
138,229
|
|
Less allowance for doubtful accounts
|
|
|
(10,616
|
)
|
|
|
-
|
|
Other
|
|
|
894
|
|
|
|
8,095
|
|
|
|
$
|
267,090
|
|
|
$
|
146,324
|
|
Inventories
consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Finished goods
|
|
$
|
228,872
|
|
|
$
|
251,692
|
|
Finished goods in transit
|
|
|
83,313
|
|
|
|
-
|
|
Deposit on finished goods
|
|
|
-
|
|
|
|
5,837
|
|
Raw materials
|
|
|
198,135
|
|
|
|
523,940
|
|
|
|
$
|
510,320
|
|
|
$
|
781,469
|
|
5.
|
Property
and Equipment and Intangible Assets
|
Property
and equipment consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Manufacturing, warehouse,
display equipment and molds
|
|
$
|
289,759
|
|
|
$
|
289,759
|
|
Office equipment and furniture
|
|
|
41,581
|
|
|
|
41,581
|
|
Mobile display unit and vehicles
|
|
|
130,500
|
|
|
|
130,500
|
|
Less: depreciation
|
|
|
(376,562
|
)
|
|
|
(310,605
|
)
|
Total Property
and Equipment
|
|
$
|
85,278
|
|
|
$
|
151,235
|
|
For
the three months ended September 30, 2017 and 2016, depreciation expense was $20,252 and $26,523, respectively. For the nine months
ended September 30, 2017 and 2016, depreciation expense was $65,958 and $78,863, respectively.
Intangible
assets consist of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Website
|
|
|
62,675
|
|
|
|
62,675
|
|
Less: amortization
|
|
|
(62,675
|
)
|
|
|
(61,926
|
)
|
Trademarks –
not amortized due to indefinite life
|
|
|
85,891
|
|
|
|
85,891
|
|
Total Intangible
Assets
|
|
$
|
85,891
|
|
|
$
|
86,640
|
|
For
the three months ended September 30, 2017 and 2016, amortization expense was $nil and $3,134, respectively. For the nine months
ended September 30, 2017 and 2016, amortization expense was $748 and $9,401, respectively. Estimated amortization expense to be
recorded for the remainder of 2017 is $Nil.
6.
|
Promissory
Notes Payable
|
The
following promissory notes are unsecured as follows:
|
a)
|
Promissory
Note #1 – repaid during the nine months ended September 30, 2017; and
|
|
|
|
|
b)
|
Promissory
Note #2 - $15,114 – no specific repayment terms.
|
Loans
payable consists of the following as of:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Short-term loan (a) below
|
|
$
|
3,623
|
|
|
$
|
14,069
|
|
Short-term loan, related party (a) below
|
|
|
89,251
|
|
|
|
120,374
|
|
Senior Secured Revolving Note (b) below
|
|
|
1,180,130
|
|
|
|
1,657,942
|
|
Factoring loan (c) below
|
|
|
7,264
|
|
|
|
-
|
|
Payment rights
loan (d) below
|
|
|
40,800
|
|
|
|
-
|
|
Total loans payable
|
|
$
|
1,321,068
|
|
|
$
|
1,792,384
|
|
|
a)
|
In
September 2015, we received short-term loans totaling $145,000 of which $130,000 was received from a family trust of our Chief
Executive Officer. These loans bear interest at 10%, are unsecured and due on demand. As of November 14, 2017, no demand for
repayment has been received.
|
|
|
|
|
b)
|
On
November 6, 2015, we entered into a Credit Agreement with TCA Global Credit Master Fund, LP (“TCA”). Under the
terms of the Credit Agreement, TCA committed to lend up to $3,500,000 (the “Credit Facility”) pursuant to a senior
secured revolving note (the “Note”). TCA has funded to date $1,750,000, $900,000 in fiscal 2015 and $850,000 in
fiscal 2017. The Credit Facility is secured by a senior secured interest in all our assets. We are charged a 12% per annum
rate of interest plus a 6% per annum administration fee on the daily loan balance outstanding. The Lender has the right, in
the Event of Default, to convert any outstanding amounts under the Note into restricted shares of our common stock based on
85% of the weighted value average price of our common shares over the prior 5 trading days prior to conversion. However, the
Lender may not convert any portion of the Note to the extent that after giving effect to the shares which would be received
on conversion, the Lender would beneficially own more than 4.99% of our common stock. In connection with the Credit Facility
and subsequent loans therein, we were obligated to pay a total of $500,000 in investment banking fees to TCA. As security
for the initial fee of $150,000 we issued 3,000,000 common shares to TCA. These shares were sold for total proceeds of $119,550
leaving a total balance owing of $380,450. The original maturity of the Note was November 6, 2016. TCA has verbally agreed
to extend the maturity date to a future date but as of November 14, 2017 we have not reached an agreement with TCA on this
extension.
|
|
|
|
|
c)
|
On
February 22, 2017, we sold future receipts totaling $61,098 for proceeds of $44,500 pursuant to a Revenue Based Factoring
Agreement dated February 20, 2017. We are required to repay $332 per business day for 184 business days. We have repaid a
total of $51,128 to September 30, 2017. The principal owing as at September 30, 2017 of $9,970 is offset by unamortized deferred
interest of $2,706.
|
|
|
|
|
d)
|
On
September 6, 2017, we entered into a Payment Rights Purchase and Sale Agreement with Everest Business Funding and sold future
receipts of $126,900 for net proceeds of $90,000. We are required to repay $846 per business day for 150 business days. We
have repaid a total of $69,372 to September 30, 2017. The principal owing as at September 30, 2017 of $57,528 is offset by
unamortized deferred interest of $16,728.
