Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Exchange
Act.
Yes [ ] No [X]
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes [ ] No [X]
As of the last business day of the
second fiscal quarter, June 30, 2015, the aggregate market value of common
stock held by non-affiliates was approximately $10,845,000 using the closing
price on that day of $0.18.
As of March 30, 2016, there were 68,924,980
shares of the Company’s common stock issued and outstanding.
We desire to
take advantage of the “safe harbor” provisions of the Private Securities
Litigation Reform Act of 1995. This Annual Report on Form 10-K (“Report”)
contains a number of forward-looking statements that reflect management’s
current views and expectations with respect to our business, strategies,
products, future results and events, and financial performance. All statements
made in this Report other than statements of historical fact, including
statements that address operating performance, the economy, events or
developments that management expects or anticipates will or may occur in the
future, including statements related to potential strategic transactions,
distributor channels, volume growth, revenues, profitability, new products,
adequacy of funds from operations, cash flows and financing, our ability to
continue as a going concern, statements regarding future operating results and
non-historical information, are forward-looking statements. In particular, the
words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,”
“will,” “can,” “plan,” “predict,” “could,” “future,” variations of such words,
and similar expressions identify forward-looking statements, but are not the
exclusive means of identifying such statements and their absence does not mean
that the statement is not forward-looking.
Readers should
not place undue reliance on these forward-looking statements, which are based
on management’s current expectations and projections about future events, are
not guarantees of future performance, are subject to risks, uncertainties and
assumptions and apply only as of March 30, 2016. Our actual results,
performance or achievements could differ materially from historical results as
well the results expressed in, anticipated or implied by these forward-looking
statements. Except as required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
In particular, our business,
including our financial condition and results of operations, may be impacted by
a number of factors, including, but not limited to, the following:
For a discussion
of some of the factors that may affect our business, results and prospects, see
“Item 1A. Risk Factors.” Readers are also urged to carefully review and
consider the various disclosures made by us in this Report and in our other
reports filed with the Securities and Exchange Commission, including our
periodic reports on Form 10-Q and current reports on Form 8-K, and those
described from time to time in our press releases and other communications,
which attempt to advise interested parties of the risks and factors that may
affect our business, prospects and results of operations.
As used in this annual report:
(i) the terms “we”, “us”, “our”, “Pulse” and the “Company” mean The Pulse
Beverage Corporation; (ii) “SEC” refers to the Securities and Exchange
Commission; (iii) “Securities Act” refers to the United States
Securities
Act of 1933
, as amended; (iv) “Exchange Act” refers to the United States
Securities
Exchange Act of 1934
, as amended; and (v) all dollar amounts refer to
United States dollars unless otherwise indicated.
PART I
ITEM 1. BUSINESS
Our Business
We are a Northglenn, Colorado based beverage company formed in 2011 by beverage industry veterans for the purpose of exploiting niche markets in the beverage industry. We own two beverage brands: Natural Cabana® Lemonade/Limeade and Coconut Water and PULSE® Heart & Body Health functional beverages. We introduced our Natural Cabana® Lemonade in 2012 and since then have developed a multi-national comprehensive distribution system in 47 states, Canada, Mexico and China. By establishing a multi-national distribution system, Pulse has secured more than 15,000 listings for its Lemonades/Limeades and more than 5,000 listings for its Coconut Waters with regional and national grocery and convenience chain stores such as: Albertsons/Safeway/Tom Thumb/City Markets, Walmart, Kroger/Fred Meyer, Kmart, Circle K, Walgreens, 7-Eleven, Whole Foods, Hy-Vee Supermarket, , Food City, Raley's Supermarkets, Price Chopper Supermarkets, WinCo Foods, ShopeRite Supermarkets and Racetrac.
We have been in business
with Natural Cabana® Lemonade for four years. We expanded this brand into
Limeade, which started selling in January, 2014, and into Coconut Water, which
started selling in March, 2014. Our PULSE® Heart
& Body Health brand of functional beverages, originally developed by Baxter
Healthcare, will be re-introduced and marketed with new packaging later in 2016.
We believe the new packaging will have wider distributor, buyer and consumer
appeal. Using our well established and
comprehensive distribution system, we will introduce PULSE® Heart & Body
Health into our existing distribution system through natural beverage
distributers such as: United Natural Food, Inc. and Nature’s Best, the two
largest natural food distributors.
We
currently produce, market, sell and distribute our brands through our strategic
regional and international distribution system, which includes over 85% Class
“A” distributors such as Sysco, The Sygma Network, UNFI and distributors for
Anheuser Busch, Miller Coors, Pepsi, RC/7-Up, Coke and Cadbury Schweppes.
Our
principal executive offices are located at 11678 N Huron Street, Northglenn,
Colorado 80234, and our telephone number at this address is (720) 382-5476. Our
website is
www.pulsebeverage.com.
Information contained on our website
is not a part of this Annual Report on Form 10-K. We completed our initial
public offering on February 15, 2011. On June 24, 2015 our common stock began
trading on the OTCQX
®
Best Marketplace for established global and growth companies operated by OTC
Markets Group Inc.
Overview and
Mission
Our mission is
to be one of the market leaders in the development and marketing of natural and
functional beverage products that provide real health benefits to a significant
segment of the population and are convenient and appealing to consumers. We
have an experienced management team of beverage industry executives that have strong
relationships in the industry and have successfully launched and/or managed the
distribution for more than twenty-five major brands over the past twenty five years.
Non-carbonated
beverages divide into a number of categories, including energy and sports
drinks, teas, juices, lemonades, bottled water, coconut water and functional
beverages. These beverage categories include a host of products that are
fortified with vitamins, minerals and dietary supplements. PULSE® Heart &
Body Health is targeted at the functional/nutritional beverage segment. Our
goal is to evolve the functional/nutritional beverage category into more of a
focus on providing true and meaningful health and wellness benefits in a
convenient and good tasting format.
Products
Natural
Cabana® Lemonade/Limeade
Natural
Cabana® Lemonade/Limeade
is a line-up of refreshing, all-natural,
“good-for-you”, ready-to-drink lemonades/limeades in a 20oz glass bottle in seven
flavours: Natural Lemonade, Cherry Lemonade, Strawberry Lemonade, Mango
Lemonade, Natural Limeade, Cherry Limeade and Raspberry Limeade. Natural
Cabana® Lemonades/Limeades contain no artificial sweeteners or
coloring with significant reduction in calories compared to competing products;
having only 60 calories and 19 grams of sugar per 8 oz. serving. Lemonades and
limeades are part of a high-growth market with few entrants. There
is only one other all-natural lemonade in the marketplace that is offered in a
smaller 16oz glass format. We believe that the lemonade/limeade market is well
established and that there is an immediate demand in North America and
internationally.
Natural
Cabana® Lemonades/Limeades are targeted to beverage consumers
desiring a lower calorie, all natural, thirst quenching beverage for enjoyment
and rehydration. Nationally, only a handful of companies market ready-to-drink
lemonades. We believe Natural Cabana® Lemonades/Limeades have competitive
advantages over existing lemonade brands as follows: offered in a large format
20oz glass bottle, has 60 calories per 8oz. serving compared to over 100 calories of
most competing beverages and is made of 100% all natural ingredients. The fact that
Natural Cabana® Lemonades/Limeades contain no
preservatives or artificial sweeteners means that they can be sold in health
food stores such as Whole Foods, GNC Live Well, Vitamin Cottage, Sunflower and
others. The following is a summary of our competition in the lemonade segment:
-
Calypso® – many flavors, 20oz glass bottle,
artificial coloring, high in calories, artificial sweeteners;
-
Hubert’s Lemonade® –
all natural lemonade in
a 16oz glass bottle;
-
Simply Lemonade® - one flavor in a 13.5oz plastic bottle
using natural lemon juice and high in calories;
-
Arizona® Iced Tea – a lemonade/tea known as “Arnold
Palmer” in a 24oz can; and
-
Country Time
Lemonade® - one flavor in a
12oz can, high in calories.
Natural
Cabana® Coconut Water
We
introduced Natural Cabana® Coconut Water, in natural and pineapple flavours in
a 16.9oz can, in March, 2014 as a major line extension to our Natural Cabana® Lemonades/Limeades.
We recently added a 11.2oz can as a 6 pack in a cardboard carton.
4
The
rapidly emerging coconut water category has nearly doubled in revenue every
year since 2005 according to the Wall Street Journal, and targeting consumer
trends – “healthy” and “natural.” Dubbed “Mother Nature’s Sports Drink,” it is
made from the highest quality coconuts from Thailand. High in electrolytes,
naturally fat and cholesterol-free, coconut water is an excellent source of
hydration, and contains healthy ingredients including calcium, potassium and
magnesium. Natural Cabana® Coconut Water debuted at a price lower than its
competitors and, according to informal customer surveys, is the best-tasting
coconut water in the market.
Coconut
water is one of the fastest growing beverage categories in the United States,
with consumers and health experts recognizing its natural hydrating qualities,
exceptional nutritional benefits and great taste. Coconut water contains high
levels of electrolytes, vitamins and minerals and less sugar than many sports
drinks.
While
there are a number of competing brands in this category, we believe our pricing
strategy, established existing distribution network, and exceptional taste of our
Natural Cabana® Coconut Water brand will give us a competitive advantage in the
marketplace.
PULSE®
Heart & Body Health
PULSE®
Heart & Body Health functional beverage (“PULSE®”) is an effective nutritional supplement for those seeking a healthy
lifestyle. It is a natural beverage product that is high in antioxidants,
selenium, Vitamin C and soluble fiber. Drinking one bottle has more fiber than two
and half servings of oatmeal. It is bottled without preservatives and in three
naturally sweetened great tasting flavors: Pomegranate/Blackberry, Pear/Peach
and Strawberry/Grapefruit. Pulse® Heart & Body Health formula contains safe
and effective levels of important ingredients to support the health of our
heart and cardiovascular and immune systems.
Our
500ml glass bottle packaging is vibrant and convenient and is water-based,
which gives rise to our trademark:
“
PULSE: Nutrition Made Simple®.”
The nutrients contained in PULSE® are backed by research and are scientifically
demonstrated to promote health in each targeted health platform. The
nutritional ingredients were specifically selected to provide the nutrition
necessary to achieve targeted health benefits using patented
liposome nano-dispersion technology that introduces the ingredients into PULSE®
in a format that allows the body to absorb the nutrients. We own all the
formulations, rights and trademarks relating to the PULSE® brand of functional beverages
and specifically we own the right to use the following Side Panel Statement for
PULSE® Heart Healthy: “Formulation developed under license from Baxter
Healthcare Corporation”. This right is in perpetuity without royalties. All PULSE®
labels contain structure/function claims that are followed by an * disclosing
the following: This statement has not been evaluated by the Food and Drug
Administration. This product is not intended to diagnose, treat, cure, or
prevent any disease.
PULSE®
is
targeted toward adults who want to feel young and healthful. PULSE® brand
mission and concept is supported by a growing consumer link between nutrition
and wellness and the ever growing need for convenient solutions to rehydrate
and to combat obesity. This fact ensures that PULSE® does not just attract the
"baby boomer" category but includes all consumers who want health
conscious beverages. There is a societal shift away from
carbonated, diet and high sugar-content beverages that contain artificial
sweeteners and preservatives. PULSE® is supported by a growing
consumer link between nutrition and wellness in convenient solutions. There is
an emergence of new product categories in the area of energy and sports drinks,
teas, juices, flavored waters, lemonades and functional/nutritional beverages.
Populations are aging, which influences the food and beverage industry, affecting
everything from packaging and taste profiles to calories and contents.
PULSE® is proprietary formulated and scientifically effective
in the recommended serving sizes as part of a daily health regimen. PULSE®
formulas include functional ingredients that are widely considered to be
critical to adult health including anti-oxidants, vitamins, minerals, soluble
fiber and soy isoflavones. The following is a summary of our
competition in the functional beverage segment:
-
Glaceau Vitamin Water® - numerous beverages/flavors, zero calories, mostly
trace amounts of vitamins and elements;
-
Function® Drinks - three beverages/seven flavors, emphasis on
detox/weight loss/energy, various antioxidants, mostly trace amounts of
vitamins and elements;
-
Neuro® - eight beverages/formulations/flavors, lightly
carbonated, proprietary blends and vitamins, small amounts of vitamins and
elements; and
-
POM Wonderful® - pomegrante based
beverage with claims to have heart and other health benefits – FDA has
requested they remove those claims from their labels.
Business Value
Drivers
Profitable
Growth
–
We believe “functional”, “image-based” and/or “better-for-you” brands properly
supported by marketing and innovation, targeted to a broad consumer base, drive
profitable growth. We are focused on maintaining and improving profit margins
and believe that tailored branding, packaging, pricing and distribution channel
strategies help achieve profitable growth. We are implementing these strategies
with a view to achieving profitable growth.
International
market development
– The expansion into international markets with our Natural
Cabana® Lemonades/Limeades and Coconut Waters, together with the re-introduction
of PULSE® Heart & Body Health functional beverages, remains a key value
driver for our growth.
Cost Management
– The principal
focus of controlling cost inputs will continue to center around reducing input
supply and production costs on a per-case basis, including raw material costs
and co-packing fees. The converting raw materials into finished goods and
finished goods into accounts receivable and the reduction of days to collect
accounts receivable while aligning our overhead costs with our growth are key
areas of focus in 2016.
Efficient
Capital Structure
–
Our capital structure is intended to optimize our working capital to finance
expansion, both domestically and internationally. We believe our strong capital
position currently provides us with a competitive advantage.
We believe that,
subject to increases in the costs of certain raw materials being contained,
these value drivers, when properly implemented, will result in:
(1) maintaining and increasing our gross profit margins;
(2) providing additional leverage over time through reduced expenses as a
percentage of net revenues; and (3) optimizing our cost of capital. The
ultimate measure of success is and will be reflected in our current and future
results of operations including positive cash flow.
5
Gross and net
sales, gross profits, contribution to fixed expenses, operating income, net
income and net income per share represent key measurements of the above value
drivers. These measurements will continue to be a key management focus in 2016.
See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION for a full discussion of our operations for 2015.
Growth
Strategy
We launched our Natural
Cabana® Lemonade ahead of PULSE® Heart & Body Health in order to establish
a comprehensive nationwide and international distribution system. Lemonades are
widely considered to be understood by beverage consumers as compared to a
highly nutritional functional beverage product such as PULSE® Heart & Body
Health, which requires more education at the distribution and retail level.
Our growth strategy
includes:
|
-
|
expanding our US distribution reach in order to service national chain stores;
|
|
-
|
expanding our brands in Canada to include Coconut Water and PULSE;
|
|
-
|
rolling out our national sales strategy in Mexico with our Natural Cabana® Coconut Water first followed by a 16.9oz version of our Lemonade/Limeade called “Limonada”;
|
|
-
|
increase awareness of our Natural Cabana® Coconut Water brand in the United States, Canada and Mexico;
|
|
-
|
successfully re-introducing PULSE® Heart & Body Health functional beverage;
|
|
-
|
introducing our new 16.9oz Lemonade/Limeade in a glass bottle under the control brand concept;
|
|
-
|
securing additional chain, convenience and key account store listings for all our brands nationwide and internationally;
|
|
-
|
increasing our direct-to-consumer online shopping;
|
|
-
|
focusing on full service Class “A” distributors;
|
|
-
|
establishing our own Southern California distributorship;
|
|
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|
focusing on placing our products in produce, natural and cold sets as opposed to the grocery isles;
|
|
-
|
completing a strategic acquisition of a successful emerging “good-for-you” beverage brand;
|
|
-
|
introducing a beverage that will compete in the energy drink marketplace;
|
|
-
|
completing the development of a third branded product that will compete in an additional segment of the beverage market; and
|
|
-
|
obtain a NASDAQ or NYSE MKT listing.
|
Expansion into
Mexico:
We secured an agreement
with an established Mexico distributor, Café El Marino, to distribute Natural Cabana® Coconut Water and have sold our first
shipment of 7,500 24pack cases. Café El Marino has been in business for more
than 60 years and has more than 1,000 employees with distribution points in
every major city in Mexico and distribution routes to almost all retail outlets.
