DC Brands International (HRDN) 10-Q 2012 Q3 Quarterly report

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

x   QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2012

o   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  to  

Commission File Number 000-54031

_____________________________________________________________

DC BRANDS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Colorado	20-1892264
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

9500 W. 49 th Avenue, Suite D-106, Wheat Ridge, CO 80033

(Address of principal executive offices including zip code)

(303) 279 3800

 ( Registrant’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x

Number of shares outstanding of the issuer’s common stock as of the latest practicable date: 334,277,749 shares of common stock, $.001 par value per share, as of November 12, 2012.  All outstanding share numbers have been adjusted for a 1:200 reverse which was effective on June 28, 2012

Transitional Small Business Disclosure Format (Check one): Yes o    No x

DC BRANDS INTERNATIONAL, INC.

		Page
	PART I.—FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Balance Sheets (June 30, 2012 Unaudited)	2
	Consolidated Statements of Operations (Unaudited)	3
	Consolidated Statements of Cash Flows (Unaudited)	4
	Consolidated Statements of Stockholders' Deficit (Unaudited)	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	24
Item 4.	Controls and Procedures	24
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURE		26

ITEM 1. FINANCIAL STATEMENTS

DC BRANDS INTERNATIONAL, INC.

Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(Unaudited)

1

DC Brands International, Inc.

Consolidated Balance Sheets

As of September 30, 2012 and December 31, 2011

	September 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	2,773		$	15,939
Accounts receivable		5,292			29,843
Inventory		137,076			161,011
Total current assets		145,141			206,793
Property and equipment, net		11,071			18,390
Total assets	$	156,212		$	225,183
Liabilities
Current liabilities
Accounts payable	$	85,221		$	207,931
Accrued bonuses		1,800,000			-
Accrued interest payable		1,138,445			863,320
Accrued liabilities		637			637
Related party payable		228,529			1,413,569
Note payable to former officer (Net of Unamortized Discount of $4,178,855 as of September 30, 2012 and 40 as of December 31, 2012)		596,979			-
Short-term notes payable and current portion of long-term debt		3,832,935			3,206,483
Total current liabilities		12,430,480			5,691,940
Long-term debt to related party		90,556			1,650,841
Long-term debt (Net of Unamortized Discount of $1,253,816 as of Sep 30, 2012 and $1,142,285 as of December 31, 2011)		1,156,307			1,825,829
Total liabilities		8,959,609			9,168,610
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 as of Sept 30, 2012 and December 31, 2011		91			91
Series B Preferred Stock, 2,500 shares authorized; shares issued
and outstanding - 106 shares as of Sep 30, 2012 and 86 shares as of December 31, 2011		-			-
Common Stock, $0.001 par value;5,000,000,000
shares authorized; shares issued and outstanding
- 198,795,531 as of Sept 30, 2012 and 995,646 as of December 31, 2011		198,796			996
Additional paid in capital		86,584,619			78,468,902
Accumulated deficit		(95,556,903	)		(87,413,416	)
Total stockholders' deficit		( 8,773,397	)		(8,943,427	)
Total liabilities and stockholders' deficit	$	156,212		$	225,183

The accompanying notes are an integral part of these consolidated financial statements.

2

DC Brands International, Inc.

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2012 and 2011

(unaudited)

		Three Months Ended Sept 30,						Nine Months Ended Sep 30,
		2012			2011			2012			2011
Net Revenues		$	20,686		$	59,999		$	129,576		$	363,616
Cost of goods sold			10,713			46,950			72,338			239,301
Gross margin			9,973			13,049			57,238			124,315
Operating Expenses
General and administrative (includes share based compensation of $0 for three months ended and $33,000 for nine months ended Sep 30 2012  and $13,800 for three months ended and $1,062,829 for nine months ended Sep 30 2011)			204,447			506,712			1,790,777			2,626,031
Sales and marketing (includes share based compensation of $0 in for three months ended and $0 for nine months ended Sep 30 2012  and $43,750 for three months ended and $294,302 for nine months ended Sep 30 2011)			20,068			136,694			222,863			1,376,819
Severance agreement  expense			-			-			1,265,800			-
Depreciation and amortization			5,476			21,475			7,319			64,425
Total operating expenses	��		229,991			664,881			3,286,759			4,067,275
Loss from operations			(220,018	)		(651,832	)		(3,229,521	)		(3,942,960	)
Other Expense (Income)
Interest expense			1,460,690			348,257			2,405,797			931,924
Interest expense - warrant liability			-			-						(1,063,800	)
Loss on retirement of debt			276,128			390,875			2,508,169			1,667,375
Total other expense (income)			1,956,836			739,132			4,913,966			1,535,499
Loss Before Taxes			(1,956,836	)		(1,390,964	)		(8,143,487	)		(5,478,459	)
Provision for income taxes (Note 6)			-			-			-			-
Net Loss		$	(1,956,836	)	$	(1,390,964	)	$	(8,143,487	)	$	(5,478,459	)
Weighted average number of common shares outstanding			76,765,949			220,821			29,032,211			183,693
Basic and diluted net loss per common share		$	(0.03	)	$	(6.30	)	$	(0.28	)	$	(29.82	)

The accompanying notes are an integral part of these consolidated financial statements.

