UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 |
| or |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from to |
DC BRANDS INTERNATIONAL, INC.
| | Colorado | |
| | (State or Other Jurisdiction of Incorporation or Organization) | |
| | 2833 | |
| | (Primary Standard Industrial Classification Code Number) | |
| | | |
| | 20-1892264 | |
| | (I.R.S. Employer Identification No.) | |
| | 9500 W. 49th Avenue, Suite D-106 Wheat Ridge, CO 80003 | |
| | (Address and telephone number of principal executive offices) | |
| | 9500 W. 49th Avenue, Suite D-106 Wheat Ridge, CO 80003 | |
| | (Address of principal place of business or intended principal place of business) | |
(303) 279-3800
Phone Number
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o 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 past 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 o
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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ) Yes x No o
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. Yes 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | | Accelerated filer o |
Non-accelerated filer o | | Smaller reporting company x |
| (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The number of shares of the issuer’s common stock issued and outstanding as of March 30, 2012 was 484,965,209 shares. This number reflects a 10-1 reverse split that was effective July 28, 2011
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently computed second quarter. $4,039,739 based upon $0.1 per share which was the last price at which the common equity purchased by non-affiliates was last sold.
Documents Incorporated By Reference: None
DC BRANDS INTERNATIONAL, INC.
FORM 10-K
For the Year Ended December 31, 2011
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| | | | Page | |
| PART I. | |
| Item 1. | Business | | | 1 | |
| Item 1A. | Risk Factors | | | 11 | |
| Item 1B. | Unresolved Staff Comments | | | | |
| Item 2. | Properties | | | 21 | |
| Item 3. | Legal Proceedings | | | 21 | |
| Item 4. | Mining Safety Disclosures | | | 21 | |
| | |
| PART II. | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | | 21 | |
| Item 6. | Selected Financial Data | | | 23 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | | 23 | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | | | | |
| Item 8. | Financial Statements and Supplementary Data | | | | |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | | | 32 | |
| Item 9A. | Controls and Procedures | | | 32 | |
| Item 9B. | Other Information | | | 33 | |
| | |
| PART III. | |
| Item 10. | Directors, Executive Officers of the Registrant and Corporate Governance | | | 34 | |
| Item 11. | Executive Compensation | | | 37 | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | | | |
| Item 13. | Certain Relationships and Related Transactions and Director Independence | | | 39 | |
| Item 14. | Principal Accounting Fees and Services | | | 39 | |
| | |
| PART IV. | |
| Item 15. | Exhibits and Financial Statement Schedules | | | 40 | |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements including, in particular, statements about future events, future financial performance including earnings estimates, plans, strategies, expectations, prospects, competitive environment, regulation and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend” or the negative of these terms or similar expressions in this Annual Report on Form 10-K. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, as well as a variety of other risks and uncertainties and other factors, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements.
Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them after the date of this Annual Report on Form 10-K, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Item 1A, "Risk Factors" under “Risks Related to Our Business” and elsewhere in this Annual Report on Form 10-K. These risk factors may not be exhaustive as we operate in a continually changing business environment with new risks emerging from time to time that we are unable to predict or that we currently do not expect to have a material adverse effect on our business. You should carefully read this report in its entirety as it contains important information about our business and the risks we face.
Company Overview
We specialize in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body. Our current focus is on the sale of our products under our H.A.R.D Nutrition label. To date, a substantial portion of our revenue has been derived from the sale of our products under this label. We currently have two distinct types of product that are sold under our H.A.R.D. Nutrition logo; our Functional Water System and nutritional supplements. The Functional Water System and nutritional supplements can each be further categorized into four sub product lines; each line tailored to different health and daily needs: our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. Our H.A.R.D. Nutrition Functional Water System provides consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water System are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle. The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top compartment. We also sell other products included in our H.A.R.D. Nutrition label such as herbal supplements which are made from a mixture of herbs and have been formulated to help maintain good health by providing the supplements that we believe are needed by our body but cannot be readily obtained from foods.
To date, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain. We recently expanded our marketing efforts in the United States through our infomercial created by Script to Screen that aired nationally in November 2011. We also sell products directly from our corporate headquarters and through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to further expand our marketing efforts in the United States.
We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our acquisition of DC Brands, LLC. Our principal offices are located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033. Our telephone number is 303-279-3800. Information about our products can be obtained from our website www.hardnutrition.com.
We, together with our wholly owned subsidiary DC Nutrition, Inc., specialize in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements aimed at maximizing the full potential of the body. Our focus has been on the sale of two distinct types of products under our H.A.R.D Nutrition label (our Functional Water Systems and nutritional supplements). To date, a substantial portion of our revenue has been derived from the sale of these products. . The Functional Water Systems and nutritional supplements can each be further categorized into four sub product lines; each line tailored to different health and daily needs: our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. Our H.A.R.D. Nutrition Functional Water Systems provide consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water Systems are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle. The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top cap compartment. During the year ended December 31, 2011, we derived $271,255 representing 83% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2010, we derived $538,888 representing 89% of our revenue from sales of our Functional Water Systems.
The other products sold under our H.A.R.D. Nutrition label are traditional supplements “not in the cap on top of the Water Systems” which are made from a mixture of herbs and have been formulated to help maintain good health by providing the supplements that we believe are needed by our body which cannot be directly obtained from foods. Our sale of nutritional supplements has not generated as much revenue as the sale of our Functional Water Systems. During the year ended December 31, 2010, we derived $66,604 representing 11% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2011, we derived $57,447 representing 17% of our revenue from sales of our H.A.R.D. Nutritional Supplement products.
To date, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain as well as a few health and fitness and gym locations. We also sell products directly from our corporate headquarters and through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to further expand our marketing efforts in the United States. We recently expanded our marketing efforts in the United States through our infomercial created by Script to Screen that aired nationally in November 2011.
We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our anticipated acquisition of DC Brands, LLC.
We have only recently commenced operations of products that are sports and fitness based nutraceutical supplements under the H.A.R.D. Nutrition label. In fact, our first functional water sales were made in August of 2009. Prior to 2006, our main focus was on the manufacture and sale of energy drinks.
Our principal offices are located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033. Our telephone number is 303-279-3800. Information about our products can be obtained from our website www.hardnutrition.com.
History
We were incorporated under the laws of the State of Colorado on April 29, 1998 as (“Telamerge”). Telamerge was originally formed for the purpose of, and engaged in the business of providing telemarketing services. Telamerge did not have meaningful business activity prior to its acquisition of DC Brands, LLC, a Florida limited liability company in 2004.
In 2002, DC Brands, LLC began the development and distribution of energy drinks under the labels “Dickens Energy Cider” and “Turn Left Energy Drink”. In August 2004, in connection with our new business plan and the anticipated acquisition of DC Brands, LLC, Telamerge changed its name to DC Brands International, Inc. DC Brands, LLC became our wholly owned subsidiary which is now inactive. In November 2004, DC Brands International, Inc. acquired all of the outstanding membership interests of DC Brands, LLC in exchange for the assumption of certain debt of DC Brands, LLC. On December 3, 2004, we effectuated a 120:1 forward split of our issued and outstanding shares of common stock. In 2006, we acquired the assets of Health Advantage Research and Development, Inc., a sports and fitness-based nutraceutical and supplement company.
In 2007, we changed the focus of our business away from carbonated energy drinks that contained sugar and caffeine to developing, marketing, distributing and selling health related products that are natural-based and contain vitamins. In July 2007, we acquired the assets of Hard Nutrition, Inc. and commenced production and marketing of our health drink/supplement combination under our current HARD Nutrition label. In September 2007, we effectuated a 10:1 reverse split of our issued and outstanding shares of common stock. Since we have outsourced our manufacturing and have no prior or future commitment for any specified quantity of products, we did not incur any manufacturing costs when we terminated production of the carbonated energy drinks; however as a result of such termination in 2008 we wrote off $2,924,000 of intellectual property related to formulas and other intangibles used in the carbonated energy drink business. Also in 2008 we wrote off an additional $8,541,669 of intellectual property related to the formulas and other intellectual property used in the carbonated energy drinks business and we incurred in excess of $200,000 in capital expenditures related to production and manufacturing expenses incurred in connection with our new line of business. In 2009, we commenced sales of our Functional Water Systems.
Existing Products
We currently sell two distinct types of products under our H.A.R.D. Nutrition label including our Functional Water Systems and our Nutritional Supplements. Each product line is further divided into similar categories based upon its targeted results, namely our performance, strength and training products, wellness products, energy products and weight loss and diet products. Each product was developed to attain its desired result based upon our research of third party documented studies as to which vitamins and herbs are likely to produce our desired results. After establishing what we believe the general consensus is regarding a particular nutraceutical’s typical effects, we then create mixtures of products to help achieve the desired result. We don’t use any “secret” ingredients or seek to include any particularly unusual vitamins and herbs in our products but rather seek to rely on established expectations regarding the intended effects of such nutraceuticals, recognizing that such intended effects have not been confirmed in any respect by the U.S. Food and Drug Administration or any other governmental agency, and as such may, in fact, not be effective. We do not engage in formal testing of the achievement of desired results of our products but do receive feedback from existing customers which is recorded and referred to when modifying or creating new products. We believe what makes us unique is not necessarily the vitamin and herb combinations chosen by our herbalist in our products themselves, but rather our ability to deliver those chosen nutraceuticals in our patented flip-top cap together with each product in our Functional Water System rather than relying on delivering the vitamins and herbs in only liquid form as part of the actual drink, as our competitors do.
Our Functional Water Systems
Our Functional Water Systems are a unique combination of a functional beverage and a nutraceutical. Due to our unique bottle design we are able to provide consumers with a combination of a beverage and a nutraceutical supplement all in one convenient bottle. We currently manufacture nine unique water systems, each of which is designed to provide a specific functional benefit for the body and can be further categorized into one of our four subcategories based upon the functional benefit desired (performance, strength and training- fitness- wellness and beauty- weight loss and diet and energy). Each system includes supplements, vitamins and minerals that are enclosed in our proprietary licensed cap which is attached to our bottle filled with a lightly flavored water specially formulated to act as a catalyst for the enclosed supplements. When the supplements and flavored water are combined they provide the body with the nutrients needed to achieve the desired result. Wrapped around each bottle is a rubber bracelet with our message “Your life won’t change until you change your life” which we believe creates a unique brand loyalty and identification tool. It is hard for us to imagine someone wearing our bracelet going back to drinking flavored water pretending to have vitamins. The Functional Water Systems have a shelf life of one year, which is the shelf life in the industry for most of the products stored in PET bottles that contain vitamin additives. We conduct periodic tests of the color, flavor and desired results of our products in house. Each product contains a label with a date stamp that specifies the shelf life. Under our agreement with Acosta, Inc., Acosta, Inc. as part of its service will be responsible for maintaining stocked shelves of our products and checking expiration dates of products.
Our nine different systems are Health +, The Fat Fighter, The Get Over It-Feel Better Now, Whacked Energy, Think!, Win, Fix It, Cleanse +, and Rebuild and Recover. The Daily Basics is a wellness product that includes vitamins and supplements. The Fat Fighter falls under the diet and weight loss category. The Get Over It-Feel Better Now is a wellness product that is a blend of vitamins, herbs and minerals. The Get Over It-Feel Better Now water system is being marketed to combat hangovers. Whacked Energy and Wide Awake are part of our energy line. Win is geared towards athletes for use when conducting fitness training.. Fix It! is a combination of herbs and supplements. Cleanse+ is a 12 day total body cleansing system intended to be taken once every 90 days and Rebuild and Recover is a very potent combination of products targeted towards the serious athlete. All of our products contain ingredients that are intended to provide health related benefits. For example, many of the products in our energy line include Ginko biloba, which has been shown in several studies to help improve focus and help concentration and improve blood flow to the brain. (See Gessner B, Voelp A, and Klasser M in Arzneimittelforschung. 1985;35(9):1459-65.(1985);Adams LL, Gatchel RJ, Gentry C. Complementary and alternative medicine: applications and implications for cognitive functioning in elderly populations. Altern Ther HealthMed. 2001;7(2):52-61;Kleijnen, J and P. Knipschild. 1992. Ginkgo biloba for cerebral insufficiency. Br. J. Clin. Pharmac. 34:352358.)
We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009 at King Soopers. During the year ended December 31, 2011, we derived $271,255 representing 83% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2010, we derived $538,888 representing 89% of our revenue from sales of our Functional Water Systems
The H.A.R.D. Nutrition Functional Water Systems are primarily sold in retail establishments. In 2011 approximately 35% of our total revenue derived from sales of our H.A.R.D. Nutrition Functional Water beverages has been derived from sales to King Soopers supermarkets, which is a division of Kroger Foods through two distributors. Our Nutritional Supplements
Our H.A.R.D. Nutrition Supplements are sold primarily though our wholly owned subsidiary DC Nutrition, Inc. and are aimed at athletes and improving performance. We currently have approximately 300 products in this product line which we divide into the four categories previously discussed: performance and strength supplements, wellness products, energy supplements and the weight loss and diet products.
Our second largest product line in terms of sales revenue is our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2011, we derived $57,447 representing 14% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2010, we derived $66,604 representing 11% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. The H.A.R.D. Nutritional Supplement products are primarily sold to retailers or by orders placed at our corporate headquarters, website and certain smaller retail establishments such as gyms and fitness centers.
During the last two years we did not spend any funds on research and development activities.
Marketing
During 2011, the focus of our marketing has been on our long form infomercial which aired nationally in November 2011. Prior thereto, our marketing focus has been in the Colorado area. We have used various forms of advertising as part of our marketing campaign. Our marketing strategy has included associations with well know public figures in the Colorado area in an effort to capitalize on their notoriety. We have engaged in an aggressive radio marketing campaign in the Colorado area, which included the promotion of our products on the KOA radio station by Dave Logan, a former NFL player and one of the KOA announcers. Our promotional agreement with Mr. Logan terminated in 2011.
We have attended various trade shows. The H.A.R.D. Nutrition Functional Water System was introduced to the public in September 2008 at a Mr. Olympic Body Building Show in Las Vegas and at the National Convenience Stores Show in Chicago a few weeks later.
We began to market our products on television beginning May 2010. TV appearances include appearance on the local television show “Colorado & Company” as well as a profile on the “hay Stacks Colorado” segment during the Rachel Rae Show in May 2009. The company produced a 60 second commercial that talks about all of our products as well as 30 commercials discussing individual products.
In addition, to the radio and media campaign, the Company offers free seminars at its headquarters geared toward gyms and fitness centers where free product samples are distributed and educational information about the products and nutrition are disseminated.
Funding
To date, we have met substantially all of our financing needs through private sale of shares of our common stock and other equity securities and loans from investors. We have raised a total of approximately $16,000,000 from our equity and debt financings subsequent to our acquisition of DC Brands, LLC in 2004. In addition, we recently entered into an accounts receivable factoring agreement with Liquid Capital Exchange, Inc. (“Liquid Capital”) pursuant to which we have agreed to sell, and Liquid Capital has agreed to purchase, certain of the accounts arising from the sale of our products. Liquid Capital in its sole discretion may advance up to 80% of the face amount of the accounts purchased less an applicable discount fee up to a maximum of $75,000. In order to secure our payment of all our indebtedness and obligations to Liquid Capital, we granted Liquid Capital a security interest and lien upon our accounts and our other assets. The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement. In July 2011 we entered into a $10 million equity funding facility with Southridge Partners II, LP, which is subject to various conditions being met prior to our use of the facility. There can be no guarantee that any funds will be derived from the equity line. If our revenue from sales and payments derived from our factoring arrangement and financing from our equity funding facility is not sufficient to meet our ongoing expenses we will need additional financing.
MANUFACTURING AND QUALITY CONTROL
Our products are manufactured by third parties and we are reliant upon these third parties to maintain proper quality control. Our manufacturer is required to maintain good manufacturing compliance. We also do our own random testing of our products to ensure that they meet our specific quality standards. Inasmuch as we do not manufacture the products, we are not subject to good manufacturing regulations, however we are subject to inspection of our corporate headquarters where the raw materials of our products are kept in inventory.
Prior to this past year, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain. Until recently, our distribution efforts have been limited due to our oral agreement with King Soopers not to provide products to other grocery stores. Given sufficient capital and attractive commercial prospects, we intend to expand our distribution effort throughout the United States. However establishing a successful distribution network nationwide will require the expenditure of substantial amounts of capital.
We have entered into an agreement with Acosta, Inc. to provide future retail distribution services, to facilitate our warehouse direct sales. The agreement provides that Acosta will maintain regular store visits in an effort to maintain shelf requirements. Acosta is entitled to a commission of 5% of net sales (as defined in the agreement) for product sales to certain specified customers in the defined territory. The term of the agreement is month to month and either party can terminate the agreement upon 30 days advance notice. Prior to entering into the agreement with Acosta, Inc. a substantial portion of our revenue derived from product sales was from products distributed by Cold Front Distribution. Although we anticipate that we will still have a portion of our products distributed by Cold Front Distribution and other distributors, especially those that are not warehouse direct sales, we do not anticipate that a substantial portion of our future revenue will be derived from product sale by such distributors. We do not have a written agreement with Cold Front Distribution and all sales are made based upon a purchase order negotiated at the time of sale.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND SUPPLIERS
Our raw materials are obtained from a variety of suppliers, some of which are located in foreign countries. We use in excess of 150 ingredients in our nine different Functional Water Systems. No one supplier is responsible for supplying in excess of 10% of our vitamins and herbs and we are not dependent upon any one supplier for the supply of any of our vitamins and herbs. We have identified at least a primary, secondary and tertiary supplier for each ingredient and believe that other suppliers are available if needed. Therefore at this time we are not dependent upon any one supplier for any of our ingredients. We do not have any written agreements with any of our suppliers and therefore we have no guarantees of minimum supply quantities. Although there is ample availability of each type of herb used in our products from a variety of suppliers, there is a limited number of suppliers that can provide the premium herbs of the quality that we use in our products at a reasonable price. Several factors that can affect the availability of quality herbs or their prices include inclement weather in the countries where the herbs are grown, embargos imposed by our government or natural catastrophes.