Our Mexico operations are headed by Carlos Villarreal. Mr. Villarreal was
responsible for the Mexico introduction and distribution of Monster Energy
Drink® in 2004 and led the expansion across all of Mexico up until June, 2010.
Mr. Villarreal has worked with leading brands such as Dr. Pepper Snapple and
Miller, among others, in their entry/distribution strategies. He has also
served as a Director for Anheuser-Busch and for Grupo Modelo (Corona) in the
U.S. and Mexico.
We plan to
produce Natural Cabana® Lemonades/Limeades (known as “Limonada”) for the Mexico
market in a 16.9oz glass “PULSE bottle” format.
Expansion
into China:
In September, 2015 we began shipping Natural Cabana
Lemonade/Limeade to China through Nantong King Food Co. (“Nantong King”), a
member of the Beijing Rosa International Trading Company, based out of Nantong
City, 50 miles north of the Port of Shanghai. Nantong King re-ordered in
December, 2015.
Prominent Industry
Acquisitions:
|
Monster Beverage Corporation
– In 2014, Coca Cola purchased a 16.7% stake in Monster for $2.15 billion. Monster’s sales over the last 12 months were more than $2.6 billion.
|
|
VOSS Water®
- slightly more than a 50% interest was sold for $105 million to the Reignwood Group (the parent company of Red Bull China). Voss’s sales increased by 25% in 2015 to $77.5 million.
|
|
Vita Coco®
- a 25% interest was sold for $165 million resulting in a valuation of $660 million. Vita Coco’s sales increased 31% in 2014 to $421 million.
|
|
Sweet Leaf Tea® and Tradewinds brands
– Nestle purchased these brands for $100 million when sales were $53 million in 2010.
|
|
SUJA Juice
- In 2015, Coca Cola invested $90 million for a 30% stake and the merchant banking arm of Goldman Sachs also agreed to pay $60 million for a 20% interest which places a value of $300 million. Sales were $42 million in 2014 and sales are projected to be more than $70 million for 2015.
|
|
Bai Brands
- Dr Pepper Snapple has invested $15 million for a 3% interest which places a value of $500 million on the brand. Bai brands was projecting sales of $125 million for 2015.
|
|
Vitamin Water®
- Coca-Cola® purchased Vitamin Water® for a reported $4.1 billion when they were selling approximately 10 million cases per year and had approximately $200 million in sales.
|
|
SOBE®
- Pepsi-Cola® purchased SOBE® for a reported $378 million when they were selling approximately 3 million cases per year and had approximately $60 million in sales.
|
6
|
FUZE®
- Coca-Cola® purchased FUZE® for a reported $300 million when FUZE®, at the time, was selling approximately 7 million cases per year and had approximately $140m in sales.
|
|
Arizona Iced Tea®
- turned down an offer from Coca-Cola® for $2.1 billion. At the time of the offer, Arizona Iced Tea® was selling approximately 25 million cases per year and $500m in sales.
|
Industry
Background
Non-alcoholic
beverages are among the most widely distributed food products in the world and
are being sold through more than 400,000 retailers in the United States, our
core market. The United States has more than 2,600 beverage companies and 500
bottlers of beverage products. Collectively they account for more than $100
billion in annual sales. It is estimated that globally more than $300 billion
worth of non-alcoholic beverages are sold annually. The beverage market is
controlled by two giants, The Coca-Cola Company (“Coke”) and PepsiCo, combining
for over 70% of the non-alcoholic beverage market. Carbonated
beverage sales are slipping, while non-carbonated beverage sales are growing.
Experts predict that beverage companies that only offer carbonated beverages
will have to work hard to off-set flagging demand. Industry watchers believe
that growth will be largely confined to non-carbonated beverages and will
chiefly affect functional drinks. Functional, sports and energy drinks are
expected to be the principal beneficiaries of this trend.
Industry
watchers are particularly confident about the prospect for drinks that are
functional and that offer therapeutic benefits and as such capitalize on the
public’s growing interest in products that promise to improve health. Although
we will face competition in our bid for market share, we believe, based on
market research, that our products, strong packaging, unique formulations and
promotions will induce early trial and in the course of two years build a
widespread and loyal following. We also believe that our products will have
strong appeal in Europe and the Pacific Rim, in particular, China. Key drivers
of the Chinese beverage market include rising inflows of foreign direct
investment, growing levels of consumer spending power, an increasingly health
conscious consuming public and the Chinese government’s market-focused economic
policy. We believe our products will be accepted in China because of China’s
growing desire for healthy products, its growing middle class and its interest
in brands that come from North America.
Distribution
Systems
Our
distribution systems are comprised of the following:
Direct
Store Delivery (“DSD”
)
DSDs
primarily distribute beverages, chips, snacks and milk and provide pre-sales,
delivery and merchandising services to their customers. Service levels are
daily and weekly and they require 25% to 30% gross profit from sales to their
customers. As
of March 30, 2016, we maintained a network of more than 150 distributors in over
48 states in America, nine provinces in Canada, Panama, Mexico, Bermuda
and Ireland. We grant these independent distributors the exclusive right in
defined territories to distribute finished cases of one or more of our products
through written agreements. These agreements typically include compensation to
those distributors in the event we provide product directly to one of our
regional retailers located in the distributor’s region. We are also obligated
to pay termination fees for cancellations of most of these written distributor
agreements, which have terms generally ranging from one to three years. We have
chosen, and will continue to choose, our distributors
based on their perceived ability to build our brand franchise in convenience
stores and grocery stores.
Direct
to Retail Channel (“Warehouse Direct”)
We
have secured listings with large retail convenience store and grocery store chains
where we ship direct to the chain stores warehousing system. Retailers
must have warehousing and delivery capabilities. Services to retailers are
provided by an assigned broker, approved by us, to oversee pre-sale and
merchandising services. Our
direct to retail channel of distribution is an important part of our strategy
to target large national or regional restaurant chains, retail accounts,
including mass merchandisers and premier food-service businesses. Through these
programs, we negotiate directly with the retailer to carry our products, and
the account is serviced through the retailer’s appointed distribution system.
These arrangements are terminable at any time by these retailers or us, and
contain no minimum purchase commitments.
Production Facilities
We outsource the
manufacturing and warehousing of our products to independent contract
manufacturers (“co-packers”). We purchase our raw
materials from North American suppliers which deliver to our third party
co-packers. We currently use three co-packers located in Oregon, Virginia and Nebraska
to manufacture and package our products. We are also seeking a co-packer for
our northeast geographic area. Having three strategically located co-packers reduces
our shipping rates and transport times. We intend to identify
co-packers in northeast US, Texas, Canada, Europe, and Asia to support the
expansion of our products in those markets and Mexico. Once our products
are manufactured, we store finished product in a warehouse adjacent to each
co-packer or in third party warehouses. Our co-packers were
chosen on the basis of their proximity to markets covered by our distributors.
Most of the ingredients used in the formulation of our products are
off-the-shelf and thus readily available. No ingredient has a lead time greater
than two weeks. Other
than minimum case volume requirements per production run for most co-packers,
we do not have annual minimum production commitments with our co-packers. Our
co-packers may terminate their arrangements with us at any time, in which case
we could experience disruptions in our ability to deliver products to our
customers. We continually review our contract packing needs in light of regulatory
compliance and logistical requirements and may add or change co-packers based
on those needs.
Raw Materials
Substantially
all of the raw materials used in the preparation, bottling and packaging of our
products are purchased by us or by our contract manufacturers in accordance
with our specifications. The raw materials used in the preparation and
packaging of our products consist primarily of juice concentrates, natural
flavors, stevia, pure cane sugar, bottles, labels, trays and enclosures. These
raw materials are purchased from suppliers selected by us or by our contract
manufacturers. We believe that we have adequate sources of raw materials, which
are available from multiple suppliers.
7
Currently, we
purchase our flavor concentrate from four flavor concentrate suppliers.
Generally, all natural flavor suppliers own the proprietary rights to the
flavors. In connection with the development of new products and flavors,
independent suppliers bear a large portion of the expense for product
development, thereby enabling us to develop new products and flavors at
relatively low cost. We anticipate that for future flavors and additional
products, we may purchase flavor concentrate from other flavor houses with the
intention of developing other sources of flavor concentrate for each of our
products. If we have to replace a flavor supplier, we could experience
disruptions in our ability to deliver products to our customers, which could
have a material adverse effect on our results of operations.
Quality Control
To
ensure that the flavor profiles and nutritional platforms of our products meet
the needs of consumers’ taste, health and life-style, we contract the services
of Catalyst Development Inc. (“Catalyst”), a beverage product development firm
located in Burnaby, BC, Canada. Catalyst developed the formulations for PULSE®
under license, for Baxter Healthcare Corporation. Catalyst’s owner, Ron
Kendrick, is our Chief of Product Development and oversees our beverage
development, inventory supply chain, and quality assurance through his team of
three persons. Our product development team has ensured PULSE® is a lower
calorie, great tasting functional beverage that provides the benefits we claim
on PULSE® labels. We use a hot-fill process of production to allow the PULSE®
product to have all natural ingredients without the use of preservatives.
We
are committed to building products that meet or exceed the quality standards
set by the U.S., Canadian, China and Mexico governments. Our products are
made from high quality all natural ingredients. We ensure that all of our
products satisfy our quality standards. Contract manufacturers are selected and
monitored by our own quality control representatives in an effort to assure
adherence to our production procedures and quality standards. Samples of our
products from each production run undertaken by each of our contract
manufacturers are analyzed and categorized in a reference library. The
manufacturing process steps include source selection, receipt and storage,
filtration, disinfection, bottling, packaging, in-place sanitation, plant
quality control and corporate policies affecting quality assurance. In
addition, we ensure that each bottle is stamped with a production date, time,
and plant code to quickly isolate problems should they arise.
For
every run of product, our contract manufacturers undertake extensive testing of
product quality and packaging. This includes testing levels of sweetness,
taste, product integrity, packaging and various regulatory cross checks. For
each product, our contract manufacturers must transmit all quality control test
results to us for reference following each production run. Testing also
includes microbiological checks and other tests to ensure the production
facilities meet the standards and specifications of our quality assurance program.
Water quality is ensured through activated carbon and particulate filtration as
well as alkalinity adjustment when required. Flavors are pre-tested before
shipment to contract manufacturers from the flavor manufacturer. We are
committed to ongoing product improvement with a view
toward ensuring the high quality of our product through a stringent contract
packer selection and training program.
Regulation
The production
and marketing of our proprietary beverages are subject to the rules and
regulations of various federal, provincial, state and local health agencies,
including in particular Health Canada, Agriculture and Agri-Food Canada (AAFC)
and the U.S. Food and Drug Administration (FDA). The FDA and AAFC also
regulate labeling of our products. From time to time, we may receive
notifications of various technical labeling or ingredient reviews with respect
to our licensed products. We believe that we have a compliance program in place
to ensure compliance with production, marketing and labeling regulations.
Our contract manufacturers
presently offer non-refillable, recyclable containers in the U.S. and
various other markets. Legal requirements have been enacted in jurisdictions in
the U.S. and Canada requiring that deposits or certain eco-taxes or fees
be charged for the sale, marketing and use of certain non-refillable beverage
containers. The precise requirements imposed by these measures vary. Other
beverage container related deposit, recycling, eco-tax and/or product
stewardship proposals have been introduced in various jurisdictions in the
U.S. and Canada. We anticipate that similar legislation or regulations may
be proposed in the future at local, state and federal levels, both in the
U.S. and Canada.
New Product Development
Our
product philosophy will continue to be based on developing products in those segments
of the market that offer the greatest chance of success such as health,
wellness and natural refreshment and rehydration, and we will continue to seek
out underserved market niches. We believe we can quickly respond, given our
technical and marketing expertise, to changing market conditions with new and
innovative products. We are committed to developing products that are distinct,
meet a quantifiable need, are proprietary, lend themselves to at least a 30%
gross profit, project a quality and healthy image, and can be distributed
through existing distribution channels. We are identifying brands
of other companies with a view to acquiring them or taking on the exclusive
distribution of their products.
Intellectual
Property
We
acquired all of the property and equipment, formulations, rights and trademarks
associated with PULSE® from Health Beverage, LLC pursuant to an Asset Purchase
Agreement that closed on January 31, 2011.
We own the following
intellectual property:
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the right from Baxter Healthcare Corporation to use the following side panel (label) statement for PULSE® Heart & Body Health™: “PRODUCT FORMULATION DEVELOPED UNDER LICENSE FROM BAXTER HEALTHCARE CORPORATION”;
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water-based beverage formulations, specifications, manufacturing methods and related Canadian and US unregistered trademark for PULSE® - Heart Healthy™. This trademark is being used currently and will not expire as long as we continue to use it;
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registered trademarks: “PULSE” – USA & CANADA (a water-based beverage) U.S. No. 2698560, Canada: TMA 622,432 and “PULSE: NUTRITION MADE SIMPLE” – USA ONLY. U.S. No. 2819813. In general, trademark registrations expire 10 years from the filing date or registration date, with the exception in Canada, where trademark registrations expire 15 years from the registration date. All trademark registrations may be renewed for a nominal fee; and
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8
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the trademark Natural Cabana® in connection with our Natural Cabana® Lemonade, Limeade and Coconut Water.
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We consider our
trademarks, trade secrets and the license right described above to be of
considerable value and importance to our business.
Segment
Information
We have one
operating segment: Non-carbonated beverages; and one reportable geographic
segment: North America.
Research and
Development
During the year
ended December 31, 2015 we spent $995 (2014 - $55,674) on research and
development costs associated with the changing of PULSE® brand of functional
beverages from gender specific formulations to a new, non-gender specific
formulation. We believe the new formulation will have
significantly wider consumer appeal.
Seasonality
Our sales are
seasonal and we experience fluctuations in quarterly results as a result of
many factors. Historically, we have generated a greater 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.
Employees
As of December 31, 2015, we had twenty-six
employees/consultants, including Robert E. Yates, who serves as our President
and Principal Executive, Financial and Accounting Officer.
ITEM
1A. RISK FACTORS
An investment in
our common stock is risky. You should carefully consider the following risks,
as well as the other information contained in this Form 10-K, before investing.
If any of the following risks actually occur, our business, business prospects,
financial condition, cash flow and results of operations could be materially
and adversely affected. In this case, the trading price of our common stock
could decline, and you might lose part or all of your investment. We may
amend or supplement the risk factors described below from time to time by other
reports we file with the SEC in the future.
Risk Factors Relating to Our Company and
Our Business
We rely on key
members of management, the loss of whose services could adversely affect our
success and development.
Our success
depends to a certain degree upon key members of our management. These
individuals are a significant factor in our growth and ability to meet our
business objectives. We have an experienced management team of beverage
industry executives who have successfully launched and/or managed the
distribution for more than twenty-five major brands over the past twenty five
years. They have strong relationships with distributors and buyers who supply
thousands of retail outlets, supermarkets and convenience stores. The loss of
our key management personnel could slow the growth of our business, or cause us
to cease operations, which may result in the total loss of an investment in our
securities.
Because we do
not have long term contractual commitments with our distributors, our business
may be negatively affected if we are unable to maintain these important
relationships and distribute our products.
Our marketing
and sales strategy depends in large part on the availability and performance of
our independent distributors. We will continue our efforts to reinforce and
expand our distribution network by partnering with new distributors and
replacing underperforming distributors. We have entered into written agreements
with many of our distributors in the U.S. and Canada, with terms ranging
from one to three years. We currently do not have, nor do we anticipate in the
future that we will be able to establish, long-term contractual commitments
from some of our distributors. In addition, despite the terms of the written
agreements with many of our top distributors, there are no minimum levels of
purchases required under some of those agreements, and most of the agreements
may be terminated at any time by us, generally with a termination fee. We may
not be able to maintain our current distribution relationships or establish and
maintain successful relationships with distributors in new geographic
distribution areas. Moreover, there is the additional possibility that we may
have to incur additional expenditures to attract and maintain key distributors
in one or more of our geographic distribution areas in order to profitably
exploit our geographic markets.