3

DC Brands International, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2012 and 2011

(unaudited)

	For Nine Months Ended Sep 30,
	2012			2011
Cash used in operating activities
Net loss	$	(8,143,487	)	$	(5,478,459	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		7,319			64,425
Common stock issued for services		33,000			1,412,695
Debt issued for services		157,914
Debt issued forpayment of expenses		27,500
Loss on retirement of debt		1,458,368			1,660,716
Severance agreement expenses		1,265,800
Amortization of debt discount		1,463,416			334,898
Reduction of debt for use of facilities		(60,000	)
Loss on Sale of PP&E		-			5,127
Changes in operating assets and liabilities:
Accounts receivable		24,551			(7,890	)
Inventory		23,935			171,543
Accounts payable		(122,710	)		(110,258	)
Accrued bonuses		1,800,000
Accrued interest payable		703,567			554,371
Related party payable		462,911			625,285
Warrant liability		-			(1,063,800	)
Net cash used in operating activities	$	(897,916	)	$	(1,831,347	)
Cash used in investing activities
Purchase of property and equipment		-			-
Net cash used in investing activities	$	-		$	-
Cash provided by financing activities
Proceeds from notes payable		884,750			1,868,500
Payment on notes payable		-			(43,871	)
Net cash provided by financing activities	$	884,750		$	1,824,629
Net increase (decrease) in cash and cash equivalents	$	(13,166	)	$	(6,718	)
Cash and cash equivalents
Beginning of period		15,939		$	23,234
End of period	$	2,773		$	16,516
Supplemental Disclosure of Noncash
Investing and Financing Activities
Notes payable converted to common stock	$	1,096,292		$	643,690
Common stock issued for warrants	$	-		$	384,600
Discount on common and preferred stock	$	7,776		$	709,466
Common Stock issued for retirement of debt and accrd int	$	2,554,660		$	2,509,960
Preferred stock issued as incentive for debt	$	7,776		$	415,505
Accrued interest recassified to long-term debt	$	126,644		$	-
Accrued interest, related party payable, & long-term debt to related party reclassified to short-term debt	$	3,510,034		$	-
Accrued interest converted to common stock	$	-		$	205,554
Addition to notes payable	$	-		$	100,000
Reclassification from accounts payable to notes payable	$	-		$	94,767
Common Stock issued as incentive for debt	$	-		$	192,500
Supplemental Disclosure
Interest paid	$	7,814		$	69,895

The accompanying notes are an integral part of these consolidated financial statements.

4

DC Brands International, Inc.

Consolidated Statement of Stockholders’ Deficit

For the Nine Months Ended September 30, 2012

	Series A Preferred Stock				Series B Preferred Stock				Common Stock				Additional Paid in		Accumulated			Total Stockholders'
	Shares		Amount		Shares		Amount		Shares		Amount		Capital		Deficit			Deficit
Balance, Dec 31, 2011 (adjusted for a 1:200 split effective June 28, 2012)		91,111	$	91		86	$	-		995,646		996	$	78,468,902	$	(87,413,416	)	$	(8,943,427	)
Preferred Stock issued with Debt						20								7,776					7,776
Discount on Notes Payable														5,718,081					5,718,081
Common stock issued in exchange for services										155,000		155		32,845					33,000
Common stock issued in exchange for retirement of debt										197,644,885		197,645		2,357,015					2,554,660
Net loss																(8,143,487	)		(8,143,487	)
Balance, Sept 30, 2012		91,111	$	91		106	$	-		198,795,531	$	198,796	$	86,584,619	$	(95,556,903	)	$	(8,773,397	)

The accompanying notes are an integral part of these consolidated financial statements.

5

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

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 2012 and 2011.

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 September 30, 2012.  The Company’s ability to continue as a going concern is contingent upon its ability to secure additional financing.  There can be no assurance given that it will be successful in its efforts to raise capital or if successful that they were be on terms that are favorable.  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. See footnote #10 Subsequent Events for an update on financing.

Basis of Presentation

These statements reflect all normal recurring adjustments, which, in the opinion of management, are necessary for the fair presentation of financial position, results of operations and cash flows for the periods presented.   The accompanying financial statements should be read in conjunction with DC Brands’ consolidated financial statements for the years ended December 31, 2011 and 2010 filed in the Company’s Annual Report on Form 10K dated December 31, 2011, which includes all disclosures required by accounting principles generally accepted in the United States of America, or GAAP. The results of operations for the periods ended September 30, 2012 and 2011 are not necessarily indicative of expected operating results for the full year.