|
Convertible
notes consist of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Face value of convertible
notes - (a) to (f) below
|
|
$
|
934,206
|
|
|
$
|
80,750
|
|
Less discounts
|
|
|
(674,181
|
)
|
|
|
(80,750
|
)
|
Revaluation
of notes
|
|
|
-
|
|
|
|
9,630
|
|
|
|
|
260,025
|
|
|
|
9,630
|
|
Less: unamortized
debt issuance costs
|
|
|
-
|
|
|
|
(7,605
|
)
|
Net carrying
value
|
|
$
|
260,025
|
|
|
$
|
2,025
|
|
|
a)
|
On
October 7, 2016, we issued a 9% convertible note in the principal amount of $80,750. We received a total amount of $75,000,
net of debt issuance costs of $7,500. The note was convertible into common shares. On April 4, 2017 GHS Investments, LLC (“GHS”),
pursuant to an Assignment Agreement between us, the lender, and GHS, satisfied our obligations to the lender in the amount
of $118,231 which included principal of $80,750 and accrued regular and default interest of $37,481. GHS had the right to
convert this amount into our common shares at a 40% discount of the average of the three lowest traded prices in the prior
20 days. Between April 19, 2017 and July 24, 2017 the principal amount of $118,123 and $761 of accrued interest was converted
into 82,843,586 common shares at an average aggregate price of $0.0014;
|
|
b)
|
On
January 11, 2017, we borrowed $43,000 (“Power Up Loan #1”) from Power Up Lending Group, Ltd (Power Up). The Power
Up Loan #1 is evidenced by a promissory note which bears interest at 8% per annum and due on October 17, 2017. On July 10,
2017 Power Up may convert Power Up Loan #1 into common shares. On March 10, 2017, we borrowed an additional $30,000 (“Power
Up Loan #2) from Power Up which is evidenced by a promissory note bearing interest at 8% per annum, due on December 30, 2017.
On June 20, 2017, we borrowed an additional $33,000 (“Power Up Loan #3) from Power Up which is evidenced by a promissory
note bearing interest at 8% per annum, due on December 30, 2017. On August 21, 2017, we borrowed an additional $43,000 (“Power
Up Loan #4) from Power Up which is evidenced by a promissory note bearing interest at 8% per annum, due on May 30, 2018. Between
July 18, 2017 and September 18, 2017 Power Up has converted Loans #1 and 2 in the amount of $73,000 plus accrued interest
of $2,970 into 81,588,918 common shares at an average price of $0.001. On December 17, 2017 Power Up may convert Power Up
Loan #3 into our common shares. On February 17,2017 Power Up may convert Power Up Loan #4 into our common shares. The conversion
price of these two loans is 61% of the average of the three lowest trading prices of our common shares during the 15-day trading
period ending on the last trading day prior to the date of conversion.
The derivative
treatment would not become applicable until the promissory notes become convertible on December 17, 2017 and February 17,
2017, respectively.
As at September 30, 2017, the carrying value of the remaining two notes was $76,000. We have reserved
a total of 308,021,620 shares for future issuance upon conversion of the notes of which a balance of 147,864,444 remains unused;
|
|
|
|
|
c)
|
On
January 25, 2017, we entered into a Settlement Agreement with certain creditors whereby Rockwell Capital Inc. purchased debts
from our creditors totaling $250,738 (the “Claim Amount”). In return Rockwell Capital Inc. can convert the Claim
Amount into free-trading common shares pursuant to Section 3(a) (10) of the Securities Act at a 40% discount of the 3 lowest
traded prices over the prior 10 days. As at March 28, 2017 the Claim Amount was fully settled and converted into 78,459,168
common shares. In connection with the Settlement Agreement we issued 625,000 common shares having a fair market value of $6,425
for a registered broker dealer to act on our behalf;
|
|
|
|
|
d)
|
On
January 26, 2017, we entered into a Debt Purchase Agreement (“DPA”) with Old Main Capital, LLC (“Old Main”)
to assign up to $1,727,484 of principal owed to TCA Global Credit Master Fund LP (“TCA”) in exchange for up to
$1,722,484 pursuant to terms of the DPA. To evidence this DPA we entered into a 10% Senior Replacement Convertible Promissory
Note for any purchases made from TCA by Old Main. As at September 30, 2017 Old Main has purchased $513,000 of such debt by
paying TCA a total of $513,000 and paying legal fees of $7,000 to legal counsel for Old Main and TCA. Additionally, we were
charged a total of $38,000 of default interest over the period from January 26, 2017 to June 30, 2017. Old Main has the right
to convert this amount into our common shares at a 35% discount of the average of the two lowest traded prices in the prior
30 days. As at September 30, 2017, a total of $496,822 was converted into 379,111,378 common shares at an average price of
$0.0013. The balance owing as at September 30, 2017 was $61,178. We had reserved 363,670,353 common shares for future issuances
of which a balance of 308,470,353 remains unused;
|
|
|
|
|
e)
|
On
April 3, 2017, we entered into an additional financing arrangement with Old Main Capital, LLC, (“Old Main #2 Note”),
and delivered an installment Convertible Promissory Note (the “Note”) to Old Main. Under the terms of the Old
Main #2 Note, we borrowed $200,000 on April 4, 2017 and $50,000 on April 26, 2017. Each loan under the Old Main #2 Note is
due nine months from date of advance and bears interest at 10% per annum. We have accrued interest of $19,246 as at September
30, 2017. In addition, pursuant to an original issue discount provision, the principle of the Old Main #2 Note was increased
above the $250,000 received by us to $294,117, which provides additional consideration to Old Main. In addition, the principal
and accrued interest on the Old Main #2 Note is convertible in whole or in part at the option of Old Main into our common
shares at a conversion price per share equal to 65% of the average of the two lowest traded prices for our common shares in
the 30 days preceding conversion. We have reserved 1,050,000,000 common shares for future issuances;
|
|
|
|
|
f)
|
On
September 22, 2017, we entered into a Securities Purchase Agreement with Crossover Capital Fund II LLC (the “Crossover
Agreement”). The Crossover Agreement represents two 10% convertible notes in the amount of $58,333 each for a total
funding of $116,666. We issued Crossover Capital Note #1 on June 22, 2017 and received $50,000, after an original issue discount
of $5,833 and debt issuance costs of $2,500. We issued Crossover Capital Note #2 on July 24, 2017 and received $50,000, after
an original issue discount of $5,833 and debt issuance costs of $2,500. The maturity date of these notes is March 22, 2018
and April 24, 2017, respectively. Crossover is entitled to convert these notes into our common shares at a conversion price
equal to 62% of the average of the three lowest trading prices of our common stock for the twenty prior trading days prior
to and including the conversion date. We have reserved up to 481,170,000 shares for future conversion of these notes;
|
|
g)
|
On
July 17, 2017, we entered into a Securities Purchase Agreement with LG Capital Funding, LLC (the “LG Agreement”).
The LG Agreement represents two 8% convertible redeemable notes in the amount of $78,750 each for a total funding of $157,500.