Our inability to
maintain our distribution network or attract additional distributors will
likely adversely affect our revenues and financial results.
Because we rely
on our distributors, retailers and brokers that distribute our competitors’
products along with our own products, we have little control in ensuring our
product will be delivered to our customers by our distributors, which could
cause our sales to suffer.
Our ability to
establish a market for our products in new geographic areas, as well as
maintain and expand our existing markets, is dependent on our ability to
establish and maintain successful relationships with reliable distributors,
retailers and brokers strategically positioned to serve those areas. Most of
our distributors, retailers and brokers sell and distribute competing products,
including non-alcoholic and alcoholic beverages, and our products may represent
a small portion of their business. To the extent that our distributors,
retailers and brokers are distracted from selling our products or do not employ
sufficient efforts in managing and selling our products, including re-stocking
retail shelves with our products, our sales and results of operations could be
adversely affected. Our ability to maintain our distribution network and
attract additional distributors, retailers and brokers will depend on a number
of factors, some of which are outside our control. Some of these factors
include: the level of demand for our brands and products in a particular
distribution area; our ability to price our products at levels competitive with
those of competing products; and our ability to deliver products in the
quantity and at the time ordered by distributors, retailers and brokers.
9
If any of the
above factors work negatively against us, our sales will likely decline and our
results of operations will be adversely affected.
Because our
distributors are not required to place minimum orders with us, we need to
manage our inventory levels, and it is difficult to predict the timing and
amount of our sales.
Our independent
distributors are not required to place minimum monthly or annual orders for our
products. In order to reduce inventory costs, independent distributors endeavor
to order products from us on a “just in time” basis in quantities, and at such
times, based on the demand for the products in a particular distribution area.
Accordingly, there is no assurance as to the timing or quantity of purchases by
any of our independent distributors or that any of our distributors will
continue to purchase products from us in the same frequencies and volumes as
they may have in the past. In order to be able to deliver our products on a
timely basis, we need to maintain adequate inventory levels of the desired
products, but we cannot predict the number of cases sold by any of our
distributors. If we fail to meet our shipping schedules, we could damage our
relationships with distributors and/or retailers, increase our shipping costs
or cause sales opportunities to be delayed or lost, which would unfavorably
impact our future sales and adversely affect our operating results. In
addition, if the inventory of our products held by our distributors and/or
retailers is too high, they will not place orders for additional products,
which would also unfavorably impact our future sales and adversely affect our
operating results.
Our business
plan and future growth is dependent in part on our distribution arrangements
with retailers and regional retail accounts. If we are unable to establish and
maintain these arrangements, our results of operations and financial condition
could be adversely affected.
We currently
have distribution arrangements with a few regional retail accounts to
distribute our products directly through their venues. However, there are
several risks associated with this distribution strategy. First, we do not have
long-term agreements in place with any of these accounts and thus, the
arrangements are terminable at any time by these retailers or us. Accordingly,
we may not be able to maintain continuing relationships with any of these
national accounts. A decision by any of these retailers, or any large retail
accounts we may obtain, to decrease the amount purchased from us or to cease
carrying our products could have a material adverse effect on our reputation,
financial condition or results of operations. In addition, we may not be able
to establish additional distribution arrangements with other national retailers.
Second, our
dependence on national and regional retail chains may result in pressure on us
to reduce our pricing to them or allow significant product discounts. Any
increase in our costs for these retailers to carry our product, reduction in
price, or demand for product discounts could have a material adverse effect on
our profit margin.
Finally, our direct
to retailer distribution arrangements may have an adverse impact on our
existing relationships with our independent regional distributors, who may view
our direct to retailer accounts as competitive with their business, making it
more difficult for us to maintain and expand our relationships with independent
distributors.
We rely on
independent contract manufacturers of our products, and this dependence could
make management of our marketing and distribution efforts inefficient or
unprofitable.
We do not own
the plants or the equipment required to manufacture and package our beverage
products, and do not directly manufacture our products but instead outsource
the manufacturing process to independent contract manufacturers (co-packers).
We do not anticipate bringing the manufacturing process in-house in the future.
Currently, our products are prepared, bottled and packaged by two primary
co-packers. Our ability to attract and maintain effective relationships with
contract manufacturers and other third parties for the production and delivery
of our beverage products in a particular geographic distribution area is
important to the success of our operations within each distribution area.
Competition for contract manufacturers’ business is intense, especially in the
western U.S., and this could make it more difficult for us to obtain new or
replacement manufacturers, or to locate back-up manufacturers, in our various
distribution areas, and could also affect the economic terms of our agreements
with our manufacturers. Our contract manufacturers may terminate their
arrangements with us at any time, in which case we could experience disruptions
in our ability to deliver products to our customers. We may not be able to
maintain our relationships with current contract manufacturers or establish
satisfactory relationships with new or replacement contract manufacturers,
whether in existing or new geographic distribution areas. The failure to
establish and maintain effective relationships with contract manufacturers for
a distribution area could increase our manufacturing costs and thereby
materially reduce profits realized from the sale of our products in that area.
In addition, poor relations with any of our contract manufacturers could
adversely affect the amount and timing of product delivered to our distributors
for resale, which would in turn adversely affect our revenues and financial
condition.
As is customary
in the contract manufacturing industry for comparably sized companies, we are
expected to arrange for our contract manufacturing needs sufficiently in
advance of anticipated requirements. We continually evaluate which of our
contract manufacturers to utilize based on the cost structure and forecasted
demand for the particular geographic area where our contract manufacturers are
located. To the extent demand for our products exceeds available inventory or
the production capacity of our contract manufacturing arrangements, or orders
are not submitted on a timely basis, we will be unable to fulfill distributor
orders on demand. Conversely, we may produce more product than warranted by
actual demand, resulting in higher storage costs and the potential risk of
inventory spoilage. Our failure to accurately predict and manage our contract
manufacturing requirements may impair relationships with our independent
distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain effective relationships with those
distributors and key accounts.
Our business and
financial results depend on the continuous supply and availability of raw
materials.
The principal
raw materials we use include glass bottles, labels, closures, flavorings,
stevia, pure cane sugar and other natural ingredients. The costs of our
ingredients are subject to fluctuation. If our supply of these raw materials is
impaired or if prices increase significantly, our business would be adversely
affected. Certain of our contract manufacturing arrangements allow such
contract manufacturers to increase their charges based on certain of their own
cost increases. While certain of our raw materials, like glass, are based on a
fixed-price purchase commitment, the prices of any of the above or any other
raw materials or ingredients may continue to rise in the future and we may not
be able to pass any cost increases on to our customers.
10
We may not
correctly estimate demand for our products. Our ability to estimate demand for
our products is imprecise, particularly with new products, and may be less
precise during periods of rapid growth, particularly in new markets. If we
materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, glass,
labels, flavors, and natural sweeteners, or sufficient packing arrangements, we
might not be able to satisfy demand on a short-term basis. Moreover,
industry-wide shortages of certain concentrates, supplements and sweeteners
have been experienced and could, from time to time in the future, be
experienced, which could interfere with and/or delay production of certain of
our products and could have a material adverse effect on our business and
financial results.
Rising raw
material, fuel and freight costs as well as freight capacity issues may have an
adverse impact on our sales and earnings.
The recent
volatility in the global oil markets has resulted in unstable fuel and freight
prices. Due to the price sensitivity of our products, we do not anticipate that
we will be able to pass any increased costs on to our customers.
At the same
time, the economy appears to be returning to pre-recession levels resulting in
the rise of freight volumes which is exacerbated by carrier failures to meet
demands and fleet reductions due to fewer drivers in the market. We may be
unable to secure available carrier capacity at reasonable rates, which could have
a material adverse effect on our operations.
We rely upon our
ongoing relationships with our key flavor suppliers. If we are unable to source
our flavors on acceptable terms from our key suppliers, we could suffer
disruptions in our business.
Currently, we
purchase our flavor concentrate from three suppliers, and we anticipate that we
will purchase flavor concentrate from others with the intention of developing
other sources of flavor concentrate for each of our products. The price of our
concentrates is determined by our flavor houses, and may be subject to change.
Generally, flavor suppliers hold the proprietary rights to their flavors.
Consequently, we do not have the list of ingredients or formulas for our
flavors and concentrates and we may be unable to obtain these flavors or
concentrates from alternative suppliers on short notice. If we have to replace
a flavor supplier, we could experience disruptions in our ability to deliver
products to our customers or experience a change in the taste of our products,
all of which could have a material adverse effect on our results of operations.
If we are unable
to maintain brand image and product quality, or if we encounter other product
issues such as product recalls, our business may suffer.
Our success depends
on our ability to maintain brand image for our existing products and
effectively build up brand image for new products and brand extensions. There
can be no assurance, however, that additional expenditures on advertising and
marketing will have the desired impact on our products’ brand image and on
consumer preferences. Product quality issues, real or imagined, or allegations
of product contamination, even when false or unfounded, could tarnish the image
of the affected brands and may cause consumers to choose other products.
In addition,
because of changing government regulations; or their implementation, or
allegations of product contamination, we may be required from time to time to
recall products entirely or from specific markets. Product recalls could affect
our profitability and could negatively affect brand image.
The inability to
attract and retain key personnel would directly affect our efficiency and
results of operations.
Our success
depends on our ability to attract and retain highly qualified employees in such
areas as distribution, sales, marketing and finance. We compete to hire new
employees, and, in some cases, must train them and develop their skills and
competencies. Our operating results could be adversely affected by increased
costs due to increased competition for employees, higher employee turnover or
increased employee benefit costs. Any unplanned turnover, particularly
involving our key personnel, could negatively impact our operations, financial
condition and employee morale.
Our
inability to protect our trademarks and trade secrets may prevent us from
successfully marketing our products and competing effectively.
Failure to
protect our intellectual property could harm our brand and our reputation, and
adversely affect our ability to compete effectively. Further, enforcing or
defending our intellectual property rights, including our trademarks,
copyrights, licenses and trade secrets, could result in the expenditure of
significant financial and managerial resources. We regard our intellectual
property, particularly our trademarks and trade secrets to be of considerable
value and importance to our business and our success. We rely on a combination
of trademark and trade secrecy laws, confidentiality procedures and contractual
provisions to protect our intellectual property rights. We are pursuing the
registration of additional trademarks in the U.S., Canada and internationally.
There can be no assurance that the steps taken by us to protect these
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our trademarks, trade secrets or similar proprietary rights. In
addition, there can be no assurance that other parties will not assert
infringement claims against us, and we may have to pursue litigation against
other parties to assert our rights. Any such claim or litigation could be
costly. In addition, any event that would jeopardize our proprietary rights or
any claims of infringement by third parties could have a material adverse
effect on our ability to market or sell our brands or profitably exploit our
products.
If we are unable
to maintain effective disclosure controls and procedures and internal control
over financial reporting, our stock price and investor confidence in us could
be materially and adversely affected.
We are required
to maintain both disclosure controls and procedures and internal control over
financial reporting that are effective. Because of its inherent limitations,
internal control over financial reporting, however well designed and operated,
can only provide reasonable, and not absolute, assurance that the controls will
prevent or detect misstatements. Because of these and other inherent
limitations of control systems, there is only the reasonable assurance that our
controls will succeed in achieving their goals under all potential conditions.
The failure of controls by design deficiencies or absence of adequate controls
could result in a material adverse effect on our business and financial
results.
Because we have losses
since inception it is difficult to evaluate your investment in our stock.
We have been
operating since February 15, 2011 and in production since September 22, 2011
and have not yet achieved positive cash flow from operations or profitability. We
have generated start-up losses to date while we build our distribution network,
which could adversely affect our stock price. For the period from inception
through December 31, 2015, we have accumulated losses in excess of $13 million.
We face a number of risks encountered by emerging growth companies, including
our need to obtain long-term sources of financing, and our need to manage
expanding operations in 2016. Our business strategy may not be successful, and
we may not successfully address these risks. If we are unable to achieve profitable
operations, investors may lose their entire investment in us.
11
We may not be
able to successfully manage growth of our business.
Our future
success will be highly dependent upon our ability to successfully manage the
anticipated expansion of our operations. Our ability to manage and support
growth effectively will be substantially dependent on our ability to implement
adequate financial and management controls, reporting systems and other
procedures, and attract and retain qualified technical, sales, marketing,
financial, accounting, and administrative and management personnel.
Our future
success also depends upon our ability to address potential market opportunities
while managing expenses. This need to manage our expenses will place a
significant strain on our management and operational resources. If we are
unable to manage our expenses effectively, our business, results of operations
and financial condition will be materially and adversely affected.
Risks
associated with acquisitions
As part of our business strategy
in the future, we could acquire beverage brands and related assets
complementary to our core business operations. Any acquisitions by us would
involve risks commonly encountered in acquisitions of assets. These risks would
include, among other things, the following:
-
exposure
to unknown liabilities of the acquired business;
-
acquisition
costs and expenses could be higher than anticipated;
-
fluctuations
in our quarterly and annual operating results could occur due to the costs
and expenses of acquiring and integrating new beverage brands;
-
difficulties
and expenses in assimilating the operations and personnel of any acquired
businesses;
-
our
ongoing business could be disrupted and our management’s time and attention
diverted; and
-
inability
to integrate with any acquired businesses successfully.
Risks Related to
our Common Stock
Our securities are
traded on the on the OTCQX
®
Best Marketplace, which may not provide
us as much liquidity for our investors as more recognized senior exchanges such
as
the
NYSE MKT and NASDAQ.
On June 24, 2015 our common stock began
trading on the OTCQX
®
Best Marketplace for established global and growth companies operated by OTC
Markets Group Inc.
The OTC markets are inter-dealer, over-the-counter markets that provide
significantly less liquidity than the NASDAQ Stock Market or other national or
regional exchanges. Securities traded on these OTC markets are usually thinly
traded, highly volatile, have fewer market makers and are not followed by
analysts. Quotes for stocks included on the OTC markets are not listed in
newspapers. Therefore, prices for securities traded solely on the OTC markets
may be difficult to obtain and holders of our securities may be unable to
resell their securities at or near their original acquisition price, or at any
price.
A sale of a substantial number of shares
of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial
amounts of our common stock in the public market, the market price of our common
stock could fall.
Any future
equity or debt issuances by us may have dilutive or adverse effects on our
existing shareholders.
We may issue
additional shares of common due to warrants or options being exercised that
could dilute your ownership in our company. Moreover, any issuances by us of
equity securities may be at or below the prevailing market price of our common
stock and in any event may have a dilutive impact on our shareholders, which
could cause the market price of our common stock to decline.
We have not paid
dividends in the past and do not expect to pay dividends in the future. Any
returns on investment may be limited to the value of our common stock.
We have never paid cash dividends on our
common stock and do not anticipate paying cash dividends in the foreseeable
future. The payment of dividends on our common stock will depend on our
earnings, financial condition and other business and economic factors affecting
us. If we do not pay dividends, our common stock may be less valuable.
Our stock price
is volatile and you may not be able to sell your shares for more than what you paid.
Our stock price has been subject to
significant volatility, and you may not be able to sell shares of common stock
at or above the price you paid for them. The trading price of our common stock
has been subject to fluctuations in the past. During the year ended December
31, 2015, our common stock traded at prices as low as $0.08 per share and as
high as $0.30 per share.
The
market price of the common stock could continue to fluctuate in the future in
response to various factors, including, but not limited to:
-
quarterly
variations in operating results;
-
our ability to
control costs and improve cash flow;
-
announcements
of technological innovations or new products by us or by our competitors;
-
changes in
investor perceptions; and
-
new products or
product enhancements by us or our competitors.
12
The stock market in general has
continued to experience volatility which may further affect our stock price.
Risk Factors
Relating to Our Industry
We compete in an
industry that is brand-conscious, so brand name recognition and acceptance of
our products are critical to our success.