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.

6

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

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 effected 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 September 30, 2012, one customer represented 85% of the Company’s accounts receivable.  This customer is a wholesale distributor, who provided product to the Company’s single largest retail grocery outlet, which represented 34% of the Company’s revenue volume during the nine months ended September 30, 2012. Another customer represented 15% of the Company’s accounts receivable who is a wholesale distributor to the Company’s second largest retail grocery outlet who services the military market.

Recent Accounting Pronouncements

During the period ended September 30, 2012, there were several new accounting pronouncements issued by the FASB the most recent of which was Accounting Standards Update No. 2012-07—Entertainment—Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs (a consensus of the FASB Emerging Issues Task Force).  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.

2. Inventory

Inventory consisted of the following:

	Sep 30,		December 31,
	2012		2011
Finished goods		20,326	$	68,173
Work in process		63,368		47,365
Raw materials		53,382		45,473
		137,076		161,011
Allowance for obsolescence		-		-
		137,076	$	161,011

7

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

3. Property and Equipment

Property and equipment consisted of the following:

	Sep 30,			December 31,
	2012			2011
Leasehold improvements	$	14,004		$	14,004
Office furniture and fixtures		31,521			31,521
Vehicles		226,843			226,843
Warehouse equipment		103,134			103,134
Computer equipment		75,170			75,170
		450,672			450,672
Accumulated depreciation		(439,601	)		(432,282	)
	$	11,071		$	18,390

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,
Remaining 3 months of 2012	$	51,708
2013	$	69,260

Minimum salary commitments under contracts with the Company’s Executive Vice-President are as follows:

Years Ending December 31,
Remaining 3 months of 2012	$	34,453
2013	$	82,031
2014	$	-

Please see Footnote #10 – Subsequent events for an update on this commitment.

8

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

5. Notes Payable

A summary of notes payable as of September 30, 2012 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
6 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		550,637			13,203.00			563,840
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		-			333,209.00			333,209
July 1, 2013, 16% interest, unsecured
12 Notes payable, originated in 2010 and 2011, due		-			1,078,333.00			1,078,333
due at various dates from July 2013 to March 2014,
16% interest, unsecured
2 Notes payable, originated in 2011 and 2012, due		207,680			-			207,680
Dec 31, 2013, 4% interest, unsecured
7 Notes payable, originated in 2011 &2012, due to be		1,325,000			-			1,325,000
repaid from a portion of gross sales beginning in
Feb 2012, 12% interest, unsecured
2 Notes payable, originated in 2011, due		45,180			-			45,180
Aug & Sept, 2012, 8% interest, unsecured
1 Note payable, originated in 2011, due		-			483,104.00			483,104
Jan 1, 2014, 10.25% interest, unsecured
2 Notes payable, originated in 2011 & 2012, due in 2012		105,000			-			105,000
4% interest and a 15% redemption premium
1 Note payable, originated in 2011, due in 2012		407,750			-			407,750
6% interest
1 Note payable, originated in 2012, convertible into,		4,775,834			-			4,775,834
common stock after 90 days. 10.25% interest rate,
secured by all assets of DC Brands International Inc.
4 Note payable, originated in 2012, due in 2012		75,000			-			75,000
6% interest
		9,111,043			1,907,849.00			11,018,892
Unamortized discount		(4,681,129	)		(751,542.00	)		(5,432,671	)
		4,429,914			1,156,307.00			5,586,221

9

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

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		271,254		1,007,017			1,278,271
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
		3,206,484		2,996,059			6,202,541
Unamortized discount		-		(1,170,230	)		(1,170,230	)
	$	3,206,484	$	1,825,829		$	5,032,311
Related Party Notes
2 Notes payable, originated in 2010, callable	$	-	$	1,650,841		$	1,650,841
with 366 day notice, 10% interest, unsecured

10

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

As of September 30, 2012 eleven notes payable totaling $1,071,210 were past due and as of December 31, 2011, ten notes payable totaling $1,026,030 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 preferred stock.

The Company settled notes payable and accrued interest payable totaling $1,121,292 and $849,245 during the nine months ended September 30, 2012 and 2011, respectively by issuing 197,644,885 and 54,793 shares of common stock during the nine months ended September 30, 2012 and 2011, respectively.  The Company valued the shares based upon the closing share price at each retirement date and recorded a loss on retirement of debt of $2,508,169 during the nine months ended September 30, 2012, and a loss on retirement of debt of $1,667,375 during the nine months ended September 30, 2011.

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 $4,516,896 of unused availability on the note at September 30, 2012.

