As of September 30, 2013 and December 31, 2012, forty-five notes payable totaling $4,605,032 and twenty-four notes payable totaling $1,618,963, 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.
Transactions involving notes payable subsequent to September 30, 2013 are set forth in Note 10. Subsequent Events.
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, 2013 and December 31, 2012, 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.
All common shares have been retroactively adjusted for the 1 for 100 reverse stock split authorized by the board on August 23, 2013 and effective October 3, 2013.
All common shares have been retroactively adjusted for the 1 for 100 reverse stock split authorized by the board on March 8, 2013 and effective April 30, 2013.
The Company issued common stock during the nine months ended September 30, 2013 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 an aggregate of 18,188,937 shares of common stock on fifty-four different occasions during the nine months ended September 30, 2013, upon partial conversion of seven different notes. The common stock was valued at the higher of current market price or $0.001 per share (par value). The shares were collectively valued at $2,651,404.
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. On April 20, 2013, Robert Armstrong, the acting CEO and CFO purchased the 91,111 shares of Series A Preferred stock formerly owned by HARDSave LLC as they chose to cancel their purchase contract for these shares. These shares were purchased by Mr. Armstrong for a promissory note.
The 269.40 shares of Series B preferred can be converted into 20.21% of the common stock of the company. As of 09/30/2013 the Company would need to issue 4,623,397 shares of common shares if all of the Series B preferred was converted. As of 09/30/2013 the Company would need to issue 47,421,781 shares of common shares to the Series B holders if all of the preferred shares in all series were converted.
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. During the first quarter of 2013 one holder of C shares converted their 1,094 shares of stock into a convertible debt security. The 1,641 shares of Series C preferred can be converted into 1.63% of the common stock of the Company. As of 09/30/2013 the Company would need to issue 302,994 shares of common shares if all of the Series C preferred was converted. As of 09/30/2013 the company would need to issue 3,107,784 shares of common shares to the Series C holders if all of the preferred shares in all series were converted.
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. As of 09/30/2013 the Company would need to issue 1,613,535 shares of common shares if all of the series E preferred was converted. As of 9/30/2013 the Company would need to issue 16,549,883 shares of common shares to the Series E holders if all of the preferred shares in all series were converted.
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. As of 09/30/2013 the Company would need to issue 1,063,217 shares of common shares if all of the Series F preferred was converted. As of 09/30/2013 the Company would need to issue 10,905,325 shares of common shares to the Series F holders if all of the preferred shares in all series were converted.
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 $1,250.00 per share. As of 09/30/2013 the Company would need to issue 1,164,519 shares of common shares if all of the Series G preferred was converted. As of 09/30/2013 the Company would need to issue 11,944,373 shares of common shares to the Series G holders if all of the preferred shares in all series were converted.
Southridge has committed to purchase up to $10 million of our common stock, which is subject to various conditions being met prior to our use of the facility. 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.
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:
The Company had related party payables and note payable to former officers of $1,319,689 and $1,319,689 at September 30, 2013 and December 31, 2012, respectively consisting primarily of notes payable to former officers. Of the $1,319,689 of related party payables, $1,000,000 was owed to Mr. Pearce in the form of a secured convertible promissory note and $319,689 was owed to Mr. Alcamo ($216,175 for deferred salary payable, $12,958 for royalties owed in accordance with the bottle cap license agreement and $90,556 in the form of an unsecured promissory note). Richard Pearce, our former Chief Executive Officer, and Jeremy J Alcamo, our former 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 $386,598 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.
On April 20, 2013, Robert Armstrong, the acting CEO and CFO purchased the 91,111 shares of Series A Preferred stock formerly owned by HARDSave LLC as they chose to cancel their purchase contract for these shares. These shares were purchased by Mr. Armstrong for a promissory note.
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 achievements of the Registrant 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, 2013 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, 2012 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.
Overview
We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009 at King Soopers. From our inception to September 30, 2013, we had incurred an accumulated deficit of $101,208,886. Our accumulated deficit through September 30, 2013 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 $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. However, we currently have no accounts receivable and therefore have not been able to use the factoring arrangement this past quarter. 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.