Our business is
substantially dependent upon awareness and market acceptance of our products
and brands by our target market. In addition, our business depends on
acceptance by our independent distributors and retailers of our brands as
beverage brands that have the potential to provide incremental sales growth.
Competition from
traditional non-alcoholic beverage manufacturers may adversely affect our
distribution relationships and may hinder development of our existing markets,
as well as prevent us from expanding our markets.
The beverage
industry is highly competitive. Due to our small size, it can be assumed that
many of our competitors have significantly greater financial, technical,
marketing and other competitive resources. We compete against giant names like The
Coca-Cola Company and PepsiCo, which combine for over 70% of the non-alcoholic
beverage market.
We compete with other beverage companies not only for consumer acceptance but
also for shelf space in retail outlets and for marketing focus by our
distributors, all of whom also distribute other beverage brands. Our products
compete with a wide range of drinks produced by a relatively large number of
manufacturers, most of which have substantially greater financial, marketing
and distribution resources than ours.
Increased
competitor consolidations, market-place competition, particularly among branded
beverage products, and competitive product and pricing pressures could impact
our earnings, market share and volume growth. If, due to such pressure or other
competitive threats, we are unable to sufficiently maintain or develop our
distribution channels, we may be unable to achieve our current revenue and
financial targets. Competition, particularly from companies with greater
financial and marketing resources than ours, could have a material adverse
effect on our existing markets, as well as on our ability to expand the market
for our products.
We compete in an
industry characterized by rapid changes in consumer preferences and public
perception, so our ability to continue developing new products to satisfy our
consumers’ changing preferences will determine our long-term success.
Failure to
introduce new brands, products or product extensions into the marketplace as
current ones mature and to meet our consumers’ changing preferences could
prevent us from gaining market share and achieving long-term profitability.
Product lifecycles can vary and consumers’ preferences change over time.
Although we try to anticipate these shifts and develop new products to
introduce to our consumers, there is no guarantee that we will succeed.
Our business is
subject to many regulations and noncompliance is costly.
The production,
marketing and sale of our beverages, including contents, labels, caps and
containers, are subject to the rules and regulations of various federal,
provincial, state and local health agencies. If a regulatory authority finds
that a current or future product or production run is not in compliance with
any of these regulations, we may be fined, or production may be stopped, thus
adversely affecting our financial condition and results of operations.
Similarly, any adverse publicity associated with any noncompliance may damage
our reputation and our ability to successfully market our products.
Furthermore, the rules and regulations are subject to change from time to time
and while we closely monitor developments in this area, we have no way of
anticipating whether changes in these rules and regulations will impact our
business adversely. Additional or revised regulatory requirements, whether
labeling, environmental, tax or otherwise, could have a material adverse effect
on our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM
2. PROPERTIES
Our principal executive offices are
located at 11678 N Huron Street, Northglenn, Colorado 80234. We lease these
facilities on a month-to-month basis at a cost of $5,587 per month. We lease
warehouse space located in Denver, Colorado for $900 per month. We believe
these facilities are suitable for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are or may be involved from time to
time in various claims and legal actions arising in the ordinary course of
business, including proceedings involving employee claims, contract disputes,
product liability and other general liability claims, as well as trademark,
copyright, and related claims and legal actions. In the opinion of our
management, the ultimate disposition of these matters will not have a material
adverse effect on our consolidated financial position, results of operations or
liquidity.
As of March 30, 2016, there were no
known legal proceedings against us. No governmental agency has instituted
proceedings, served, or threatened us with any complaints.
ITEM 4. MINE
SAFETY DISCLOSURES
Not Applicable.
13
PART II
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market
Information
Prior
to April 5, 2011, there was no public trading market for our securities. We completed our
initial public offering on February 15, 2011. On April 11, 2011 our common
stock started trading under the symbol “PLSB” on the OTCBB operated by the
Financial Industry Regulatory Authority, Inc. (“FINRA”) and the OTCQB operated
by OTC Markets Group, Inc. On June 24, 2015 our common stock began trading on
the OTCQX
®
Best Marketplace for established global and growth companies operated by OTC
Markets Group Inc.
The following table sets forth the range
of high and low bid prices for our common stock for each applicable quarterly
period. The table reflects inter-dealer prices without retail mark-up, mark-down
or commissions and may not represent actual transactions.
Fiscal Year Ended December 31,
2015:
|
High
|
Low
|
First
Quarter
|
$0.30
|
$0.16
|
Second
Quarter
|
$0.20
|
$0.13
|
Third
Quarter
|
$0.18
|
$0.09
|
Fourth
Quarter
|
$0.12
|
$0.08
|
Fiscal Year Ended December 31,
2014:
|
High
|
Low
|
First
Quarter
|
$0.81
|
$0.44
|
Second
Quarter
|
$0.69
|
$0.40
|
Third
Quarter
|
$0.48
|
$0.32
|
Fourth
Quarter
|
$0.37
|
$0.12
|
The closing
price of our common stock on the OTCQX on March 30, 2016 was $0.08 per share.
Number of
Shareholders
As of March 30, 2016 there were 68,924,980
shares of our common stock issued and outstanding and approximately 2,500
shareholders. The transfer agent of our common stock is V-Stock Transfer, LLC, 18
Lafayette Place, Woodmere, NY 11958.
Dividends
We have never paid cash dividends or
distributions to our equity owners. We do not expect to pay cash dividends on
our common stock, but instead, intend to utilize available cash to support the
development and expansion of our business. Any future determination relating to
our dividend policy will be made at the discretion of our Board of Directors
and will depend on a number of factors, including but not limited to, future
operating results, capital requirements, financial condition and the terms of
any credit facility or other financing arrangements we may obtain or enter
into, future prospects and in other factors our Board of Directors may deem
relevant at the time such payment is considered. There is no assurance that we
will be able or will desire to pay dividends in the near future or, if
dividends are paid, in what amount.
Stock
Repurchases
There were no
shares repurchased during the fourth quarter of 2015.
Securities
Issued in Unregistered Transactions
During the quarter ended December 31,
2015, we issued the following securities in unregistered transactions:
On November 6, 2015 we issued 3,000,000
common shares having a fair value of $150,000 pursuant to an Advisory Services
Agreement in connection with a Credit Facility.
On December 31, 2015 we issued 88,277
common shares having a fair value of $12,000 pursuant to an employment contract.
On December 31, 2015 we issued 275,000
common shares having a fair value of $22,000 pursuant to an employment contract
with an officer and director.
Subsequent Sales of Unregistered Securities
Subsequent to
December 31, 2015, we issued the following securities in unregistered
transactions:
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.
We relied upon the exemption from
registration provided by Section 4(a)(2) of the Securities Act of 1933 with
respect to the issuance of the shares listed above. The persons who acquired
these securities were sophisticated investors who were provided full
information regarding our business and operations. There was no general
solicitation in connection with the offer or sale of these securities. The
persons acquired these securities for their own accounts. The shares cannot be
sold unless pursuant to an effective registration statement or an exemption
from registration. No commissions were paid to any person in connection with
the issuance of these securities.
14
ITEM 6. SELECTED
FINANCIAL DATA
Not
applicable.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion
that follows is derived from our consolidated audited balance sheets as of
December 31, 2015 and 2014 and the audited consolidated statements of
operations and cash flows for the years ended December 31, 2015 (‘2015”) and
December 31, 2014 (“2014”).
|
|
2015
|
|
|
2014
|
|
|
Increase
(Decrease)
|
|
Gross Sales
|
$
|
3,730,676
|
|
$
|
3,802,136
|
|
$
|
(71,460
|
)
|
Less: Promotional allowances and slotting fees
|
|
(247,162
|
)
|
|
(438,821
|
)
|
|
191,659
|
|
Net Sales
|
|
3,483,514
|
|
|
3,363,315
|
|
|
120,199
|
|
Cost of Sales
|
|
2,405,874
|
|
|
2,402,869
|
|
|
3,005
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
1,077,640
|
|
|
960,446
|
|
|
117,194
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Advertising, samples and displays
|
|
80,269
|
|
|
136,971
|
|
|
(56,702
|
)
|
Freight-out
|
|
359,266
|
|
|
391,242
|
|
|
(31,976
|
)
|
General and administration
|
|
1,288,224
|
|
|
1,578,363
|
|
|
(290,139
|
)
|
Research and development
|
|
995
|
|
|
55,674
|
|
|
(54,679
|
)
|
Salaries and benefits and broker/agent’s fees
|
|
1,208,603
|
|
|
1,401,742
|
|
|
(193,139
|
)
|
Stock-based compensation
|
|
606,556
|
|
|
166
|
|
|
606,390
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
3,543,913
|
|
|
3,564,158
|
|
|
(20,245
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Loss from Operations
|
|
(2,466,273
|
)
|
|
(2,603,712
|
)
|
|
(137,439
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Other Expenses
|
|
(242,653
|
)
|
|
(127,614
|
)
|
|
115,039
|
|
Net Loss
|
$
|
(2,708,926
|
)
|
$
|
(2,731,326
|
)
|
$
|
(22,400
|
)
|
Net
Sales
During 2015
gross revenues, on sale of 265,227 cases (2014 – 279,729 cases) of Natural
Cabana® Lemonade/Limeade, declined by $116,523 to $3,070,600 (2014 -
$3,187,123). During 2015 gross revenues, on sale of 58,474 cases (2014 – 54,814
cases) of Natural Cabana® Coconut Water, increased by $16,957 to $630,244 (2014
- $613,287). During 2015 gross revenues, on sale of 1,526 cases (2014 – 54
cases) of PULSE® Heart & Body Health, increased by $28,106 to $29,832 (2014
- $1,726).
During
2015 our overall net sales, after promotional allowances and slotting fees,
increased by $120,199 (3.6%) to $3,483,514 (2014 - $3,363,315). During 2015,
promotional allowances and slotting fees, decreased by $191,659 to $247,162
(2014 - $438,821). As a percentage of gross sales, promotional allowances and
slotting fees decreased by 5% to 6.6% (2014 – 11.6%). During 2015 we
eliminated some promotional programs that were not as effective as planned and
reduced slotting fees paid for shelf space.
We were delayed
in switching over to our new coconut water supplier, and as a result net sales of coconut water did not increase as much as
planned. Our new coconut water was widely
taste-tested and paneled and the consensus of opinion was that it better suits
the palette of North American coconut water consumers. The majority of our
existing distributors, and recently secured retail chains, delayed ordering
until we received this product in early December, 2015. Additionally, the
remainder of new accounts secured did not order coconut water until early in
2016 so as to kick off new displays in cold sections leading up to the warmer
months. We recently introduced a smaller 11.2oz six-pack coconut water which
some big box retailers find easier to sell; this should increase net sales in
2016. We
expect overall net sales to increase as we expand our markets internationally
into Mexico, China and Canada and as we introduce a 16.9oz control branded
lemonade/limeade in April, 2016. We also intend on repackaging PULSE Heart
& Body Health into a more attractive package and re-introducing this brand
into the Southern California marketplace and China. Our
China distributor began ordering Lemonade/Limeade in September and our Mexico
distributor was shipped its first order of 15,000 cases of Natural Cabana®
Coconut Water, which sale was recorded in 2015. Due to changes in food laws in
Mexico during the process of shipping product from Asia, we must overlay labels
with a new information label. This has delayed the reorder in Mexico until the
second quarter of 2016. Our distributor will
initially distribute 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 in
2016.
Cost
of Sales
During
2015 cost of sales increased by $3,005 to $2,405,874 (2014 – $2,402,869). As a
percentage of net revenue, cost of sales for 2015 decreased by 2.38% to 69.06%
(2014 – 71.44%). 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
2015 gross profit increased by $117,194 to $1,077,640 (2014 - $960,446). Gross
profit for 2015, as a percent of net sales, increased by 2.38% to 30.94% (2014
– 28.56%). 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.
15
Expenses
Advertising,
samples and displays
Advertising,
samples and displays includes in-store sampling, samples shipped to
distributors, display racks, ice barrels, sell sheets, shelf strips and door
decals. During 2015 advertising, samples and displays expense decreased by $56,702
to $80,269 (2014 - $136,971). As a percentage of net sales, this expense
decreased by 1.8% to 2.3% (2014 – 4.1%). We reduced this cost due to less
display racks and barrels being needed in 2015. We expect this 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
2015, freight-out decreased by $31,976 to $359,266 (2014 - $391,242). On a per
case basis, freight-out decreased by $0.07 per case to $1.10 (2014 - $1.17). We
expect freight-out, on a per case basis, to decrease due to lower
transportation costs in the United States. 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
includes gross profit less variable expenses such as advertising, samples and
displays and freight-out. This line item is not GAAP and therefore it is not
disclosed separately in our consolidated financial statements. During
2015, as a percentage of net sales, contribution to fixed expense increased by 5.47%
to 18.32% (2014 – 12.85%). We expect contribution to fixed expenses to increase
due to the reasons disclosed under each category above.
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.
General and
administration expenses for the years ended December 31, 2015 and 2014 consist
of the following:
|
|
2015
|
|
|
2014
|
|
|
Increase
(Decrease)
|
|
Advisory and consulting fees
|
$
|
110,000
|
|
$
|
120,000
|
|
$
|
(10,000
|
)
|
Amortization and depreciation
|
|
106,423
|
|
|
98,433
|
|
|
7,990
|
|
Bad debts
|
|
156,090
|
|
|
24,470
|
|
|
131,620
|
|
Legal, professional and regulatory fees
|
|
129,965
|
|
|
149,454
|
|
|
(19,489
|
)
|
Office, rent and telephone
|
|
254,448
|
|
|
235,260
|
|
|
19,188
|
|
Shareholder, broker and investor relations
|
|
245,950
|
|
|
560,723
|
|
|
(314,773
|
)
|
Trade shows
|
|
875
|
|
|
40,723
|
|
|
(39,848
|
)
|
Travel and meals
|
|
284,473
|
|
|
349,300
|
|
|
(64,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,288,224
|
|
$
|
1,578,363
|
|
$
|
(290,139
|
)
|
During
2015 general and administrative expenses decreased by $290,139 to $1,288,224 (2014
- $1,578,363). During 2015 we fully provided for a potential bad debt of
$128,196 associated with one of our major distributors. We are working with
this distributor to reverse the negative trend it is experiencing. In the
meantime we have started our own distributorship in this geographic location in
order to service our existing customers and to expand in that important marketplace.
Shareholder, broker and investor relations decreased by $314,773 to $245,950 (2014
- $560,723). Of this expense, a total of $230,000 (2014 - $333,833) was
associated with the issuance of our common shares. Currently we have no plans
to increase the costs associated with communicating with our shareholders and
potential investors and stock brokers. Trade shows expense decreased by $39,848
to $875 (2014 - $40,723) due to not attending certain conferences in 2015 such
as the Natural Products Expo West Conference, Roth Capital Conference and
Marcum Conference. Travel and meals decreased by $64,827 to $284,473 (2014 - $349,300)
due to an overall effort to decrease overhead. Expense categories such as:
advisory/consulting fees, amortization/depreciation,
legal/professional/regulatory fees, and office/rent/telephone all fluctuated
less than 10% when compared to 2014 and are not expected to change more than
10% in 2016.
Salaries and benefits and broker/agent’s fees
During
2015 salaries and benefits and broker/agent’s fees decreased by $193,139 to $1,208,603
(2014 - $1,401,742). This decrease was due to the rationalization of the number
and placement of salespeople in the field. We concentrated on chain store
listings and international expansion which is where we see the majority of our
growth coming from. These areas of growth are generally handled by our two
senior officers.
Stock-based
compensation
On December 31,
2015 we granted stock options under the Amended 2011 Plan to certain officers,
directors, employees and consultants to purchase 12,700,000 common shares at
$0.10 per common share. A total of 10,375,000 stock options vested on December
31, 2015 and a further 2,325,000 stock options vest monthly at a rate of
138,889 shares per month for sixteen months and the remaining 102,776 shares
vest on May 23, 2017. Of the 12,700,000 stock options granted a total of
7,500,000 were granted to three directors/officers valued at $440,274 of which
$302,547 was charged to operations at December 31, 2015 and $135,927 will be
amortized to operations over the next seventeen months ended May 23, 2017.