We issued Note #1 on July 17, 2017 and Note #2 on September 1, 2017 and received $150,000 net of legal fees of $7,500. The
maturity dates of these notes are July 17, 2018 and September 1, 2018, respectively. LG Capital is entitled to convert these
notes into our common shares at a conversion price equal to 60% of the lowest trading price of our common stock for the twenty
prior trading days. We have reserved up to 538,815,000 shares for future conversions;
|
|
|
|
|
h)
|
On
July 19, 2017, we issued a 12% convertible note in the principal amount of $62,000 to JSJ Investments Inc. (the “JSJ
Note”) due on demand on or after April 19, 2018. We received a net amount of $50,000, after an original issue discount
of $10,000 and debt issuance costs of $2,000. The note has a cash redemption premium of 150% of the principal amount in the
first 180 days. The note is convertible into common shares at a 40% discount to the average of the three lowest trading prices
during the previous twenty trading days to the date of conversion. We have reserved up to 453,000,000 shares for future conversion
of this note;
|
|
|
|
|
i)
|
On
August 10, 2017, we issued an 8% convertible note in the principal amount of $50,000 to Eagle Equities LLC due on demand on
or after August 10, 2018. We received a net amount of $47,500, after debt issuance costs of $2,500. This note is convertible
into common shares at a 40% discount to the lowest trading price during the previous twenty trading days to the date of conversion.
We have reserved up to 133,333,000 shares for future conversion of this note;
|
|
|
|
|
j)
|
On
September 1, 2017, we issued an 8% convertible note in the principal amount of $78,750 to Adar Bays, LLC due on demand on
or after September 1, 2018. We received a net amount of $75,000, after debt issuance costs of $3,750. This note is convertible
into common shares at a 40% discount to the lowest trading prices during the previous twenty trading days to the date of conversion.
We have reserved up to 276,315,000 shares for future conversion of this note;
|
|
|
|
|
k)
|
On
September 5, 2017, we entered into a Securities Purchase Agreement with Crown Bridge Partners, LLC (the “Crown Bridge
Agreement”). The Crown Bridge Agreement represents three 10% convertible redeemable notes in the amount of $35,000 each
for a total funding of $105,000. We issued Note #1 on September 7, 2017 and received $30,000 net of original issue discount
of $3,500 and legal fees of $1,500. The maturity date of this note is September 7, 2018. Crown Bridge is entitled to convert
this note into our common shares at a 40% discount to the average of the three lowest trading prices during the previous twenty
trading days to the date of conversion. We have reserved up to 318,181,818 shares for future conversions.
|
9.
|
Derivative
Liabilities
|
The
embedded conversion option of the convertible debenture described in Note 8 contains a conversion feature that qualifies for embedded
derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change
in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance, beginning
|
|
$
|
93,206
|
|
|
$
|
-
|
|
Original discount limited to proceeds
of notes
|
|
|
1,633,298
|
|
|
|
80,750
|
|
Fair value of derivative liabilities
in excess of note proceeds received
|
|
|
1,596,972
|
|
|
|
9,825
|
|
Change in fair value of embedded conversion
option
|
|
|
(222,184
|
)
|
|
|
2,631
|
|
Conversion of
derivative liability
|
|
|
(1,877,365
|
)
|
|
|
-
|
|
Balance, ending
|
|
$
|
1,223,928
|
|
|
$
|
93,206
|
|
We
use Level 3 inputs for our valuation methodology for the embedded conversion option liabilities
as their fair values were determined by using the Black-Scholes option pricing model
based on various assumptions. The model incorporates the price of a share of our common
stock (as quoted on the Over the Counter Markets), volatility, risk free rate, dividend
rate and estimated life. Significant changes in any of these inputs in isolation would
result in a significant change in the fair value measurement. As required, these are
classified based on the lowest level of input that is significant to the fair value measurement.
The following table shows the assumptions used in the calculations:
|
|
Expected
Volatility
|
|
Risk-free
Interest Rate
|
|
Expected
Dividend Yield
|
|
|
Expected
Life (in years)
|
|
|
|
|
|
|
|
|
|
|
|
At issuance
|
|
133% - 294%
|
|
0.52% - 1.24%
|
|
|
0
|
%
|
|
0.15 - 1.00
|
At September 30, 2017
|
|
200% - 278%
|
|
1.06% - 1.31%
|
|
|
0
|
%
|
|
0.26 – .93
|
On
April 24, 2017, an Information Statement was filed with the Securities and Exchange Commission pursuant to Section 14C of the
Securities Exchange Act of 1934, to notify our shareholders of a proposed amendment to our Articles of Incorporation. We proposed
an amendment to our Articles of Incorporation that would increase the number of authorized shares of our common stock from 500,000,000
to 5,000,000,000 (the “Authorized Increase Amendment”). The Authorized Increase Amendment was unanimously adopted
and approved on April 23, 2017 by written consent of our Board of Directors. The Authorized Increase Amendment became effective
on May 29, 2017.
Equity
transactions during the nine months ended September 30, 2017:
|
a)
|
On
January 25, 2017, in connection with the Settlement Agreement described in Note 7 we issued 625,000 common shares having a
fair market value of $6,425 for a registered broker dealer to act on our behalf;
|
|
|
|
|
b)
|
Between
February 15, 2017 and September 22, 2017, a total of $496,822 of the Old Main #1 debt was converted into 379,111,378 common
shares at an aggregate average price of $0.0013 per share;
|
|
|
|
|
c)
|
Between
April 21, 2017 and July 24, 2017, a total of $118,123 of the GHS debt and $761 of accrued interest was converted into 82,843,586
common shares at an aggregate average price of $0.0014 per share;
|
|
|
|
|
d)
|
Between
January 27, 2017 and March 24, 2017, a total of $250,738 of the Rockwell Capital Inc. Settlement Agreement Claim Amount was
settled and converted into 78,459,168 common shares at an aggregate average price of $0.003 per share;
|
|
|
|
|
e)
|
Between
July 18, 2017 and September 18, 2017, a total of $73,000 of the Power Up debt and $2,970 of accrued interest was converted
into 81,588,918 common shares at an aggregate average price of $0.001 per share;
|
|
|
|
|
f)
|
On
March 13, 2017, we issued 200,000 common shares to settle $2,000 of creditor debt. These shares were valued at $0.01 per common
shares;
|
|
|
|
|
g)
|
On
March 13, 2017, we issued 500,000 common shares at a fair value of $0.01 per share to a service provider pursuant to a Consultant
Agreement. The fair market value of these shares, being $5,000 was charged to operations.
|
Equity
transactions during the nine months ended September 30, 2016:
|
a)
|
On
January 31, 2016, we issued 238,889 common shares and on February 29, 2016 we issued 238,889 common shares having an aggregate
fair value of $40,611 pursuant to an employment contract with an officer/director. This contract expired on March 8, 2016.
