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: March 31, 2014
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) |
1685 S. Colorado Blvd, Unit S291 Denver, CO 80222
(Address of principal executive offices including zip code)
(720) 281-7143
( 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: 3,665,972,644 shares of common stock, $.001 par value per share, as of May 13, 2014.
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 | 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 | 10 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risks | 16 |
| Item 4. | Controls and Procedures | 16 |
| | | |
| | PART II—OTHER INFORMATION | |
| Item 1. | Legal Proceedings | 17 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 17 |
| Item 3. | Defaults Upon Senior Securities | 17 |
| Item 4. | Mining Safety Disclosures | 17 |
| Item 5. | Other Information | 17 |
| Item 6. | Exhibits | 17 |
| SIGNATURE | 18 |
ITEM 1. FINANCIAL STATEMENTS
DC BRANDS INTERNATIONAL, INC.
Consolidated Financial Statements
As of March 31, 2013 and 2012
(Unaudited)
DC Brands International, Inc.
Consolidated Balance Sheets
As of March 31, 2014 and December 31, 2013
| | | As of March 31, | | | As of December 31, | |
| | | 2014 | | | 2013 | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 3,103 | | | $ | 11 | |
| Total current assets | | | 3,103 | | | | 11 | |
| | | | | | | | | |
| Property and equipment, net | | | - | | | | - | |
| Investments | | | 50,000 | | | | 50,000 | |
| | | | | | | | | |
| Total assets | | $ | 53,103 | | | $ | 50,011 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 137,039 | | | $ | 137,039 | |
| Accrued Bonuses | | | 1,800,000 | | | | 1,800,000 | |
| Accrued interest payable | | | 1,559,852 | | | | 1,422,453 | |
| Related party payable | | | 229,133 | | | | 229,133 | |
| Note payable to former officers | | | 1,090,556 | | | | 1,090,556 | |
| Short-term notes payable and current portion of long-term debt (Net of Unamortized Discount of $35,736 as of March 31, 2014 and $255,486 as of December 31, 2013) | | | 4,694,034 | | | | 4,484,666 | |
| Total current liabilities | | | 9,510,614 | | | | 9,163,847 | |
| Long-term debt (Net of Unamortized Discount of $643,018 as of March 31, 2014 and $122,177 as of December 31, 2013) | | | 333,270 | | | | 319,110 | |
| Total liabilities | | | 9,843,884 | | | | 9,482,957 | |
| | | | | | | | | |
| 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 March 31, 2014 and December 31, 2013 | | | 91 | | | | 91 | |
Series B - G Preferred Stock, 100,000 shares authorized; shares issued and outstanding - 60,849 shares as of March 31, 2014 and 60,686 shares as of December 31, 2013 | | | 61 | | | | 61 | |
Common Stock, $0.001 par value; 5,000,000,000 shares authorized; shares issued and outstanding | | | | | | | | |
| -2,460,216,842 as ofMarch 31, 2014 and 505,243,481 as of December 31, 2013 | | | 2,460,217 | | | | 505,244 | |
| Additional paid in capital | | | 90,390,183 | | | | 92,385,040 | |
| Accumulated deficit | | | (102,641,333 | ) | | | (102,323,382 | ) |
| Total stockholders' deficit | | | (9,790,781 | ) | | | (9,432,946 | ) |
| | | | | | | | | |
| Total liabilities and stockholders' deficit | | $ | 53,103 | | | $ | 50,011 | |
The accompanying notes are an integral part of these unaudited financial statements.
DC Brands International, Inc.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2014 and 2013
(unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Net Revenues | | $ | 1,105 | | | $ | 16,370 | |
| Cost of goods sold | | | - | | | | 9,577 | |
| Gross margin | | | 1,105 | | | | 6,793 | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| General and administrative | | | 58,013 | | | | 67,973 | |
| Sales and marketing | | | - | | | | 33,455 | |
| Depreciation and amortization | | | - | | | | 2,519 | |
| Total operating expenses | | | 58,013 | | | | 103,947 | |
| Loss from operations | | | (56,908 | ) | | | (97,154 | ) |
| | | | | | | | | |
| Other Expense (Income) | | | | | | | | |
| Interest expense | | | 261,043 | | | | 365,249 | |
| Gain on Sale of Assets | | | - | | | | (4,500 | ) |
| Loss on retirement of debt | | | - | | | | 405,066 | |
| Total other expense (income) | | | 261,043 | | | | 765,815 | |
| Loss Before Taxes | | | (317,951 | ) | | | (862,969 | ) |
| Provision for income taxes | | | - | | | | - | |
| Net Loss | | $ | (317,951 | ) | | $ | (862,969 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding | | | 1,446,338,298 | | | | 97,856 | |
| | | | | | | | | |
| Basic and diluted net loss per common share | | $ | (0.00 | ) | | $ | (8.82 | ) |
The accompanying notes are an integral part of these unaudited financial statements.