16
The
fair value of stock options granted were estimated at the date of grant using
the Black-Scholes option-pricing model. During the years ended
December 31, 2015 and 2014, we recorded stock-based compensation of $606,556
and $166. The weighted average fair values of stock options vested during the
year ended December 31, 2015 was $.06.
Other
Income (Expense)
Other
income (expense) for the years ended December 31, 2015 and 2014 consist of the
following:
|
|
2015
|
|
|
2014
|
|
|
Increase
(Decrease)
|
|
Asset impairment
|
$
|
(159,597
|
)
|
$
|
(74,877
|
)
|
$
|
84,720
|
|
Contract settlement
|
|
(7,009
|
)
|
|
-
|
|
|
7,009
|
|
Financing expense
|
|
(10,000
|
)
|
|
(26,000
|
)
|
|
(16,000
|
)
|
Interest (expense) income, net
|
|
(69,885
|
)
|
|
5,027
|
|
|
74,912
|
|
Gain (loss) on disposal of equipment
|
|
3,838
|
|
|
(31,764
|
)
|
|
(35,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(242,653
|
)
|
$
|
(127,614
|
)
|
$
|
115,039
|
|
During
2015 we incurred interest expense of $69,885, net of interest income of $826. We
accrued interest of $8,663 on $145,000 of short-term bridge loans received in
September, 2015 and we paid interest of $11,195 on our TCA loan received on
November 6, 2015. We also incurred interest of $2,892 associated with credit
card indebtedness during the year. Additionally, associated with the closing of
the Credit Facility discussed in Note 7 to our consolidated financial
statements, we incurred $281,230 of debt issuance costs which is being
amortized to interest expense over the term of the loan to November 6, 2016. A
total of $47,961 was charged to interest expense during the year ended December
31, 2015.
During 2014 we received $8,156 interest income from interest earned on our cash
balances and long-term note receivable. This was offset by interest expense of
$3,129 associated with credit card indebtedness.
During
2015 we incurred a contract settlement cost of $7,009 (2014 - $nil) to allow us
to enter into multiple other distribution agreements in a key geographic area.
During 2015 we incurred a $10,000
financing fee expense associated with a potential loan we elected not to take
due to poor terms offered. During 2014 we incurred a financing expense of
$26,000 being the fair market value of 100,000 common shares issued pursuant to
a financing arrangement which did not materialize in a financing acceptable to
us.
During
2015 our asset impairment expense was $159,597. We elected to write-down an
inventory deposit due from our previous coconut water supplier in the amount of
$45,333. A note receivable was written-down to a negotiated amount resulting in
a loss of $6,993. We wrote-off a total of $63,742 of raw materials that were
obsolete or expired and $23,766 of damaged or discontinued finished goods. We
wrote-down trademarks totalling $19,763. During 2014 we incurred an asset
impairment charge of $55,996 for raw materials obsolete or expired and
trademarks written-down of $18,881.
During
2015 we received $6,736 from insurance proceeds from a delivery van written-off
resulting in a gain of $3,838. In 2014 we sold a piece of manufacturing equipment
installed at one of our co-packers for $18,000 resulting in a loss on sale of
$31,764.
Net
Loss
During
2015 net loss decreased by $22,400 to $2,708,926 (2014 - $2,731,326). This
decrease was due to our 2015 operating plan which included rationalizing our overhead
to align expenses with conducting our business differently using warehouse
direct to distribute our products in the United States and using international
distributors which handle all of their own promotions. This reduced the amount
of overhead we incurred during 2015. We expect our monthly net losses to turn
into monthly net income during the middle of 2016 due to increased net sales
and gross profit and reduced expenses as discussed above.
Net
losses to date, for the most part, continue to be the result of a concentrated
effort to establish and increase brand awareness and to establish and improve
upon our extensive nationwide and international distribution systems. Our net
losses are also due to the development of our brands including: PULSE® Heart
& Body Health, Natural Cabana® Lemonade and Limeade and Coconut Water and
to secure distribution and chain store listings.
Non-GAAP
financial information not disclosed in the financial statements
During
2015 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), decreased by $871,442 to $1,278,311
(2014 - $2,149,753). These reductions were due to a significant decrease in
general and administrative expenses and a reduction in promotions, slotting,
advertising and freight-out.
LIQUIDITY
AND CAPITAL RESOURCES
Overview
During the year ended December 31, 2015 our cash position increased
by $381,753 to $431,270 and our working capital position declined by $886,473
to $253,650. At December 31, 2015, our working capital consisted of: cash of $431,270;
accounts receivable of $386,462; inventories of $988,910 (including finished
product of $344,764 and raw materials of $644,146); and prepaid expenses of $15,461.
Our current liabilities include accounts payable of $387,252, accrued expenses
of $193,644, other current amounts due of $209,720, credit card indebtedness of
$22,066 and loans payable of $755,771.
17
The following table sets forth the major
sources and uses of cash for the year ended December 31, 2015 and 2014:
|
2015
|
|
2014
|
|
Net
cash used in operating activities
|
|
($1,347,360)
|
|
|
($1,797,974)
|
|
Net
cash used in investing activities
|
|
(78,708)
|
|
|
(27,503)
|
|
Net
cash provided by financing activities
|
|
1,807,821
|
|
|
100,000
|
|
Net
increase (decrease) in cash
|
|
$381,753
|
|
|
($1,725,477)
|
|
Cash
Used in Operating Activities
During
2015 we used cash of $1,347,360 in operating activities. This was made up of
the net loss of $2,708,926 less adjustments for non-cash items such as: shares
and options issued for services of $871,581, amortization and depreciation of $106,423,
asset impairment of $159,597, a bad debt allowance of $156,091, amortization to
interest expense of debt issuance costs of $47,961, a gain on sale of assets of
$3,838 and reduction of note receivable for services of $92,800; all totaling $1,430,615.
After non-cash items, the net cash loss was $1,278,311 compared to a cash loss
during 2014 of $2,149,753, an improvement of $871,442. Our net cash used in
operating activities as a result of changes in operating assets and liabilities
was $69,049. We used cash of $127,970 to pay down our accounts payable. This
was offset by decreases in current assets: accounts receivable of $2,196,
inventory of $24,369, prepaid expenses of $22,806 and other assets of $9,550.
During 2014 we
used cash of $1,797,974 in operating activities. This was made up of the net
loss of $2,731,326 less adjustments for non-cash items such as: an asset
impairment charge of $55,996, shares and options issued for services of
$333,999, amortization and depreciation of $117,314, bad debt allowance of
$16,500, loss on sale of an asset of $31,764 and a financing fee of $26,000;
all totaling $581,573. After non-cash items, the net loss was $2,149,753. Our
net cash used in operating activities was reduced by $333,779 due to an
increase in accounts receivable of $134,216, an increase in inventory of
$10,767, a decrease in prepaid expenses of $19,777 and an increase in accounts
payable and accrued expenses of $482,169.
Cash
Used in Investing Activities
During
2015 we used cash of $78,708 in investing activities. A total of $64,981 was
spent on moulds, dies and label artwork, $6,387 on computer equipment
associated with Walmart online processing system and $5,500 on a delivery van
for Northern California. We spent $4,573 on trademarks and $4,003 on
formulation and testing associated with bringing our PULSE® Heart & Body
Health brand of functional beverages available for commercial production. We
received $6,736 from insurance proceeds from a delivery van written-off.
During 2014 we used cash of $27,503 in
investing activities. A total of $14,089 was spent on label printing plates and
office equipment. We spent $36,706 on formulation, testing, trademarking and
label design associated with bringing our brands into commercial production. We
received $18,000 from the sale of a piece of manufacturing equipment and we
received $5,292 in principal repayments against our long-term loan due from
Catalyst Development, Inc.
Cash
Provided by Financing Activities
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 during the year ended December 31, 2014. On May 27,
2015 we sold an additional 750,000 Units at $0.10 per Unit for cash proceeds of
$45,000, and debt settlement of $30,000. Each Unit consisted of one share of
restricted common stock and one-half of a warrant. Each whole warrant allows
the holder to purchase one additional share at a price of $0.20 per share at
any time between March 10, 2016 and May 27, 2016.
In
September, 2015 we received short-term loans totaling $145,000. These loans are
unsecured and due on demand. Interest of $8,663 has been accrued at December
31, 2015 and included in accounts payable and accrued expenses. At March 30,
2016 these loans have not been demanded.
During 2014, we received $100,000
from subscription proceeds pursuant to a $0.10 per Unit offering closed on
March 27, 2015.
On November 6, 2015, we entered into a Credit Agreement
with TCA Global Credit Master Fund, LP (the “Lender”). Under the terms of
the Credit Agreement, the Lender has committed to lend a total of $3,500,000
(the “Credit Facility”) to us pursuant to a senior secured revolving note (the
“Note”). The initial tranche of $650,000 was funded on November 6, 2015 and a
second tranche of $250,000 was funded on December 22, 2015 for a total of
$900,000 advanced against this Credit Facility. This loan matures on November
6, 2016 unless extended by the Lender. We must meet specific monthly
collateral requirements to further draw upon the Credit Facility (See
“Additional Capital” below). The Credit Facility is secured by a senior
secured interest in all of 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. Repayment terms are 20% of gross receipts until we reach $130,000
of repayments after which we pay 10% of gross receipts. During the year we
repaid $55,949 leaving a balance owing of $844,040 at December 31, 2015.
Associated with the closing of the Credit Facility we incurred $281,230 of debt
issuance costs which will be amortized to interest expense over the term of the
loan to November 6, 2016. A total of $47,961 was charged to interest expense
during the year ended December 31, 2015. The Lender has the right, in the Event
of Default, to convert any outstanding amounts under the Note into restricted
shares of the Company’s common stock based on 85% of the weighted value average
price of the Company’s 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 the Company’s
common stock. In connection with the Credit Facility, we
are obligated to pay a $150,000 facility fee which has been included in
accounts payable and accrued liabilities. As security for this fee we issued
3,000,000 shares of restricted common stock to the Lender who has the right to
sell enough shares to recover its fee. The value of these shares, being
$150,000, was charged to additional paid in capital. Any excess shares not
sold will be returned to us for cancellation. We have the right to buy-back
these shares by paying $150,000 to the Lender on or before May 6, 2016.
18
Additional Capital
As of December 31, 2015, we had cash of $431,270 and
working capital of $253,650. On
March 22, 2016, we entered into Amendment No. 1 to 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. We received $455,860, net of $44,140 of closing
costs, on March 22, 2016 and will receive a further $250,000 once we collect an
account receivable from our Mexico distributor. A further $250,000 will be
received once we have met certain other performance criteria. 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 purchase these shares by paying
$350,000 to the Lender on or before September 22, 2016.
These additional sources of cash will allow us to meet
our working capital needs through to the middle of 2017. Cash used in
operations during the year ended December 31, 2015 totaled $1,347,360
compared to $1,797,974 for 2014. The decrease in cash used in operations
compared to 2014 is primarily driven by increasing our overall gross profit by
$117,194 (12%), achieving greater operational efficiencies and reducing
operating expenses.
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 credit facility 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.
As of March 30, 2016, we believe that our cash on hand,
available working capital and financing alternatives will be sufficient to meet
our anticipated cash needs through the first half of 2017 and is sufficient to
alleviate the uncertainties relating to our ability to successfully execute on
our business plan and finance our operations through the middle of 2017. Our
financial statements for the years 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 December 31, 2015, 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
of 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 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 and our formulations and related
intangible assets based on case sales divided by 2,000,000 cases 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 years ended
December 31, 2015 and 2014, we identified impairment of trademarks of $19,763
and $18,881, respectively.
RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
See Note 2 to
our consolidated financial statements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
19
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM,
To
the Board of Directors and Stockholders of
The
Pulse Beverage Corporation
Northglenn,
Colorado
We have audited the accompanying consolidated
balance sheets of The Pulse Beverage Corporation and subsidiary (the “Company”)
as of December 31, 2015 and 2014, and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for each of the years
in the two year period ended December 31, 2015. The Company’s management is
responsible for these consolidated financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. The company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
financial position of The Pulse Beverage Corporation and subsidiary as of
December 31, 2015 and 2014, and the results of its operations and its cash
flows for each of the years in the two year period ended December 31, 2015 in
conformity with accounting principles generally accepted in the United States
of America.