We currently rely on one manufacturer, Ball Corporation, for the supply of the bottles that are used in our products. However, we believe that alternative suppliers are readily available. We have an existing relationship with three different co-packers/bottlers to manufacture our products. We have also reviewed and approved two other co-packers/bottlers that we intend to use as our sales volume increases. We supply the ingredients to the co-packers and they manufacture our products in accordance with our specifications in the bottles we obtain from Ball Corporation and supply to the co-packer and then our label is affixed to the bottles. The labels are purchased from an independent third party. We place orders for our bottles and finished goods based upon our estimates of our future sales volume and reserve line time with our co-packers a few weeks in advance of our anticipated order fulfillment date. We do not have any written agreement with the supplier of our bottles, the co-packer or the manufacturer of our patented cap and enter into purchase orders that are at negotiated prices at the time each order is placed. Typically the payment terms for the co-packers on these orders is net thirty days. The payment terms for our bottles and the manufacture of our caps is typically cash on delivery. We own the tool used in the manufacturing process of our caps. Although there are several other manufacturers of bottles that we could use as well as co-packers, due to the unique nature of our cap, we would incur substantial start up costs for the transfer of the equipment needed to produce our caps if we were to use an alternative cap manufacturer. Due to the unique shape of our patented bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers. Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps. In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.
The industries in which we operate are is highly competitive. Not only do we compete with other manufacturers of functional beverages but we also compete with manufacturers of nutraceutical supplements and dietary supplements.
Our competition in the beverage industry includes products owned by multinational corporations with significant financial resources, including products such as Vitamin Water and Gatorade which are owned by Coca-Cola and Pepsi. Our energy drinks also compete with products such as Monster, Red Bull and Rockstar. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever.
We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Joint Juice, Slimfast and Nutrisystem. The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. These markets include manufacturers, distributors and physicians. Numerous manufacturers and distributors compete with us for customers throughout the United States in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies and health food stores. Many of the competitors are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. In addition, we will compete with several large pharmaceutical companies for therapeutic and symptomatic relief of disease symptoms. Many of these drug companies are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. These drug companies also have substantially greater political influence and regulatory support for the use of their products in the treatment of diseases and wellness.
The market is highly sensitive to the introduction of new products. As a result, in order to remain competitive, we believe we will continually need to successfully introduce new products.
We are also subject to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can offer employees compensation packages that are difficult for us to compete with.
We regard our patent, trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, suppliers and others to protect our proprietary rights.
Richard Pearce, our President & Chief Executive Officer, and Jeremy J Alcamo, our Executive VP., have received a design patent in the United States (US D 576,877S) for the flip-top cap compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap. The Patent was issued on September 16, 2008 and has a term of 14 years, terminating on September 15, 2022. In addition, the Company owns several copyrights and trademarks that are used in connection with its H.A.R.D. Nutrition product line. See “Certain Relationships and Related Transactions.”
The steps we take to protect our proprietary rights in our intellectual property and brand name may not be adequate to prevent the misappropriation of our intellectual property and brand name in the United States or abroad. Existing patent and trademark laws afford only limited practical protection for our intellectual property and product lines. However, because of the rapid pace of the natural product industry's development, we believe that the legal protection for our product is less significant to our success than the knowledge, technical expertise and marketing skills of our personnel, the frequency of product expansion and pace of market penetration.
As noted in a September 2011article in the Natural Products Insider titled Postmodern Nutrition: Functional Foods, Beverages, functional foods managed to not only stay on their feet, but to take make a few strides. Nutrition Business Journal reported functional foods grew 4.6 percent in 2010, pulling in $39 billion in sales, as compared to $37.3 in 2009. Global Industry Analysts (GIA) is predicting the global market to exceed $130 billion by 2015.
According to Steve French, managing partner at Natural Marketing Institute (NMI), Baby Boomers have been acute growth drivers of functional foods because of their uncertainty about the future of health care (seven out of 10 Boomers said they’re taking a more active role when it comes to health), and in an attempt to delay aging and prevent disease. Boomers are interested in health-condition-specific products.
“In the United States, growth in the functional food and beverages category is being driven by a number of factors, including an aging population, high health care costs and a heightened consumer awareness of the link between diet and health,” said Stephen Moon, CEO, Provexis plc.
NMI’s 2011 Healthy Aging Boomer Database found they would be more likely to purchase foods/beverages if they offered a specific health benefit—cholesterol/heart; immunity/joint pain/cancer prevention/energy booster; and toxic cleanup/cleanse digestive track—in primary, secondary and tertiary order, respectively. A total of 75 percent of Boomers wish all foods had some type of health-boosting claim, and more than 25 percent of them feel functional products can be used instead of medicines.
As noted in a March 2012 article in the Natural Products Insider titled Supplement Use on the Rise, Sixty-nine percent of U.S. adults take dietary supplements according to a survey commissioned by the Council for Responsible Nutrition (CRN), a trade association for the dietary supplement industry. Conducted by Ipsos Public Affairs, the survey indicates an upward trend in dietary supplement consumption, as consumer usage is up from 66 percent in 2010, 65 percent in 2009 and 64 percent in 2008.
Further, consumer confidence in dietary supplements remains steady, as the survey also finds 84 percent of adults are confident in the safety, quality and effectiveness of supplements, with 82 percent in 2010 and 84 percent in 2009 indicating as such.
REGULATION
In the United States, we are subject to compliance with laws, governmental regulations, administrative determinations, court decisions and similar constraints. Although our products are not deemed to be drugs, they are deemed to be dietary supplements and therefore subject to all regulations regarding products and dietary supplements ingested by consumers. Such laws, regulations and other constraints exist at the federal, state and local levels in the United States and at all levels of government in foreign jurisdictions. These regulations include constraints pertaining to: (i) the manufacturing, processing, formulating, packaging, labeling, distributing and selling (ii) advertising of products and product claims (iii) transfer pricing, and (iv) method of use.
In the United States, the formulation, manufacturing, packaging, storing, labeling, advertising, distribution and sale of our Products are subject to regulation by various governmental agencies, which include, among others (i) the Food and Drug Administration (“FDA”), (ii) the Federal Trade Commission (“FTC”), and (iii) the Consumer Product Safety Commission. The most active regulation has been administered by the Food and Drug Administration, which regulates the formulation, manufacture and labeling of products pursuant to the Federal Food, Drug and Cosmetic Act (‘FDCA”) and regulations promulgated thereunder. Most importantly, the FDA has guidelines under the Dietary Supplement Health and Education Act (DSHEA) to enable the manufacturing, advertising, marketing, and sale of dietary supplements. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the interstate labeling, promotion, advertising and sale of dietary supplements, over the counter drugs, and foods.
Compliance with applicable FDA and any state or local statutes is crucial. Although we believe that we are in compliance with applicable statutes, should the FDA amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. As a marketer of a product that is ingested by consumers, we are always subject to the risk that one or more of our products that currently are not subject to regulatory action may become subject to regulatory action. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us, or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.
The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, generally when a company adds an ingredient to a food, the FDCA requires that the ingredient either be determined by the Company to be generally regarded as safe (“GRAS”) by qualified experts or go through FDA’s review and approval process as a food additive.
The FDCA has been amended with respect to dietary supplements by the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). The DSHEA provides a statutory framework governing the safety, composition and labeling of dietary supplements. It regulates the types of statements that can be made concerning the effect of a dietary supplement. The DSHEA generally defines the term “dietary supplement” to include products that contain a “dietary ingredient” which may include vitamins, minerals, herbs or other botanicals, amino acids, and metabolites. Our products contain herbs and supplements currently consumed as part of a healthy and regular diet of human beings and therefore are considered dietary supplements. Under the DSHEA, a dietary supplement manufacturer is responsible for ensuring that a dietary supplement is safe before it is marketed. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be sold without FDA pre-approval and without notifying the FDA. The ingredients in our products were on the market before October 15, 1994 and therefore may be sold without FDA pre-approval.
With respect to labeling, DSHEA permits “statements of nutritional support” for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well being (but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). This, therefore, severely limits the direct advertising of the healthcare benefits of our products. A company making a statement of nutritional support must possess substantiating evidence for the statement, and disclose on the label that the FDA has not reviewed that statement and that the product is not intended to diagnose, treat, cure or prevent a disease.
We intend to label our products with statements of nutritional support and believe that we have adequate substantiating evidence to support such statements. However, the FDA may determine that a given statement of nutritional support that we or our licensees decide to make is a drug claim rather than an acceptable nutritional support statement. Such a determination would require deletion or substantiating proof of the drug claim.
In addition, DSHEA allows the dissemination of “third party literature”, publications such as reprints of scientific articles linking particular dietary, ingredients with health benefits. Third party literature may be used in connection with the sale of dietary supplements to consumers. Such a publication may be so used if, among other things, it is not false or misleading, no particular brand of dietary supplement is promoted and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with our products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug or as a “misbranded” product, causing us to incur substantial fines and penalties.
Our products and product related activities may also be subject to regulation by other regulatory agencies, including but not limited to the Federal Trade Commission (“FTC”), the Consumer Products Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Advertising of dietary supplement products is subject to regulation by the FTC under the Federal Trade Commission Act (“FTCA”). The FTCA prohibits unfair methods of competition and unfair or deceptive trade acts or practices in or affecting commerce. Furthermore, the FTCA provides that the dissemination or the causing to be disseminated of any false advertising pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Pursuant to this FTC requirement, we are required to have adequate substantiation of all material advertising claims made for our products. Failure to adequately substantiate claims may be considered either deceptive or unfair practices.
The FTC has recently issued a guidance document to assist supplement marketers of dietary supplement products in understanding and complying with the substantiation requirement.
The FTC is authorized to use a variety of processes and remedies for enforcement, both administratively and judicially including compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. State and local authorities can also regulate advertising and labeling for dietary supplements and conventional foods.
Our activities are also regulated by various agencies of the states and localities in which our products are sold, including, the Colorado Department of Public Health and Environment which in March 2010 performed[l2] an inspection of our warehouse facility, which entailed an inspection of our plant and grounds, sanitary operations (general maintenance and pest control) and our equipment and utensils and did not result in any corrective action to our product or ingredients.
In September 2011 the Food and Drug Administration (FDA) conducted a regulatory inspection of our facilities, and reviewed our manufacturing processes, ingredients, and labeling. No violations were issued, and we continue to follow FDA guidelines in our manufacturing and marketing. We were given a list of areas to improve, and have addressed those issues and believe that we are now in compliance. We continue to always strive to be in full compliance with Good Manufacturing Practices (GMP) in anticipation of future random inspections by the FDA.
We believe that current and reasonably foreseeable governmental regulation will have minimal impact on our business.
Employees
As of December 31, 2011, we had 15 full time employees.
RISK FACTORS
Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below, the other information in this Annual Report, the documents incorporated by reference herein and the risk factors discussed in our other filings with the Securities and Exchange Commission when evaluating our company and our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known by us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of the money paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
We have a limited operating history in our current line of business.
Because we have a limited operating history in our current line of business, there can be no assurance that we will be able to implement any aspect of our business plan or establish a successful business. We are subject to all of the business risks and uncertainties associated with any new business enterprise, including product acceptance, establishing an effective distribution channel and having sufficient funds. In 2004, we changed our focus to the manufacture of energy drinks. In 2006, we began selling health related products under our H.A.R.D. nutrition label, which to date has only been sold in a small targeted territory.
We may not be profitable.
We expect to incur operating losses for the foreseeable future. Our marketing program, which we consider to be crucial to our future success, has required significant expenditures. These expenditures will result in a loss until adequate revenues are derived from sales. For the years ended December 31, 2011 and 2010, we had revenue of $328,701 and $605,493, respectively and sustained a net loss of $7,383,739 and $10,018,421 respectively. Our ability to become profitable depends on our ability to have successful operations and generate and sustain sales, while maintaining reasonable expense levels, all of which are uncertain in light of our limited operating history in our current line of business.
We may not be able to continue as a going concern.
The opinion of our independent registered public accounting firm for our fiscal years ended December 31, 2011 and December 31, 2010 is qualified subject to substantial doubt as to our ability to continue as a going concern. See “Report of Independent Registered Public Accounting Firm” and the notes to our Financial Statements. During the year ended December 31, 2011 we incurred $5,079,995 of operating expenses, had a net loss of ($7,383,739) and at December 31, 2011 had an accumulated deficit of $87,413,416 and stockholders’ deficit of $8,943,427. During the year ended December 31, 2010 we incurred $5,174,524 of operating expenses, had a net loss of ($10,018,420) and at December 31, 2010 had an accumulated deficit of $80,029,677 and stockholders’ deficit of $7,820,257.
Our products have been sold in a limited territory, which may not be indicative of the acceptance of our products in a broader territory.
To date, our products have been sold in a limited territory. Until recently we focused our sales and marketing efforts in the Colorado area. In fact, substantially all of our revenue for the year ended December 31, 2011 and the year ended December 31, 2010 was derived from sales in the Colorado area. Other than our infomercial, our marketing efforts have been limited to this territory and have included advertising on KOA, the Broncos radio station. If our current market becomes saturated, our sales will be adversely impacted. Our success will be dependent upon our ability to expand our sales territory and our ability to apply our sales and marketing plans used in our current territory to a broader territory. Our inability to expand our territory will have an adverse impact on our anticipated revenue.
The loss of King Soopers as a customer would have a material adverse effect on our business.
We sell a substantial portion of our H.A.R.D. Nutritional Functional Water Systems indirectly to King Soopers, a grocery chain in Colorado which is a division of Krogers. The loss of King Soopers as a customer would have a material adverse effect on our business. We do not have any written agreement with King Soopers and they are not required to purchase any specified quantity of products from us. In August 2009 we entered into an oral agreement with King Soopers pursuant to which we agreed not to sell our Functional Water Systems to any other grocery stores or allow any distributors to sell our products to any grocery stores until the end of the first quarter of 2010 so long as they continued to sell our Functional Water Systems. The agreement was subsequently extended until August 1, 2010, when it expired. Although the agreement did not guarantee any purchase quantities or marketing or display terms, our indirect sales to King Soopers represented a significant quantity of our product sales. Since August 1, 2010, we and our distributors are no longer prohibited from selling our Functional Water Systems to other grocery stores, however, our indirect sales to King Soopers continue to remain stable and continue to represent a significant portion of our Functional Water Systems sales. Although we consider our relationship with King Soopers to be good, they could at any time decide not to purchase our beverages.
There may be future dilution of our common stock and current shareholders will experience immediate dilution.
If we sell additional equity or convertible debt securities, those sales could result in additional dilution to our shareholders. Our recent conversions of our notes in the principal amount of $935,000 has resulted in our issuance of 244,914,543 shares of our common stock. On March 20, 2012, we had debt in outstanding principal balance of $1,544,409 convertible into shares of common stock based upon the closing price of our stock on the conversion date. Of such debt, $1,242,017 converts into shares of our common stock at a conversion price of 20% of the greater of the closing price or the highest bid price of our common stock on the date of conversion, In addition, our Series B preferred shares convert into shares of common stock at a rate of 1.5% of our outstanding voting capital stock, calculated on a fully diluted basis as of the date of the notice of conversion divided by twenty (20); therefore, it is difficult for us to accurately quantify the number of shares that we will be required to issue upon such conversions. Using the March 20, 2012 numbers, if all of the Company’s outstanding debt, warrants and all of our preferred stock were to convert to common stock, we would be required to issue approximately an additional 3,906,887,277 shares, which would exceed the number of shares currently available for issuance. Therefore, we have received approval of our stockholders and board of directors to increase our number of authorized shares to 5,000,000,000 and are awaiting regulatory approval of such action. The issuance of such shares of common stock will cause such shareholders to suffer dilution.
We are currently in default under three of our notes.
We have not made all of the required payments under 10 notes that matured from 2006 and 2010 in the principal amount of $1,026,030. One holder has demanded payment on one of the notes and has initiated a lawsuit to receive payment on his note that has matured .Should the holder of any note demand payment and we are unable to renegotiate the terms of the note, the note holder could declare the note in default and take legal action against us. Our ability to continue to operate is dependent upon our ability to raise additional funds to repay the notes secured by our assets or to renegotiate the terms of the notes.
We have several notes that are due in 2012 and 2013, and we will need additional capital to repay these loans and may not be able to obtain it.
As of December 31, 2011, we have notes in the aggregate principal amount of $ 7,853,383 outstanding. Of such amount, notes in the principal amount of $ 2,956,483_are due in 2012 and notes in the principal amount of $1,986,542_are due 2013. We do not have the funds to repay these loans. One holder has demanded payment on one of the notes and has initiated a lawsuit to receive payment on his note that has matured. We will need to raise additional funds in order to repay these loans. We cannot assure you that additional financing will be available if needed on terms favorable to us.
Certain of our notes contain features that could have a dilutive effect to our investors.
If the price that we issue any shares of our stock in a put is lower than the conversion price of our notes in the principal amount of $53,000, and $32,500 certain of our lenders will be entitled to reduce the price at which they convert their notes to shares of our common stock and therefore will be entitled to receive more shares than anticipated. On November 10, 2011 we entered into a Securities Purchase Agreement with an accredited investor for the sale of a convertible promissory note in the aggregate principal amount of $53,000(the “Note”). Additionally, on December 13, 2011, we entered into a Securities Purchase Agreement with an accredited investor for the sale of a convertible promissory note in the aggregate principal amount of $32,500 (the “December Note”). The Note is convertible into shares of our common stock beginning 180 days from the date of the Note at a conversion price of 58% of the average of the lowest five trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. The December Note is convertible into shares of our common stock beginning 180 days from the date of the December Note at a conversion price of 55% of the average of the lowest three trading prices of our common stock during the ten trading days on the OTCBB proceeding the conversion date. However, a reduction in the conversion price as set forth above will result in us issuing a greater number of shares of common stock than anticipated, which will have the effect of diluting the shares of common stock of our investors.
We have no independent audit committee nor do we have an audit committee financial expert at this time. Our full board of directors functions as our audit committee and is composed of one director who is not considered independent. This may hinder our board of directors’ effectiveness in fulfilling the functions of the audit committee.