6. Income Taxes

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.

At September 30, 2012 and December 31, 2011, the Company provided a full valuation allowance against any calculated deferred tax asset based on the weight of available evidence, both positive and negative, including the Company’s history of losses, which indicate that it is more likely than not that such benefits will not be realized.

7. Stockholders’ Equity

All common shares have been retroactively adjusted for the 200 for 1 reverse stock split authorized by the board on May 21, 2012 and effective June 28, 2012.

Issuances of Common Stock

The Company issued common stock during the nine months ended September 30, 2012 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 155,000 shares of common stock during the nine months ended September 30, 2012 related to services provided by vendors.  The shares were valued at prices ranging from $0.60 to $0.12 per share and were collectively valued at $33,000.

11

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

The Company issued 197,644,885 shares of common stock during the nine months ended September 30, 2012 in order to pay off or pay down notes payable and accrued interest.  The common stock was valued at prices ranging from $2,00 to $0.02 per share.  The shares were collectively valued at $2,554,660

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 20 shares of Series B preferred stock in the first 6 months of 2012. These shares were issued in conjunction with the issuance of $250,000 of debt. This brings the total shares of Series B preferred shares outstanding to 106.  These 106 shares of Series B preferred can be converted into 7.95% of the common stock of the Company. As of 9/30/2012 the Company would need to issue 17,169,195 of common shares if all of the Series B preferred was converted.

The Series B Preferred Stock does not have any voting rights.  The Series B Preferred Stock is convertible into common stock at any time.

Warrants

The Company issued 73,150 Warrants exercisable for a maximum of 146,300 shares of common stock from March to May 2009 in conjunction with the sale of common stock at $10.00 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 $100.00 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 $100.00 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 $100.00 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 $40.00 the warrant holder is due $60.00 of stock value.  Therefore they would be issued an additional 1 ½ shares of common stock ($60.00 due / $40.00 average value = 1 ½.)  If the average trading price of our common stock for the 60 days following the 24th month was $80.00 the warrant holder is due $20.00 of stock value.  Therefore they would be issued an additional 1/4 share of common stock ($20.00 due / $80.00 average value = 1/4.)   If the average trading price of our common stock for the 60 days following the 24th month was $20.00 the warrant holder is due $80.00 of stock value.  Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($80.00 due / $20.00 average value = 4 reduced to 2 because of maximum.)

12

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

The Company issued 73,750 Warrants exercisable for a maximum of 147,500 shares of common stock from August to December 2009 in conjunction with the sale of common stock at $10.00 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 $30.00 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 $30.00 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 $30.00 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 $20.00 the warrant holder is due $10.00 of stock value.  Therefore they would be issued an additional  ½ shares of common stock ($20.00 due / $10.00 average value =  ½.)  If the average trading price of our common stock for the three-month period following the 12th month was $40.00 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 $6.00 the warrant holder is due $24.00 of stock value.  Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($24.00 due / $6.00 average value = 4 reduced to 2 because of maximum.) 

During 2010 10,000 shares were issued in satisfaction of one warrant that reached maturity.  Also during 2010 nine warrants were purchased by the company for $9 because the stock traded above the target rate in excess of the required days during the life of the warrant.  This leaves the total warrants outstanding at 96,150 exercisable for a maximum of 192,300 shares of common stock. 

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 19,230 shares as full settlement of these warrants.

13

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

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.

Transactions involving common stock subsequent to Sep 30, 2012 are set forth in Note 10. Subsequent Events.

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:

	Three months ended Sep 30,				Nine months ended Sep 30,
	2012		2011		2012		2011
General and administrative	$	-	$	13,800	$	33,000	$	1,062,892
Sales and marketing		-		43,750		-		294,302
	$	-	$	57,550	$	33,000	$	1,357,194

9. Related Party Transactions

The Company had related party payables of $228,529 and $1,413,569 at Sep 30, 2012 and December 31, 2011, 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. On June 5, 2012 Richard Pearce sold his Series A Preferred stock to Stephen Horgan and resigned as CEO.  Mr. Pearce converted his $1,560,285 related party note payable as well as his deferred salary and royalty into a $4.775 million convertible note. The Company is party to a royalty agreement with two of the Company’s officers (past officer) 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 (former officer) collectively deferred $26,703 and $183,330 in salaries and $1,978 and $1,060 in royalties during the three months ended September, 2012 and 2011, respectively.  The related party payables are non-interest bearing and due on demand.  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.  Cut & Dried Productions, a company owned by our former C.E.O. made additional loans to the Company in the 3rd quarter of 2012 in the amount of $15,000 bringing the total due to $407,750.