Recent Developments
On May 30, 2013 we entered into the tea business when we purchased 15% of Village Tea Company Distribution, Inc. (“Village Tea”) , a manufacturer and distributor of premium blends of loose leaf tea. We believe that there is synergy between us and Village Tea and we intend to provide various services to Village Tea such as aiding Village Tea with their manufacturing and bottling needs. On June 27, 2013 the Company signed an exclusive manufacturing supply services agreement with Village Tea Company Distribution, Inc. ("Village Tea"), to develop a line of ready to drink teas with added supplements for Village Tea. Village Tea intends to use the Company’s existing capabilities, which include a patented supplement delivery cap, to enhance the tea for those interested in sports nutrition. Village Tea also intends to utilize their existing and anticipated distribution channels to sell this unique new product. DC Brands shall arrange for the retention of a manufacturer for the Products which shall produce, package, store and ship Product in accordance with good manufacturing practices prevailing in the industry and in strict compliance with the specifications, formulas, manufacturing process and quality control standards and coding systems. DC Brands agrees to oversee the processing, preparation and packaging of the Products in accordance with the terms of this Agreement. Village Tea shall have full responsibility for procurement and payment for all beverage ingredients including teas and vitamin and herbal supplements necessary to produce the Products (the “Product Supplies”) and DC Brands shall have full responsibility for procurement (at Village Tea’s expense) of the bottles, labels, flip-top and other packaging materials (collectively "Packaging Materials") necessary to package the Products. Packaging Materials shall be ordered in quantities based upon quarterly forecasts provided by Village Tea, which forecasts shall be provided on the last day of each quarter showing estimates for the next two quarters. Village Tea shall be responsible for the costs associated with any and all completed Products including all Packaging Materials acquired, whether or not used as agreed to by Village Tea and Suppliers.
Results of Operations
Quarter ended September 30, 2013 Compared to quarter ended September 30, 2012
Revenue- During the quarter ended September 30, 2013, we generated zero revenue related to the sale of our H.A.R.D, Nutrition Functional Water System which commenced in August 2009. During the same period of 2012, we had revenue of $20,686. The company is currently working with Village Tea to develop proprietary blends for a ready to drink line of teas. Some will utilize the DC Brands patented cap to deliver vitamins and supplements on the top of these new ready to drink teas. Our gross margin decreased from $9,973 for the quarter ended September 30, 2012 to $0for the quarter ended September 30, 2013. Our cost of goods sold decreased approximately 100% to $0 for the quarter ended September 30, 2013 from $10,713 for the quarter ended September 30, 2012. The decrease in the cost of goods sold was attributable to the decrease in sales. Sales of our H.A.R.D, Nutrition Functional Water System and H.A.R.D. Nutrition supplements accounted for 100% and 0% respectively of our revenue for the quarter ended September 30, 2013.
Expenses- Our total operating expenses, excluding depreciation and amortization, for the quarter ended September 30, 2013 were $42,064 as compared to $224,515 for the quarter ended September 30, 2012.
General and administrative expenses were $42,064 and $204,447 for the quarters ended September 30, 2013 and September 30, 2012, respectively and included salaries, legal, accounting and other professional fees and occupancy related expenses. The general and administrative expenses of $42,064for the quarter ended September 30, 2013 included $0 for salaries, 39,796 for legal accounting and other professional expenses, and $2,268 for occupancy related expenses. The general and administrative expenses $204,447 for the quarter ended Sept 30, 2012 included $72,758 for salaries, 47,722 for legal accounting and other professional expenses, and $20,696 for occupancy related expenses.
Sales and marketing consisted of advertising and other promotional expenses. Sales and marketing expenses were $0 and $20,068 for the quarters ended September 30, 2013 and September 30, 2012.
Interest expense for the quarter ended September 30, 2013 decreased 77% to $340,063 from $1,460,690 for the quarter ended September 30, 2012.
Net loss for the quarter ended September 30, 2013 decreased 21% to $1,540,209 as compared to $1,.956,836 for the quarter ended September 30, 2012 and was attributable to reduced operations.
Liquidity and Capital Resources
Revenues
At September 30, 2013 we had cash and cash equivalents of $487 as compared to $16,628 at December 31, 2012. Our working capital deficit at September 30, 2013 was $9,091,337 and at December 31, 2012 was $7,592,035.
For the nine months ended September 30, 2013 our cash used in operating activities was $129,241. Our primary sources and uses of cash from operating activities for the period were losses from operations, loss on retirement of debt, and accrued interest of $ 217,288.
Net cash provided by financing activities for the nine months ended September 30, 2013 was $109,000.