Currently, we have no independent audit committee nor do we have an audit committee financial expert at this time. Our full board of directors functions as our audit committee and is comprised of one director who is not considered to be "independent" in accordance with the requirements of Rule 10A-3 under the Exchange Act. An independent audit committee plays a crucial role in the corporate governance process, assessing our company's processes relating to its risks and control environment, overseeing financial reporting, and evaluating internal and independent audit processes. The lack of an independent audit committee may prevent the board of directors from being independent from management in its judgments and decisions and its ability to pursue the committee's responsibilities without undue influence. We may have difficulty attracting and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified, independent directors, the management of our business could be compromised. In addition, the director on our board of directors is not considered to be a “financial expert” in that he does not have the education or experience of being a chief financial officer.
We face substantial uncertainties in establishing our business.
Establishing a successful business will require us to attain certain goals to which no assurance can be given that we will be successful in our efforts. We believe that in order to establish a successful business we must, among other things, hire personnel to run our day to day operations, develop a larger distribution network and establish a customer base and brand name. In order to implement any of these we will be required to expend a substantial amount of money. If we are unable to raise the necessary money, we will be unable to accomplish these goals and if we are unable to accomplish one or more of these goals, our business may fail.
We may experience difficulty in effectively managing our planned expansion.
Further growth and expansion of the Company's business would place additional demands upon the Company's current management and other resources and would require additional production capacity, working capital, information systems, management, operational and other financial resources. In order to expand our business, we will need to increase our sales volume and expand our sales territory. Such expansion will require significant additional expenditures for manufacturing, raw materials inventory and marketing and we will not be able to effectuate any such expansion without additional capital. Critical to such expansion will be establishment of a nationwide distribution network and there can be no assurance that we will be able to establish a successful nationwide distribution network. Further growth of the Company will also depend on various factors, including, among others, our ability to attract and retain new employees, the development of new products, competition and federal and state regulation of the functional beverage and nutritional supplements industry. Not all of the foregoing factors are within the control of the Company. No assurance can be given that the Company's business will grow in the future and that the Company will be able to effectively manage such growth. If the Company is unable to manage growth effectively, the Company's business, results of operations and financial condition would be materially adversely affected.
We may need additional capital and may not be able to obtain it.
We may need to raise additional funds in order to support further expansion, meet competitive pressures, or respond to unanticipated requirements. In addition, we have several notes payable that are past due or due upon demand. Although no request for repayment of these notes has been made yet, there can be no assurance that the note holders will continue to forbear on collecting amounts due under the notes. We cannot assure you that additional financing will be available if needed on terms favorable to us. We currently do not have any commitments for additional funding other than a factoring arrangement with Liquid Capital Exchange, Inc. for the factoring of our accounts receivable and an Equity Line withSouthridge Partners II, LP, which is dependent upon stock sales volume and our stock price.
If our cap manufacturer were to cease production of our caps, we would incur substantial start up and other costs if we were to engage an alternative manufacturer.
If for any reason our current cap manufacturer were to cease production of our caps, the engagement of an alternative manufacturer would cause us to incur substantial additional costs. Due to the unique shape of our bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers. Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps. In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.
If our suppliers were to fail to meet our needs, our costs for our raw materials and bottles may increase substantially due to many factors beyond our control.
If our current suppliers were to be unwilling or unable to meet our needs, we could suffer shortages or incur substantial costs. Changing suppliers could require long lead times. The principal raw materials we use in our business are PET bottles and caps, and herbs, vitamins, juice, electricity, fuel and water. The cost of the raw materials can fluctuate substantially. Although each type of herb used in our products is readily available from multiple sources, the premium herbs used in our products are of a quality that is not available from many sources. The cost and availability of the premium herbs is based upon availability and can be impacted by severe weather conditions that cause crop failures, natural disasters, embargos from the countries from which they are derived and diseases such as salmonella. In addition, our suppliers could be impacted by financial difficulties, strikes, transportation interruption, government regulation, political instability and terrorism. PET prices increased significantly in recent periods. We are also significantly impacted by increases in fuel costs for our distribution and transportation. Any increases in raw materials or manufacturing costs will exert pressure on our costs and we may not be able to pass along any such increases to our customers or consumers, which could negatively affect our business and financial performance.
Our performance is dependent upon certain key employees, the loss of which would have a material adverse effect on our business
Our performance significantly depends upon the continued contributions of our Chief Executive Officer and President, Richard Pearce, our Executive VP, Jeremy Alcamo, and other key employees, including Robert Nikkel, our Chief Herbalist, each individually and as a group, and our ability to retain and motivate them. Our officers and key personnel have many years of experience with us and in our industry and it may be difficult to replace them. If we lose key personnel or are unable to recruit qualified personnel, our operations and ability to manage our business may be adversely affected. We do not yet have “key person” life insurance for any of our executive officers or key employees.
Our current management controls the right to vote our common stock and they may be able to control our company indefinitely.
Richard Pearce, our President & Chief Executive Officer, has the right to control the vote of 51.25% of our outstanding common stock through his ownership of our Series A Preferred Stock. As a result, Mr. Pearce may be able to effectively control our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, for an indefinite period of time. This concentration of voting control might have the effect of delaying or preventing a change in control and might adversely affect the market value of our common stock in the future and the voting rights of our other stockholders.
Any additional issuance of our common stock will cause dilution only to a limited number of our shareholders.
Future issuances of shares of our common stock will cause dilution to all shareholders other than the voting rights of Richard Pearce, the holder of our Series A Preferred Stock. Our Series A Preferred Stock has the right to vote 51.25% of the outstanding common stock at any time upon vote of the majority holder. Therefore, the holder of the voting power of the Series A Preferred Stock will never have their voting power diluted by future stock issuances.
We operate in highly competitive markets.
The industries in which we operate are highly competitive. Not only do we compete with other manufacturers of functional beverages but we also compete with manufacturers of nutraceutical supplements and dietary supplements. We compete with multinational corporations with significant financial resources, including products such as Vitamin Water owned by Coca-Cola and Gatorade owned by PepsiCo. We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Slimfast and Nutrisystem. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. Our inability to compete effectively could result in a decline in our sales. As a result, we may have to reduce our prices or increase our spending on marketing, advertising and product innovation. Any of these could negatively affect our business and financial performance.
We may not effectively respond to changing consumer preferences, trends, health concerns and other factors.
Consumers’ preferences can change due to a variety of factors, including aging of the population, social trends, negative publicity, economic downturn or other factors. If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop new products in response, our sales could suffer. Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.
Substantial disruption to production at our bottling or flavor plants or other manufacturing facilities could occur.
A disruption in production at any of our functional water manufacturing facilities, could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, manufacturing problems, disease, strikes, transportation interruption, government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.
Our products may not meet health and safety standards or could become contaminated.
We have adopted various quality, environmental, health and safety standards. We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards. Even if our products meet these standards they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
Weather and climate changes could adversely affect our business.
In general, sales of functional beverages usually increase when the weather is warm. However, certain of our products, such as our H.A.R.D. Nutrition Functional Water System named “Get Over It Feel Better Now” which is geared at the treatment of colds and flu will normally have higher sales during cold weather months. Inasmuch as the mix of our products may vary from quarter to quarter, we cannot guarantee that diversity of our products will reduce the risk or that the seasonal aspects of our products will not adversely affect our business. Unseasonable or unusual weather or long-term climate changes may negatively impact the price or availability of raw materials, energy and fuel, and demand for our products. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.
We depend on a small number of large retailers for a significant portion of our sales.
Food and beverage retailers in the United States have been consolidating. Consolidation has resulted in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we, and our bottlers and distributors, do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. Certain retailers make up a significant percentage of our products’ retail volume, including volume sold by our bottlers and distributors. The loss of sales of any of our products in a major retailer could have a material adverse effect on our business and financial performance.
We depend on third-party suppliers, distributors and manufacturers. Any disruption or extended delay in product supply from any of our third-party suppliers or loss of distributors could have a significant adverse impact on our operations.
There are numerous companies that produce, or supply the ingredients and products used in our business. We do not manufacture the bottles or their flip-top cap compartments directly and depend entirely on third party manufacturers and suppliers. We do not have guaranteed supply or pricing arrangements with our suppliers or bottling manufacturer, but submit purchase orders and pay for ingredients and materials as needed. As a result, we risk increased cost of materials and difficulty in procuring products.
We also rely upon the efforts of third party distributors. Our success will in part depend upon our ability to recruit, retain and motivate distributors and the distributor’s ability to recruit, retain and motivate sales employees and to make sales of our products. In our efforts to attract and retain distributors, we will compete with other companies that are more established. Our operating results will be harmed if our products do not generate sufficient interest to attract and retain distributors.
Our ability to enter new markets and sustain satisfactory levels of sales in each market will be dependent in part upon the ability of our suppliers, manufacturers and distributors to properly perform their functions and to comply with local regulations or market environments, for introduction into such markets. While outsourcing may reduce the cost of operations, it also reduces direct control by us over the services rendered. Although we attempt to select reputable suppliers, manufacturers and distributors and will conduct quality control tests, it is possible that one or more of these providers could fail to perform as we expect. In addition, the expanded role of third party providers has required and will continue to require us to implement and adopt new procedures and processes for retaining and managing these providers.
The failure of any manufacturer to supply products as required by us could have a material adverse effect on our business, results of operations and financial condition. If we do not timely and effectively develop and implement our outsourcing strategy or if third party providers do not perform as anticipated, we may experience operational difficulties, increased costs, or even manufacturing delays, which could materially and adversely affect our business, financial condition and results of operations.
Although a number of alternative manufacturers exist that we believe could replace our main suppliers with alternative sources at comparable prices and terms, any disruption or extended delay in raw material products supply from any of our third party suppliers could have a significant adverse impact on our operations. In addition, the time needed to replace any main supplier could adversely affect our operations by delaying shipments and potentially losing customers to our competition.
We may not comply with applicable government laws and regulations, and they could change.
We are subject to a variety of federal, state and local laws and regulations in the United States. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. See “Business — Regulatory Matters” for more information regarding many of these laws and regulations. Violations of these laws or regulations could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on functional beverages or ingredients could increase our costs. Certain of the herbs used in our products are obtained from foreign countries and importing them into the United States is subject to various regulations. Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling laws, could become applicable to our products. Some local and regional governments and school boards have enacted, or have proposed to enact, regulations restricting the sale of certain types of soft drinks in schools. Any violations or changes of regulations could have a material adverse effect on our profitability, or disrupt the production or distribution of our products, and negatively affect our business and financial performance.
Our financial results may be negatively impacted by the recent global financial events.
The recent global financial events have resulted in the consolidation, failure or near failure of a number of institutions in the banking, insurance and investment banking industries and have substantially reduced the ability of companies to obtain financing. These events have also caused a substantial reduction in the stock market. These events could have a number of different effects on our business, including:
| | • | reduction in consumer spending, which would result in a reduction in our sales volume; |
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| | • | a negative impact on the ability of our customers to timely pay their obligations to us or our vendors to timely supply materials, thus reducing our cash flow; |
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| | • | an increase in counterparty risk; |
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| | • | restricted access to capital markets that may limit our ability to take advantage of business opportunities, such as acquisitions. |
Other events or conditions may arise directly or indirectly from the global financial events that could negatively impact our business.
Our business is sensitive to public perception. If any product proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding their safety or effectiveness, then our image in the marketplace would be negatively impacted.
Our results of operations may be significantly affected by the public’s perception of our Company and similar companies. Our products have not been approved by the FDA and have not been endorsed by any organization searching for cures for the diseases that we believe such products treat or prevent. Although the naturally occurring chemically unaltered products are not required to be approved by the FDA, many consumers only purchase FDA approved products. In addition, our business could be adversely affected if any of our products or similar products distributed by other companies proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding the safety or effectiveness of our products or any similar products. Our products contain vitamins, minerals, extracts from herbs and other ingredients that we regard as safe when taken as directed by us. While quality control testing is conducted on the ingredients in such products, we are highly dependent upon consumers' perception of the overall integrity of the dietary supplements business. The safety and quality of products made by competitors in our industry may not adhere to the same quality standards that ours do, and may result in a negative consumer perception of the entire industry. If our products suffer from negative consumer perception, it is likely our sales will slow and we will have difficultly generating revenues.
If the products we sell do not have the healthful effects intended, our business may suffer.
In general, our products sold consist of food, nutritional supplements which are classified in the United States as “dietary supplements” which do not currently require approval from the FDA or other regulatory agencies prior to sale. Although many of the ingredients in such products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, they contain innovative ingredients or combinations of ingredients. Although we believe all of such products and the combinations of ingredients in them are safe when taken as directed by the Company, there is little long-term experience with human or other animal consumption of certain of these ingredients or combinations thereof in concentrated form. The products could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects.
We are at risk for product liability claims and require adequate insurance to protect us against such claims. If we are unable to secure the necessary insurance coverage at affordable cost to protect our business against any claims, then our exposure to liability will greatly increase and our ability to market and sell our products will be more difficult since certain customers rely on this insurance in order to distribute our products .
We are at risk that consumers and users of our products will bring lawsuits alleging product liability. We are not aware of any claims pending against us, or our products that would adversely affect our business. While we will continue to attempt to take what we consider to be appropriate precautions, these precautions may not protect us from significant product liability exposure in the future. We currently pay an annual premium of $8,848 for product liability insurance with the following coverage limitations: $1,000,000 for bodily injury and property damage; $100,000 for damage to premises; and $1,000,000 per person for personal injury and advertising injury with an aggregate limit of $2,000,000. Any liability in excess of our $2,000,000 coverage limit will not be covered by our insurance and will have to be paid by us. There can be no assurance that we will be able to retain this coverage or that this coverage will be cost-justified or sufficient to satisfy any future claims. If we are sued, we may not have sufficient resources to defend against the suit or to pay damages. A material lawsuit could negatively impact our business.
The success of our business will depend upon our ability to create brand awareness.
The market for functional beverages and nutraceuticals is already highly competitive, with many well-known brands leading the industry. Our ability to compete effectively and generate revenue will be based upon our ability to create awareness of our products distinct from those of our competitors. It is imperative that we are able to convey to consumers the fact that our products are not just functional beverages but are also nutraceuticals. However, advertising and packaging and labeling of such products will be limited by various regulations. Our success will be dependent upon our ability to convey to consumers that our products are superior to those of our competitors.
We must continue to develop and introduce new products to succeed.
The functional beverage and nutritional supplement industry is subject to rapid change. New products are constantly introduced to the market. Our ability to remain competitive depends on our ability to enhance existing products, continue to develop and manufacture new products in a timely and cost effective manner, to accurately predict market transitions, and to effectively market our products. Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.
The success of new product introductions depends on various factors, including the following:
| ● | proper new product selection; |
| ● | successful sales and marketing efforts; |
| ● | timely delivery of new products; |
| ● | availability of raw materials; |
| ● | pricing of raw materials; |
| ● | regulatory allowance of the products; and |
| ● | customer acceptance of new products. |
We face challenges in developing new products, primarily with funding development costs and diversion of management time. On a regular basis, we evaluate opportunities to develop new products through product line extensions and product modifications. However, there is no assurance that we will successfully develop product line extensions or integrate newly developed products into our business. In addition, newly developed products may not contribute favorably to our operations and financial condition. Our failure to develop, or have developed on our behalf, and introduce new products on a timely basis would adversely affect our future operating results.
Our success is dependent upon our ability to protect and promote our proprietary rights.
If we are unable to protect our intellectual property rights, our ability to compete effectively would be harmed and we may never become profitable. We cannot be certain that the steps we have taken to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. Although we have entered into confidentiality agreements with our employees and consultants, there can be no assurance given that all such agreements can be enforced in a timely manner or that any such employees or consultants will not violate their respective agreements with us. There also can be no assurance given that the scope of our protection is broad enough to protect all of our interests or that it cannot be circumvented, that it will not violate the proprietary rights of others, or that we will not be prevented from using our products and trademarks if challenged. In fact, even if broad enough, others may still infringe upon our rights, which will be costly to protect. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend ourselves against claims.
The intellectual property that we possess is important to the manufacture and marketing of our products. This intellectual property includes ingredient formulas, trademarks, copyrights, patent, business processes and other trade secrets. We also have an exclusive license for the design patent for our flip-top cap compartment that is contained in each bottle and holds the nutraceutical capsules. The flip-top cap design is unique and allows our products to be effective by separating the drink from the nutraceutical, ensuring that the drink only acts as a catalyst when combined. See “Business — Intellectual Property and Trademarks” for more information. To date, we do not know of any other company that can combine a functional beverage and nutraceutical in a manner that allows for easy consumer use as is available with our products.
We have not paid, and do not intend to pay, cash dividends in the foreseeable future.
Payment of cash dividends is dependent upon our revenues and earnings, if any, capital requirements and our general financial conditions, as well as requirements for surplus under state law. At present, we are unable to pay any cash dividends to any shareholder and we do not intend to do so in the immediate future. We intend to reinvest any future earnings in developing and expanding our business.
A limited trading market currently exists for our securities and we cannot assure you that an active market will ever develop, or if developed, will be sustained.
There is currently a limited trading market for our securities on the pink sheets and the over-the-counter-market. We cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholders may have a substantial impact on any such market.
We may issue shares of preferred stock with greater rights than our common stock.
Our articles of incorporation authorize our board of directors to issue up to twenty five million shares of preferred stock in one or more series and determine the price for those shares without seeking any further approval from our stockholders, one hundred thousand of which have been designated as Series A Preferred Stock. In 2011 we created a class of Series B preferred stock that is convertible into a fixed % of our common stock. As of 12/31/2011 there were 86 shares of Series B outstanding that are convertible into 6.45% of the common stock or 13,728,318 shares. Further, under Colorado law, the board of directors may at its discretion, and without stockholder approval, create other series of preferred stock and set the other terms of the preferred stock. Any preferred stock such as our Series A Preferred Stock with respect to voting rights, that is issued may rank ahead of our common stock, in terms of dividends, liquidation rights and voting rights that could adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.
Our principal office is located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033. This space consists of approximately 15,000 square feet. The lease provides that it terminates on April 30, 2013 and our base rent expense is approximately $15,000 per month, which includes a base rent and excludes certain payments for operating expenses. We believe these facilities are adequate to serve our present needs.
| ITEM 3. | LEGAL PROCEEDINGS |
We are not a party to any material legal proceedings.