/s/ RBSM,
LLP
New
York, New York
March
30, 2016
20
The Pulse Beverage Corporation
Consolidated Balance Sheets
As of December 31, 2015 and 2014
(Audited)
|
|
2015
|
|
|
2014
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
$
|
431,270
|
|
$
|
70,664
|
|
Accounts receivable, net (Note 3)
|
|
386,462
|
|
|
544,749
|
|
Inventories (Note 4)
|
|
988,910
|
|
|
1,146,120
|
|
Prepaid expenses
|
|
15,461
|
|
|
268,267
|
|
Other current assets
|
|
-
|
|
|
15,057
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
1,822,103
|
|
|
2,044,857
|
|
Property and equipment, net of accumulated depreciation of $266,099 and $174,613, respectively (Note 6)
|
|
247,235
|
|
|
266,553
|
|
Other Assets:
|
|
|
|
|
|
|
Loan receivable, net of current portion (Note 5)
|
|
-
|
|
|
177,232
|
|
Intangible assets, net of accumulated amortization of $52,683 and $39,548 (Note 6 )
|
|
1,131,793
|
|
|
1,156,115
|
|
Total Other Assets
|
|
1,131,793
|
|
|
1,333,347
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
3,201,131
|
|
$
|
3,644,757
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
790,616
|
|
$
|
883,587
|
|
Credit card indebtedness
|
|
22,066
|
|
|
21,147
|
|
Loans Payable (Note 7)
|
|
755,771
|
|
|
-
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
1,568,453
|
|
|
904,734
|
|
|
|
|
|
|
|
|
Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, 1,000,000 shares authorized, $0.001 par value, none issued
|
|
-
|
|
|
-
|
|
Common stock, 100,000,000 shares authorized, $0.00001 par value 68,447,202 and 54,276,037 issued and outstanding, respectively (Note 8)
|
|
684
|
|
|
543
|
|
Additional paid-in capital
|
|
14,879,160
|
|
|
13,177,720
|
|
Subscriptions received (Note 8)
|
|
-
|
|
|
100,000
|
|
Accumulated deficit
|
|
(13,247,166
|
)
|
|
(10,538,240
|
)
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
1,632,678
|
|
|
2,740,023
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
3,201,131
|
|
$
|
3,644,757
|
|
(The accompanying notes are integral to these financial
statements)
21
The Pulse Beverage Corporation
Consolidated Statements of Operations
For the Years Ended December 31, 2015 and 2014
(Audited)
|
|
2015
|
|
|
2014
|
|
Gross Sales
|
$
|
3,730,676
|
|
$
|
3,802,136
|
|
Less: Promotional Allowances and Slotting Fees
|
|
(247,162
|
)
|
|
(438,821
|
)
|
Net Sales
|
|
3,483,514
|
|
|
3,363,315
|
|
Cost of Sales
|
|
2,405,874
|
|
|
2,402,869
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
1,077,640
|
|
|
960,446
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
Advertising, samples and displays
|
|
80,269
|
|
|
136,971
|
|
Freight-out
|
|
359,266
|
|
|
391,242
|
|
General and administration
|
|
1,288,224
|
|
|
1,578,363
|
|
Research and development
|
|
995
|
|
|
55,674
|
|
Salaries and benefits and broker/agent’s fees
|
|
1,208,603
|
|
|
1,401,742
|
|
Stock-based compensation (Note 11)
|
|
606,556
|
|
|
166
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
3,543,913
|
|
|
3,564,158
|
|
|
|
|
|
|
|
|
Net Operating Loss
|
|
(2,466,273
|
)
|
|
(2,603,712
|
)
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
Asset impairment
|
|
(159,597
|
)
|
|
(74,877
|
)
|
Contract settlement
|
|
(7,009
|
)
|
|
-
|
|
Financing expense
|
|
(10,000
|
)
|
|
(26,000
|
)
|
Interest (expense) income, net
|
|
(69,885
|
)
|
|
5,027
|
|
Gain (loss) on disposal of equipment
|
|
3,838
|
|
|
(31,764
|
)
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
(242,653
|
)
|
|
(127,614
|
)
|
|
|
|
|
|
|
|
Net Loss
|
$
|
(2,708,926
|
)
|
$
|
(2,731,326
|
)
|
|
|
|
|
|
|
|
Net Loss Per Share – Basic and Diluted
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding – Basic and
Diluted
|
|
62,861,000
|
|
|
52,007,000
|
|
(The accompanying notes are integral to these financial
statements)
22
The Pulse Beverage Corporation
Consolidated Statements of Changes in Stockholders’
Equity
Years Ended December 31, 2015 and 2014
(Audited)
|
|
Shares
#
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Subscriptions Received
|
|
|
Accumulated Deficit
|
|
|
Total Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2013
|
|
51,654,135
|
|
|
517
|
|
|
12,668,580
|
|
|
-
|
|
|
(7,806,914
|
)
|
|
4,862,183
|
|
Shares issued for services rendered or to be rendered in a future period at an average fair value of $0.95
|
|
2,621,902
|
|
|
26
|
|
|
508,974
|
|
|
-
|
|
|
-
|
|
|
509,000
|
|
Common stock issuable
|
|
|
|
|
-
|
|
|
-
|
|
|
100,000
|
|
|
-
|
|
|
100,000
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
166
|
|
|
-
|
|
|
-
|
|
|
166
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,731,326
|
)
|
|
(2,731,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2014
|
|
54,276,037
|
|
$
|
543
|
|
$
|
13,177,720
|
|
$
|
100,000
|
|
$
|
(10,538,240
|
)
|
$
|
2,740,023
|
|
Shares issued for cash at $0.10 per share
|
|
10,500,000
|
|
|
105
|
|
|
1,049,895
|
|
|
(100,000
|
)
|
|
-
|
|
|
950,000
|
|
Shares issued for debt settlement at $0.10 per share
|
|
100,000
|
|
|
1
|
|
|
9,999
|
|
|
|
|
|
|
|
|
10,000
|
|
Shares issued for share issuance costs at a fair value of $0.10 per share
|
|
200,000
|
|
|
2
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
-
|
|
Shares issued for employment services at an average fair value of $0.14 per share
|
|
96,165
|
|
|
1
|
|
|
13,024
|
|
|
|
|
|
|
|
|
13,025
|
|
Shares issued to a director pursuant to an employment contract at a fair value of $0.08 per share
|
|
275,000
|
|
|
2
|
|
|
21,998
|
|
|
|
|
|
|
|
|
22,000
|
|
Shares issued as security for an accrued liability (Note 7)
|
|
3,000,000
|
|
|
30
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
-
|
|
Stock-based compensation
|
|
-
|
|
|
-
|
|
|
606,556
|
|
|
-
|
|
|
-
|
|
|
606,556
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,708,926
|
)
|
|
(2,708,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – December 31, 2015
|
|
68,447,202
|
|
$
|
684
|
|
$
|
14,879,160
|
|
$
|
-
|
|
$
|
(13,247,166
|
)
|
$
|
1,632,678
|
|
(The accompanying notes are integral to these financial
statements)
23
The Pulse Beverage Corporation
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2015 and 2014
(Audited)
|
|
2015
|
|
|
2014
|
|
Cash Flow from Operating Activities
|
|
|
|
|
|
|
Net loss
|
$
|
(2,708,926
|
)
|
$
|
(2,731,326
|
)
|
Adjustments to reconcile net loss to net cash used in operations:
|
|
|
|
|
|
|
Amortization and depreciation
|
|
106,423
|
|
|
117,314
|
|
Asset impairment
|
|
159,597
|
|
|
55,996
|
|
Bad debt allowance
|
|
156,091
|
|
|
16,500
|
|
Amortization of deferred financing fees
|
|
47,961
|
|
|
-
|
|
Finance fee paid with shares
|
|
-
|
|
|
26,000
|
|
(Gain) loss on sale of assets
|
|
(3,838
|
)
|
|
31,764
|
|
Reduction of long-term note for services
|
|
92,800
|
|
|
-
|
|
Shares and options issued for services
|
|
871,581
|
|
|
333,999
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
2,196
|
|
|
(134,216
|
)
|
Decrease in prepaid expenses
|
|
22,806
|
|
|
19,777
|
|
Decrease (increase) in inventories
|
|
24,369
|
|
|
(10,767
|
)
|
Decrease (increase) in other assets
|
|
9,550
|
|
|
(5,184
|
)
|
(Decrease) increase in accounts payable and accrued expenses
|
|
(127,970
|
)
|
|
482,169
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
(1,347,360
|
)
|
|
(1,797,974
|
)
|
|
|
|
|
|
|
|
Cash Flow to Investing Activities
|
|
|
|
|
|
|
Proceeds from note receivable
|
|
-
|
|
|
5,292
|
|
Proceeds from disposal of asset
|
|
6,736
|
|
|
18,000
|
|
Purchase of property and equipment
|
|
(76,868
|
)
|
|
(14,089
|
)
|
Acquisition of intangible assets
|
|
(8,576
|
)
|
|
(36,706
|
)
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
(78,708
|
)
|
|
(27,503
|
)
|
|
|
|
|
|
|
|
Cash Flow from Financing Activities
|
|
|
|
|
|
|
Proceeds from loans, net of finance costs
|
|
913,770
|
|
|
-
|
|
Repayment of loans payable
|
|
(55,949
|
)
|
|
-
|
|
Proceeds from the sale of common stock, net of costs
|
|
950,000
|
|
|
100,000
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
1,807,821
|
|
|
100,000
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash
|
|
381,753
|
|
|
(1,725,477
|
)
|
|
|
|
|
|
|
|
Cash - Beginning of Year
|
|
49,517
|
|
|
1,774,994
|
|
|
|
|
|
|
|
|
Cash - End of Year
|
$
|
431,270
|
|
$
|
49,517
|
|
|
|
|
|
|
|
|
Non-Cash Financing and Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services, prepaid expenses and debt settlement
|
$
|
881,581
|
|
$
|
509,166
|
|
|
|
|
|
|
|
|
Supplemental Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
13,296
|
|
$
|
3,129
|
|
Income taxes paid
|
|
-
|
|
|
-
|
|
(The accompanying notes are integral to these financial
statements)
24
The Pulse Beverage Corporation
Notes to Financial Statements
(Audited)
|
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”.
|
|
We manufacture and distribute Natural Cabana® Lemonade, Limeade and Coconut Water and PULSE® Heart & Body Health functional beverages. 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. Our products are also distributed internationally in Canada, China and Mexico.
|
|
As of December 31, 2015, we had cash of $431,270 and working capital of $253,651. On March 22, 2016, we entered into Amendment No. 1 to 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 (See Note 6). The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. We received $455,860, net of $44,140 of closing costs, on March 22, 2016 and will receive a further $250,000 once we collect an account receivable from our Mexico distributor. A further $250,000 will be received once we have met certain other performance criteria. 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 purchase these shares by paying $350,000 to the Lender on or before September 22, 2016.
|
|
These additional sources of cash will allow us to meet our working capital needs through to the middle of 2017. Cash used in operations during the year ended December 31, 2015 totaled $1,347,360 compared to $1,797,974 for 2014. The decrease in cash used in operations compared to 2014 is primarily driven by increasing our overall gross profit by $117,194 (12%), achieving greater operational efficiencies and reducing operating expenses.
|
|
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 credit facility 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.
|
|
As of March 30, 2016, we believe that our cash on hand, available working capital and financing alternatives will be sufficient to meet our anticipated cash needs through the first half of 2017 and is sufficient to alleviate the uncertainties relating to our ability to successfully execute on our business plan and finance our operations through the middle of 2017. Our financial statements for the years 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.
|
2.
|
Summary of Significant Accounting Policies
|
|
The accompanying consolidated financial statements include the accounts of our wholly-owned Mexico subsidiary, Natural Cabana SA de CV and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the Securities and Exchange Commission (SEC) rules and regulations applicable to financial reporting. All intercompany transactions are eliminated upon consolidation.
|
|
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.
|
|
Cash and Cash Equivalents
|
|
We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash invested in money market accounts. As of December 31, 2015, there were no cash equivalents.
|
25
|
Accounts receivable primarily consists of trade receivables due from wholesalers, distributors and large chain stores. We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. Accounts receivable is reported as the customers’ outstanding balances less any allowance for doubtful accounts. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance. The allowance for doubtful accounts was $156,090 and $16,500 at December 31, 2015 and 2014, respectively.
|
|
Inventories consist of raw materials and finished goods and are stated at the lower of cost or market and include adjustments for estimated obsolete or excess inventory. Cost is based on actual cost on a first-in first-out basis. Raw materials that will be used in production in the next twelve months are recorded in inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
|
|
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon disposal of equipment and leasehold improvements, the accounts are relieved of the costs and related accumulated depreciation or amortization, and resulting gains or losses are reflected in the Statements of Operations. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. Equipment consists of bottle molds, office and warehouse equipment, and display coolers, all of which have an estimated life of five years.
|
|
We account for long-lived assets in accordance with ASC Topic 360-10-05, “Accounting for the Impairment or Disposal of Long-Lived Assets.” ASC Topic 360-10-05 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. We assess recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value or disposable value. There is an impairment charge in 2015 and 2014 related to trademarks written-down of $19,763 and $18,881, respectively.
|
|
Intangible assets are comprised primarily of the cost of formulations of our products and of 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 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 and our formulations and related intangible assets based on case sales divided by 2,000,000 cases 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 years ended December 31, 2015 and 2014, we identified impairment of trademarks of $19,763 and $18,881, respectively.
|
|
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.
|
|
Shipping and handling costs
|
|
The actual costs of shipping and handling for freight to our customers are included in operating expenses.
|
|
We have no elements of comprehensive income or loss during the years ended December 31, 2015 and 2014.
|
26
|
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.
|
|
Advertising costs are expensed as incurred. During the years ended December 31, 2015 and 2014, we incurred advertising costs of $80,269 and $136,971, respectively.
|
|
ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
|
|
Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
|
|
Level 2 – Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
|
|
Level 3 – Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability. We have no level 3 assets or liabilities. The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
|
|
We have financial instruments whereby the fair value of the financial instruments could be different from that recorded on a historical basis. Our financial instruments consist of cash, accounts and loans receivables, accounts payable and accrued expenses. The carrying amounts of our financial instruments approximate their fair values as of December 31, 2015 and 2014 due to their short-term nature.
|
|
We follow ASC subtopic 740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
|
|
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. The determination of taxes payable includes estimates. We believe that we have appropriate support for the income tax positions taken, and to be taken, on our tax returns and that our accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. No reserves for an uncertain income tax position have been recorded for the years ended December 31, 2015 or 2014.
|
|
Concentration of Business and Credit Risk
|
|
Financial instruments and related items, which potentially subject us to concentrations of credit risk, consist primarily of cash and receivables. We place our cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of December 31, 2015 and 2014, we exceeded insurance limits by $139,381 and $nil, respectively.
|
|
We review a customer’s credit history before extending credit. At and for the year ended December 31, 2015 there was one customer with a balance owing to us of 39% of accounts receivable. In 2014 there was one customer with a balance owing to us of 25% of accounts receivable. There was one customer representing 13% of net sales in 2015 and no sales to a customer exceeding 10% for 2014.
|
|
We account for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the statement of operations based on their fair values at the date of grant.
|
|
We account for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date.
|
27
|
We calculate the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. We estimate forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, we monitor both stock option and warrant exercises as well as employee termination patterns.
|
|
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
|
|
Basic and Diluted Net Income (Loss) Per
Share
|
|
Net loss per share is computed in accordance with ASC subtopic 260-10. We present basic loss per share (“EPS”) and diluted EPS on the face of our statements of operations. Basic EPS is computed by dividing reported earnings by the weighted average shares outstanding. Diluted EPS is computed by adding to the weighted average shares the dilutive effect if common stock was issued upon the exercise of stock options and warrants. For the years ended December 31, 2015 and 2014, the denominator in the diluted EPS computation is the same as the denominator for basic EPS due to the anti-dilutive effect of outstanding warrants on our net loss. Total potentially dilutive common share equivalents relating to stock purchase warrants and options granted or issued, at December 31, 2015 and 2014 were 34,230,080 and 23,309,247, respectively. At March 30, 2016 there were 23,214,997 potentially dilutive common share equivalents.
|
|
Reclassification of Prior Period
|
|
Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no impact on reported net loss, total assets or liabilities.
|
|
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.
|
|
During the fourth quarter of 2014, we adopted Accounting Standards Update ("ASU") 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. This ASU was effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The adoption of this guidance has not had a material impact on our financial position, results of operations or cash flows.
|
|
During the first quarter of 2015, we adopted FASB’s guidance on reporting discontinued operations and disclosures of disposals of components of an entity. This standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for annual reporting periods ending after December 15, 2014. Early adoption was permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of this guidance has not had a material impact on our financial position, results of operations or cash flows.
|
|
During the fourth quarter of 2015, we adopted ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, and amortization of those costs should be reported as interest expense. This ASU is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. We adopted this change concurrently with our senior revolving loan secured together with related costs during the fourth quarter of 2015.
|
|
Recent Accounting Pronouncements Issued But Not Adopted as of December 31, 2015
|
|
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 November 2015, the FASB issued (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes
.”
Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. We have adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against our net deferred tax assets.
|
28
|
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 acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. 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 are currently evaluating the impact of adopting this guidance.
|
|
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 do not expect the adoption of this guidance to have an impact on our consolidated financial statements.
|
|
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 are currently evaluating the impact of adopting this guidance.
|
|
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 will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to 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 do not expect the adoption of this guidance to have an impact on our consolidated financial statements.
|
|
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. The adoption of ASU 2014-16 will not have a significant impact on our financial position or results of operations.
|
|
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. The adoption of ASU 2014-16 will not have a significant impact on ouir financial position or results of operations.
|
|
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 expect to adopt this guidance on January 1, 2017. We are currently evaluating the potential impact, if any, the adoption of ASU 2014-15 will have on footnote disclosures, however, we do not expect the adoption of this guidance to have any impact on our financial position, results of operations or cash flows.
|
29
|
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.
|
|
Accounts
receivable consists of the following as of December 31:
|
|
2015
|
|
|
2014
|
|
|
Trade accounts receivable
|
$
|
534,727
|
|
$
|
540,355
|
|
|
Less: Allowance for doubtful accounts
|
|
(156,090
|
)
|
|
(16,500
|
)
|
|
Trade accounts receivable - net
|
|
378,637
|
|
|
523,855
|
|
|
Value added tax recoverable
|
|
2,290
|
|
|
-
|
|
|
Due from suppliers of services
|
|
5,535
|
|
|
20,894
|
|
|
|
$
|
386,462
|
|
$
|
544,749
|
|
|
Inventories
consists of the following as of December 31:
|
|
2015
|
|
|
2014
|
|
|
Finished goods
|
$
|
344,764
|
|
$
|
543,548
|
|
|
Deposit on finished goods
|
|
-
|
|
|
67,706
|
|
|
Raw materials
|
|
644,146
|
|
|
534,866
|
|
|
|
$
|
988,910
|
|
$
|
1,146,120
|
|
|
In 2011 we loaned $200,000 to a company owned by our Chief of Product Development. The loan bears interest at a rate of 4% per annum and matures on May 16, 2016 when a final payment of $174,000 is due. Catalyst repays this loan on a monthly basis at $1,060 principal and interest.
|
|
This company was owed fees of $164,931 at June 30, 2015 and it was agreed that these outstanding fees would offset the loan receivable due from this company after applying a 4% interest charge and the balance of the note, being $24,993, be written-down to $18,000. As a result we incurred an asset impairment charge of $6,993. As of December 31, 2015 the balance of the note receivable was $10,000 and the fees owing to Catalyst was $10,000. It was agreed that these two balances would offset, as a result, at December 31, 2015 the loan receivable balance was $nil.
|
30
6.
|
Property and Equipment and Intangible Assets
|
|
Property and equipment consists of the
following as of December 31:
|
|
2015
|
|
|
2014
|
|
|
Manufacturing, warehouse, display equipment
and molds
|
$
|
337,253
|
|
$
|
272,272
|
|
|
Office equipment and furniture
|
|
41,581
|
|
|
35,194
|
|
|
Mobile display unit and vehicles
|
|
134,500
|
|
|
133,700
|
|
|
Less: depreciation
|
|
(266,099
|
)
|
|
(174,613
|
)
|
|
Total Property and Equipment
|
$
|
247,235
|
|
$
|
266,553
|
|
|
For the years ended December 31, 2015 and 2014, depreciation expense was $93,288 and $85,873, respectively
|
|
Intangible assets consists of the following as of December 31:
|
|
2015
|
|
|
2014
|
|
|
Formulations, rights and patents
|
$
|
969,696
|
|
$
|
965,694
|
|
|
Website
|
|
62,675
|
|
|
62,675
|
|
|
Less: amortization
|
|
(52,682
|
)
|
|
(39,547
|
)
|
|
Trademarks – not amortized due to
indefinite life
|
|
152,104
|
|
|
167,293
|
|
|
Total Intangible Assets
|
$
|
1,131,793
|
|
$
|
1,156,115
|
|
|
For the years ended December 31, 2015 and 2014, amortization expense was $13,135 and $12,560, respectively. Estimated amortization expense to be recorded for the next five fiscal years and thereafter is as follows:
|
|
2016
|
$25,098
|
|
2017
|
$36,989
|
|
2018
|
$48,320
|
|
2019
|
$72,480
|
|
2020
|
$96,640
|
|
Thereafter
|
$700,160
|
|
Loans payable consists of the following as
of December 31:
|
|
2015
|
|
|
2014
|
|
|
Short-term loan – (a) below
|
$
|
15,000
|
|
$
|
-
|
|
|
Short-term loan – related party – (a)
below
|
|
130,000
|
|
|
-
|
|
|
|
|
145,000
|
|
|
-
|
|
|
Senior Secured Revolving Note – (b) below
(Note 15)
|
|
844,040
|
|
|
-
|
|
|
Less: unamortized debt issuance costs
|
|
(233,269
|
)
|
|
-
|
|
|
Net carrying value
|
|
610,771
|
|
|
-
|
|
|
|
$
|
755,771
|
|
$
|
-
|
|
31
|
a)
|
In September, 2015 we received short-term loans totaling $145,000 of which $130,000 was received by a family trust of our Chief Executive Officer. These loans are unsecured and are due on demand. Interest of $8,663 has been accrued at December 31, 2015 and included in accounts payable and accrued expenses. At March 30, 2016 these loans have not been demanded.
|
|
b)
|
On November 6, 2015, we entered into a Credit Agreement with TCA Global Credit Master Fund, LP (the “Lender”). Under the terms of the Credit Agreement, the Lender has committed to lend a total of $3,500,000 (the “Credit Facility”) to us pursuant to a senior secured revolving note (the “Note”). The initial tranche of $650,000 was funded on November 6, 2015 and a second tranche of $250,000 was funded on December 22, 2015 for a total of $900,000 advanced against this Credit Facility. This loan matures on November 6, 2016 unless extended by the Lender. We must meet specific monthly collateral requirements to further draw upon the Credit Facility (See Note 15). The Credit Facility is secured by a senior secured interest in all of 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. Repayment terms are 20% of gross receipts until we reach $130,000 of repayments after which we pay 10% of gross receipts. During the year we repaid $55,949 leaving a balance owing of $844,040 at December 31, 2015. Associated with the closing of the Credit Facility we incurred $281,230 of debt issuance costs which will be amortized to interest expense over the term of the loan to November 6, 2016. A total of $47,961 was charged to interest expense during the year ended December 31, 2015. The Lender has the right, in the Event of Default, to convert any outstanding amounts under the Note into restricted shares of the Company’s common stock based on 85% of the weighted value average price of the Company’s 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 the Company’s common stock. In connection with the Credit Facility, we are obligated to pay a $150,000 facility fee which has been included in accounts payable and accrued liabilities. As security for this fee we issued 3,000,000 shares of restricted common stock to the Lender who has the right to sell enough shares to recover its fee. These shares are issued and outstanding as of December 31, 2015, however, the value will be recognized as the related liability is extinguished. Any excess shares not sold by the Lender will be returned to us for cancellation. We have the right to buy-back these shares by paying the $150,000 facility fee to the Lender on or before May 6, 2016.
|
|
We have 100,000,000 shares of common stock authorized at a par value of $0.00001.
|
|
Equity transactions during the year ended December 31, 2015
|
|
a)
|
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 at December 31, 2014. On May 27, 2015 we sold 750,000 Units at $0.10 per Unit for cash proceeds of $45,000, debt settlement of $30,000. Each Unit consisted of one share of restricted common stock and one-half of a warrant. Each whole warrant allows the holder to purchase one additional share at a price of $0.20 per share at any time between March 10, 2016 and May 27, 2016.
|
|
b)
|
During 2015 we issued a total of 96,165 common shares, having an aggregate fair value of $13,025 to three employees for services rendered.
|
|
c)
|
On November 6, 2015 we issued 3,000,000 restricted common shares. See Note 7 (c).
|
|
d)
|
On December 31, 2015 we issued 275,000 restricted common shares, having a fair value of $22,000, pursuant to an employment contract with a director.
|
|
Equity transactions during the year ended December 31, 2014
|
|
a)
|
During 2014 we issued a total of 2,621,902 common shares, having an aggregate fair value of $0.95 per share, pursuant to service agreements.
|
|
b)
|
On December 31, 2014 we reserved 1,000,000 common shares pursuant to subscriptions of $100,000 received at December 31, 2014.
|
|
At December 31, 2015 we had 21,080,080 common stock purchases warrants outstanding having an average exercise price of $0.44 per common share and having an average expiration date of .39 years. During the year warrants to acquire 4,554,167 common shares expired unexercised and a further 16,415,083 common shares expired unexercised subsequent to December 31, 2015.
|
|
Pursuant to a Special Meeting of Shareholders held on July 29, 2011, the Shareholders amended our Articles of Incorporation to authorize the issuance of 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. As of December 31, 2015 and 2014, there have been no issuances of preferred stock.
|
11.
|
Stock Options and Stock-based Compensation
|
|
On July 29, 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan") under which were authorized to grant up to 4,500,000 shares of common stock. On December 31, 2015 we approved the increase in the amount of shares authorized to be issued pursuant to the plan to 20,000,000 shares (the “Amended 2011 Plan”).
|
|
In 2012 we granted stock options under the 2011 Plan to certain officers, directors, employees and consultants to purchase 3,200,000 common shares at $0.50 per common share. On December 31, 2015 we cancelled 675,000 stock options to certain employees and consultants due to the expiry or cancellation of a contract. We also cancelled 1,950,000 stock options granted to two directors and a consultant per agreement to issue new stock options.
|
32
|
On December 31, 2015 we granted stock options under the Amended 2011 Plan to certain officers, directors, employees and consultants to purchase 12,700,000 common shares at $0.10 per common share. A total of 10,375,000 stock options vested on December 31, 2015 and a further 2,325,000 stock options vest monthly at a rate of 138,889 shares per month for sixteen months and the remaining 102,776 shares and $6,009 vest on May 23, 2017. Of the 12,700,000 stock options granted a total of 7,500,000 were granted to three directors/officers valued at $438,474 of which $302,547 was charged to operations at December 31, 2015.
|
|
The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model. During the years ended December 31, 2015 and 2014, we recorded stock-based compensation of $606,556 and $166. The weighted average fair values of stock options vested during the year ended December 31, 2015 was $.06.
|
|
The weighted average assumptions used for each of the years ended December 31, 2015 and 2014 are as follows:
|
|
|
|
2015
|
|
|
2014
|
|
|
Expected
dividend yield
|
|
0%
|
|
|
-
|
|
|
Risk-free
interest rate
|
|
1.71%
|
|
|
-
|
|
|
Expected
volatility
|
|
103%
|
|
|
-
|
|
|
Expected option
life (in years)
|
|
5
|
|
|
-
|
|
|
The following table summarizes the continuity of our stock options:
|
|
|
Number of Options
|
|
Weighted Average Exercise
Price
|
|
Weighted Average Remaining
Contractual Term (years)
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2013
|
3,075,000
|
|
$0.50
|
|
3.34
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Forfeited/Cancelled
|
-
|
|
-
|
|
-
|
|
-
|
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014
|
3,075,000
|
|
0.50
|
|
3.34
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
12,700,000
|
|
0.10
|
|
5.00
|
|
-
|
|
|
Forfeited/cancelled
|
(2,625,000
|
)
|
-
|
|
-
|
|
-
|
|
|
Exercised
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
13,150,000
|
|
$0.11
|
|
4.87
|
|
$-
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2015
|
10,825,000
|
|
$0.12
|
|
4.85
|
|
$-
|
|
|
A summary of the status of our non-vested stock options outstanding as of December 31, 2015, and changes during the years ended December 31, 2015 and 2014 is presented below:
|
|
Non-vested
stock options
|
Number of
Options
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2013
|
25,000
|
|
$0.37
|
|
|
|
|
|
|
|
|
Granted
|
-
|
|
-
|
|
|
Vested
|
(25,000
|
)
|
0.37
|
|
|
Non-vested
at December 31, 2014
|
-
|
|
$-
|
|
|
|
|
|
|
|
|
Granted
|
12,700,000
|
|
$.06
|
|
|
Vested
|
(10,375,000
|
)
|
0.06
|
|
|
|
|
|
|
|
|
Non-vested
at December 31, 2015
|
2,325,000
|
|
$0.06
|
|
33
|
The following table summarizes information about stock options outstanding and exercisable under our stock incentive plan at December 31, 2015:
|
|
|
Number Outstanding
|
|
Weighted Average Remaining
Contractual Life (Years)
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
12,700,000
|
|
5.00
|
|
$0.10
|
|
|
$0.50
|
450,000
|
|
1.33
|
|
$0.50
|
|
|
|
|
|
|
|
|
|
|
|
13,150,000
|
|
4.87
|
|
$0.11
|
|
|
|
Number Exercisable
|
|
Weighted Average Remaining
Contractual Life (Years
|
)
|
Weighted Average Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
$0.10
|
10,375,000
|
|
5.00
|
|
$0.10
|
|
|
$0.50
|
450,000
|
|
1.33
|
|
$0.50
|
|
|
|
|
|
|
|
|
|
|
|
10,825,000
|
|
4.85
|
|
$0.12
|
|
|
Stock-based compensation expense:
|
|
Stock-based compensation expense is recognized using the straight-line attribution method over the employees’ requisite service period. We recognize compensation expense for only the portion of stock options or restricted stock expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to stock-based compensation expense may be required in future periods.
|
|
At December 31, 2015, we had unrecognized compensation expense related to unvested stock options of $135,927 to be recognized over a weighted-average period of 1.42 years.
|
|
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
|
|
The significant components of deferred tax assets and liabilities are as follows:
|
|
|
2015
|
|
2014
|
|
|
Deferred tax assets:
|
|
|
|
|
|
Net operating loss
|
4,074,383
|
|
$3,331,573
|
|
|
Stock-based compensation
|
859,192
|
|
634,428
|
|
|
Other reserves
|
52,899
|
|
9,068
|
|
|
Asset impairment
|
-
|
|
32,524
|
|
|
|
4,986,475
|
|
4,002,971
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property, Plant & Equipment
|
(59,022
|
)
|
(78,362
|
)
|
|
Intangible assets
|
(354,507
|
)
|
(361,479
|
)
|
|
Net deferred tax assets
|
4,572,946
|
|
3,563,130
|
|
|
Less: Valuation allowance
|
(4,572,946
|
)
|
(3,563,130
|
)
|
|
Deferred tax asset, net of valuation allowance
|
$-
|
|
$-
|
|
|
The net change in the valuation allowance for the year ended December 31, 2015 was $1,009,816.
|
|
We have a net operating loss carryover of $10,995,265 available to offset future income for income tax reporting purposes, which will expire in various years through 2035, if not previously utilized. However, our ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section 382.
|
34
|
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the years ended December 31, 2015 and 2014, there was no income tax or related interest and penalty items in the income statement, or liabilities on the balance sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years beginning January 1, 2011 or state income tax examination by tax authorities for years beginning January 1, 2010. We are not currently involved in any income tax examinations.
|
13.
|
Fair Value Measurements
|
|
There were no financial instruments that were measured at fair value on a recurring basis as of December 31, 2015 and 2014.
|
|
The carrying amounts of our financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses as of December 31, 2015 and 2014 approximate fair value because of the short maturity of these instruments. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of the notes payable approximates fair value.
|
|
There were no changes in valuation technique from prior periods.
|
|
We lease office, warehouse and storage space, under operating leases that expire at various dates through the year ending December 31, 2017. Certain leases contain renewal options for varying periods and escalation clauses for adjusting rent to reflect changes in price indices. Certain leases require that we pay for insurance, taxes and maintenance applicable to the leased property.
|
|
Minimum aggregate future lease payments under non-cancelable operating leases as of December 31, 2015 are as follows:
|
|
2016
|
$38,640
|
|
2017
|
$37,739
|
|
Rent expense under all operating leases, including short-term rentals as well as cancelable and non-cancelable operating leases, gross, was $65,278 and $90,825 for the years ended December 31, 2015 and 2014, respectively.
|
|
We are or may be involved from time to time in various claims and legal actions arising in the ordinary course of business, including proceedings involving employee claims, contract disputes, product liability and other general liability claims, as well as trademark, copyright, and related claims and legal actions. In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
|
|
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.
|
|
On March 22, 2016, we entered into Amendment No. 1 to 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 (See Note 7). The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. We received $455,860, net of $44,140 of closing costs, on March 22, 2016 and will receive a further $250,000 once we collect an account receivable from our Mexico distributor. A further $250,000 will be received once we have met certain other performance criteria. 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 purchase these shares by paying $350,000 to the Lender on or before September 22, 2016.
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During the last
two fiscal years, we have had no disagreements with our accountants on
accounting and financial disclosure.
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures
Robert E. Yates,
who is both our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining our disclosure controls and
procedures. Disclosure controls and procedures are those procedures
that are designed to ensure that information we are required to disclose in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and to ensure that information required to be
disclosed by us in those reports is accumulated and communicated to our
management, including our principal executive and principal financial officer,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Our chief executive officer
and chief financial officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of December 31, 2015. Based on that
evaluation, it was concluded that our disclosure controls and procedures were
effective as of December 31, 2015.
35
Management's
Report on Internal Control over Financial Reporting
Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting and for the assessment of the effectiveness of internal
control over financial reporting. As defined by the SEC, internal
control over financial reporting is a process designed by, or under the supervision
of our principal executive officer and principal financial officer and
implemented by our Board of Directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of our financial statements in accordance with U.S.
generally accepted accounting principles.
Our internal control over
financial reporting includes those policies and procedures that:
-
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets;
-
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and directors; and
-
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material effect
on the financial statements.
Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
As of December
31, 2015 we conducted an evaluation, under the supervision and with the
participation of our chief executive officer (our principle executive officer)
and our chief financial officer (also our principal financial and accounting
officer) of the effectiveness of our internal control over financial reporting
based on criteria established in Internal Control - Integrated Framework issued
in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission,
or the COSO Framework. Management's assessment included an
evaluation of the design of our internal control over financial reporting and
testing of the operational effectiveness of those controls.
Based upon this
assessment, management concluded that our internal control over financial
reporting was effective.