These shares were valued at $0.08 per share or $16,844 in total which amount was deducted from additional paid in capital;
|
|
|
|
|
b)
|
On
April 12, 2016, we issued 50,000 common shares to a former Advisory Board Member for the past use of her name on our website.
The value of these shares being $3,875 was charged to operations during the three months ended September 30, 2016;
|
|
|
|
|
c)
|
On
May 5 and September 7, 2016, we issued 1,000,000 common shares and 200,000 common shares, respectively, to settle $120,000
of creditor debt. These shares were valued at $0.10 based on a negotiated settlement price dated April 21, 2016;
|
|
|
|
|
d)
|
Between
April 12, 2016 and September 22, 2016, we issued a total of 500,000 common shares at an average fair value of $0.10 per share
to a service provider. The aggregate value of these shares, being $51,041, was charged to operations during the nine months
ended September 30, 2016; and
|
|
|
|
|
e)
|
On
May 11, 2016, we issued 250,000 common shares at $0.15 per share to a service provider pursuant to a Strategic Advisory and
Services Agreement. These shares were valued at the 5 days weight average price prior to issuance.
|
At
September 30, 2017, we had no common stock purchase warrants outstanding.
There
are 1,000,000 shares of preferred stock, par value $0.001, issuable in series with rights, preferences and limitations to be determined
by the Board of Directors from time to time. On December 9, 2016, our Board of Directors created a series of Preferred Shares,
$0.001 par value per share, designated as Series “A” Preferred Shares. The number of shares constituting Series “A”
Preferred Shares is 300,000. Each Series “A” Preferred Share entitles the holder to 1,000 votes on all matters submitted
to a vote of our shareholders. On December 9, 2016, we issued 100,000 Series “A” Preferred Shares to our Chief Executive
Officer for $400 and on April 24, 2017 we issued a further 200,000 Series “A” Preferred Shares to our Chief Executive
Officer for $800.
Subsequent
to September 30, 2017 we have not entered into any debt and equity transactions.
Statements
of Operations
|
|
Q3-2017
|
|
|
Q3-2016
|
|
|
Increase
(Decrease)
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Sales
|
|
$
|
467,966
|
|
|
$
|
709,754
|
|
|
($
|
241,788
|
)
|
|
|
(34
|
%)
|
Less: promotion/slotting
|
|
|
(31,298
|
)
|
|
|
(53,005
|
)
|
|
|
21,707
|
|
|
|
(41
|
%)
|
Net Sales
|
|
|
436,668
|
|
|
|
656,749
|
|
|
|
(220,081
|
)
|
|
|
(34
|
%)
|
Cost of Sales
|
|
|
355,185
|
|
|
|
434,158
|
|
|
|
78,973
|
|
|
|
(18
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
81,482
|
|
|
|
222,591
|
|
|
|
(141,109
|
)
|
|
|
(63
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, samples
and displays
|
|
|
7,857
|
|
|
|
16,672
|
|
|
|
(8,815
|
)
|
|
|
(53
|
%)
|
Asset impairment
|
|
|
2,691
|
|
|
|
-
|
|
|
|
2,691
|
|
|
|
100
|
%
|
Freight-out
|
|
|
55,226
|
|
|
|
67,965
|
|
|
|
(12,739
|
)
|
|
|
(19
|
%)
|
General and administration
|
|
|
252,022
|
|
|
|
349,931
|
|
|
|
(97,909
|
)
|
|
|
(28
|
%)
|
Salaries,
benefits and agent’s fees
|
|
|
140,788
|
|
|
|
211,069
|
|
|
|
(70,281
|
)
|
|
|
(33
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
458,584
|
|
|
|
645,637
|
|
|
|
(187,053
|
)
|
|
|
(20
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating
Loss
|
|
|
(377,102
|
)
|
|
|
(423,046
|
)
|
|
|
(45,944
|
)
|
|
|
(11
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expense
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
(100
|
%)
|
Interest expense
|
|
|
(70,519
|
)
|
|
|
(48,143
|
)
|
|
|
22,376
|
|
|
|
46
|
%
|
Accretion of discount on convertible
debentures
|
|
|
(405,020
|
)
|
|
|
(172,073
|
)
|
|
|
232,947
|
|
|
|
135
|
%
|
Gain on extinguishment of convertible
debentures
|
|
|
403,531
|
|
|
|
-
|
|
|
|
403,531
|
|
|
|
100
|
%
|
Loss in fair
value of derivatives
|
|
|
(473,027
|
)
|
|
|
-
|
|
|
|
473,027
|
|
|
|
100
|
%
|
Total Other Income
(Expense)
|
|
|
(545,035
|
)
|
|
|
(260,216
|
)
|
|
|
284,819
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Continuing Operations
|
|
|
(922,137
|
)
|
|
|
(683,262
|
)
|
|
|
238,875
|
|
|
|
35
|
%
|
Loss from Discontinued
Operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
n/a
|
|
Net Loss
|
|
($
|
922,137
|
)
|
|
($
|
683,262
|
)
|
|
$
|
238,875
|
|
|
|
35
|
%
|
Net
Sales
We
introduced Natural Cabana® Lemonade in a 20oz glass bottle in 2012 and since then have developed
a US regional distribution system. During July 2016, we began eliminating
a number of weaker, non-performing and slow-paying
distributors and now have approximately 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 which has led to reductions
in overhead associated with direct store delivery distributors. The continued decrease in net sales during Q3-2017 compared to
Q3-2016 was expected. As part of the restructure we switched our packaging for
Natural Cabana®
Lemonade/Limeade from a 20oz glass bottle to a 16.9oz European style glass bottle used in the making of Citrus Tree and Pulse
Heart Health.
This change has been well received in the market place and we expect to continue
to deliver our products in this packaging. Our net revenue during Q3-2017 was impacted as a result of offering discounts to our
distributors to clear out the 20oz product to make room for the 16.9oz product.
Some
of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway/Tom Thumb Markets, Walmart,
Kroger/King Soopers/City Markets, Stater Bros, Food Max, Houchens/IGA/IGA Express/IGA Cross Roads, Kmart, 7-Eleven, United C-stores,
Weis Markets, King Kullen, Dierbergs Markets, Hy-Vee Supermarket, WinCo Foods, Price Less Markets, Gristede’s Foods, Toot
n Totem, Travel
America, Smashburger, Bolla Markets,
Shop-Rite Grocery, Natural Foods, Flash Foods and Associated Foods.