Please see Footnote 10. Subsequent Events for details on the deferred salary after September 30, 2012.  On September 26, 2012 a newly formed LLC named HARD Save LLC purchased the 91,111 previously issued shares of Series A Preferred stock previously owned by Richard Pearce and then Stephen Horgan in a private transaction in the amount of $250,000.  The purchase resulted in HARD Save LLC having voting control of 51.25% of the voting securities of the Company.

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DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

10. Subsequent Events

	Shares		Common Stock		Additional Paid in Capital		Amount
For conversion of debt		135,482,218	$	135,482	$	0	$	135,482
		135,482,218	$	135,482	$	0	$	135,482

\

Shares Issued	Series B		Series C		Series D		Series E		Series F		Series G		Amount
For conversion of debt		-		1,244		-		2,776		5,500		6,000	$	3,950,066
In conjunction with Securities Purchase Agreement		95		0		25,880							$	365,000
		95		1,244		25,880		2,776		5,500		6,000	$	4,315,066

Subsequent to September 30, 2012 HARD Save LLC entered into a Securities Purchase Agreement with the Company which allows it to invest up to a potential $1.25 million into the Company as needed to execute the national expansion business plan developed by Stephen Horgan.  The Company also entered into exchange agreements with the managing members of HARDSave LLC converting their debt into Series C Preferred Stock.  The Company also entered into an exchange agreement with Richard Pearce to waive $1 million of his outstanding debt and convert $2.775 million of his debt into Series E Preferred Stock.  On October 5 our Executive VP resigned his position after being unable to come to terms with HARD Save, LLC regarding his compensation.  .  

15

DC Brands International, Inc.

Notes to Consolidated Financial Statements

As of September 30, 2012 and December 31, 2011

(unaudited)

On October 12, 2012, the Company filed a Certificate of Designations creating the class C, D, E, F and G of Preferred Stock.

The Class C Preferred Stock has no dividend, liquidation or voting rights. The Class C Preferred Stock is convertible at any time after the 13th month after the date of its issuance into such number of shares of common stock of the Company as shall equal 1% of the outstanding common shares on the date of conversion divided by 1,000.

The Class D Preferred Stock has no dividend, conversion or voting rights. The Class D Preferred Stock is entitled to a liquidation preference equal to 40% of the proceeds of any sale of shares of common stock in excess of 25% of the outstanding shares, a liquidation or winding up, the sale of 20% of the Series A Preferred.

The Class E Preferred Stock has no liquidation or voting rights. The Class E Preferred Stock is entitled to a 10.25% dividend that is payable quarterly beginning in month 14 after issuance. Each share of the Class E Preferred Stock is convertible at any time after month 13 into such number of shares of common stock of the Company as shall equal $2,500 of the outstanding common shares on the date of conversion.

The Class F Preferred Stock has no dividend, liquidation or voting rights. The Class F Preferred Stock is convertible at any time after the 6th month into such number of shares of common stock of the Company as shall equal 1.0% of the outstanding common shares on the date of conversion divided by 1,000. The Company has the right to redeem the Class F Preferred at a redemption price of $286.86 per share.

The Class G Preferred Stock has no dividend, liquidation or voting rights. The Class G Preferred Stock is convertible at any time after the 13th month into such number of shares of common stock of the Company as shall equal 1.0% of the outstanding common shares on the date of conversion divided by 1,000. The Company has the right to redeem the Class G Preferred at a redemption price of $1,250 per share.

16

Item 2.  Management’s Discussion and Analysis of Financial Conditions and Results of Operations

This discussion and analysis should be read in conjunction with the accompanying Financial Statements and related notes. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis we review our estimates and assumptions. Our estimates are based on our historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but we do not believe such differences will materially affect our financial position or results of operations. Our critical accounting policies, the policies we believe are most important to the presentation of our financial statements and require the most difficult, subjective and complex judgments, are outlined below in ‘‘Critical Accounting Policies,’’ and have not changed significantly.

CAUTIONARY STATEMENT RELATING TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements made in this report may constitute “forward-looking statements on our current expectations and projections about future events”. These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or our achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases you can identify forward-looking statements by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. These statements are based on our current beliefs, expectations, and assumptions and are subject to a number of risks and uncertainties. Although we believe that the expectations reflected-in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.   These forward-looking statements are made as of the date of this report, and we assume no obligation to update these forward-looking statements whether as a result of new information, future events, or otherwise, other than as required by law. In light of these assumptions, risks, and uncertainties, the forward-looking events discussed in this report might not occur and actual results and events may vary significantly from those discussed in the forward-looking statements.

General

The following analysis of our consolidated financial condition and results of operations for the three months ended September 30, 2012 should be read in conjunction with the consolidated financial statements, including footnotes, and other information presented elsewhere in this Quarterly Report on Form 10-Q and the risk factors and the financial statements for the year ended December 31, 2011 and the other information set forth in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition.