We may occasionally become subject to legal proceedings and claims that arise in the ordinary course of our business. It is impossible for us to predict with any certainty the outcome of pending disputes, and we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations.
| ITEM 4. | MINE SAFETY DISCLOSURES |
| ITEM 5. | MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERS |
Until January 13, 2011 our stock was traded solely on the pink sheets under the symbol DCBR. On January 13, 2011 our 15C211 form was approved by FINRA and our stock began trading on the OTC.BB exchange under the symbol DCBR
Per Share Common Stock Bid Prices by Quarter and Average Daily Trading Volume for each Quarter
For the Fiscal Year Ended on December 31, 2011 and 2010.
| | | High | | | Low | |
| Quarter Ended December 31, 2011 | | $ | 0.1000 | | | $ | 0.0020 | |
| Quarter Ended September 30, 2011 | | $ | 0.3800 | | | $ | 0.0310 | |
| Quarter Ended June 30, 2011 | | $ | 0.5000 | | | $ | 0.0500 | |
| Quarter Ended March 31, 2011 | | $ | 0.9000 | | | $ | 0.3400 | |
| | | | | | | | | |
| Quarter Ended December 31, 2010 | | $ | 1.0000 | | | $ | 0.3000 | |
| Quarter Ended September 30, 2010 | | $ | 1.0000 | | | $ | 0.5000 | |
| Quarter Ended June 30, 2010 | | $ | 1.5000 | | | $ | 0.8000 | |
| Quarter Ended March 31, 2010 | | $ | 2.3000 | | | $ | 0.8000 | |
Holders
As of December 31, 2011, there were approximately 284 holders of record of our common stock. As of December 31, 2011 we had 199,113,770 shares of common stock outstanding. The number of shares of the issuer’s common stock issued and outstanding as of March 30, 2012 was 484,965,209 shares. These numbers reflects a 10-1 reverse split that was effective July 28, 2011
Dividends
We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the Board of Directors may think are relevant. We do not anticipate having any earnings from which to pay dividends in the foreseeable future and currently intend to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Purchase of Equity Securities by the Small Business Issuer and Affiliated Purchasers
The Company issued common stock during the twelve months ended December 31, 2011, as set forth below. The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.
The Company issued 3,860,000 shares of common stock during the twelve months ended December 31, 2011, for settlement of warrant liability. The shares were valued at $386,000. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 5,988,137 shares of common stock during the twelve months ended December 31, 2011, related to services provided by vendors. The shares were valued at prices ranging from $0.80 to $0.003 per share. The shares were collectively valued at $1,321,572. These shares were issued to 30 vendors in exchange for services. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 158,757,855 shares of common stock on sixty different occasions during the twelve months ended December 31, 2011, upon partial conversion of four different notes.. The common stock was valued at $0.60 to $0.002 per share. The shares were collectively valued at $4,031,475. These securities were issued under Section 3(a)(9) of the Securities Act of 1933 .
The Company issued 305,000 shares of common stock during the twelve months ended December 31, 2011, related to the issuance of debt. The shares were valued from $0.80 to $0.50 per share and collectively valued at $192,500. These were issued in conjunction with three notes with a principal amount of $205,000. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
In January 2012 we raised $250,000 from the sale of one unit from our current offering. The unit consisted of a promissory note and 20 shares of Series B preferred that are convertible into 1 ½% of the common shares of the company. These issuances of securities qualified for exemption under Regulation D promulagated under the Securities Act of 1933 and Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
Series A Preferred Stock
The Series A Preferred Stock votes together with the common stock as a single class and the holders of the Series A Preferred Stock are entitled to such number of votes as shall equal 51.25% of the number of votes that may be cast by the outstanding shares of common stock. The Series A Preferred Stock is not convertible into common stock and does not carry any redemption features.
Series B Preferred Stock
The company issued 86 shares of Series B preferred stock in 2011. These shares were issued in conjunction with the issuance of $1,075,000 of debt. The 86 shares of Series B preferred can be converted into 6.45% of the common stock of the company. As of 12/31/2011 the company would need to issue 13,728,318 of common shares if all of the Series B preferred was converted.
| ITEM 6. | SELECTED FINANCIAL DATA |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
Financial Operations Overview
In 2009 we began sales of our H.A.R.D. Nutrition Functional Water System. From our inception to December 31, 2011, we had incurred an accumulated deficit of $87,413,416. Our accumulated deficit through December 31, 2011 is primarily attributable to our issuance of stock compensation.
Since inception, we have primarily financed our operations from the sale of common stock and debt. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements for the next few months. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital and if we do not have adequate working capital we may need to raise additional funds, whether through a stock offering or otherwise.
We have entered into an accounts receivable factoring agreement with Liquid Capital pursuant to which we have agreed to sell and Liquid Capital has agreed to purchase certain of the accounts arising from the sale of our products. Liquid Capital in its sole discretion may advance up to 80% of the face amount of the accounts purchased less an applicable discount fee up to a maximum of $75,000. In order to secure our payment of all our indebtedness and obligations to Liquid Capital, we granted Liquid Capital a security interest and lien upon our accounts and our other assets. The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement. There can be no assurance that the funds derived from this arrangement will be sufficient to meet our needs. Subsequent to year-end we entered into a $10 million equity funding facility with Centurion Private Equity, LLC. This facility gives us the right to sell shares of our common stock to Southridge at a price determined by the current market. These sales are limited by our trading volume and price limitations determined by the Company and there can be no assurance that we will be able to use such facility.
Results of Operations
Year ended December 31, 2011 Compared to year ended December 31, 2010
Revenue- During the year ended December 31, 2011 we generated revenue of $328,701, a substantial portion of which is attributable to the sale of our H.A.R.D, Nutrition Functional Water System which commenced in August 2009. This represented an approximate 46% decrease from the prior year. This decrease was principally due to the complete elimination of advertising in 2011 except for the November test of our new long form infomercial. During the same period of 2010, we had revenue of $605,493. Our gross margin increased from $133,915 for the year ended December 31, 2010 to $139,798 for the year ended December 31, 2010. The improvement in our COGS in 2011 vs. 2010 was created by several factors: The reduction in sales reduced the related shipping costs associated with production and delivery of our product, in 2011 the amount of product that was written off due to spoilage was greatly reduced and the salvaging of the pill packs, which have a two year shelf life vs. the one yr shelf life of the drink increased these savings. These reductions were partially offset by the allocation of salaries to the production costs of the dry products on the HARD Nutrition side of the company.
Sales of our H.A.R.D, Nutrition Functional Water System and H.A.R.D. Nutrition supplement accounted for 83% and 17% respectively of our revenue for the year ended December 31, 2011. At least 60% of our sales of our H.A.R.D. Nutrition Functional Water System were attributed to indirect sales to King Soopers.
Expenses- Our total operating expenses for the year ended December 31, 2011 was $5,079,955 as compared to $5,174,524 for the year ended December 31, 2010.
General and administrative expenses were $3,151,663 and $3,860,941 for the years ended December 31, 2011 and December 31, 2010, respectively and included salaries, travel expenses, legal, accounting and other professional fees and occupancy related expenses. The majority of this decrease was due to the decreased professional, legal and audit fees since we no longer incurred fees related to our preparation and filing of a registration statement on Form S-1 and a Form 15-C-211 filing. Included in general and administrative expenses was stock based compensation expenses for services provided to vendors and employees of $125,973 and $1,156,440 for the year ended December 31, 2011 and 2010, respectively. The remaining general and administrative expenses $3,025,870 and $2,704,501 for the years ended December 31, 2011 and 2010, respectively included $1,434,668 and $1,243,910 for salaries, $110,963 and $203,519 for travel expenses, $1,204,051 and $952,748 for legal accounting and other professional expenses and $166,814 and $215,627 33 for occupancy related expenses.
Sales and marketing which consisted of advertising and other promotional expenses increased when comparing 2011 and 2010. Sales and marketing expenses were $1,842,391 and $1,227,890 for the years ended December 31, 2010 and December 31, 2011, respectively and included stock based compensation for services provided by vendors and employees of $294,302 and $357,068 for the years ended December 31, 2011 and 2010, respectively. The remaining sales and marketing expenses, $1,548,089 and $870,822 for the years ended December 31, 2011 and 2010, respectively included $584,429 and $586,828, respectively for advertising including over $500,000 spent on the production of our long form infomercial.
Interest expense decreased by approximately 95% from 2011 to 2010 because of the interest expense related to warrant liability which changed from an expense of $1,855,400 in 2010 to income of $1,063,800 in. The loss on retirement of debt increased 30% from 2010 to 2011 due to increased conversions of debt into equity.
Net loss for the year ended December 31, 2011 decreased by approximately 26% to $7,383,739 as compared to $10,018,412 for the period ended December 31, 2010 and was primarily attributable to the decrease in interest expense related to warrants.
Liquidity and Capital Resources
Revenues
At December 31, 2011 we had cash and cash equivalents of $15,939 as compared to $23,234 at December 31, 2010. Our working capital deficit at December 31, 2011 was $5,485,147 and at December 31, 2010 was $3,705,277.
For the twelve months ended December 31, 2011 our cash used in operating activities was $2,540,938. Our primary sources and uses of cash from operating activities for the period were losses from operations, excluding common stock issued for services, loss on retirement of debt and depreciation and amortization of $4,531,496 plus a deferral of $776,177 in salaries and royalties payable to our officers offset by a decrease in warrant liability of $1,063,800.
Net cash used in investing activities for the twelve months ended December 31, 2011 was $0.
Net cash provided by financing activities for the twelve months ended December 31, 2011 was $2,533,643 which included $2,582,500 from the issuance of notes.
At December 31, 2011 we had cash and cash equivalents of $15,935 as compared to $23,234 at December 31, 2010. Our working capital deficit at December 31, 2011 was $5,485,147 and at December 31, 2010 was $3,75,277.
For the twelve months ended December 31, 2011 our cash used in operating activities was $3,705,275. Our primary sources and uses of cash from operating activities for the period were losses from operations..
Net cash provided by financing activities for the twelve months ended December 31, 2011 was $2,533,643.
Current and Future Financing Needs
We have incurred an accumulated deficit of $87,413,416 through December 31, 2011. We have incurred negative cash flow from operations since we started our business. At December 31, 2011, we had short term and long term debt of $6,683,153 We have no commitment for additional funding other than the factoring arrangement and the $10 million equity financing agreement that we have entered into. In addition, we have lease commitments of $206,832 and $69,260 for 2012 and 2013. We also have minimum salary commitments for compensation to our Chief Executive Officer and Executive Vice President in accordance with the terms of their employment agreements that range from $750,000 to $1,007,031, per year We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements for the next few months. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital and if we do not have adequate working capital we may need to raise additional funds, whether through a stock offering or otherwise.
We also have note payable commitments with respect to various notes payable issued to unaffiliated third parties who are accredited investors. A summary of notes payable as of December 31, 2011 is as follows: At December 31, 2011 we had 46 notes outstanding, of which ten notes or 9% of the aggregate principal balance were past due. To date, no demand for payment has been made. Three notes in the aggregate principal amount of $563,156 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $462,873 bearing interest at a rate of 15% are owed to 7 investors in our private placements are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $ $926,142 owed to four investors with a maturity date of July 1, 2013. These notes bear interest at a range from 6% to 16% per annum. Three of these notes with a total principal amount of $592,933 are callable by holder anytime after January 1, 2012 and were called in 2012. The $5 million revolving note with a principal outstanding balance as of December 31, 2011 of $1,278,270 bears interest at a rate of 10.25% per annum and matures on January 1, 2015. The revolving note can be converted into shares of common stock at 20% of the closing price of the stock on the day prior to conversion. During the year ended December 31, 2011, $1,035,000 was assigned to other lenders of which $271,253 is outstanding principle at the balance sheet date. The conversion rates for these assigned notes range from 50% - 70% of the average closing trade or bid price for the five to ten days prior to conversion; and others have a conversion rate the lower of a set dollar amount or 60 - 65% of the lowest two trade or bid prices for the 5-10 days prior to the conversion date.
We have 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16%. We have 6 notes payable with an aggregate principal balance of $1,077,000 originated in 2011 with a 24 month maturity bearing interest at 12%. 82 shares of Series B preferred stock was issued in conjunction with these notes. One of these 6 note holders with a principle balance of $125,000 has initiated a suit to collect past due interest and to call the note. We have one note payable originated in 2011that converted a payable overdue to one of our vendors. The note bears interest at 4% and has a maturity of 12/31/13. We have 2 notes payable originated in 2011 with an aggregate principal balance of $85,500 originated in 2011 with a 9 month maturity bearing interest at 8%. These notes are convertible into common stock after 6 months. We have one note payable originated in 2011 with an aggregate principal balance of $252,500 originated in 2011 with a maturity date of December 31, 2015 bearing interest at 4%. We have 1 note payable originated in 2011 with an aggregate principal balance of $60,000, bearing 4% interest, which matures in 2012 and carries a 15% redemption premium.
Related Party Notes
We have 1 note payable originated in 2011 with an aggregate principal balance of $326,000 due in 2012 bearing interest at 6%. This note is from Cut & Dried Productions, LLC a company that Richard Pearce, the CEO of DC Brands International, owns a majority of. One of the 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16% is due to Bob Armstrong, the CFO, in the amount of $5,000.We still have two notes with a principal balance of $1,650,840 that are related party payables owed to Richard Pearce and Jeremy Alcamo. They bear interest at a rate of 10% and are callable with 366 days notice which classifies them as long term debt. Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of a debt or equity financing or any combination thereof and our receipt of gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.
A summary of notes payable as of December 31, 2011 is as follows:
| | | Current | | | Long Term | | | Total | |
| 1 Note payable, originated in 2004, due in 2006, | | $ | 538,890 | | | $ | - | | | $ | 538,890 | |
| 6% interest rate, secured by assets of | | | | | | | | | | | | |
| DC Brands, LLC, a wholly owned subsidiary | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable originated in 2007, due in 2007, | | | 10,000 | | | | - | | | | 10,000 | |
| 36% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Notes payable originated in 2007, due in 2008, | | | 14,266 | | | | - | | | | 14,266 | |
| 24% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 7 Notes payable, originated in 2008, | | | 462,873 | | | | - | | | | 462,873 | |
| due at various dates from July to August | | | | | | | | | | | | |
| 2010, 15% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2010, due | | | 271,253 | | | | 1,007,017 | | | | 1,278,270 | |
| January 1, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 3 Notes payable, originated in 2010, due | | | 592,933 | | | | - | | | | 592,933 | |
| July 1, 2013, callable by Noteholders after | | | | | | | | | | | | |
| January 1, 2012, 6% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2010, due | | | - | | | | 333,209 | | | | 333,209 | |
| July 1, 2013, 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 12 Notes payable, originated in 2010 and 2011, due | | | - | | | | 1,078,333 | | | | 1,078,333 | |
| due at various dates from July 2013 to March 2014, | | | | | | | | | | | | |
| 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due | | | 94,767 | | | | - | | | | 94,767 | |
| Dec 31, 2013, 4% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2011, due to be | | | 750,000 | | | | 325,000 | | | | 1,075,000 | |
| repaid from a portion of gross sales beginning in | | | | | | | | | | | | |
| Feb 2012, 12% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2 Notes payable, originated in 2011, due | | | 85,500 | | | | - | | | | 85,500 | |
| Aug & Sept, 2012, 8% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due | | | | | | | 252,500 | | | | 252,500 | |
| Dec 31, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Notes payable, originated in 2011, due in 2012 | | | 60,000 | | | | - | | | | 60,000 | |
| 4% interest and a 15% redemption premium | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Notes payable, originated in 2011, due in 2012 | | | 326,000 | | | | - | | | | 326,000 | |
| 6% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 3,206,483 | | | | 2,996,059 | | | | 6,202,542 | |
| Unamortized discount | | | - | | | | (1,170,230 | ) | | | (1,170,230 | ) |
| | | | | | | | | | | | | |
| | | $ | 3,206,483 | | | $ | 1,825,829 | | | $ | 5,032,312 | |
| | | | | | | | | | | | | |
| Related party notes | | | | | | | | | | | | |
| 2 Notes payable, originated in 2010, callable | | $ | - | | | $ | 1,650,841 | | | $ | 1,650,841 | |
| with 366 day notice, 10% interest, unsecured | | | | | | | | | | | | |
A summary of notes payable as of December 31, 2010 is as follows:
A summary of notes payable as of December 31, 2010 is as follows: At December 31, 2010 we had 30 notes outstanding, twelve of the notes or 31% of the aggregate principal balance were either past due or due on demand. Two notes in the aggregate principal amount of $256,688 are non interest bearing and are due on demand. To date, no demand for payment has been made. Three notes in the aggregate principal amount of $566,261 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $462,873 bearing interest at a rate of 15% are owed to 7 investors in our private placements and payment was due between July and August 2010, $362,873 due on or before July 31, 2010, $100,000 due on or before August 31, 2010. Notes in the aggregate principal amount of $ $926,142 owed to four investors with a maturity date of July 1, 2013. These notes bear interest at a range from 6% to 16% per annum. Three of these notes with a total principal amount of $592,933 are callable by holder anytime after January 1, 2012. A total of 6,332,089 of new shares of common stock were issued to these four debt holders in connection with the debt restructuring. The $5 million revolving note with a principal outstanding balance as of December 31, 2010 of $1,893,708 was restructured on June 2010 such that it now bears interest at a rate of 10.25% per annum and matures on January 1, 2015. A warrant for the purchase of 25,000,000 shares of our common stock at an exercise price of $.01 was issued to this debt holder. The fair market value of this warrant, $1,750,000 was booked as additional paid in capital and as interest expense warrant liability. We also converted $1,650,840 of related party payables owed to Richard Pearce and Jeremy Alcamo into notes bearing interest at a rate of 10% that are callable with 366 days notice which classifies them as long term debt. Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of a debt or equity financing or any combination thereof and our receipt of gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.