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.
We
have been in operation with our first product, Natural Cabana® Lemonade, for just over five years. We expanded this brand
into Limeade, which started selling in January 2014, and into Coconut Water, which started selling in March 2014.
During
Q3-2017, our aggregate gross revenues compared to Q3-2016 decreased by $241,788 to $467,966
(Q3-2016 - $709,754). The most significant reason for the decline is due to selling our
Canadian Natural Cabana lemonade/limeade business to our Canadian distributor in Q4-2016.
Canadian sales during Q3-2016 was $64,272 compared to $nil during Q3-2017. Additionally,
during the last six months of 2016, we determined that it was necessary to re-structure
how we organized our business to lower our overhead and increase our productivity so
that we could, in the future, sell more product at a lower cost. In the short-term this,
coupled with our cash crunch, impacted our ability to sell and deliver product which
had a short-term negative impact on our sales. We believe that over the long-term these
structural changes will enhance shareholder value. The impact of these decisions will
be evident in all aspects of our business.
During
Q3-2017 gross revenues, on sale of 30,405 cases (Q3-2016 – 50,049 cases) of 16.9oz and 20oz. Natural Cabana® Lemonade/Limeade,
declined by $236,414 to $344,190 (Q3-2016 - $580,604). The most significant reason for the decline is due to selling our Canadian
business to our Canadian distributor during Q4-2016. Canadian sales during Q3-2016 was $64,272 compared to $nil during Q3-2017.
In
April 2016, we introduced our Lemonade/Limeade formula in a 16.9oz glass bottle package under a private label “Citrus Tree”.
During Q3-2017 gross revenues, on sale of 946 cases (Q3-2016 – 1,539 cases) of Citrus Tree, declined by $19,270 to $700
(Q3-2016 - $19,970). We cleared out remaining Citrus Tree product at $1.35 per case.
During
Q3-2017 gross revenues, on sale of 10,884 cases (Q3-2016 – 9,224 cases) of Natural Cabana® Coconut Water, increased
by $13,895 to $123,076 (Q3-2016 - $109,180). Demand for this product is getting stronger.
During
Q3-2017 our aggregate net sales, after promotional allowances and slotting fees, decreased by $456,496 to $780,858 (Q3-2016 -
$1,237,353). During Q3-2017, promotional allowances and slotting fees, decreased by $21,707 to $31,298 (Q3-2016 - $53,005). As
a percentage of gross sales, promotional allowances and slotting fees increased to 3.85% (Q3-2016 – 4%).
Cost
of Sales
During
Q3-2017 cost of sales decreased by $78,973 to $355,185 (Q3-2016 – $434,158). This decrease was due to lower net revenues.
As a percentage of net revenue, cost of sales increased to 81.3% from 66.1%. This was a result of short-term excessive cost of
16.9oz bottles which were paid for many years ago and kept in inventory attracting storage costs. Once the remaining 16.9oz bottle
inventory of 2,500 cases is depleted our cost will significantly reduce. We expect cost of sales to produce Natural Cabana®
Lemonade/Limeade in the 16.9oz bottle to significantly reduce during the remainder of the year once the bottle inventory on hand
is depleted.
Gross
Profit
During
Q3-2017, gross profit decreased by $141,109 to $81,482 (Q3-2016 - $222,591). This decrease was due to lower net revenues and higher
cost of sales as discussed above, both of which are temporary as we transition from 20oz bottles into 16.9oz bottles. As a percentage
of net revenue, gross profit declined during Q3-2017 to 18.7% from 33.9% during Q3-2016. We expect gross profit for the sale of
Natural Cabana® Lemonade/Limeade to remain stable throughout 2017 due to stable sales prices, promotional programs and raw
material costs.
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 Q3-2017 advertising, samples and displays expense decreased by $8,815 to $7,857 (Q3-2016 - $16,672). This
expense has consistently been 2% of net revenues and a decrease in net revenues as discussed above results in a decrease in advertising,
samples and displays expense.
Freight-out
During
Q3-2017, freight-out decreased by $12,739 to $55,226 (Q3-2016 - $67,965). On a per case basis, freight-out increased by $.19 per
case to $1.31 (Q3-2016 - $1.12 per case). This increase was a result of higher shipping costs due to closing out of our Portland
co-packer and the move from two warehouses to one warehouse. We expect freight-out, on a per case basis, to decrease due to lower
transportation costs due to smaller packaging and due to the move to warehouse direct from direct to consumer.
General
and administrative
Overall,
we have rationalized our overhead to align our expenses to a new strategic way of conducting our business utilizing more warehouse
direct distribution and utilizing strong international distributors that distribute, market and promote our brands in their territories.
This reduces the amount of overhead we require to operate our business.
During
Q3-2017, general and administrative expenses decreased by $97,910 to $252,022 (Q3-2016 - $349,932). The majority of this decrease
was due to $nil bad debt expense during Q3-2017 compared to $124,161 during Q3-2016 relating to a full allowance for a Mexico
account receivable. Shareholder, broker and investor relations decreased by $22,469 to $14,001 (Q3-2016 - $36,470). We employ
an investor relations company to improve investor awareness. We paid them $12,000 during Q3-2017 (Q3-2016 - $33,250 including
250,000 shares issued at a fair value of $21,250). Legal, professional and regulatory fees increased by $72,766 to $91,088 (Q3-2016
- $18,321). This increase was due to more legal fees associated with the financings closed during Q3-2017 compared to Q3-2016.
Travel decreased by $4,485 to $25,846 (Q3-2016 - $30,691). This decrease was due to an overall effort to decrease this expense
category and overhead in general.
Salaries
and benefits and broker/agent’s fees
During
Q3-2017 salaries and benefits and broker/agent’s fees decreased by $70,281 to $140,788 (Q3-2016 - $211,069). During Q3-2016
we rationalized the number and placement of salespeople in the field. We concentrated on chain store listings and warehouse direct
distributors 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 2017 and 2018 we expect this cost to be less than $130,000 per quarter.