Current and Future Financing Needs
We have incurred an accumulated deficit of $101,208,886 through September 30, 2013. We have incurred negative cash flow from operations since we started our business. At September 30, 2013, we had short term and long term debt of $5,991,089, which includes related party debt. 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 September 30, 2013 is as follows: At September 30, 2013 we had 54 notes outstanding, of which thirty-seven notes or 74% of the aggregate principal balance were past due. We have one note payable with a principal balance of $538,889 bearing interest at 6% and due in 2006. We had two notes with and aggregate principal balance of $24,266 bearing interest from 24% to 36% and due in 2007 and 2008. To date no demands for payment have been received on these three notes. Notes in the aggregate principal amount of $368,878 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. The $5 million revolving note with a principal outstanding balance as of September 30, 2013 of $1,451 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 September 30, 2013, $265,688 was assigned to other lenders who still hold $674,373 in 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 8 notes payable with an aggregate principal balance of $723,333 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 $1,275,000 originated in 2011 with a 24 month maturity bearing interest at 12%. 106 shares of Series B preferred stock were issued in conjunction with these notes. We have two notes payable with a principal balance of 207,682 originated in 2011 and 2012 that converted a payable overdue to one of our vendors. The notes bear interest at 4% and have a maturity of 12/31/13. We have one note payable originated in 2012 with an aggregate principal balance of $31,330 originated in 2012 with a 9 month maturity bearing interest at 8%. This note is convertible into common stock after 6 months. We have one note payable originated in 2011 with an aggregate principal balance of $263,914 originated in 2011 with a maturity date of December 31, 2015 bearing interest at 4%. We have 4 notes payable originated in 2011and 2012 with an aggregate principal balance of $112,769, bearing 4% interest, which matures in December 2012 and carries a 15% redemption premium. We have one $25,000 note that bears interest at 6% that was originated in 2012 and due in 2012. We have one note originated in 2013 that was a conversion from Series C Preferred stock in the amount of $439,836 and bears interest at 6%. This note is convertible into common stock of the company at a 60% discount from market. We have 6 notes originated in 2013 with an aggregate principal balance of $143,500 and maturity dates from 9 months to 12 months. These notes are convertible into common stock of the company at discount rates from 50% to 60% from current market. We have one note originated in 2013 with an aggregate principal balance of $45,000 for the purchase of the Village Tea Company shares. It is due in 2013.
Related Party Notes
We have 2 note originated in 2011 with an aggregate principal balance of $314,598 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. Bob Armstrong, the CFO and Acting CEO owns $50,000 of that note. We have a note with a principal balance of $90,556 that are related party payables owed to Jeremy Alcamo. They bear interest at a rate of 10% and is callable with 366 days notice which classifies it as long term debt. We also have a $1,000,000 note due to Richard Pearce our former CEO that bears interest at 10.25% and is convertible into common stock at a 60% discount to the current market rate.
A summary of notes payable as of September 30, 2013 is as follows:
| | | Current | | | Long Term | | | Total | |
| 1 Note payable, originated in 2004, due in 2006, | | $ | 538,888 | | | $ | - | | | $ | 538,888 | |
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, | | | 14,267 | | | | - | | | | 14,267 | |
| 24% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2008, | | | 368,879 | | | | - | | | | 368,879 | |
| due at various dates from July to August | | | | | | | | | | | | |
| 2010, 15% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 10 Notes payable, originated in 2010, due | | | 674,373 | | | | 1,451 | | | | 675,824 | |
| January 1, 2015, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 8 Notes payable, originated in 2010 and 2011, due | | | 723,333 | | | | - | | | | 723,333 | |
| due at various dates from July 2013 to March 2014, | | | | | | | | | | | | |
| 16% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2 Notes payable, originated in 2011 and 2012, due | | | 207,682 | | | | - | | | | 207,682 | |
| Dec 31, 2013, 4% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2011 &2012, due to be | | | 1,274,999 | | | | - | | | | 1,274,999 | |
| repaid from a portion of gross sales beginning in | | | | | | | | | | | | |
| Feb 2012, 12% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2012, due | | | 31,330 | | | | - | | | | 31,330 | |
| June, 2013, 8% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2011, due | | | 263,914 | | | | - | | | | 263,914 | |
| Jan 1, 2014, 10.25% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 4 Notes payable, originated in 2011 & 2012, due in 2012 | | | 112,769 | | | | - | | | | 112,769 | |
| 4% interest and a 15% redemption premium | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2 Note payable, originated in 2011, due in 2012 | | | 314,598 | | | | - | | | | 314,598 | |
| 6% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2012, due in 2012 | | | 25,000 | | | | - | | | | 25,000 | |
| 6% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2013, due in 2015 | | | 439,836 | | | | - | | | | 439,836 | |
| 4% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 6 Notes payable, originated in 2013, due in 2015 | | | 143,500 | | | | - | | | | 143,500 | |
| 0% - 10% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2013, due in 2013 | | | 45,000 | | | | - | | | | 45,000 | |
| 0% interest | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | 5,188,368 | | | | 1,451 | | | | 5,189,819 | |
| Unamortized discount | | | (518,419 | ) | | | - | | | | (518,419 | ) |
| | | | | | | | | | | | | |
| | | $ | 4,669,949 | | | $ | 1,451 | | | | 4,671,400 | |
| | | | | | | | | | | | | |
| Related party notes | | | | | | | | | | | | |
| 1 Note payable, originated in 2010, callable | | | 90,556 | | | | - | | | | 90,556 | |
| with 366 day notice, 10% interest, unsecured | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 1 Note payable, originated in 2012, convertible into, | | | 1,000,000 | | | | - | | | | 1,000,000 | |
| common stock after 90 days. 10.25% interest rate, | | | | | | | | | | | | |
| secured by all assets of DC Brands International Inc. | | | | | | | | | | | | |
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 aimed at maximizing the full potential of the body. Until recently, 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, our revenue has been derived substantially from the sale of our Functional Water Systems. Due to our limited capital resources we. have suspended the sale of our nutritional supplements and focused solely on the sale of Functional Water Systems tailored to different health and daily needs, namely, 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 period ended September 30, 2013, we derived no revenue from sales of our Functional Water Systems. During the year ended September 30, 2012, we derived $8,654 representing 42% of our revenue from sales of our Functional Water Systems.