Two notes in the aggregate principal amount of $15,251 bear interest at a rate of 11% and the principal amount outstanding is payable by June 30, 2011.
| | | | Current | | | Long Term | | | Total | |
| 1 | Note payable, originated in 2004, due in 2006, | | | 541,995 | | | | - | | | | 541,995 | |
| | 6% interest rate, secured by assets of | | | | | | | | | | | | |
| | DC Brands, LLC, a wholly owned subsidiary | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2005, due on demand, | | | 242,188 | | | | - | | | | 242,188 | |
| | non interest bearing, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2005, due on demand, | | | 14,500 | | | | - | | | | 14,500 | |
| | non interest bearing, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2007, due in 2007, | | | 10,000 | | | | - | | | | 10,000 | |
| | 36% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2007, due in 2008, | | | 14,266 | | | | - | | | | 14,266 | |
| | 24% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 7 | Notes payable, originated in 2008, | | | 462,873 | | | | - | | | | 462,873 | |
| | due at various dates from July to August | | | | | | | | | | | | |
| | 2010, 15% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable, originated in 2010, due | | | - | | | | 1,893,708 | | | | 1,893,708 | |
| | January 1, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 3 | Notes payable, originated in 2010, due | | | - | | | | 592,933 | | | | 592,933 | |
| | July 1, 2013, callable after January 1, 2012 | | | | | | | | | | | | |
| | 6% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable, originated in 2010, due | | | - | | | | 333,209 | | | | 333,209 | |
| | July 1, 2013, 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 9 | Notes payable, originated in 2010, due | | | - | | | | 773,333 | | | | 773,333 | |
| | due at various dates from July to September 2013, | | | | | | | | | | | | |
| | 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 2 | Notes payable, originated in 2007, due in | | | 15,252 | | | | - | | | | 15,252 | |
| | monthly installments, maturing 2011 to 2012, interest | | | | | | | | | | | | |
| | from 1.9% to 11%, secured by motor vehicles | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | 1,301,074 | | | | 3,593,183 | | | | 4,894,257 | |
| Unamortized discount | | | - | | | | (919,624 | ) | | | (919,624 | ) |
| | | | | | | | | | | | | | |
| | | | $ | 1,301,074 | | | $ | 2,673,559 | | | $ | 3,974,633 | |
| | | | | | | | | | | | | | |
| Related party notes | | | | | | | | | | | | |
| 2 | Notes payable, originated in 2010, callable | | $ | - | | | $ | 1,650,841 | | | $ | 1,650,841 | |
| | with 366 day notice, 10% interest, unsecured | | | | | | | | | | | | |
Our continued operations in the long term will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.
Southridge has committed to purchase up to $10 million of our common stock. From time to time during the term of the Equity Line, and at our sole discretion, we may present Southridge with a put notice requiring them to purchase shares of our common stock. The purchase price of the shares will be equal to ninety-two percent (92%) of the average of the two lowest closing bid prices for our common stock (the “Market Price”) during the five (5) trading day period beginning on the trading day immediately following the date Southridge receives our put notice. As a result, our existing shareholders will experience immediate dilution upon the purchase of any of the shares by Southridge. The issue and sale of the shares under the Equity Purchase Agreement may also have an adverse effect on the market price of the common shares. Southridge may resell some, if not all, of the shares that we issue to it under the Equity Purchase Agreement and such sales could cause the market price of the common stock to decline significantly. To the extent of any such decline, any subsequent puts would require us to issue and sell a greater number of shares to Southridge in exchange for each dollar of the put amount. Under these circumstances, our existing shareholders will experience greater dilution.
We have based our estimate on assumptions that may prove to be wrong. As previously stated, we may need to obtain additional funds in the next couple of months or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, other than the 10 million equity financing agreement that we signed in 2011, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.
Subsequent to the year ended, we raised an aggregate of $250,000 from one investor through the issuance of notes. The notes bear interest at a rate of 12% per annum and mature in 36 months. We also raised $244,500 in new debt from an existing debt holder.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. Management regularly reviews these estimates and judgments for impairment, valuation and other changes in estimate. Our critical account estimates are set forth below and have not changed during 2011. There were no changes to any estimates or judgments that had a material impact on the financial presentation.
The critical accounting policies affecting our financial reporting are summarized in Note 1 to the consolidated financial statements included in this prospectus. Policies involving the most significant judgments and estimates are summarized below.
Accounts Receivable
Our accounts receivable are unsecured, and we are at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. We sell products generally on net 30 day terms. We do not normally charge financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when we have exhausted all reasonable means of collection. We did not have an allowance for doubtful accounts at December 31, 2011, or December 31, 2010 as we deemed our accounts receivable all to be collectible.
Our method of determining the allowance for doubtful accounts and estimates used therein are subject to the risk of change if, in the future, our sales volume and type of customers would change.
As of December 31, 2011 and 2010, there were no past due receivables.
Fair Value of Financial Instruments
Effective May 1, 2008, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") on "Fair Value Measurements" for assets and liabilities measured at fair value on a recurring basis. This guidance establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of this guidance did not have an impact on our financial position or operating results, but did expand certain disclosures.
The FASB 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 at the measurement date. Additionally, the FASB requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
| Level 1: | Observable inputs such as quoted market prices in active markets for identical assets or liabilities. |
| Level 2: | Observable market-based inputs or unobservable inputs that are corroborated by market data |
| Level 3: | Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions. |
We did not have any Level 2 or Level 3 assets or liabilities as of December 31, 2011.
Cash and cash equivalents include money market securities and commercial paper and marketable securities representing certificates of deposits maturing in less than one year that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.
In addition, the FASB issued, "The Fair Value Option for Financial Assets and Financial Liabilities," effective for May 1, 2008. This guidance expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value option for any of our qualifying financial instruments, other than those subject to a recent acquisition.
Warrant Liability
The warrant liability is calculated using a Barrier Option Model with MonteCarlo Simulation from Global Derivatives.com. The current stock price, the stock volatility for the prior three months and the risk free rate (treasury bills) equal to the remaining term of the warrants are the inputs used in this valuation model. This model specifically addresses the fact that no additional shares of stock will need to be issued if our stock price hits the target (barrier) of $.50 or $.15. The stock volatility for any quarter is capped at 90% as volatilities greater than this produce an unreasonably low estimation of liability. This amount is adjusted quarterly based upon the changes in valuation provided by the model. There were no warrants outstanding as of December 31, 2011 as they had all expired or been paid off with the issuance of additional shares of common stock. The valuation model produced a $1,448,400 warrant liability as of December 31, 2010 respectively.
Equity-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. The FASB issued accounting guidance requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. This accounting guidance requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Recently Issued Accounting Standards
During the year ended December 31, 2011, there were several new accounting pronouncements issued by the FASB the most recent of which was Accounting Standards Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
Disclosure Controls and Procedures
The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Form 10-K, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Management conducted an assessment of the Company’s internal control over financial reporting based on the framework and criteria established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2011, the Company’s internal control over financial reporting is not effective based on those criteria. The COSO framework requires rigid adherence to control principles that require sufficient and adequately trained personnel to operate the control system. The Company has insufficient accounting personnel for it to be able to segregate duties as required by COSO. The Company does not have sufficient resources to maintain all the reference material required to ensure that Company personnel are properly advised and trained to prepare complete disclosures in its financial information and as a result must rely on its independent registered public accounting firm to assist in these matters. Management is considering adding additional accounting staff, but at the present time does not have the financial resources to make the commitment.
The Company’s management, including its Chief Executive Officer and Principal Financial Officer, does not expect that the Company’s disclosure controls and procedures and its internal control processes will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As a result of internal control weaknesses, there were eleven post closing accounting entries made to the books and records. These entries were discovered through the joint efforts of management and the auditors. In addition, certain disclosures were added to this filing to fulfill the COSO requirements and the requirements of Regulation S-X.
Changes in Internal Control
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
| ITEM 9B. | OTHER INFORMATION |
None.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive Officers
The following table sets forth the name of our executive officers and directors and the position held by each:
| Name | | Age | | Position |
| Richard Pearce | | | 50 | | President, Chief Executive Officer, and Chairman of the Board of Directors |
| Bob Armstrong | | | 50 | | Chief Financial Officer |
| Jeremy Alcamo | | | 38 | | Executive VP and Director serving on the Board |
| Wade Brantley | | | 53 | | Director of Investor Relations and Director serving on the Board |
| Robert Nikkel | | | 62 | | Chief Herbalist |
| Peter Papilion | | | 57 | | Director serving on the Board |
The background of our executive officers is as follows:
Richard Pearce, President, Chief Executive Officer and Chairman of the Board of Directors
Mr. Pearce has been our CEO since 2002. Prior to becoming CEO, Mr. Pearce was the founder of several business ventures including Bay Area Cash Registers in Tampa, Florida, Cash Graf, a COMDEX “Best In Show” software package that included accounting, database, appointment scheduling and word processing programs, a clothing line called Refuze 2 Luz, which was sold in hundreds of stores across the United States and ClearPath Inc. d/b/a ThermaProducts, Inc., the world’s first and only portable snow melting equipment.
Mr. Pearce has been associated with us for over 9 years and brings to the board extensive knowledge about our business operations. He also brings to the Board significant executive leadership and operational experience. Mr. Pearce’s prior business experience with other manufacturers of products, along with his tenure at our company, we believe gives him broad and extensive understanding of our operations and the proper role and function of the Board.
Bob Armstrong, Chief Financial Officer
Mr. Armstrong has been our Chief Financial Officer since May 3, 2010. Mr. Armstrong joined the Company from Three Palms, LLC where he spent eleven years as CFO. His responsibilities included all activities related to client administration, accounting and reporting for over 40 hedge funds. Prior to Three Palms, Mr. Armstrong spent ten years as an independent financial consultant advising small and rapidly growing companies in all aspects of financial management. His clients included companies in the telecommunications and food service industries. Mr. Armstrong also spent four years as Assistant Treasurer for Nu-West Industries, Inc., a publicly traded chemical fertilizer manufacturer. Mr. Armstrong began his career as an auditor with Deloitte & Touche in Denver. Mr. Armstrong received a B.S. in Business Administration from The Ohio State University in 1984.
Jeremy Alcamo, Executive VP. and Director
Mr. Alcamo officially joined the team in October of 2006. As Executive VP, he oversees operations. In this capacity, Mr. Alcamo assists in coordinating the manufacturing and shipping of the drinks in addition to the ordering and purchasing of point-of-sale materials. Prior to working at DC Brands, Mr. Alcamo worked for Colorado-based companies Avanti Petroleum; a franchisee of Total Petroleum convenience stores; and Palo Alto; a franchisee of Taco Bells, Pizza Huts and Kentucky Fried Chickens. He also worked with Richard Pearce previously at ThermaProducts, where he was responsible for the company’s accounting and product development. Mr. Alcamo is a graduate of Regis University and has a Bachelor’s degree in professional accounting and Business Administration.
Mr. Alcamo brings a strong business background to our company, having worked with various companies in the Colorado area. He brings significant financial and operational management, as well as financial reporting expertise to the Board.
Wade Brantley, Director of Investor Relations and Director
Mr. Brantley joined the Company in January, 2010. For the five years prior to joining the Company, Mr. Brantley was an Associate Vice President in Investments with Wells Fargo Financial Advisors. Mr. Brantley has over twenty five years of combined experience in the government and capital markets arenas. Mr. Brantley is the director of Investor Relations and responsible for shareholder communications and stock related issues, as well as monitoring the compliance and regulatory requirements applicable to DC Brands as a publicly traded entity.
Mr. Brantley received his Masters Degree from Drake University’s College of Business and Public Administration. He completed the Executive Certification for Investment Management Analyst through the Wharton School of Business and the Investment Management Consultants Association. His experiences include structuring debt and equity financing for public and private projects, and small business development. He has served as an elected official on the board of a special district, as well as an appointed executive director to a general improvement taxing district. Mr. Brantley has been appointed to several community based committees for development and planning of public facilities.
Mr. Brantley brings a strong business background to our company, having worked in the financial service industry for over twenty five years. His experiences have resulted in a broad understanding of the operational, financial and strategic issues facing public and private companies.
Robert Nikkel, Chief Herbalist
Mr. Nikkel has been with DC Brands, LLC, the company that we acquired in 2004, for the last ten years. He has been involved in the manufacture of pharmaceutical and herbal medicine since 1987. Mr. Nikkel concentrates his work on the use of Eastern medicine, specifically the concept of wellness based upon total lifestyle, for athletes in sports to perfect performance lifestyle and the supplements to support them. He has written over 300 formulas that are assets of the Company that include formulas to treat illness as well as formulas to increase athletic performance.
Peter Papilion , Director
Peter Papilion has been a director since November, 2005. From 1998 until the present he has been a director of Global Sourcing with G&G Outfitters, Inc., a global company engaged in the sale of promotional items worldwide. His responsibilities include sourcing production facilities worldwide for branded merchandise and OEM products.
Mr. Papillion brings significant knowledge and experience to the Board. He has significant experience in marketing and promotional activities. His extensive management experience is an important aspect of his service on this Board.
Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting of shareholders following their election. To date, none of our directors have received any compensation from us, whether in the form of cash or securities, for their service as directors. Peter Papillion is our only independent director serving on our Board of Directors.
Directors’ Term of Office
Directors will hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board of directors.
Audit Committee
Our board of directors currently serves as our audit committee. The audit committee is responsible for recommending independent auditors and reviewing management actions in matters relating to audit functions. The committee reviews, with independent auditors, the scope and results of its audit engagement, the system of internal controls and procedures and reviews the effectiveness of procedures intended to prevent violations of laws.
The audit committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and the auditors prior to filing of officers’ certifications with the SEC to receive information concerning, among other things, significant deficiencies in the design or operation of internal controls.
None of our board members other than Peter Papillion are “independent” in accordance with rule 4200(a)(14) of the Nasdaq Marketplace Rules. Our board of directors does not have an “audit committee financial expert,” within the meaning of that phrase under applicable regulations of the Securities and Exchange Commission, serving on the audit committee. The board of directors believes that each member is financially literate and experienced in business matters and is capable of (1) understanding generally accepted accounting principles (“GAAP”) and financial statements, (2) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (3) analyzing and evaluating our financial statements, (4) understanding our internal controls and procedures for financial reporting, and (5) understanding audit committee functions, all of which are attributes of an audit committee financial expert. However, the board of directors believes that no audit committee member has obtained these attributes through the experience specified in the SEC's definition of “audit committee financial expert.” Further, as is the case with many small companies, it would be difficult for us to attract and retain board members who qualify as “audit committee financial experts,” and competition for such individuals is significant. The board of directors believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated “audit committee financial expert.”
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who beneficially own more than 10 percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s common stock. Such officers, directors and persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file with the SEC.
Based solely on a review of the copies of such forms that were received by the Company, or written representations from certain reporting persons that no Form 5s were required for those persons, the Company is not aware of any failures to file reports or report transactions in a timely manner during the Company’s fiscal year ended December 31, 2010.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller. Such code of ethics is posted on the Company’s internet website, which is located at www.hardnutrition.com.
ITEM 11. EXECUTIVE COMPENSATION
During the year ended December 31, 2011 and 2010 we did not issue any options or shares of restricted stock to any named officers or directors in connection with their employment or service to the Company and there are no outstanding equity awards as of December 31, 2011 or 2010.
Executive Compensation
The following table sets forth all compensation awarded, earned or paid for services rendered to our executive officers that exceeded $100,000 during each of the fiscal years ended December 31, 2010 and 2009.
Summary Compensation Table
| Name and | Year | | Salary | | | Bonus | | | Option | | Stock | | All Other | | | Total | |
| Principal | (b) | | ($)(c) | | | ($)(d) | | | Awards | | Awards | | Compensation | | | ($)(i) | |
| Position | | | | | | | | | ($)(f) | | ($)(g) | | ($)(h) | | | | |
| (a) | | | | | | | | | | | | | | | | | |
| | | | | (1)(2) | | | | | | | | | | | (3) | | | | |
| Richard Pearce, | 2011 | | | 725,000 | | | | - | | | | - | | | | | 5,027 | | | | 730,027 | |
| President & CEO | 2010 | | | 625,000 | | | | - | | | | - | | | | | 4,867 | | | | 629,867 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Jeremy Alcamo | 2011 | | | 129,167 | | | | - | | | | - | | | | | - | | | | 129,167 | |
| Executive Vice President | 2010 | | | 125,000 | | | | - | | | | - | | | | | - | | | | 125,000 | |
(2) Salary shown in the table represents salary earned by Mr. Alcamo. Mr. Alcamo deferred salary of $71,134 and $71,646 in 2011 and 2010, respectively.
(3) Consists of expenses to provide Mr. Pearce an automobile.
Employment Agreements
On October 1, 2004, we entered into a ten year Employment Agreement with Richard Pearce which expires in October 2014. The Employment Agreement appoints Mr. Pearce as our President and Chief Executive Officer and requires that Mr. Pearce devote his full time to the business of the Company in exchange for compensation increasing from a base salary of $250,000 for the first year to $1,000,000 the tenth year of the term of the Employment Agreement. The agreement also provides that so long as Mr. Pearce is serving as our President and Chief Executive Officer that he is to also serve as one of our directors. Mr. Pearce is entitled to a life insurance policy at our expense, of which we are a 50% beneficiary and a person designated by him is the other 50% beneficiary. To date, such policy has not been purchased. Upon execution of the agreement, Mr. Pearce was issued 100,000 shares of our Series A Preferred Stock which entitled Mr. Pearce to such number of votes as shall equal 56.25% of the voting power of our outstanding stock; however subsequent to the issuance Mr. Pearce exchanged 5% of his voting power for 40,000,000 shares of common stock. Mr. Pearce now holds 91,111 shares of Series A Preferred Stock that have the right to vote 51.25% of the outstanding voting shares. The agreement is subject to termination without cause upon the vote of three quarters of the shareholders and board and with cause upon the determination of an arbitrator and only after Mr. Pearce has been notified at least three times of his breach. In the event of a termination with or without cause, Mr. Pearce is entitled at his option to be paid in full the current value of all monies and other forms of compensation owed, at that time, under the employment agreement throughout its then remaining term or to the same on a periodic basis (consistent with whatever periodic payments are owed as of that time). Cause is defined as willful and malicious misappropriation of customer assets for personal gain to Mr. Pearce, willful and flagrant disregard of reasonable written instructions of the board of directors involving those consistent with Mr. Pearce’s position and title as determined by an independent professional arbitrator and only after not less than 3 written notices from the Chairman of the Board to follow the policies and procedures of the board of directors. We may also suffer treble damages if we attempt to remove Mr. Pearce from office by threat of actual litigation which does not meet the criteria for cause.