Other
Income (Expense)
During
Q3-2017, we incurred interest expense of $70,519 (Q3-2016 - $48,143). This was mainly made up of interest paid or payable to TCA
of $26,183, accrued interest of $10,135 relating to the Old Main #2 convertible note, $21,517 paid on our future receipts and
factoring arrangements and $8,941 accrued on other convertible notes. During Q3-2017, we incurred a loss in fair value of derivative
liabilities of $473,027 (Q3-2016 – $nil) and accretion of discount on convertible debenture of $405,020 (Q3-2016 - $172,073).
During Q3-2017 we recorded a gain on extinguishment of convertible debentures of $403,531 (Q3-2016 - $nil). During Q3-2017 we
did not incur a financing expense (Q3-2016 - $40,000 was incurred). We expect these two non-cash expenses to remain due to the
nature of our current and ongoing financing arrangements.
Net
Loss
Net
loss for Q3-2017 increased by $238,875 to $922,137 (Q3-2016 - $683,262). This increase was mainly due to non-cash expenses such
as: accretion of discount on convertible debentures of $405,020 and a $473,027 loss in change in fair value of derivatives. Net
loss was also significantly impacted in a temporary reduction in gross profit as discussed above.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
The
discussion that follows is derived from our interim unaudited Condensed Consolidated Statements of Operations for the nine months
ended September 30, 2017 (“YTD-2017”) and September 30, 2016 (“YTD-2016”).
Statements
of Operations
|
|
YTD-2017
|
|
|
YTD-2016
|
|
|
Increase
(Decrease)
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Sales
|
|
$
|
1,264,672
|
|
|
$
|
2,450,949
|
|
|
($
|
1,186,277
|
)
|
|
|
(48
|
%)
|
Less: promotion/slotting
|
|
|
(80,362
|
)
|
|
|
(151,192
|
)
|
|
|
70,830
|
|
|
|
(47
|
%)
|
Net Sales
|
|
|
1,184,310
|
|
|
|
2,299,757
|
|
|
|
(1,115,447
|
)
|
|
|
(49
|
%)
|
Cost of Sales
|
|
|
926,661
|
|
|
|
1,517,370
|
|
|
|
590,709
|
|
|
|
(18
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
257,649
|
|
|
|
782,387
|
|
|
|
(524,738
|
)
|
|
|
(67
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising, samples
and displays
|
|
|
32,701
|
|
|
|
53,911
|
|
|
|
(21,210
|
)
|
|
|
(39
|
%)
|
Asset impairment
|
|
|
2,691
|
|
|
|
8,268
|
|
|
|
(5,577
|
)
|
|
|
(67
|
%)
|
Freight-out
|
|
|
151,897
|
|
|
|
227,218
|
|
|
|
(75,321
|
)
|
|
|
(33
|
%)
|
General and administration
|
|
|
767,851
|
|
|
|
904,713
|
|
|
|
(136,861
|
)
|
|
|
(15
|
%)
|
Salaries, benefits
and agent’s fees
|
|
|
419,132
|
|
|
|
713,922
|
|
|
|
(294,791
|
)
|
|
|
(41
|
%)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
3,939
|
|
|
|
(3,939
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating
Expenses
|
|
|
1,374,272
|
|
|
|
1,911,971
|
|
|
|
(537,698
|
)
|
|
|
(28
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating
Loss
|
|
|
(1,116,623
|
)
|
|
|
(1,129,584
|
)
|
|
|
(12,960
|
)
|
|
|
(1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expense
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
(100
|
%)
|
Interest expense
|
|
|
(252,281
|
)
|
|
|
(120,530
|
)
|
|
|
131,750
|
|
|
|
109
|
%
|
Accretion of discount on convertible
debentures
|
|
|
(1,124,763
|
)
|
|
|
(423,007
|
)
|
|
|
701,756
|
|
|
|
166
|
%
|
Gain on extinguishment of convertible
debentures
|
|
|
403,531
|
|
|
|
-
|
|
|
|
403,531
|
|
|
|
100
|
%
|
Loss in fair
value of derivatives
|
|
|
(1,375,241
|
)
|
|
|
-
|
|
|
|
1,375,241
|
|
|
|
100
|
%
|
Total Other Income
(Expense)
|
|
|
(2,348,754
|
)
|
|
|
(583,537
|
)
|
|
|
1,661,537
|
|
|
|
242
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Continuing Operations
|
|
|
(3,465,377
|
)
|
|
|
(1,713,121
|
)
|
|
|
1,752,256
|
|
|
|
102
|
%
|
Loss from Discontinued
Operations
|
|
|
-
|
|
|
|
(103,680
|
)
|
|
|
(103,680
|
)
|
|
|
(100
|
%)
|
Net Loss
|
|
($
|
3,465,377
|
)
|
|
($
|
1,816,801
|
)
|
|
$
|
1,648,576
|
|
|
|
91
|
%
|
Net
Sales
We
introduced Natural Cabana® Lemonade in a 20oz glass bottle in 2012 and since then have developed
a US regional distribution system. During July 2016, we began eliminating
a number of weaker, non-performing and slow-paying
distributors and now have approximately 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 which has led to reductions
in overhead associated with direct store delivery distributors. The continued decrease in net sales during YTD-2017 compared to
YTD-2016 was expected. As part of the restructure we switched our packaging for
Natural Cabana®
Lemonade/Limeade from a 20oz glass bottle to a 16.9oz European style glass bottle used in the making of Citrus Tree and Pulse
Heart Health.
This change has been well received in the market place and we expect to continue
to deliver our products in this packaging. Our net revenue during YTD-2017 was impacted as a result of offering discounts to our
distributors to clear out the 20oz product to make room for the 16.9oz product.
Some
of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway/Tom Thumb Markets, Walmart,
Kroger/King Soopers/City Markets, Stater Bros, Food Max, Houchens/IGA/IGA Express/IGA Cross Roads, Kmart, 7-Eleven, United C-stores,
Weis Markets, King Kullen, Dierbergs Markets, Hy-Vee Supermarket, WinCo Foods, Price Less Markets, Gristede’s Foods, Toot
n Totem, Travel
America, Smashburger, Bolla Markets,
Shop-Rite Grocery, Natural Foods, Flash Foods and Associated Foods.
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.
We
have been in operation with our first product, Natural Cabana® Lemonade, for just over five years. We expanded this brand
into Limeade, which started selling in January 2014, and into Coconut Water, which started selling in March 2014.