There were no
changes in our internal control over financial reporting that occurred during
the quarter ended December 31, 2015 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
This annual
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to an exemption for non-accelerated filers set forth
in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection
Act.
ITEM 9B. OTHER INFORMATION
See Item 5 of
this report.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Executive Officers and Directors
The names, ages,
and respective positions of our directors and executive officers are set forth
below.
Name
|
Age
|
Present
Positions
|
Robert
E. Yates
|
67
|
President,
Chief Executive, Financial, and Accounting Officer, Treasurer and Director
|
Parley
(Paddy) Sheya
|
60
|
Vice
President, Secretary, National Sales Manager and Director
|
Brian
D. Corday
|
55
|
Executive
Vice President of Business Development
|
Robert E. Yates
Mr. Yates has
been one of our officers and directors since February 15, 2011. Mr. Yates is
qualified to be a director based on his extensive experience in the beverage
industry.
Mr. Yates is a
seasoned business executive with experience in growing and managing businesses.
From 2006 to 2009, Mr. Yates served as a General Manager of Mobility Works, in
Cincinnati, Ohio, a company engaged in providing specialty equipment and
handicapped accessible vehicles in support of disabled populations. From 1993
to 2005, Mr. Yates was in charge of a start-up operation for Vancol with his
areas of responsibility: product development, plant production and the
distribution of Vancol’s many products in both the United States and Canada.
Under his guidance, Vancol’s sales rose from less than $10 million to $50
million in three years. Over the last twenty years, Mr. Yates’ beverage
portfolio has included such brands as Monster; AriZona Tea; Rock Star, Vitamin
Water, Perrier, Everfresh Juices, Ocean Spray, Miller Beer, Honest Tea and Fiji
Water. In addition, Mr. Yates successfully launched his own brand, Quencher,
which he built into a 2 million case brand in two years. Mr. Yates completed a
management course at Oglethorpe University in Atlanta, Georgia, and has an
associate’s degree in business administration from Highland Park College, in
Highland Park, Michigan and completed a Professional Personnel Management
Course with the US Air Force.
36
Parley Sheya
Mr. Sheya has
been one of our officers and directors since July 1, 2011. Mr. Sheya is qualified
to be a director based on his extensive experience in the beverage industry.
Mr. Sheya brings
over thirty years of international executive sales and distribution management
experience in the beverage industry. He has an extensive track record in the
development of brands and in building beverage brand sales and distribution
systems from the ground up to multi-million case sales. He was sales manager
for a beverage brand called Kwencher®. Mr. Sheya has managed a broad range of
beverage brands including: Jolt Cola®, Hires Root Beer®; Crush® Soda;
Bubble-Up®; Country Time Lemonade®; Hansen’s Natural Sodas and Juices; New York
Seltzer® and Evian Water®. From 2007 to 2008 Mr. Sheya was a self-employed
beverage consultant and from 2008 to 2009 was the key account manager for New
Leaf Brands Inc. managing national sales for Inspiration Beverage and from 2010
to June 2011 was sales manager for Bing Energy Drink.
Brian D. Corday
Brian D. Corday
was appointed to our board of directors and was elected Executive Vice
President of Business Development on December 2, 2015. Mr. Corday was qualified
to be a director based on his extensive experience in the areas of finance and
business strategic planning and has held executive positions at several Wall
Street firms.
Mr. Corday has
thirty years of experience assisting public companies in the areas of finance
and business strategic planning. Mr. Corday has held executive positions at
several major Wall Street firms, most recently as Chairman and President of
BullBear Ventures, LLC, a private equity firm dedicated to maximizing brand
value and building shareholder value through market awareness and strategic
acquisitions and joint ventures.
Our directors serve
until our next annual stockholders meeting or until their successors are duly
elected and qualified. Officers hold their positions at the will of the board
of directors.
Committees
We
do not have a nominating, compensation or audit committees or committees
performing similar functions. Our directors believe that it is not necessary to
have such committees, at this time, because the functions of such committees
can be adequately performed by the board of directors.
We
do not have any defined policy or procedural requirements for shareholders to
submit recommendations or nominations for directors. The board of directors
believes that, given the stage of our development, a specific nominating policy
would be premature and of little assistance until our business operations
develop to a more advanced level. We do not have any specific or minimum
criteria for the election of nominees to the board of directors and we do not
have any specific process or procedure for evaluating such nominees. The board
of directors will assess all candidates, whether submitted by management or
shareholders, and make recommendations for election or appointment.
A
shareholder who wishes to communicate with our board of directors may do so by
directing a written request addressed to our President and director, Robert E.
Yates, at the address appearing on the first page of this annual report.
Involvement in
Certain Legal Proceedings
In December,
2006 Robert E. Yates filed for personal bankruptcy in Federal Bankruptcy Court
in Denver, Colorado. His personal bankruptcy was finalized in February, 2007.
In May, 2005 Vancol Industries filed for bankruptcy under Chapter 7 of the
Bankruptcy Code. Mr. Yates resigned his position as an executive officer of
Vancol Industries in 2005.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the
Exchange Act requires our directors and executive officers and persons who
beneficially own more than ten percent of a registered class of our equity
securities to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock and our other equity securities. Officers,
directors and greater than ten percent beneficial shareholders are required by
SEC regulations to furnish us with copies of all Section 16(a) forms they file.
To the best of our knowledge based solely on a review of Forms 3, 4, and 5 (and
any amendments thereof) received by us during or with respect to the year ended
December 31, 2015, no persons have failed to file, on a timely basis, the
identified reports required by Section 16(a) of the Exchange Act during fiscal
year ended December 31, 2015.
Code of Ethics
We have not
adopted a formal code of ethics that applies to our directors, officers or
employees since we only have fifteen employees including our two officers.
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The following table sets forth
the compensation earned by Executive Officers during the last two fiscal years.
Name and
Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity Incentive Plan Compensation
($)
|
Nonqualified Deferred Compensation
Earnings
($)
|
All Other Comp-
ensation
($)
|
Total
($)
|
Robert
E. Yates
President, Chief Executive Officer, Treasurer, Chief Financial and Accounting
Officer
|
2015
|
90,500
|
-
|
nil
|
148,158
|
Nil
|
Nil
|
Nil
|
238,658
|
2014
|
102,000
|
5,000
|
nil
|
nil
|
Nil
|
Nil
|
Nil
|
107,000
|
Parley
Sheya
Vice President, Secretary and National Sales Manager
Brian
D. Corday
Executive Vice President of Business Development
|
2015
|
86,750
|
-
|
nil
|
148,158
|
Nil
|
Nil
|
Nil
|
234,908
|
2014
|
100,000
|
2,500
|
nil
|
nil
|
Nil
|
Nil
|
Nil
|
102,500
|
2015
|
10,000
|
-
|
22,000
|
10,231
|
Nil
|
Nil
|
Nil
|
42,231
|
37
Stock Incentive
Plan
On July 29, 2011, we adopted the 2011 Equity Incentive
Plan (the “2011 Plan") under which were authorized to grant up to
4,500,000 shares of common stock. On December 31, 2015 we approved the increase in the amount of shares authorized to be issued pursuant to the
plan to 20,000,000 shares (the “Amended 2011 Plan”).
In 2012 we granted stock options under the 2011 Plan to
certain officers, directors, employees and consultants to purchase 3,200,000
common shares at $0.50 per common share. On December 31, 2015 we cancelled
675,000 stock options to certain employees and consultants due to the expiry or
cancellation of a contract. We also cancelled 1,950,000 stock options granted
to two directors and a consultant per agreement to issue new stock options.
On December 31, 2015 we granted stock options under the
Amended 2011 Plan to certain officers, directors, employees and consultants to
purchase 12,700,000 common shares at $0.10 per common share. A total of
10,375,000 stock options vested on December 31, 2015 and a further 2,325,000
stock options vest monthly at a rate of 138,889 shares per month for sixteen months
and the remaining 102,776 shares and $6,009 vest on May 23, 2017. Of the
12,700,000 stock options granted a total of 7,500,000 were granted to three directors/officers
valued at $440,274 of which $302,547 was charged to operations at December 31,
2015.
The fair values of stock options granted were estimated
at the date of grant using the Black-Scholes option-pricing model. During the years ended December 31, 2015 and 2014, we recorded
stock-based compensation of $606,556 and $166. The weighted average fair values
of stock options vested during the year ended December 31, 2015 was $.06.
The weighted average assumptions used for
each of the years ended December 31, 2015 and 2014 are as follows:
|
2015
|
2014
|
Expected
dividend yield
|
0%
|
-
|
Risk-free
interest rate
|
1.71%
|
-
|
Expected
volatility
|
103%
|
-
|
Expected option
life (in years)
|
5
|
-
|
The following table summarizes the
continuity of our stock options:
|
Number of Options
|
Weighted Average Exercise
Price
|
Weighted Average Remaining
Contractual Term (years)
|
Aggregate Intrinsic Value
|
|
|
|
|
|
Outstanding, December 31, 2013
|
3,075,000
|
$0.50
|
3.34
|
$-
|
|
|
|
|
|
|
|
|
|
|
Granted
|
-
|
-
|
-
|
-
|
Forfeited/Cancelled
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Outstanding, December 31, 2014
|
3,075,000
|
0.50
|
3.34
|
-
|
|
|
|
|
|
Granted
|
12,700,000
|
0.10
|
5.00
|
-
|
Forfeited/cancelled
|
(2,625,000)
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
|
|
|
|
|
Outstanding, December 31, 2015
|
13,150,000
|
$0.11
|
4.87
|
$-
|
|
|
|
|
|
Exercisable, December 31, 2015
|
10,825,000
|
$0.12
|
4.85
|
$-
|
38
A summary of the status of our non-vested
stock options outstanding as of December 31, 2015, and changes during the years
ended December 31, 2015 and 2014 is presented below:
Non-vested
stock options
|
Number of
Options
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
Non-vested
at December 31, 2013
|
25,000
|
$0.37
|
|
|
|
Granted
|
-
|
-
|
Vested
|
(25,000)
|
0.37
|
Non-vested
at December 31, 2014
|
-
|
$-
|
|
|
|
Granted
|
12,700,000
|
$.06
|
Vested
|
(10,375,000)
|
0.06
|
|
|
|
Non-vested
at December 31, 2015
|
2,325,000
|
$0.06
|
At December 31, 2015, there was $135,927 of unrecognized
compensation cost related to non-vested stock options.
The table below
summarizes all unexercised options, stock that has not vested, and equity
incentive plan awards for each named executive officer as of December 31, 2015:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
OPTION
AWARDS
|
STOCK
AWARDS
|
Name
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
Option
Exercise Price
($)
|
Option
Expiration Date
|
Number
of Shares or Units of Stock That Have Not Vested
(#)
|
Market
Value of Shares or Units of Stock That Have Not Vested
($)
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or
Other Rights That Have Not Vested
(#)
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested
(#)
|
Robert Yates
|
2,500,000
|
-
|
-
|
0.10
|
December
31, 2020
|
-
|
-
|
-
|
-
|
Parley Sheya
|
2,500,000
|
-
|
-
|
0.10
|
December
31, 2020
|
-
|
-
|
-
|
-
|
Brian D. Corday
|
175,000
|
2,325,000
|
-
|
0.10
|
December
31, 2020
|
-
|
-
|
-
|
-
|
Compensation of
Directors
There was no
compensation of our directors for the year ended December 31, 2015. We did not pay
our directors, who also act as senior management/officers, any fees or other
compensation for acting as directors during our fiscal year ended December 31,
2015 and 2014.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth certain
information concerning the number of shares of our common stock owned
beneficially as of March 30, 2016 by: (i) each person (including any group)
known to us to own more than 5% of any class of our voting securities, (ii)
each of our directors, (iii) each of our officers and (iv) our officers and
directors as a group. Except as otherwise indicated, each shareholder listed
possess sole voting and investment power with respect to the shares shown.
Name
and address
|
Shares
Owned
|
|
Percent of
Class¹
|
|
|
|
|
|
|
Robert
E. Yates² - 11580 Quivas Way,
Westminster, CO 80234
|
4,211,333
|
|
6.11%
|
|
Parley Sheya - 11678 N Huron St, Northglenn, CO 80234
|
613,333
|
|
0.89%
|
|
Brian D. Corday – 415 Cullingworth Drive, Johns Creek, GA 30022-6359
|
752,778
|
|
1.09%
|
|
|
|
|
|
|
All
executive officers and directors as a group (3 persons)
|
5,577,444
|
|
8.09%
|
|
¹ Based on 68,924,980 shares
of common stock issued and outstanding as of March 30, 2016.
² A total of 51,333 common shares are held of record by
Jonni K. Yates, the wife of Mr. Yates.
39
Securities
Authorized For Issuance under Compensation Plans
The table set
forth below present’s information relating to our equity compensation plans as
of the date of December 31, 2015:
Plan Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and
Rights
(a)
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
(b)
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding column (a))
|
Amended 2011 Equity
Incentive Plan
|
13,150,000
|
$0.12
|
6,850,000
|
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party
Transactions
The following
were related party transactions during the year ended December 31, 2015:
On December 31,
2015 we granted stock options under the Amended 2011 Plan to certain officers,
directors, employees and consultants to purchase 12,700,000 common shares at $0.10
per common share. A total of 10,375,000 stock options vested on December 31,
2015 and a further 2,325,000 stock options, granted to a director, vest monthly
at a rate of 138,889 shares per month for sixteen months and the remaining
102,776 shares vest on May 23, 2017. Of the 12,700,000 stock options granted a
total of 7,500,000 were granted to three directors/officers valued at $440,274
of which $302,547 was charged to operations at December 31, 2015.
Review, Approval
and Ratification of Related Party Transactions
Our Board of Directors
has responsibility for establishing and maintaining guidelines relating to any
transactions with our officers or directors. Any related party transaction with
a director or officer must be referred to the non-interested directors, if any,
for approval. We intend to adopt written guidelines for the board of directors
which will set forth the requirements for review and approval of any related
party transactions.
Director
Independence
None of our
directors is independent, as that term is defined in Section 803 of the listing
standards of the NYSE MKT.
Conflicts
Relating to Officers and Directors
To date, we do
not believe that there are any conflicts of interest involving our officers or
directors. With respect to transactions involving real or apparent conflicts of
interest, we have adopted policies and procedures which require that: (i) the
fact of the relationship or interest giving rise to the potential conflict be
disclosed or known to the directors who authorize or approve the transaction
prior to such authorization or approval, (ii) the transaction be approved by a
majority of our disinterested outside directors, and (iii) the transaction be
fair and reasonable to us at the time it is authorized or approved by our
directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is
a summary of the fees billed to us by our current auditors, RBSM, LLP, during
2015 and 2014:
Fee Category
|
2015
Fees
|
2014
Fees
|
|
$
|
|
$
|
|
Audit
Fees
|
|
34,679
|
|
35,000
|
Audit-Related
Fees
|
|
13,500
|
|
15,500
|
Tax
Fees
|
|
3,000
|
|
4,200
|
All
Other Fees
|
|
-
|
|
-
|
Total
Fees
|
$
|
51,179
|
$
|
56,000
|
Audit Fees
consist of fees
billed for professional services rendered for the audit of our financial
statements and review of our interim financial statements included in quarterly
reports and services that are normally provided by our auditors in connection
with statutory and regulatory filings or engagements.
Audit Related
Fees
consist of fees billed for assurance and related services that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported under "Audit Fees".
Tax Fees
consist of fees
billed for professional services for tax compliance, tax advice and tax
planning.
All Other Fees
consist of fees
for products and services other than the services reported above. There were no
management consulting or other services provided in fiscal 2015 or 2014.
40
Pre-Approval
Policies and Procedures
We currently do
not have a designated Audit Committee, and accordingly, our Board of Directors'
policy is to pre-approve all audit and permissible non-audit services provided
by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to
the particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to our Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. Our Board of Directors may also
pre-approve particular services on a case-by-case basis.
Our Board of
Directors has determined that the provision of non-audit services is compatible
with maintaining the principal accountant's independence.