17

Overview

We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009 at King Soopers. From our inception to Sep 30, 2012, we had incurred an accumulated deficit of $95,556,903.  Our accumulated deficit through Sept 30, 2012 is primarily attributable to our issuance of stock compensation.

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 have 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 $750,000. 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. 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, which to date have not been met. 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.  In October 2012, we entered into a Securities Purchase Agreement with HARD Save, LLC which allows HARD Save, LLC to invest up to $1.25 million in us in exchange for a total of 10,000 units if all $1.25 million is invested.  Each unit contains .0333 shares of Series B Preferred Stock and 9.111 shares of Series D Preferred Stock.

Results of Operations

Quarter ended Sept 30, 2012 Compared to quarter ended Sept 30, 2011

Revenue- During the quarter ended Sept 30, 2012, we generated revenue of $20,686, 42% of which was attributable to the sale of our H.A.R.D, Nutrition Functional Water System which commenced in August 2009.  This represented a 66% decrease from the same period in the prior year.  During the same period of 2011, we had revenue of $59,999.  Our gross margin decreased from $13,049 for the quarter ended Sept 30, 2011 to $9,973 for the quarter ended Sept 30, 2012. Our cost of goods sold decreased approximately 77% to $10,713 for the quarter ended Sept 30, 2012 from $46,950 for the quarter ended Sept 30, 2011.  The decrease in the cost of goods sold was attributable to a decrease in sales and increases in the % of sales from supplements vs. our functional water systems which carry a higher profit margin.    Sales of our H.A.R.D, Nutrition Functional Water System and H.A.R.D. Nutrition supplements accounted for 42% and 58% respectively of our revenue for the quarter ended Sept 30, 2012.

Expenses- Our total operating expenses, excluding depreciation and amortization, for the quarter ended Sept 30, 2012 were $224,515 as compared to $643,406 for the quarter ended Sept 30, 2011. 

General and administrative expenses were $204,447 and $506,712 for the quarters ended Sept 30, 2012 and Sept 30, 2011, respectively and included salaries, legal, accounting and other professional fees and occupancy related expenses.  Included in general and administrative expenses was stock based compensation expense for services provided by vendors and employees of $0 for the quarter ended Sept 30, 2012. The remaining general and administrative expenses $204,447 for the quarter ended Sept 30, 2011 included $72,758 for salaries, 47,722 for legal accounting and other professional expenses and $20,696 for occupancy related expenses. Included in general and administrative expenses was stock based compensation expense for services provided by vendors and employees of $13,800 for the quarter ended Sept 30, 2011. The remaining general and administrative expenses $492,912 for the quarter ended Sept 30, 2011 included $338,136 for salaries, 48,615 for legal accounting and other professional expenses and $38,027 for occupancy related expenses. Sales and marketing consisted of advertising and other promotional expenses. Sales and marketing expenses were $20,068 and $136,694 for the quarters ended Sept 30, 2012 and Sept 30, 2011, respectively and included stock based compensation for services provided by vendors and employees of $0 and $43,750 for the quarters ended Sept 30, 2012 and 2011 respectively.  The remaining sales and marketing expenses, $20,068 for the quarter ended Sept 30, 2012 did not include any advertising expenses.  The remaining sales and marketing expenses, $92,944 for the quarter ended Sept 30, 2011 did not include any advertising expenses but did include $48,950 of product giveaways.

Interest expense for the quarter ended Sept 30, 2012 increased 319% from $348,257 to $1,460,690 for the quarter ended September 30, 2011 due to additional debt issued. Net loss for the quarter ended Sept 30, 2011 increased 41% to $1,956,836 as compared to $1,390,964 for the quarter ended Sept 30, 2010 and was primarily attributable to the increase in interest expense offset by a reduction in the loss on retirement of debt.

Liquidity and Capital Resources

Revenues

At Sept 30, 2012 we had cash and cash equivalents of $2,773 as compared to $15,939 at December 31, 2011.  Our working capital deficit at Sept 30, 2012 was $7,537,605 and at December 31, 2011 was $5,485,147.   

For the nine months ended Sept 30, 2012 our cash used in operating activities was $897,916.  Our primary sources and uses of cash from operating activities for the period were losses from operations, loss on retirement of debt, severance agreement expense, Amortization of debt discount, accrued bonuses, accrued interest payable and related party payable of $ 989,425.  

Net cash provided by financing activities for the nine months ended Sept 30, 2012 was $884,750 which was the proceeds from the issuance of notes payable.