During
YTD-2017, our aggregate gross revenues compared to YTD-2016 decreased by $1,186,277 to $1,264,672 (YTD-2016 - $2,450,949). The
most significant reason for the decline is due to selling our Canadian business to our Canadian distributor during Q4-2016. Canadian
sales during YTD-2016 was $385,920 compared to $nil during YTD-2017. Additionally, during the last six months of 2016, we determined
that it was necessary to re-structure how we organized our business to lower our overhead and increase our productivity so that
we could, in the future, sell more product at a lower cost. In the short-term this, coupled with our cash crunch, impacted our
ability to sell and deliver product which had a short-term negative impact on our sales. We believe that over the long-term these
structural changes will enhance shareholder value. The impact of these decisions will be evident in all aspects of our business.
During
YTD-2017 gross revenues, on sale of 85,667 cases (YTD-2016 – 170,095 cases) of 16.9oz and 20oz. Natural Cabana® Lemonade/Limeade,
declined by $1,073,229 to $937,664 (YTD-2016 - $2,010,893). The most significant reason for the decline is due to selling our
Canadian business to our Canadian distributor during Q4-2016. Canadian sales during YTD-2016 was $385,920 compared to $nil during
YTD-2017.
In
April 2016, we introduced our Lemonade/Limeade formula in a 16.9oz glass bottle package under a private label “Citrus Tree”.
During YTD-2017 gross revenues, on sale of 946 cases (Q3-2016 – 2,691 cases) of Citrus Tree, declined by $34,142 to $745
(Q3-2016 - $34,887). During Q3-2017 we cleared out remaining Citrus Tree product at $1.35 per case.
During
YTD-2017 gross revenues, on sale of 27,796 cases (YTD-2016 – 37,226 cases) of Natural
Cabana® Coconut Water, decreased by $78,906 to $326,263 (YTD-2016 - $405,169).
During
YTD-2017 our aggregate net sales, after promotional allowances and slotting fees, decreased by $1,115,447 to $1,184,310 (YTD-2016
- $2,299,757). During YTD-2017, promotional allowances and slotting fees, decreased by $70,830 to $80,362 (YTD-2016 - $151,192).
As a percentage of gross sales, promotional allowances and slotting fees increased to 6.35% (YTD-2016 – 6.17%).
Cost
of Sales
During
YTD-2017 cost of sales decreased by $590,708 to $926,662 (YTD-2016 – $1,517,370). This decrease was due to lower net revenues.
As a percentage of net revenue, cost of sales increased to 78.2% from 66%. This was a result of short-term excessive cost of 16.9oz
bottles which were paid for many years ago and kept in inventory attracting storage costs. Once the remaining 16.9oz bottle inventory
of 2,500 cases is depleted our cost will significantly reduce. We expect cost of sales to produce Natural Cabana® Lemonade/Limeade
in the 16.9oz bottle to significantly reduce during the remainder of the year once the bottle inventory on hand is depleted.
Gross
Profit
During
YTD-2017, gross profit decreased by $524,738 to $257,649 (YTD-2016 - $782,387). This decrease was due to lower net revenues and
higher cost of sales as discussed above, both of which are temporary as we transition from 20oz bottles into 16.9oz bottles. As
a percentage of net revenue, gross profit declined during YTD-2017 to 21.76% from 34% during YTD-2016. We expect gross profit
for the sale of Natural Cabana® Lemonade/Limeade to remain stable throughout 2017 due to stable sales prices, promotional
programs and raw material costs.
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-2017 advertising, samples and displays expense decreased by $21,210 to $32,701 (YTD-2016 - $53,911). This
expense has consistently been between 2% and 3% of net revenues and a decrease in net revenues as discussed above results in a
decrease in advertising, samples and displays expense.
Freight-out
During
YTD-2017, freight-out decreased by $75,321 to $151,897 (YTD-2016 - $227,218). On a per case basis, freight-out increased by $.25
per case to $1.33 (YTD-2016 - $1.08 per case). The increase was a result of higher shipping cost due to closing out of our Portland
co-packer and the move from two warehouses to one warehouse. We expect freight-out, on a per case basis, to decrease due to lower
transportation costs due to smaller packaging and due to the move to warehouse direct from direct to consumer.
General
and administrative
Overall,
we have rationalized our overhead to align our expenses to a new strategic way of conducting our business utilizing more warehouse
direct distribution and utilizing strong international distributors that distribute, market and promote our brands in their territories.
This reduces the amount of overhead we require to operate our business.
During
YTD-2017, general and administrative expenses decreased by $136,861 to $767,851 (YTD-2016 - $904,712). The majority of this decrease
was due to $5,947 bad debt expense during YTD-2017 compared to $164,161 during YTD-2016 relating to a full allowance for a Mexico
account receivable. Shareholder, broker and investor relations decreased by $11,833 to $78,883 (YTD-2016 - $90,715). We employ
an investor relations company to improve investor awareness. We paid them $68,800 during YTD-2017 (YTD-2016 - $24,000 in cash
and 500,000 shares having a fair value of $51,041). Legal and professional fees increased by $128,988 to $234,659 (YTD-2016 -
$105,671). This increase was due to more legal fees associated with the financings closed during YTD-2017 compared to YTD-2016.
Travel decreased by $43,739 to $72,650 (YTD-2016 - $116,389). This decrease was due to an overall effort to decrease this expense
category and overhead in general.
Salaries
and benefits and broker/agent’s fees
During
YTD-2017 salaries and benefits and broker/agent’s fees decreased by $294,791 to $419,131 (YTD-2016 - $713,922). During YTD-2016
we rationalized the number and placement of salespeople in the field. We concentrated on chain store listings and warehouse direct
distributors 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 2017 we expect this cost to be less than $130,000 per quarter.
Stock-based
compensation
During
YTD-2016 we incurred $3,939 of stock-based compensation due to the value of vested stock options (YTD-2017 - $nil). We have no
further unrecognized stock-based compensation cost to record.
Net
Operating Loss
Net
operating loss for YTD-2017 decreased by $12,960 to $1,116,623 (YTD-2016 - $1,129,584). Offsetting the $524,738 decline in gross
profit was an overall reduction of expenses of $537,698. 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)
During
YTD-2017, we incurred interest expense of $252,281 (YTD-2016 - $120,530). This was mainly made up of interest paid or payable
to TCA of $92,050, default interest added to convertible debentures totalling $71,750, $8,788 of interest incurred on bridge loans,
accrued interest of $19,246 relating to the Old Main #2 convertible note, $34,064 paid on our future receipts and factoring arrangements
and $14,236 accrued on other convertible notes. During YTD-2017, we incurred a loss in fair value of derivative liabilities of
$1,375,241 (YTD-2016 – $nil) and accretion of discount on convertible debenture of $1,124,763 (YTD-2016 - $423,007). During
YTD-2017 we recorded a gain on extinguishment of convertible debentures of $403,531 (YTD-2016 - $nil). During YTD-2017 we did
not incur a financing expense (YTD-2016 - $40,000 was incurred). We expect these two non-cash expenses to remain due to the nature
of our current and ongoing financing arrangements.