On May 1, 2010, we entered into a three year employment agreement with Jeremy Alcamo. The Employment Agreement appoints Mr. Alcamo as our Executive Vice President and requires that Mr. Alcamo devote the time he deems necessary to the performance of the business of the Company in exchange for an annual salary of $125,000 subject to increases each year which shall be at least 5% per year. The Company has the right to terminate the Employment Agreement upon Mr. Alcamo’s death or disability or for cause as defined in the agreement. Mr. Alcamo has the right to terminate the Employment Agreement for good reason as defined in the agreement which includes a material breach by the Company and a change of control. In the event of a termination by Mr. Alcamo for good reason, or by the Company without cause, Mr. Alcamo is entitled to receive his monthly salary for an additional six months in addition to any accrued bonus, vacation pay and expense reimbursement.
We currently maintain no other agreements for employment with any of our other executive officers or employees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We determine beneficial ownership based on the rules of the Securities and Exchange Commission. In general, beneficial ownership includes shares over which a person has sole or shared voting or investment power and shares which the person has the right to acquire within 60 days. Unless otherwise indicated, the persons listed below have sole voting and investment power over the shares beneficially owned. As of December 31, 2011 we had 199,113,770 shares of common stock outstanding.
| Name and Address of Beneficial Owner | | Shares Beneficially Owned (1) | | | Percentage of Class | |
| Richard Pearce(2) | | | 213,104,642 | | | | 52.02 | % |
| Bob Armstrong | | | 473,049 | | | | * | |
| Jeremy Alcamo | | | 72,500 | | | | * | |
| | | | | | | | | |
| Peter Papilion | | | 4,500 | | | | * | |
| Wade Brantley | | | 84,500 | | | | * | |
| Robert Nikkel | | | 25,000 | | | | * | |
| | | | | | | | | |
| All executive officers and directors as a group (seven persons) | | | 213,764,190 | | | | 52.18 | % |
| Scott Allen Richter (3) | | | 27,546,182 | | | | 6.72 | % |
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding, including for purposes of computing the percentage ownership of the person holding such option, warrant or convertible security, but not for purposes of computing the percentage of any other holder.
(2) Includes 1,226,327 shares that Mr. Pearce has the right to purchase in accordance with the terms of his Employment Agreement. Excludes 91,111 shares of Series A Preferred Stock that Mr. Pearce owns that allows him the right to vote 51.25% of the outstanding voting stock or 209,328,315 votes.
(3) The share ownership by Mr. Richter is based upon transfer agent records provided as December 2012 and has not been further verified.
All common shares have been retroactively adjusted for the 10 for 1 reverse stock split authorized by the board on June 27, 2011 and effective July 28, 2011.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The Company had related party payables of $1,413,569 and $637,392 at December 31, 2011 and 2010, respectively consisting primarily of deferred salaries payable and royalties payable to its officers. Of the $1,413,569 of related party payables, $1,259,129 was owed to Mr. Pearce ($1,248,399 for deferred salary payable and $11,194 for royalties owed in accordance with the bottle cap license agreement) and $153,974 was owed to Mr. Alcamo ($142,780 for deferred salary payable and $11,194 for royalties owed in accordance with the bottle cap license agreement). Richard Pearce, our Chief Executive Officer, and Jeremy J Alcamo, our Executive Vice President, have received a design patent in the United States (US D 576,877S) for the flip-top compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap. The royalty agreement with Richard Pearce and Jeremy Alcamo is for a term of five years and is renewable by the Company for five additional one year terms and provides that they are entitled to receive 5 cents per cap or 2 1/2 cents each for each bottle cap sold. The bottle cap is a specialized cap that contains the vitamin supplements in the Company’s functional water system. The agreement may be immediately terminated upon the occurrence of: (i) a default in payments due thereunder if the default has continued for ten days after notice of the default was given; (ii) upon a party’s insolvency, assignment for the benefit of creditors of filing of a bankruptcy petition; or (iii) a party’s refusal or failure to perform an obligation under the agreement if such default is not cured within ten days of notice thereof. The related party payables are non-interest bearing and due on demand. We have 1 note payable originated in 2011 with an aggregate principal balance of $326,000 due in 2012 bearing interest at 6%. This note is from Cut & Dried Productions, LLC a company that Richard Pearce, the CEO of DC Brands International, owns a majority of. One of the 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16% is due to Bob Armstrong, the C.F.O. in the amount of $5,000.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Aggregate fees including expenses billed to us for the years ended December 31, 2011 and 2010, for professional services performed by Turner, Stone and Company were as follows:
| | | 2011 | | | 2010 | |
| | | | | | | |
| Audit Fees and Expenses | | $ | 48,650 | | | $ | 123,875 | |
| Audit-Related Fees | | | | | | | | |
| Tax Fees | | | - | | | | 24,000 | |
| All Other Fees | | | - | | | | | |
| Total | | $ | 48,650 | | | $ | 147,875 | |
(a) Financial Statements
1. These financial statements are set forth in Item 8.
2. No financial statement schedules are required.
(b) Reports on Form 8-K
There are no Reports on Form 8-K
(c) Exhibits
Exhibit Number | | Description |
| 3.1 | | Articles of Incorporation filed on April 29, 1998(1) |
| 3.2 | | By-Laws(1) |
| 3.3 | | Articles of Amendment filed on August 23, 2004(1) |
| 3.4 | | Articles of Amendment filed on December 3, 2004 (1) |
| 3.5 | | Articles of Amendment filed on January 31, 2006 (1) |
| 3.6 | | Certificate of Designations for Series A Preferred Stock filed on May 21, 2007 (1) |
| 3.7 | | Articles of Amendment filed on August 31, 2007 (1) |
| 3.8 | | Certificate of Correction to Certificate of Designations(1) |
| 3.9 | | Form of Warrant for purchase of up to 4,000,000 shares of common stock (2) |
| 3.10 | | Form of Warrant for purchase of up to 2,000,000 shares of common stock(2) |
| 3.11 | | Articles of Amendment filed July 9, 2010(3) |
| 3.12 | | Articles of Amendment filed July 12, 2011 (4) |
| 3.13 | | Certificate of Designations for Series B Preferred Stock (5) |
| 5.1 | | Opinion of Gracin & Marlow, LLP* |
| 10.1 | | License Agreement (1) |
| **10.2 | | Employment Agreement dated October 1, 2004 between DC Brands International, Inc. and Richard Pearce (1) |
| **10.3 | | Exchange Agreement dated June 8, 2007 between Richard Pearce and DC Brands International, Inc. (1) |
| **10.4 | | Exchange Agreement dated March 24, 2008 between Richard Pearce and DC Brands International, Inc.(1) |
| **10.5 | | Employment Agreement dated May 1,2010 between DC Brands International, Inc and Jeremy Alcamo(1) |
| 10.6 | | Endorsement Agreement dated October 21, 2009 between DC Brands International, Inc and Chris Andersen(2) |
| 10.7 | | Sales Representative Contract dated March 15,2 010 between Acosta, Inc. and DC Brands International, Inc.(1) |
| 10.8 | | Purchase and Sale Agreement dated as of June 4, 2010 between Liquid Capital Exchange, Inc. and DC Brands International, Inc.(1) |
| 10.9 | | Investment Agreement, dated January 31, 2011, by and between the Company and Centurion Private Equity, LLC (6) |
| 10.10 | | Registration Rights Agreement, dated January 31, 2011, by and between the Company and Centurion Private Equity, LLC (6) |
| 10.11 | | Equity Purchase Agreement, dated July 8, 2011, by and between the Company and Southridge Partners II, LP (7) |
| 10.12 | | Registration Rights Agreement, dated July 8, 2011, by and between the Company and Southridge Partners II, LP (7) |
| 14 | | Code of Conduct * |
| 21 | | List of Subsidiaries* |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) * |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)* |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002. * |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002. * |
| | | |
| ***+101.INS | | XBRL Instance Document |
| ***+101.SCH | | XBRL Taxonomy Extension Schema Document |
| ***+101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| ***+101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| ***+101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| ***+101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | |
| (1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 10, 2010. |
| |
| (2) Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on June 22, 2010. |
| |
| (3) Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 14, 2010. |
| |
| (4) Incorporated by reference to the Company’s Information Statement on Schedule DEF 14C filed with the Securities and Exchange Commission on July 7, 2011. |
| |
| (5) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 filed with the Securities and Exchange Commission on November 14, 2011. |
| |
| (6) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2011. |
| |
| (7) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2011. |
| * Filed herewith. |
| **Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report |
| *** As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
DC BRANDS INTERNATIONAL, INC.
Consolidated Financial Statements
And
Report of Independent Registered Public Accounting Firm
December 31, 2011 and 2010
Board of Directors and Stockholders
DC Brands International, Inc. and subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheets of DC Brands International, Inc. and subsidiaries, (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of DC Brands International, Inc. and subsidiaries at December 31, 2011 and 2010, and the results of their consolidated operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses, negative cash flows from operations and had negative working capital at December 31, 2011 and 2010, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/s/ Turner, Stone & Company, L.L.P.
Certified Public Accountants
Dallas, Texas
March 30, 2012
DC BRANDS INTERNATIONAL, INC.
Consolidated Financial Statements
As of December 31, 2011 and 2010
DC Brands International, Inc.
Consolidated Balance Sheets
As of December 31
| | | 2011 | | | 2010 | |
| | | | | | | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | | 15,939 | | | $ | 23,234 | |
| Accounts receivable | | | 29,843 | | | | 72,857 | |
| Inventory | | | 161,011 | | | | 305,307 | |
| Total current assets | | | 206,793 | | | | 401,398 | |
| | | | | | | | | |
| Property and equipment, net | | | 18,390 | | | | 109,418 | |
| | | | | | | | | |
| Total assets | | | 225,183 | | | $ | 510,816 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | | 207,931 | | | $ | 388,447 | |
| Accrued interest payable | | | 863,320 | | | | 330,723 | |
| Accrued liabilities | | | 637 | | | | 637 | |
| Related party payable | | | 1,413,569 | | | | 637,392 | |
| Warrant liability | | | - | | | | 1,448,400 | |
| Short-term notes payable and current portion of long-term debt | | | 3,206,483 | | | | 1,301,074 | |
| Total current liabilities | | | 5,691,940 | | | | 4,106,673 | |
| Long-term debt to related party | | | 1,650,841 | | | | 1,650,841 | |
| Long-term debt (Net of Unamortized Discount of $1,142,285 in 2011 and $919,624 in 2010) | | | 1,825,829 | | | | 2,673,559 | |
| Total liabilities | | | 9,168,610 | | | | 8,431,073 | |
| | | | | | | | | |
| Stockholders' deficit | | | | | | | | |
| Preferred Stock, $0.001 par value; 25,000,000 shares authorized | | | | | | | | |
| Series A Preferred Stock, 100,000 shares authorized; shares issued | | | | | |
| and outstanding - 91,111 shares in 2011 and 2010 | | | 91 | | | | 91 | |
| Series B Preferred Stock, 2,500 shares authorized; shares issued | | | | | | | | |
| and outstanding - 86 shares in 2011 and 0 shares in 2010 | | | - | | | | - | |
| Common Stock, $0.001 par value; 500,000,000 | | | | | | | | |
| shares authorized; shares issued and outstanding | | | | | | | | |
| - 199,113,770 in 2011 and 30,216,778 in 2010 | | | 199,114 | | | | 30,217 | |
| Additional paid in capital | | | 78,270,784 | | | | 72,237,889 | |
| Issuances in exchange for promotional consideration | | | - | | | | (158,776 | ) |
| Accumulated deficit | | | (87,413,416 | ) | | | (80,029,677 | ) |
| Total stockholders' deficit | | | (8,943,427 | ) | | | (7,920,257 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | | 225,183 | | | $ | 510,816 | |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
DC Brands International, Inc.
Consolidated Statements of Operations
For the Twelve Months Ended December 31
| | | 2011 | | | 2010 | |
| Net Revenues | | $ | 328,701 | | | $ | 605,493 | |
| Cost of goods sold | | | 188,904 | | | | 471,578 | |
| Gross margin | | | 139,798 | | | | 133,915 | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| General and administrative (includes share based compensation of $125,793 in 2011 and $1,156,440 in 2010) | | | 3,151,663 | | | | 3,860,742 | |
| Sales and marketing (includes share based compensation of $294,302 in 2011 and $357,068 in 2010) | | | 1,842,391 | | | | 1,227,890 | |
| Depreciation and amortization | | | 85,901 | | | | 85,892 | |
| Total operating expenses | | | 5,079,955 | | | | 5,174,524 | |
| Loss from operations | | | (4,940,157 | ) | | | (5,040,608 | ) |
| | | | | | | | | |
| Other Expense (Income) | | | | | | | | |
| Interest expense | | | 1,282,797 | | | | 1,206,715 | |
| Interest (income) expense - warrant liability | | | (1,063,800 | ) | | | 1,855,400 | |
| Loss on retirement of debt | | | 2,481,273 | | | | 1,915,697 | |
| Gain on extinguishment of debt | | | (256,688 | ) | | | - | |
| Total other expense (income) | | | 2,443,582 | | | | 4,977,812 | |
| | | | | | | | | |
| Net Loss | | $ | (7,383,739 | ) | | $ | (10,018,420 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding | | | 50,133,338 | | | | 25,186,875 | |
| | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (0.15 | ) | | $ | (0.40 | ) |
The accompanying notes are an integral part of these financial statements.
DC Brands International, Inc.
Consolidated Statements of Cash Flows
For the Twelve Months Ended December 31
| | | 2011 | | | 2010 | |
| Cash used in operating activities | | | | | | |
| Net loss | | $ | (7,383,739 | ) | | $ | (10,018,420 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| used in operating activities: | | | | | | | | |
| Depreciation and amortization | | | 85,901 | | | | 85,892 | |
| Common stock issued for services | | | 1,445,348 | | | | 1,653,508 | |
| Debt Issued for services | | | 60,000 | | | | - | |
| Loss on retirement of debt | | | 2,481,570 | | | | 1,915,697 | |
| Extinguishment of debt | | | (256,688 | ) | | | - | |
| Amortization of debt discount | | | 458,677 | | | | 562,884 | |
| Loss on sale of property and equipment | | | 5,127 | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 43,014 | | | | 112,250 | |
| Inventory | | | 144,296 | | | | 59,684 | |
| Prepaid expense | | | | | | | 7,423 | |
| Accounts payable | | | (85,747 | ) | | | (184,761 | ) |
| Accrued interest payable | | | 748,926 | | | | 124,392 | |
| Accrued liabilities | | | - | | | | (6,665 | ) |
| Related party payable | | | 776,177 | | | | 628,956 | |
| Warrant liability | | | (1,063,800 | ) | | | 1,855,400 | |
| Net cash used in operating activities | | $ | (2,540,938 | ) | | $ | (3,203,760 | ) |
| Cash used in investing activities | | | | | | | | |
| Purchase of property and equipment | | | - | | | | (28,703 | ) |
| Net cash used in investing activities | | $ | - | | | $ | (28,703 | ) |
| Cash provided by financing activities | | | | | | | | |
| Proceeds from issuance of common stock | | | - | | | | 576,500 | |
| Interest accruals paid with stock | | | | | | | 272,967 | |
| Proceeds from notes payable | | | 2,582,500 | | | | 2,531,500 | |
| Payment on notes payable | | | (48,857 | ) | | | (206,632 | ) |
| Net cash provided by financing activities | | $ | 2,533,643 | | | $ | 3,174,335 | |
| Net decrease in cash and cash equivalents | | $ | (7,295 | ) | | $ | (58,128 | ) |
| Cash and cash equivalents | | | | | | | | |
| Beginning of year | | | 23,234 | | | | 81,362 | |
| End of year | | $ | 15,939 | | | $ | 23,234 | |
| | | | | | | | | |
| Supplemental Disclosure of Noncash | | | | | | | | |
| Investing and Financing Activities | | | | | | | | |
| Common stock issued for retirement of debt and accrued interest | | $ | 3,921,338 | | | $ | 3,415,905 | |
| Common stock issued for warrants | | $ | 384,600 | | | | | |
| Discount on common and preferred stock | | $ | 709,283 | | | | | |
| Accrued interest converted to common stock | | $ | 216,329 | | | | | |
| Notes payable converted to common stock | | $ | 2,258,436 | | | $ | 1,270,750 | |
| Addition to notes payable | | $ | 100,000 | | | | | |
| Reclassification from accounts payable to notes payable | | $ | 94,767 | | | | | |
| Preferred stock issued as incentive for debt | | $ | 416,783 | | | | | |
| Common stock issued as incentive for debt | | $ | 192,500 | | | $ | 1,373,900 | |
| Accrued interest refinanced into new note payable | | | | | | $ | 200,357 | |
| Notes payable refinanced | | | | | | $ | 2,341,338 | |
| Debt forgiven for warrant exercise | | | | | | $ | 250,000 | |
| Related party advance converted to notes payable | | | | | | $ | 1,650,841 | |
| Wattants issued as incentive to debt holder | | | | | | $ | 1,750,000 | |
| Supplemental Disclosure | | | | | | | | |
| Interest paid | | $ | 74,895 | | | $ | 117,689 | |
The accompanying notes are an integral part of these financial statements.
DC Brands International, Inc.