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Current and Future Financing Needs

We have incurred an accumulated deficit of $95,556,903 through Sep 30, 2012. We have incurred negative cash flow from operations since we started our business. At Sep 30, 2012, we had short term and long term debt of $5,676,777, which includes related party debt.   We have no commitment for additional funding and none of our potential sources of funding, the Securities Purchase Agreement entered into in October 2012, our factoring arrangement and the $10 million equity financing agreement, are firm commitments to provide financing. In addition, we have lease commitments of $5,708 and $69,260 for the remainder of 2012 and 2013.   In the past we have spent, and provided we receive adequate funding, 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 Sep 30, 2012 is as follows: At Sep 30, 2012 we had 52 notes outstanding, of which eleven  notes or 10% of the aggregate principal balance were past due. 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 6 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. Concurrently with the Securities Purchase Agreement executed October 2012 these notes were converted into preferred stock.The $5 million revolving note with a principal outstanding balance as of Sep 30, 2012 of $13,203 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 three months ended Sep 30, 2012, an additional$122,000 was assigned to other lenders of which $550,637 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. The $2 million revolving note with a principal outstanding balance as of Sep 30, 2012 of $483,104 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. 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 7 notes payable with an aggregate principal balance of $1,325,000 originated in 2011 with a 24 month maturity bearing interest at 12%. 102 shares of Series B preferred stock were issued in conjunction with these notes. We have two notes payable in the amount of $207,680 originated in 2011 and 2012 that 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 3 notes payable originated in 2011 & 2012 with an aggregate principal balance of $45,180 with a 9 month maturity bearing interest at 8%. These notes are convertible into common stock after 6 months. We have 2 notes payable originated in 2011and 2012 with an aggregate principal balance of $105,000, bearing 4% interest, which matures in 2012 and carries a 15% redemption premium.  We have 1 note receivable originated in 2011 with an aggregate principal balance of $407,750 due in 2012 bearing interest at 6%. This note is from Cut & Dried Productions, LLC a company that Richard Pearce, the former CEO of DC Brands International, owns a majority of.  Effective June 5, 2012 Richard Pearce resigned as President and CEO and sold his Series A Preferred stock to Stephen Horgan who was named the new President and CEO.  Related to this transaction was a severance agreement that included a promissory note to Richard Pearce in the amount of $4,775,834 that bears interest at 10.25% and is secured by lien on all of the assets of DC Brands International, Inc. and its subsidiary.  The note is repaid in the form of converting the debt into common stock anytime after 90 days.  The conversions are discounted 60% to the current market price based upon the closing bid price from the previous trading day.  We have four short term notes originated in June 2012 in the amount of $75,000 that bear interest at 6%.

Related Party Notes

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 one note with a principal balance of $90,556 that is owed to Jeremy Alcamo. It bears interest at a rate of 10% and is callable with 366 days notice which classifies it 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 Jeremy Alcamo, Jeremy Alcamo at his option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon. 

19

A summary of notes payable as of September 30, 2012 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
6 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		550,637			13,203.00			563,840
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		-			333,209.00			333,209
July 1, 2013, 16% interest, unsecured
12 Notes payable, originated in 2010 and 2011, due		-			1,078,333.00			1,078,333
due at various dates from July 2013 to March 2014,
16% interest, unsecured
2 Notes payable, originated in 2011 and 2012, due		207,680			-			207,680
Dec 31, 2013, 4% interest, unsecured
7 Notes payable, originated in 2011 &2012, due to be		1,325,000			-			1,325,000
repaid from a portion of gross sales beginning in
Feb 2012, 12% interest, unsecured
2 Notes payable, originated in 2011, due		45,180			-			45,180
Aug & Sept, 2012, 8% interest, unsecured
1 Note payable, originated in 2011, due		-			483,104.00			483,104
Jan 1, 2014, 10.25% interest, unsecured
2 Notes payable, originated in 2011 & 2012, due in 2012		105,000			-			105,000
4% interest and a 15% redemption premium
1 Note payable, originated in 2011, due in 2012		407,750			-			407,750
6% interest
1 Note payable, originated in 2012, convertible into,		4,775,834			-			4,775,834
common stock after 90 days. 10.25% interest rate,
secured by all assets of DC Brands International Inc.
4 Note payable, originated in 2012, due in 2012		75,000			-			75,000
6% interest
		9,111,043			1,907,849			11,018,892
Unamortized discount		(4,681,129	)		(751,542	)		(5,432,671	)
		4,429,914			1,156,307			5,586,221
Related party notes
1 Note payable, originated in 2010, callable		-			90,556.00			90,556
with 366 day notice, 10% interest, unsecured

20

OUR PLAN OF OPERATIONS

OPERATING MODEL AND REPORTING STRUCTURE

DC BRANDS INTERNATIONAL, INC.

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 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 Systems and nutritional supplements.  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 quarter ended Sep 30, 2012, we derived $8,654 representing 42% of our revenue from sales of our Functional Water Systems.  During the year ended December 31, 2011, we derived $271,255, representing 83% 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 but 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 quarter ended Sep 30, 2012, we derived $12,032 representing 58% 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 nutritional supplements.