Net
Loss from Continuing Operations
Net
loss from continuing operations for YTD-2017 increased by $1,752,256 to $3,465,377 (YTD-2016 - $1,713,121). This increase was
mainly due to non-cash expenses such as: accretion of discount on convertible debentures of $1,124,763 and a $1,375,241 loss in
change in fair value of derivatives offset by a gain on extinguishment of debt of $403,531. Net loss was also significantly impacted
in a decline in gross profit of $524,738 as discussed above.
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 during YTD-2017 increased by $1,648,576 to $3,465,377 (YTD-2016 - $1,816,801) This increase was mainly due to non-cash expenses
such as: accretion of discount on convertible debentures of $1,124,763 and a $1,375,241 loss in change in fair value of derivatives
offset by a gain on extinguishment of debt of $403,531. Net loss was also significantly impacted in a decline in gross profit
of $524,738 as discussed above. We also incurred a loss from discontinued operations of $103,680 (YTD-2015 - $nil).
LIQUIDITY
AND CAPITAL RESOURCES
The
discussion that follows is derived from our interim unaudited Condensed Consolidated Financial Statements for the nine months
ended September 30, 2017 (“2017”) and September 30, 2016 (“2016”).
Overview
During
2017, our cash position decreased by $79,753 to $79,907 and our working capital decreased by $924,726 to negative $2,612,921 from
negative $1,688,195 as at December 31, 2016. As at September 30, 2017, our current assets consisted of: cash of $79,907; accounts
receivable of $267,090; inventories of $510,320 (including finished product of $228,872, inventory in transit of $83,313 and raw
materials of $198,135); and prepaid expenses of $8,050. Our current liabilities include accounts payable of $334,029, accrued
expenses of $65,715, credit card indebtedness of $22,003, distributor’s in a credit balance of $11,040, fees owing to an
advisory board member of $207,220, an amount owing to our CEO of $18,147, promissory notes payable of $15,114, convertible debentures,
net of discount, of $260,025, derivative liability of $1,223,928, and loans payable of $1,321,068.
The
following table sets forth the major sources and uses of cash for 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
Net cash used in operating
activities
|
|
($
|
827,758
|
)
|
|
($
|
803,784
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(22,547
|
)
|
Net cash provided
by financing activities
|
|
|
748,005
|
|
|
|
476,483
|
|
Net (decrease)
in cash
|
|
($
|
79,753
|
)
|
|
($
|
349,848
|
)
|
Cash
Used in Operating Activities
During
2017, we used cash of $827,758 in operating activities. This was made up of the net loss of $3,465,377 less adjustments for non-cash
items such as: shares and options issued for services of $11,700, amortization and depreciation of $66,706, amortization to interest
expense of debt issuance costs of $9,500, default interest added to convertible loans of $71,750, interest and expenses paid through
a debt swap of $143,449, loss on change in fair value of derivative liability of $1,375,241, accretion of discount on convertible
debenture of $1,124,763 offset against a gain on extinguishment of convertible debentures of $403,531; all totaling $2,410,195.
After non-cash items, the net cash loss was $1,055,182 compared to a cash loss during 2016 of $992,980. Our net cash received
from operating activities as a result of changes in operating assets and liabilities was $227,424 due to an increase in accounts
receivable of $131,383, a decrease in inventories of $271,149, a decrease in prepaid expenses of $13,535 and an increase in accounts
payable and accrued expenses of $74,123.
During
2016 we used cash of $803,784 in operating activities. This was made up of the net loss of $1,816,801 less adjustments for non-cash
items such as: asset impairment of $8,268, bad debt allowance of $164,161, accretion of debt issuance costs of $423,005, shares
and options issued for services of $140,122, amortization and depreciation of $88,265; all totaling $823,821. After non-cash items,
the net loss was $992,980. Our net cash received from operating activities as a result of changes in operating assets and liabilities
was $189,192 due to an increase in accounts receivable of $159,291, a decrease in inventories of $6,270, an increase in prepaid
expenses of $104 and an increase in accounts payable and accrued expenses of $354,649.
Cash
Used in Investing Activities
During
2017, we did not use any cash 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.
Cash
Provided by Financing Activities
During
2017, we received $748,005 from financing activities, which consisted of $800 received from our Chief Executive Officer for purchase
of 300,000 Series A Preferred Shares, $44,500 received pursuant to a Revenue Factoring Loan Agreement, $90,000 received pursuant
to a Future Payment Rights Agreement, $851,500 received pursuant to convertible notes, which were offset by $182,322 repayment
of loans payable and $56,473 repayment of promissory notes.
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 nine months ended September 30, 2016 we received gross proceeds of $850,000 less transaction costs of $86,640
for net proceeds of $763,360. During 2016 we repaid a total of $286,877.
Additional
Capital
Our
continuation as a going concern is dependent upon our ability to obtain necessary debt and/or equity financing to fund our growth
strategy, pay debt when due, to continue operations, and to attain profitability. As at September 30, 2017 we had a working capital
deficit of $2,612,921, cumulative losses of $20,160,094 and a stockholders’ deficit of $2,441,752. All of these factors
combined raises substantial doubt regarding our ability to continue as a going concern within one year after the date that the
consolidated financial statements are issued. These consolidated financial statements do not include any adjustments to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to
continue as a going concern. Since our inception through September 30, 2017, we have obtained funds primarily from the issuance
of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management
believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet our
obligations as they become due, and will allow the development of our core business.
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. We believe our debt and equity financing alternatives will be made available to us to support our working
capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be
highly dilutive to our existing shareholders.
OFF
BALANCE-SHEET ARRANGEMENTS
We
have not had, and at September 30, 2017, 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 considering current and forecasted economic conditions. While there are several 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 trademarks that represent our exclusive ownership of “Natural Cabana®”,
used in connection with the manufacture, sale and distribution of our products. We do not amortize trademarks as they have an
indefinite life; we amortize our website over a period of 5 years on a straight-line basis. 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
three months ended September 30, 2017, 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 consolidated financial statements.