Consolidated Statements of Stockholders’ Deficit
For the Twelve Months Ended December 31
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Series A Preferred Stock | | | Series B Preferred Stock | | | Common Stock | | | Additional Paid in | | | Additional | | | Accumulated | | | Total Stockholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Issuances | | | Deficit | | | Deficit | |
| Balance, December 31, 2009, as previously reported | | | 91,111 | | | $ | 91 | | | | | | | | | | 201,569,720 | | | $ | 201,570 | | | $ | 63,283,790 | | | $ | (375,844 | ) | | $ | (70,011,257 | ) | | $ | (6,901,650 | ) |
| Effect of retroactive stock split (Note 7) | | | - | | | | - | | | | - | | | | - | | | | (181,412,748 | ) | | | (181,413 | ) | | | 181,413 | | | | - | | | | - | | | | - | |
| Balance December 31, 2009, as restated | | | 91,111 | | | | 91 | | | | | | | | | | | | 20,156,972 | | | | 20,157 | | | | 63,465,203 | | | | (375,844 | ) | | | (70,011,257 | ) | | | (6,901,650 | ) |
| Common stock issued in exchange for cash | | | | | | | | | | | | | | | | | | | 913,000 | | | | 913 | | | | 575,587 | | | | | | | | | | | | 576,500 | |
| Common stock issued in exchange for services | | | | | | | | | | | | | | | | | | | 1,417,089 | | | | 1,417 | | | | 1,295,023 | | | | 217,068 | | | | | | | | 1,513,508 | |
| Common stock issued in exchange for retirement of debt | | | | | | | | | | | | | | | | | | | 3,423,175 | | | | 3,423 | | | | 3,412,482 | | | | | | | | | | | | 3,415,905 | |
| Warrants issued as incentive to debt holder | | | | | | | | | | | | | | | | | | | 2,500,000 | | | | 2,500 | | | | 1,997,500 | | | | | | | | | | | | 2,000,000 | |
| Common Stock issued on exercise of warrant | | | | | | | | | | | | | | | | | | | 200,000 | | | | 200 | | | | 119,800 | | | | | | | | | | | | 120,000 | |
| Common stock issued in conjunction with debt offering | | | | | | | | | | | | | | | | | | | 1,606,542 | | | | 1,607 | | | | 1,372,293 | | | | | | | | | | | | 1,373,900 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (10,018,420 | ) | | | (10,018,420 | ) |
| Balance, Dec 31, 2010 | | | 91,111 | | | | 91 | | | | - | | | | - | | | | 30,216,778 | | | | 30,217 | | | | 72,237,889 | | | | (158,776 | ) | | | (80,029,677 | ) | | | (7,920,257 | ) |
| Common stock issued in exchange for cash | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | | | | | | | | | - | |
| Preferred Stock issued with Debt | | | | | | | | | | | 86 | | | | - | | | | | | | | | | | | 416,783 | | | | | | | | | | | | 416,783 | |
| Common stock issued in exchange for services | | | | | | | | | | | | | | | | | | | 5,988,137 | | | | 5,988 | | | | 1,280,584 | | | | 158,776 | | | | | | | | 1,445,348 | |
| Common stock issued in exchange for retirement of debt | | | | | | | | | | | | | | | | | | | 158,757,855 | | | | 158,758 | | | | 3,762,579 | | | | | | | | | | | | 3,921,337 | |
| Common stock issued in conjunction with debt offering | | | | | | | | | | | | | | | | | | | 305,000 | | | | 305 | | | | 192,195 | | | | | | | | | | | | 192,500 | |
| Common Stock issued for warrants | | | | | | | | | | | | | | | | | | | 3,846,000 | | | | 3,846 | | | | 380,754 | | | | | | | | | | | | 384,600 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (7,383,739 | ) | | | (7,383,739 | ) |
| Balance, Dec 31, 2011 | | | 91,111 | | | $ | 91 | | | | 86 | | | $ | - | | | | 199,113,770 | | | $ | 199,114 | | | $ | 78,270,784 | | | $ | - | | | $ | (87,413,416 | ) | | $ | (8,943,427 | ) |
The accompanying notes are an integral part of these financial statements.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
| 1. | Business and Significant Accounting Policies |
The Company
DC Brands International, Inc. (“DC Brands” or the “Company”) was incorporated under the laws of Colorado in 1998 as Telemerge Holding Corp. and changed its name to DC Brands International, Inc. in 2004. DC Brands specializes in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body. The Company’s current focus is on the sale of products under its H.A.R.D. Nutrition label. The Company currently has two distinct types of products sold under its H.A.R.D. Nutrition logo; Functional Water Systems and nutritional supplements. The Company’s products are sold to consumers, primarily through retail outlet distribution. The Company’s products were distributed principally in the state of Colorado during 2011 and 2010.
Financial Condition
The Company has incurred significant losses and negative cash flows since its inception. In addition, the Company had negative working capital (current assets less current liabilities) at December 31, 2011. The Company’s ability to continue as a going concern is contingent upon its ability to secure additional financing. Although the Company raised in excess of $500,000 in Debt/Equity financing subsequent to December 31, 2011, and believes that its prospects for securing additional financing are good, there can be no assurance given that it will be successful in its efforts to raise capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Principles of Consolidation
These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries DC Nutrition, Inc. and DC Brands, LLC (inactive). All material intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
DC Brands considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market investments. DC Brands maintains balances from time to time in excess of the federally insured limits.
Accounts Receivable
The Company’s accounts receivable are unsecured, and the Company is at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. The Company sells products generally on net 30 day terms. The Company does not normally charge financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when the Company has exhausted all reasonable means of collection. The Company did not have an allowance for doubtful accounts at December 31, 2011 or December 31, 2010 as it deemed its accounts receivable all to be collectible.
Inventory
Inventory consists of Functional Water Systems and nutritional supplements. Inventory is classified as finished goods when assembled into product ready for sale. Unassembled components are classified as raw materials. Components partially assembled or in the process of assembly are classified as work in process. Inventory is stated at lower of cost or market on a first-in first-out method. Management establishes a reserve for damaged and discontinued inventory when the estimated market value is determined to be lower than cost.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Property and Equipment
Property and equipment is recorded at the original cost to the Company and is depreciated or amortized over estimated useful lives of three to five years, and leasehold improvements are amortized over the remaining life of the lease, using the straight-line method, commencing when the asset is placed in service. Depreciation expense totaled $85,901 and $85,892, for the twelve months ended December 31, 2011 and 2010, respectively.
Warrant Liability
The warrant liability is calculated using a Barrier Option Model with MonteCarlo Simulation from Global Derivatives.com. The current stock price, the stock volatility for the prior three months and the risk free rate (treasury bills) equal to the remaining term of the warrants are the inputs used in this valuation model. This model specifically addresses the fact that no additional shares of stock will need to be issued if our stock price hits the target (barrier) of $.50 or $.15. The stock volatility for any quarter is capped at 90% as volatilities greater than this produce an unreasonably low estimation of liability. This amount is adjusted quarterly based upon the changes in valuation provided by the model.
Income Taxes
The Company uses the liability method for accounting for income taxes. Under this method, the Company recognizes deferred assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The Company establishes a valuation allowance for all deferred tax assets for which there is uncertainty regarding realization.
Net Loss Per Common Share
Generally Accepted Accounting Principles (GAAP) provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. Basic and diluted loss per share was the same as of December 31, 2011 and December 31, 2010. Common stock equivalents of 1,226,327 shares outstanding at both December 31, 2011 and December 31, 2010 from stock issuable on demand as described in Footnote 7 – Stockholders’ Equity – Stock Rights were not included in the calculation of earnings per share because they would have been anti-dilutive.
Revenue Recognition
Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured. The Company accepts returns only if the item is damaged. Items returned will be recorded when the items are returned. Historically, we have not had any products returned. However, we believe that the lack of returns, is in part due to our secret shopper program pursuant to which our Chief Executive Officer has used his own funds to purchase damaged products and products which are not damaged but have earlier generation labels. Although difficult to predict, we believe that returns without this program could be as high as one half of one percent of annual sales. These repurchased products are then donated to charity or used in promotional campaigns and are not resold.
Share-Based Compensation
Share-based compensation is measured at the grant date, based on the closing value of the Company’s common stock at the date of grant and is recognized over the requisite service period.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Advertising Expense
Advertising expense is expensed as incurred. Advertising expense totaled $54,259 and $1,229,476 for the twelve months ended December 31, 2011 and 2010, respectively.
Secret Shopper Program
Our secret shopper program was initially conducted by the Company itself in 2009 using Company funds for repurchases. Accordingly, we reversed sales for those products that we purchased, reversed the cost of goods sold for those products that we purchased and recorded a marketing expense for the amount of money used to repurchase the products as well as the amount of money used to retool the products. Commencing 2010, we did not repurchase any products; however our Chief Executive Officer used approximately $30,000 of his own funds to repurchase products. The only cost incurred by the Company during 2010 in connection with this program was approximately $3,000 for retooling of products that was included in marketing expense, as theses products were later used in our marketing events. There was no activity in 2011.
| DC Brands International, Inc | | | |
| Secret Shopper Program | | | |
| | | | |
| | | Year Ended | |
| | | 12/31/2010 | |
| Sales Reversed | | $ | 0 | |
| COGS Reversed | | $ | 0 | |
| Marketing Expense Recorded | | $ | 0 | |
| Product by CEO | | $ | 35,000 | |
Credit Risk and Customer Concentrations
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments potentially subjecting the Company to concentrations of credit risk consist principally of accounts receivable.
As of December 31, 2011, one customer represented 47% and a second customer represented 42% of the company’s accounts receivable. Both customers are wholesale distributors, one who provides product to the Company’s single largest retail grocery outlet, which represented 28% of the Company’s revenue volume during the twelve months ended December, 2011 and the other provides product to the military bases which represented 12% of the Company’s revenue volume during the twelve months ended December 31, 2011.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates included in these financial statements include the estimated useful lives and realizablilty of long lived assets.
Fair Value of Financial Instrument Estimates
GAAP 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 at the measurement date. The fair value hierarchy established by GAAP prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, the Company uses valuation techniques that maximize the use of observable inputs when determining fair value. The three levels of the hierarchy are as follows:
Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to us for identical assets or liabilities;
Level 2: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and
Level 3: Unobservable inputs that are supported by little or no market activity.
The Company has no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities) as of December 31, 2011. The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued interest payable, accrued liabilities, related party payables, notes payable and warrant liability. The carrying amounts of all these financial instruments approximate their fair value due to their short maturities with the exception of warrant liability. The warrant liability is adjusted at each reporting period based upon the Company’s stock price as described more fully in Footnote 7 – Stockholder’s Equity – Warrants.
Recent Accounting Pronouncements
During the year ended December 31, 2011, there were several new accounting pronouncements issued by the FASB the most recent of which was Accounting Standards Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
Inventory consisted of the following:
| | | 2011 | | | 2010 | |
| Finished goods | | $ | 68,173 | | | $ | 174,555 | |
| Work in process | | | 47,365 | | | | 71,358 | |
| Raw materials | | | 45,473 | | | | 59,394 | |
| | | | 161,011 | | | | 305,307 | |
| Allowance for obsolescence | | | - | | | | - | |
| | | $ | 161,011 | | | $ | 305,307 | |
| 3. | Property and Equipment |
Property and equipment consisted of the following:
| | | 2011 | | | 2010 | |
| Leasehold improvements | | $ | 14,004 | | | $ | 14,004 | |
| Office furniture and fixtures | | | 31,521 | | | | 31,521 | |
| Vehicles | | | 226,843 | | | | 231,970 | |
| Warehouse equipment | | | 103,134 | | | | 103,134 | |
| Computer equipment | | | 75,170 | | | | 75,170 | |
| | | | 450,672 | | | | 455,799 | |
| Accumulated depreciation | | | (432,282 | ) | | | (346,381 | ) |
| | | $ | 18,390 | | | $ | 109,418 | |
| 4. | Commitments and Contingencies |
The Company leases office and warehouse space under a non-cancellable operating lease expiring in April 2013. Future minimum lease payments under the lease are as follows:
| Years Ending December 31, | | | |
| | | | |
| 2012 | | $ | 206,832 | |
| 2013 | | $ | 69,260 | |
Minimum salary commitments under contracts with the Company’s CEO and Executive Vice-President are as follows:
| Years Ending December 31, | | | |
| | | | |
| 2012 | | $ | 962,812 | |
| 2013 | | $ | 1,007,031 | |
| 2014 | | $ | 750,000 | |
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
A summary of notes payable as of December 31, 2011 is as follows:
| | | Current | | | Long Term | | | Total | |
| 1 Note payable, originated in 2004, due in 2006, | | $ | 538,890 | | | $ | - | | | $ | 538,890 | |
| 6% interest rate, secured by assets of | | | | | | | | | | | | |
| DC Brands, LLC, a wholly owned subsidiary | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable originated in 2007, due in 2007, | | | 10,000 | | | | - | | | | 10,000 | |
| 36% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable originated in 2007, due in 2008, | | | 14,266 | | | | - | | | | 14,266 | |
| 24% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 7 Notes payable, originated in 2008, | | | 462,873 | | | | - | | | | 462,873 | |
| due at various dates from July to August | | | | | | | | | | | | |
| 2010, 15% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2010, due | | | 271,253 | | | | 1,007,017 | | | | 1,278,270 | |
| January 1, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 3 Notes payable, originated in 2010, due | | | 592,933 | | | | - | | | | 592,933 | |
| July 1, 2013, callable by Noteholders after | | | | | | | | | | | | |
| January 1, 2012, 6% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2010, due | | | - | | | | 333,209 | | | | 333,209 | |
| July 1, 2013, 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 12 Notes payable, originated in 2010 and 2011, due | | | - | | | | 1,078,333 | | | | 1,078,333 | |
| due at various dates from July 2013 to March 2014, | | | | | | | | | | | | |
| 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due | | | 94,767 | | | | - | | | | 94,767 | |
| Dec 31, 2013, 4% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2011, due to be | | | 750,000 | | | | 325,000 | | | | 1,075,000 | |
| repaid from a portion of gross sales beginning in | | | | | | | | | | | | |
| Feb 2012, 12% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2 Notes payable, originated in 2011, due | | | 85,500 | | | | - | | | | 85,500 | |
| Aug & Sept, 2012, 8% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due | | | | | | | 252,500 | | | | 252,500 | |
| Dec 31, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due in 2012 | | | 60,000 | | | | - | | | | 60,000 | |
| 4% interest and a 15% redemption premium | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due in 2012 | | | 326,000 | | | | - | | | | 326,000 | |
| 6% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 3,206,483 | | | | 2,996,059 | | | | 6,202,542 | |
| Unamortized discount | | | - | | | | (1,170,230 | ) | | | (1,170,230 | ) |
| | | | | | | | | | | | | |
| | | $ | 3,206,483 | | | $ | 1,825,829 | | | $ | 5,032,312 | |
| | | | | | | | | | | | | |
| Related party notes | | | | | | | | | | | | |
| 2 Notes payable, originated in 2010, callable | | $ | - | | | $ | 1,650,841 | | | $ | 1,650,841 | |
| with 366 day notice, 10% interest, unsecured | | | | | | | | | | | | |
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
A summary of notes payable as of December 31, 2010 is as follows:
| | | | Current | | | Long Term | | | Total | |
| 1 | Note payable, originated in 2004, due in 2006, | | | 541,995 | | | | - | | | | 541,995 | |
| | 6% interest rate, secured by assets of | | | | | | | | | | | | |
| | DC Brands, LLC, a wholly owned subsidiary | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2005, due on demand, | | | 242,188 | | | | - | | | | 242,188 | |
| | non interest bearing, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2005, due on demand, | | | 14,500 | | | | - | | | | 14,500 | |
| | non interest bearing, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2007, due in 2007, | | | 10,000 | | | | - | | | | 10,000 | |
| | 36% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable originated in 2007, due in 2008, | | | 14,266 | | | | - | | | | 14,266 | |
| | 24% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 7 | Notes payable, originated in 2008, | | | 462,873 | | | | - | | | | 462,873 | |
| | due at various dates from July to August | | | | | | | | | | | | |
| | 2010, 15% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable, originated in 2010, due | | | - | | | | 1,893,708 | | | | 1,893,708 | |
| | January 1, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 3 | Notes payable, originated in 2010, due | | | - | | | | 592,933 | | | | 592,933 | |
| | July 1, 2013, callable after January 1, 2012 | | | | | | | | | | | | |
| | 6% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 1 | Note payable, originated in 2010, due | | | - | | | | 333,209 | | | | 333,209 | |
| | July 1, 2013, 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 9 | Notes payable, originated in 2010, due | | | - | | | | 773,333 | | | | 773,333 | |
| | due at various dates from July to September 2013, | | | | | | | | | | | | |
| | 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| 2 | Notes payable, originated in 2007, due in | | | 15,252 | | | | - | | | | 15,252 | |
| | monthly installments, maturing 2011 to 2012, interest | | | | | | | | | |
| | from 1.9% to 11%, secured by motor vehicles | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | 1,301,074 | | | | 3,593,183 | | | | 4,894,257 | |
| Unamortized discount | | | - | | | | (919,624 | ) | | | (919,624 | ) |
| | | | | | | | | | | | | | |
| | | | $ | 1,301,074 | | | $ | 2,673,559 | | | $ | 3,974,633 | |
| | | | | | | | | | | | | | |
| Related party notes | | | | | | | | | | | | |
| 2 | Notes payable, originated in 2010, callable | | $ | - | | | $ | 1,650,841 | | | $ | 1,650,841 | |
| | with 366 day notice, 10% interest, unsecured | | | | | | | | | | | | |
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
As of December 31, 2011 and 2010, ten notes payable totaling $1,026,030 and ten notes payable totaling $1,029,134, respectively, were past due. There are no default penalties or fees that may be sanctioned against the Company for not paying the notes upon maturity. The Company intends to restructure these notes into long-term debt or equity.
The Company retired notes payable and accrued interest payable totaling $1,313,172 and $1,509,208 during the twelve months ended December 31, 2011 and 2010, respectively by issuing 158,757,855 and 34,231,740 shares of common stock during the twelve months ended December 31, 2011 and 2010, respectively. The Company valued the shares at $3,921,337 and $3,415,905 based upon the closing share price at each retirement date and recorded a loss on retirement of debt of $2,609,145 and $1,915,697 during the twelve months ended December 31, 2011, and 2010 respectively. The Company extinguished two notes during 2011 and realized a gain of $256,688.
The note payable due January 1, 2015 has a face amount of up to $5,000,000 and functions as a revolving line of credit. There was $3,721,730 of unused availability on the note at December 31, 2011. The revolving note can be converted into shares of common stock at 20% of the closing price of the stock on the day prior to conversion. During the year ended December 31, 2011, $1,035,000 was assigned to other lenders of which $271,253 is outstanding principle at the balance sheet date. The conversion rates for these assigned notes range from 50% - 70% of the average closing trade or bid price for the five to ten days prior to conversion; and others have a conversion rate the lower of a set dollar amount or 60 - 65% of the lowest two trade or bid prices for the 5-10 days prior to the conversion date.