Under the direction of Stephen Horgan, who became our President and CEO in June we immediately created 4 separate divisions for the Company; Functional Beverage, Dry Supplements, Online and International.  We expect that our Southern California and retail efforts in beverages will initially be enhanced by growth in our Dry Supplements and Online Divisions. We currently have minimal international sales and expect that the international division will be slower in developing and will take about a year before it will begin to contribute any meaningful amount to revenue. We expect to be in the market with our new distinct, packaging during the fourth quarter of 2012.

We plan to change our marketing focus and implement a grass roots online, social media networking marketing approach aimed at  gaining local consumers, and to use any traction received to expand the distribution network into other national markets that we believe have a consumer base that will embrace our nutritional dry supplements and beverage products.  During 2011 and 1ST Qtr 2012, the focus of our marketing had 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 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.  

Critical Accounting Policies

Management believes that the critical accounting policies and estimates discussed below involve the most complex management judgments due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts. Specific risks associated with these critical accounting policies are discussed throughout this MD&A, where such policies have a material effect on reported and expected financial results. For a detailed discussion of the application of these and other accounting policies, refer to the individual Notes to the Financial Statements for the period ended Sep 30, 2012.

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Revenue Recognition

The Company recognizes revenues when products are shipped or services are delivered to customers, pricing is fixed or determinable, and collection is reasonably assured. Net revenues include product sales net of returns and allowances.

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.

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, 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.

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 or the first two quarters of 2012.  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 filing. 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 June 30, 2012 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 Sep 30, 2012, there were no past due receivables. 

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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 Sep 30, 2012.

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 or June 30, 2012.

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.

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Recently Issued Accounting Standards

During the period ended Sep 30, 2012, there were several new accounting pronouncements issued by the FASB, the most recent pronouncement issued was Accounting Standards Update No. 2012-07—Entertainment—Films (Topic 926): Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs (a consensus of the FASB Emerging Issues Task Force).  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.

Off Balance Sheet Arrangements

There are no off balance sheet arrangements.

Contractual Obligations

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) 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 as of Sep 30, 2012 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.

(b) Changes in Internal Control over Financial Reporting

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 Sep 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II.   OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following information sets forth certain information with respect to all securities which we have sold during the past quarter. We did not pay any commissions in connection with any of these sales.

In July through September 2012 we issued to eight debtors an aggregate of 177,924,311 shares of our common stock in conjunction with pay down of debt. These securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”). The offering did not involve any general solicitation or advertising by us. Each individual acknowledged the existence of transfer restrictions applicable to the securities sold by us. Certificates representing the securities sold contain a legend stating the restrictions on transfer to which such securities are subject.

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to eight debtors an aggregate of 135,482,218 shares of our common stock in conjunction with pay down of debt.  These securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”).  The offering did not involve any general solicitation or advertising by us.  Each individual acknowledged the existence of transfer restrictions applicable to the securities sold by us. Certificates representing the securities sold contain a legend stating the restrictions on transfer to which such securities are subject.

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to three debtors an aggregate of 1,244 shares of our Series C Preferred Stock in conjunction with conversion of debt.  These securities were issued in reliance on Section 3(a)(9 )of the Securities Act of 1933, as amended (the “Act”). 

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to two debtors an aggregate of 2,776 shares of our Series E Preferred Stock in conjunction with conversion of debt.  These securities were issued in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”).   

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to two debtors an aggregate of 5,500 shares of our Series F Preferred Stock in conjunction with conversion of debt.    These securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”).    Each individual acknowledged the existence of transfer restrictions applicable to the securities sold by us. Certificates representing the securities sold contain a legend stating the restrictions on transfer to which such securities are subject.

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to two debtors an aggregate of 6,000 shares of our Series G Preferred Stock in conjunction with conversion of debt.  These securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”).   Each individual acknowledged the existence of transfer restrictions applicable to the securities sold by us. Certificates representing the securities sold contain a legend stating the restrictions on transfer to which such securities are subject.

Subsequent to September 30, 2012 and prior to the filing date of this repost we issued to one entity 95 shares of Series B Preferred Stock  and 25,880  shares of Series D Preferred Stock in conjunction with the sale of Preferred Shres.  These securities were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Act”).   Each individual acknowledged the existence of transfer restrictions applicable to the securities sold by us. Certificates representing the securities sold contain a legend stating the restrictions on transfer to which such securities are subject.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mining Safety Disclosures

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

Regulation S-B Number	Exhibit
31.1	Certification of the Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: November 14, 2012	DC BRANDS INTERNATIONAL, INC. (Registrant)
	By:	/s/ Stephen Horgan
		Stephen Horgan President and Chief Executive Officer (Principal Executive Officer)

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