On June 27, 2013 the Company signed an exclusive manufacturing supply services agreement with Village Tea Company Distribution, Inc. ("Village Tea"), to develop a line of ready to drink teas with added supplements for Village Tea. Village Tea intends to use the Company’s existing capabilities, which include a patented supplement delivery cap, to enhance the tea for those interested in sports nutrition. Village Tea also intends to utilize their existing and anticipated distribution channels to sell this unique new product. DC Brands shall arrange for the retention of a manufacturer for the Products which shall produce, package, store and ship Product in accordance with good manufacturing practices prevailing in the industry and in strict compliance with the specifications, formulas, manufacturing process and quality control standards and coding systems. DC Brands agrees to oversee the processing, preparation and packaging of the Products in accordance with the terms of this Agreement. Village Tea shall have full responsibility for procurement and payment for all beverage ingredients including teas and vitamin and herbal supplements necessary to produce the Products (the “Product Supplies”) and DC Brands shall have full responsibility for procurement (at Village Tea’s expense) of the bottles, labels, flip-top and other packaging materials (collectively "Packaging Materials") necessary to package the Products. Packaging Materials shall be ordered in quantities based upon quarterly forecasts provided by Village Tea, which forecasts shall be provided on the last day of each quarter showing estimates for the next two quarters. Village Tea shall be responsible for the costs associated with any and all completed Products including all Packaging Materials acquired, whether or not used as agreed to by Village Tea and Suppliers.
The other products previously 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 period ended September 30, 2013, we derived no revenue from sales of our H.A.R.D. Nutritional Supplement products. During the period ended September 30, 2012, we derived $12,032 representing 58% of our revenue from sales of our H.A.R.D. Nutritional Supplement products.
On May 30, 2013 we purchased 15% of Village Tea Company distribution, Inc. They manufacture and distribute premium blends of loose leaf tea.
Until recently, our primary 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. Since 2013, to conserve costs our primary focus has been on sales of our products through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to expand our marketing efforts in the United States beyond the local Colorado area.
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 commenced operations of products that are sports and fitness based nutraceutical supplements under the H.A.R.D. Nutrition label in 2009. 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 1685 South Colorado Blvd, Suite S291, Denver, Colorado 80222. Our telephone number is (720)281-7143. Information about our products can be obtained from our website www.hardnutrition.com.
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 Sept 30, 2013.
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 the third quarter of 2013. 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
In the past our accounts receivable have been unsecured, and we have been 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, 2012 or September 30, 2013 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, 2012 and September 30, 2013, 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 September 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.
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 period ended September 30, 2013, there were several new accounting pronouncements issued by the FASB. 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”) who also serves as our 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 who also serves as our CFO concluded that the Company’s disclosure controls and procedures are not effective as of September 30, 2013 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 who is also our 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 September 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 19, 2013 a debtholder, filed a complaint in Jefferson County Court based upon a promissory note issued May 31, 2010 and is seeking relief of the payment of the $125,000 debt plus accrued interest owed as well as compensatory and consequential damages. It is not know at this time the outcome of these 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 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 Sept 2013 we issued to four debtors an aggregate of 12,232,599 shares of our common stock in conjunction with conversion of debt. These issuances were exempt from registration under Section 3(a)(9) of the Securities Act of 1933. 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 we issued to five debtors an aggregate of 292,414,918 shares of our common stock in conjunction with conversion of debt. These issuances were exempt from registration under Section 3(a)(9) of the Securities Act of 1933. 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 |
| | Certification of the Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of the Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | 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 |
| | | |
| | 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 |
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 19, 2013 | DC BRANDS INTERNATIONAL, INC. (Registrant) |
| | | |
| | By: | /s/Robert H. Armstrong |
| | | Robert H. Armstrong Chief Executive Officer (Principal Executive Officer) |