Three notes totaling $305,000 were issued in 2011 bearing interest at 16% with a 36 month maturity. Six notes totaling $1,075,000 were issued in 2011 bearing interest at 12% with various maturities and a maximum 24 month maturity. 86 shares of Series B preferred stock was issued with these 6 notes that is convertible into 6.45% of the common stock of the company. Two notes totaling $85,500 were issued in 2011 bearing interest at 8% due in August and September 2012. These notes are convertible into common stock after 6 months at a discount of 42% ($53,000) or 45% ($32,500) of the average of the lowest 5 and 3 closing bid price in the 10 days prior to conversion respectively. One note for $60,000 was issued in 2011 bearing interest at 4%. It can be paid off at any time by the Company by paying a 15% redemption premium. One note totaling $326,000 was issued in 2011 bearing interest at 6% due in 2012.
Transactions involving notes payable subsequent to December 31, 2011 are set forth in Note 10. Subsequent Events.
Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Current year and accumulated deferred tax benefit at the effective combined Federal and state income tax rate of 37.25% is $29,288,000 and a valuation allowance has been set up for the full amount because it is “more likely than not” that the accumulated deferred tax benefit will not be realized in the future.
The following table sets forth the components of estimated net deferred tax assets as of December 31, 2011 and 2010.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
| | | 2011 | | | 2010 | |
| Deferred tax assets | | | | | | |
| NOL expense (benefit) | | $ | 29,288,000 | | | $ | 26,216,000 | |
| Less: valuation allowance | | | (29,288,000 | ) | | | (26,216,000 | ) |
| Net deferred tax asset | | $ | - | | | $ | - | |
A reconciliation of estimated income tax expense at the statutory combined Federal and state income tax rate for the years ended December 31, 2011 and 2010 is as follows:
| | | 2011 | | | | | | 2010 | | | | |
| Income tax expense combined rate | | $ | 2,787,000 | | | | 37.25 | % | | $ | 3,731,000 | | | | 37.25 | % |
| Impairment | | | | | | | | | | | | | | | | |
| Tax amortization | | | 285,000 | | | | 2.9 | % | | | 285,000 | | | | 2.9 | % |
| Increase in valuation allowance | | | (3,072,000 | ) | | | (40.15 | )% | | | (4,016,000 | ) | | | (40.15 | )% |
| Income tax expense | | $ | - | | | | | | | $ | - | | | | | |
The Company has not filed tax returns since its inception. The Company is in the process of preparing past tax returns and does not believe that it will be exposed to any risk of penalty or forfeiture of NOLs.
| 7. | Stockholders’ Equity Transactions |
All common shares have been retroactively adjusted for the 10 for 1 reverse stock split authorized by the board on June 27, 2011 and effective July 28, 2011.
Issuances of Common Stock
The Company issued common stock during the twelve months ended December 31, 2010, as set forth below. The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.
The Company issued 913,000 shares of common stock during the twelve months ended December 31, 2010, in exchange for $576,500 in cash at prices ranging from $0.50 to $1.00 per share.
The Company issued 2,500,000 shares of common stock during the twelve months ended December 31, 2010, upon the exercise of options in exchange for $25,000 in cash at a price of $0.10per share.
DC Brands International, Inc.
Notes to Consolidated Financial Statements
December 31, 2011 and 2010
The Company issued 1,242,089 shares of common stock during the twelve months ended December 31, 2010, related to services provided by vendors. The shares were valued at prices ranging from $0.6 to $1.30 per share. The shares were collectively valued at $1,156,440.
The Company issued 3,423,175 shares of common stock during the twelve months ended December 31, 2010, in order to pay off or pay down notes payable and accrued interest. The common stock was valued at $0.60 to $1.30 per share. The shares were collectively valued at $3,415,905.
The Company issued 1,606,542 shares of common stock during the twelve months ended December 31, 2010, related to the issuance of debt. The shares were valued from $0.80 to $1.20 per share and collectively valued at $1,373,900.
The Company issued common stock during the twelve months ended December 31, 2011, as set forth below. The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.
The Company issued 3,846,000 shares of common stock during the twelve months ended December 31, 2011, for settlement of warrant liability. The shares were valued at $384,600
The Company issued 5,988,137 shares of common stock during the twelve months ended December 31, 2011, related to services provided by vendors. The shares were valued at prices ranging from $0.80 to $0.003 per share. The shares were collectively valued at $1,321,572.
The Company issued 158,757,855 shares of common stock during the twelve months ended December 31, 2011, in order to pay off or pay down notes payable and accrued interest. The common stock was valued at $0.60 to $0.002 per share. The shares were collectively valued at $3,921,337.
The Company issued 305,000 shares of common stock during the twelve months ended December 31, 2011, related to the issuance of debt. The shares were valued from $0.80 to $0.50 per share and collectively valued at $192,500.
Series A Preferred Stock
The Series A Preferred Stock votes together with the common stock as a single class and the holders of the Series A Preferred Stock are entitled to such number of votes as shall equal 51.25% of the number of votes that may be cast by the outstanding shares of common stock. The Series A Preferred Stock is not convertible into common stock and does not carry any redemption features.
Series B Preferred Stock
The company issued 86 shares of Series B preferred stock in 2011. These shares were issued in conjunction with the issuance of $1,075,000 of debt. The 86 shares of Series B preferred can be converted into 6.45% of the common stock of the company. As of 12/31/2011 the company would need to issue 13,728,318 of common shares if all of the Series B preferred was converted.
Warrants
The Company issued 14,630,000 Warrants exercisable for a maximum of 29,260,000 shares of common stock from March to May 2009 in conjunction with the sale of common stock at $0.05 per Unit, each Unit consisting of a share of common stock and a Warrant which expire between March 5, 2012 and May 29, 2012. In the event that the average trading price exceeds $0.50 per share over any consecutive 20 day period between the 12th and 24th months following the issue date of the Warrants, the Warrants become null and void. In the event that the average trading price does not exceed $0.50 per share as set forth above, the Warrant may be exercised by the holder. The Warrant is redeemable into the number of shares that would need to be issued to cause the holder to have achieved an average selling price of $0.50 per share had they sold their shares during the 60 days following the 24th month following this issue date of the Warrants. The warrants are exercisable at an exercise price of $0.00 no additional funds need be provided by the holders in order to exercise the warrants and to obtain the underlying shares once the milestone set forth above that allow for exercise is met. As the Measurement Period has not yet passed, the number of shares of common stock for which the Warrants may be redeemed is not yet determinable. For example if the average trading price of our common stock for the 60 days following the 24th month was $.20 the warrant holder is due $.30 of stock value. Therefore they would be issued an additional 1 ½ shares of common stock ($.30 due / $.20 average value = 1 ½.) If the average trading price of our common stock for the 60 days following the 24th month was $.40 the warrant holder is due $.10 of stock value. Therefore they would be issued an additional 1/4 share of common stock ($.10 due / $.40 average value = 1/4.) If the average trading price of our common stock for the 60 days following the 24th month was $.10 the warrant holder is due $.40 of stock value. Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($.40 due / $.10 average value = 4 reduced to 2 because of maximum.)
The Company issued 14,750,000 Warrants exercisable for a maximum of 29,500,000 shares of common stock from August to December 2009 in conjunction with the sale of common stock at $0.05 per Unit, each Unit consisting of a share of common stock and a Warrant which expire between November 15, 2010 and March 15, 2011. In the event that the average trading price exceeds $0.15 per share in the three-month period between the 12th and 15th months following the issue date of the Warrants (the “Measurement Period”), the Warrants may be redeemed by the Company at a nominal amount. In the event that the average trading price does not exceed $0.15 per share during the Measurement Period, the Warrant may be exercised by the holder. The Warrant is redeemable into the number of shares that would need to be issued to cause the holder to have achieved an average selling price of $0.15 per share had they sold their shares during the Measurement Period. The warrants are exercisable at an exercise price of $0.00 no additional funds need be provided by the holders in order to exercise the warrants and to obtain the underlying shares once the milestone set forth above that allows for exercise is met. As the Measurement Period has not yet passed, the number of shares of common stock for which the Warrants may be redeemed is not yet determinable. For example if the average trading price of our common stock for the three-month period following the 12th month was $.10 the warrant holder is due $.05 of stock value. Therefore they would be issued an additional ½ shares of common stock ($.05 due / $.10 average value = ½.) If the average trading price of our common stock for the three-month period following the 12th month was $.20 the warrant holder is due no additional stock value. Therefore no additional shares of stock would need to be issued. If the average trading price of our common stock for the 60 days following the 24th month was $.03 the warrant holder is due $.12 of stock value. Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($.12 due / $.03 average value = 4 reduced to 2 because of maximum.)
The warrant holders will receive restricted shares of common stock upon exercise of their warrants; however following exercise they will be entitled to piggyback registration rights under certain specified circumstances. In 2011 the Company issued 3,846,000 shares as full settlement of these warrants.
In June 2010, the Company issued a Warrant to one of its debt holders in conjunction with the restructuring of its debt. The Warrant is exercisable for 25,000,000 shares of the Company’s common stock at an exercise price of $.01 per share. The Warrant contains a limitation on exercise that provides that the holder cannot exercise the warrant if such exercise would cause the holder to own in excess of 4.99% of the outstanding shares of common stock of the Company. Such limitation can be waived by the holder upon 60 days notice.
Stock Rights
The Company’s CEO has the right to demand that the Company issue him 1,226,327 shares of common stock. The right stems from his employment agreement, whereby he was entitled to receive shares, such that his ownership interest would equal 56.25% of outstanding common stock. The Company recorded compensation expense as these rights were earned, prior to June 2007 when he relinquished the right to earn additional shares.
Transactions involving common stock subsequent to December 31, 2011, are set forth in Note 10. Subsequent Events.
Equity Line of Credit
Southridge has committed to purchase up to $10 million of our common stock. From time to time during the term of the Equity Line, and at our sole discretion, we may present Southridge with a put notice requiring them to purchase shares of our common stock. The purchase price of the shares will be equal to ninety-two percent (92%) of the average of the two lowest closing bid prices for our common stock (the “Market Price”) during the five (5) trading day period beginning on the trading day immediately following the date Southridge receives our put notice. As a result, our existing shareholders will experience immediate dilution upon the purchase of any of the shares by Southridge. The issue and sale of the shares under the Equity Purchase Agreement may also have an adverse effect on the market price of the common shares. Southridge may resell some, if not all, of the shares that we issue to it under the Equity Purchase Agreement and such sales could cause the market price of the common stock to decline significantly. To the extent of any such decline, any subsequent puts would require us to issue and sell a greater number of shares to Southridge in exchange for each dollar of the put amount. Under these circumstances, our existing shareholders will experience greater dilution.
| 8. | Share Based Compensation Expense |
The Company recognizes expense associated with shares issued for services over the service period. The shares are valued based upon the fair value of the common stock on the date that the Company becomes obligated to issue the shares. Expenses associated with shares issued for services are as follows:
| | | 2011 | | | 2010 | |
| General and administrative | | $ | 125,793 | | | $ | 1,156,440 | |
| Sales and marketing | | | 294,302 | | | | 357,068 | |
| | | $ | 420,095 | | | $ | 1,513,508 | |
| 9. | Related Party Transactions |
The Company had related party payables of $1,413,569 and $637,392 at December 31, 2011 and December 31, 2010, respectively consisting primarily of deferred salaries payable and royalties payable to its officers. In June of 2010 $1,650,841 of related party payables were converted into two notes callable with 366 days notice and earning 10% interest. The Company is party to a royalty agreement with two of the Company’s officers whereby the officers are entitled to receive $0.05 per cap for each bottle cap sold. The bottle cap is a specialized cap that contains the vitamin supplements in the Company’s functional water system. The officers collectively deferred $761,070 and $667,672 in salaries and $8,740 and $13,648 in royalties during the twelve months ended December, 2011 and 2010, respectively. The related party payables are non-interest bearing and due on demand. We have 1 note payable originated in 2011 with an aggregate principal balance of $326,000 due in 2012 bearing interest at 6%. This note is from Cut & Dried Productions, LLC a company in which Richard Pearce, the CEO of DC Brands International owns a majority interest. Cut & Dried may also provide advertising and marketing support to DC Brands. The Company has been reimbursed $60,000 during the year by Cut & Dried for the use of office space, personnel and other resources. One of the 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16% is due to Bob Armstrong, the C.F.O. in the amount of $5,000. In 2011 the company converted an overdue payable to our attorneys Gracin & Marlow into a promissory note in the amount of $94,767.
Subsequent to December 31, 2011, the Company issued common stock as follows:
| | | Shares | | | Common Stock | | | Additional Paid in Capital | | | Amount | |
| For conversion of debt | | | 279,851,439 | | | $ | 279,851 | | | $ | 880,460 | | | $ | 1,160,311 | |
| In exchange for services | | | 6,000,000 | | | | 6,000 | | | | 12,000 | | | | 18,000 | |
| | | | 285,851,439 | | | $ | 285,851 | | | $ | 892,460 | | | $ | 1,178,311 | |
The Company also sold an additional unit of $250,000, 12% debt and 20 shares of Series B Preferred stock. The Company also raised $244,500 by issuing debt to an existing lender.
On March 20, 2012 we have received approval of our stockholders and board of directors to increase our number of authorized common shares to 5,000,000,000. Our 14C was filed on March 28.
Three notes in the principal amount of $592,933 are callable after January 1, 2012 and have been called.
Exhibit Number | | Description |
| 3.1 | | Articles of Incorporation filed on April 29, 1998(1) |
| 3.2 | | By-Laws(1) |
| 3.3 | | Articles of Amendment filed on August 23, 2004(1) |
| 3.4 | | Articles of Amendment filed on December 3, 2004 (1) |
| 3.5 | | Articles of Amendment filed on January 31, 2006 (1) |
| 3.6 | | Certificate of Designations for Series A Preferred Stock filed on May 21, 2007 (1) |
| 3.7 | | Articles of Amendment filed on August 31, 2007 (1) |
| 3.8 | | Certificate of Correction to Certificate of Designations(1) |
| 3.9 | | Form of Warrant for purchase of up to 4,000,000 shares of common stock (2) |
| 3.10 | | Form of Warrant for purchase of up to 2,000,000 shares of common stock(2) |
| 3.11 | | Articles of Amendment filed July 9, 2010(3) |
| 3.12 | | Articles of Amendment filed July 12, 2011 (4) |
| 3.13 | | Certificate of Designations for Series B Preferred Stock (5) |
| 5.1 | | Opinion of Gracin & Marlow, LLP* |
| 10.1 | | License Agreement (1) |
| **10.2 | | Employment Agreement dated October 1, 2004 between DC Brands International, Inc. and Richard Pearce (1) |
| **10.3 | | Exchange Agreement dated June 8, 2007 between Richard Pearce and DC Brands International, Inc. (1) |
| **10.4 | | Exchange Agreement dated March 24, 2008 between Richard Pearce and DC Brands International, Inc.(1) |
| **10.5 | | Employment Agreement dated May 1,2010 between DC Brands International, Inc and Jeremy Alcamo(1) |
| 10.6 | | Endorsement Agreement dated October 21, 2009 between DC Brands International, Inc and Chris Andersen(2) |
| 10.7 | | Sales Representative Contract dated March 15,2 010 between Acosta, Inc. and DC Brands International, Inc.(1) |
| 10.8 | | Purchase and Sale Agreement dated as of June 4, 2010 between Liquid Capital Exchange, Inc. and DC Brands International, Inc.(1) |
| 10.9 | | Investment Agreement, dated January 31, 2011, by and between the Company and Centurion Private Equity, LLC (6) |
| 10.10 | | Registration Rights Agreement, dated January 31, 2011, by and between the Company and Centurion Private Equity, LLC (6) |
| 10.11 | | Equity Purchase Agreement, dated July 8, 2011, by and between the Company and Southridge Partners II, LP (7) |
| 10.12 | | Registration Rights Agreement, dated July 8, 2011, by and between the Company and Southridge Partners II, LP (7) |
| 14 | | Code of Conduct (8) |
| 21 | | List of Subsidiaries (1) |
| 22.1 | | Facilities Use Agreement* |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) * |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)* |
| 32.1 | | Certification of Chief Executive Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002. * |
| 32.2 | | Certification of Chief Financial Officer pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002. * |
* Filed herewith.
**Management contract or compensatory plan or arrangement required to be identified pursuant to Item 15(a)(3) of this report
*** As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.
| ***+101.INS | XBRL Instance Document |
| ***+101.SCH | XBRL Taxonomy Extension Schema Document |
| ***+101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| ***+101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| ***+101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| ***+101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) Incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on May 10, 2010.
(2) Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on June 22, 2010.
(3) Incorporated by reference to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 14, 2010.
(4) Incorporated by reference to the Company’s Information Statement on Schedule DEF 14C filed with the Securities and Exchange Commission on July 7, 2011.
(5) Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 filed with the Securities and Exchange Commission on November 14, 2011.
(6) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2011.
(7) Incorporated by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2011.
(8) Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31,2 010 filed with the Securities and Exchange Commission on March 31, 2011.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form 10-K and authorized this registration statement to be signed on its behalf by the undersigned, in Wheat Ridge, Colorado, on March 30, 2012.
| DC BRANDS INTERNATIONAL, INC. | |
| | | |
| By: | /s/ Richard Pearce | |
| | Richard Pearce, Chief Executive Officer | |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| | | | | |
| /s/ Richard Pearce | | Chairman and Chief Executive Officer | | March 30, 2012 |
| Richard Pearce | | (Principal Executive Officer) | | |
| | | | | |
| /s/ Bob Armstrong | | Chief Financial Officer | | March 30, 2012 |
| Bob Armstrong | | (Principal Accounting Officer) | | |
| | | | | |
| /s/ Jeremy Alcamo | | Executive Vice President and Director | | March 30, 2012 |
| Jeremy Alcamo | | | | |
| | | | | |
| /s/ Wade Brantley | | Director | | March 30, 2012 |
| Wade Brantley | | | | |
| | | | | |
| /s/ Peter Papilion | | Director | | March 30, 2012 |
| Peter Papilion | | | | |
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