Attached files
| file | filename |
|---|---|
| EX-31.2 - CERTIFICATION - Pulse Beverage Corp | exhibit31-2.htm |
| EX-31.1 - CERTIFICATION - Pulse Beverage Corp | exhibit31-1.htm |
| EX-32.1 - CERTIFICATION - Pulse Beverage Corp | exhibit32-1.htm |
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-53586
THE PULSE
BEVERAGE CORPORATION
(Exact name of registrant as specified
in its charter)
| Nevada | 36-4691531 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
11678 N Huron St, Northglenn, CO 80234
(Address of principal executive
offices, including zip code)
(720) 382-5476
(Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.00001 per share
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.
| Large accelerated filer [ ] | Accelerated filer [ ] |
| Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
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.
Documents Incorporated by Reference: None.
THE PULSE BEVERAGE CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
Table of Contents
2
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
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:
- Our ability to successfully execute on our 2016 operating plan;
- Our ability to establish new, and maintain existing distribution arrangements with distributors, retailers, brokers and regional and national retail accounts, most of whom sell and distribute competing products, and whom we rely upon to employ sufficient efforts in managing and selling our products, including re-stocking retail shelves with our products, on which our business plan and future growth are dependent in part;
- Our ability to successfully re-introduce our PULSE® Heart & Body Health brand of functional beverages, including our sales and marketing strategies relating to the distribution and sales at a retail level;
- Our continued ability to secure store listings, obtain favorable placement within each store and increase case sales through promotions with respect to Natural Cabana® Lemonade, Limeade and Coconut Water;
- Our ability to receive further advances from our credit facility of $3.5 million;
- Our continued ability to use our working capital resources to efficiently finance the growth of our business, including building inventory levels and financing receivables from our customers and then to generate sufficient cash flow from operations to preserve our existing cash resources and achieve profitability;
- Our continued ability to manage our inventory levels and to predict the timing and amount of our sales;
- Our reliance on third-party contract manufacturers of our products, which could make management of our marketing and distribution efforts inefficient or unprofitable;
- Our continued ability to secure a continuous supply of raw materials, as well as other factors affecting our supply chain;
- Our continued ability to maintain brand image and product quality and the risk that we may suffer other product issues such as product recalls;
- Our ability to attract and retain key personnel, which would directly affect our efficiency and results of operations;
- Our ability to protect our trademarks and trade secrets, which may prevent us from successfully marketing our products and competing effectively;
- Litigation or legal proceedings, which could expose us to significant liabilities and damage to our reputation;
- Our ability to compete successfully against much larger established companies currently operating in the beverage industry, which tend to dominate shelf-space; and
- Our ability to comply with the many regulations to which our business is subject.
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.
REFERENCES
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.
3
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; |
| - | 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:
| - | 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”; |
| - | 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; |
| - | 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 |
8
| - | the trademark Natural Cabana® in connection with our Natural Cabana® Lemonade, Limeade and Coconut Water. |
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)
| 1. | Nature of Operations |
| 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 |
| Basis of presentation |
| 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. |
| Use of Estimates |
| The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. |
| 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 |
| 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. |
| Inventory |
| 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 |
| 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. |
| Long-Lived Assets |
| 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 |
| 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 Recognition |
| Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50. All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor terminations, we may accept returned product. To date, such returns have been de minimis. |
| Shipping and handling costs |
| The actual costs of shipping and handling for freight to our customers are included in operating expenses. |
| Comprehensive loss |
| We have no elements of comprehensive income or loss during the years ended December 31, 2015 and 2014. |
26
| Seasonality |
| Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. Historically, we have generated a higher percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the entire fiscal year. |
| Advertising costs |
| 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. |
| Fair Value |
| 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. |
| Financial Instruments |
| 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. |
| Income Taxes |
| 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. |
| Stock-based Compensation |
| 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. |
| Recent Pronouncements |
| We continually assess any new accounting pronouncements to determine their applicability to our operations and financial reporting. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect the change. |
| 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. |
| 3. | Accounts Receivable |
|
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 |
| 4. | Inventories |
|
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 |
| 5. | Loan Receivable |
| 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 |
| 7. | Loans Payable |
| 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. |
| 8. | Common Stock |
| 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. |
| 9. | Warrants |
| 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. |
| 10. | Preferred Stock |
| 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. |
| 12. | Income Taxes |
| 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. |
| 14. | Commitments |
| Operating Leases |
| 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. |
| 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. |
| 15. | Subsequent Events |
| 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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Report are as follows:
1) Financial Statements: The financial statements, related notes and the report of the independent registered public accounting firm are included in Item 8 of Part II of this 2015 Annual Report on Form 10-K.
2) Financial Statement Schedules: All schedules have been omitted because they are not applicable or not required, or the required information is included in the financial statements or notes thereto.
3) Exhibits: The required exhibits are included at the end of this Report and are described in the exhibit index.
EXHIBIT INDEX
| Exhibit No. | Description of Exhibit |
| 2.1 (1) | Share Exchange Agreement dated February 15, 2011 |
| 3.1 (1) | Articles of Merger dated February 17, 2011 |
| 3.2 (2) | Articles of Incorporation including all amendments to date |
| 3.3 (2) | Bylaws |
| 10.1 (3) | The Pulse Beverage Corporation 2011 Equity Incentive Plan |
| 31.1* | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) |
| 31.2* | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) |
| 32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
| 101 .INS | XBRL Instance Document* |
| 101 .SCH | XBRL Taxonomy Extension Schema Document* |
| 101 .CAL | XBRL Taxonomy Calculation Linkbase Document* |
| 101 .DEF | XBRL Taxonomy Extension Definition Linkbase Document* |
| 101 .LAB | XBRL Taxonomy Label Linkbase Document* |
| 101 .PRE | XBRL Taxonomy Presentation Linkbase Document* |
*Provided herewith
| (1) | Incorporated by reference from our current report on Form 8K filed February 22, 2011 |
| (2) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on February 6, 2007 |
| (3) | Incorporated by reference from our Current Report on Form 8-K as filed with the SEC on July 31, 2012 |
41
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2016
The Pulse Beverage Corporation
By:
Name: Robert E. Yates
Title: Chief Executive Officer (principal executive officer)
In accordance with the Securities Exchange Act of 1934, this report has been signed by the following persons representing the majority of the Board of Directors on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title |
Date |
| /s/ Robert E. Yates | President, Chief Executive Officer, Principal Financial and Accounting Officer, and Director | March 30, 2016 |
| /s/ Parley Sheya | Director | March 30, 2016 |