DC Brands International, Inc.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2014 and 2013
(unaudited)
| | | Three Months Ended March 31, | |
| | | 2014 | | | 2013 | |
| Cash used in operating activities | | | | | | |
| Net loss | | $ | (317,951 | ) | | $ | (862,969 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| Depreciation and amortization | | | - | | | | 2,519 | |
| Debt issued for services | | | 15,000 | | | | - | |
| Loss on retirement of debt | | | (0 | ) | | | 405,066 | |
| Amortization of debt discount | | | 122,242 | | | | 199,283 | |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | | | - | | | | 13,372 | |
| Inventory | | | - | | | | 25,588 | |
| Prepaid expenses | | | - | | | | 923 | |
| Accounts payable | | | - | | | | 4,471 | |
| Accrued interest payable | | | 138,801 | | | | 165,966 | |
| Net cash used in operating activities | | $ | (41,908 | ) | | $ | (45,781 | ) |
| Cash provided by investing activities | | | | | |
| Sale of property and equipment | | | - | | | | 4,100 | |
| Net cash provided by investing activities | | $ | - | | | $ | 4,100 | |
| Cash provided by financing activities | | | | | |
| Proceeds from notes payable | | | 45,000 | | | | 26,000 | |
| Net cash provided by financing activities | | $ | 45,000 | | | $ | 26,000 | |
| Net decrease in cash and cash equivalents | | $ | 3,092 | | | $ | (15,681 | ) |
| Cash and cash equivalents | | | | | | | | |
| Beginning of period | | | 11 | | | | 16,628 | |
| End of period | | $ | 3,103 | | | $ | 947 | |
| | | | | | | | | |
Supplemental Disclosure of Noncash Investing and Financing Activities | | | | | |
| Notes payable converted to common stock | | $ | 170,381 | | | $ | 22,324 | |
| Common stock issued for retirement of debt and accrued interest | | $ | 1,954,973 | | | $ | 427,390 | |
| Accrued interest reclassified to long-term debt | | $ | 1,402 | | | $ | - | |
| Disposition of fully depreciated property, plant &equipment | | $ | - | | | $ | 211,020 | |
| Preferred stock exchanged for debt | | $ | 635,000 | | | $ | 439,836 | |
| Supplemental Disclosure | | | | | | | | |
| Interest paid | | $ | - | | | $ | - | |
The accompanying notes are an integral part of these unaudited financial statements.
DC Brands International, Inc.
Consolidated Statement of Stockholders’ Deficit
For the Three Months Ended March 31, 2014
| | | Series A Preferred Stock | | | Series B - G Preferred Stock | | | Common Stock | | | Additional Paid in | | | Accumulated | | | Total Stockholders' | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Deficit | | | Deficit | |
| Balance, December 31, 2013 | | | 91,111 | | | $ | 91 | | | | 60,849 | | | $ | 61 | | | | 505,243,481 | | | $ | 505,244 | | | $ | 92,385,040 | | | $ | (102,323,382 | ) | | $ | (9,432,946 | ) |
| Common stock issued in exchange for retirement of debt | | | | | | | | | | | | | | | | | | | 1,954,973,361 | | | | 1,954,973 | | | | (1,783,190 | ) | | | | | | | 171,783 | |
| Preferred Stock exchanged for convertible debt | | | | | | | | | | | (163 | ) | | | - | | | | | | | | | | | | (635,000 | ) | | | | | | | (635,000 | ) |
| Discount on Notes Payable | | | | | | | | | | | | | | | | | | | | | | | | | | | 423,333 | | | | | | | | 423,333 | |
| Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (317,951 | ) | | | (317,951 | ) |
| Balance, March 31, 2014 | | | 91,111 | | | $ | 91 | | | | 60,686 | | | $ | 61 | | | | 2,460,216,842 | | | $ | 2,460,217 | | | $ | 90,390,183 | | | $ | (102,641,333 | ) | | $ | (9,790,781 | ) |
The accompanying notes are an integral part of these unaudited financial statements.
| 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 focus during the first half of 2013 was the sale of products under its H.A.R.D. Nutrition label. During the second half of the year the focus was shifted to its joint venture tea business and the Company’s restructuring. The Company’s current focus is on providing financial and other services to the Colorado marijuana industry.
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 March 31, 2014.
On February 27, 2013, we received proposed terms from a creditor, as well as other creditors, to provide funding for us in the form of convertible debt. We have recently received funding from such creditor that has been used to continue our current operations. In an effort to preserve cash, we liquidated our raw material inventory and warehouse assets and moved the functional beverage inventory into a much smaller location. By the end of 2013 the inventory was about to expire and was donated to a local charity and the balance of our raw materials stored at the Michigan co-packing facility were lost when they went out of business.
In January 2013 our C.E.O. (Stephen Horgan) resigned. We laid off all employees except for our C.F.O. (Bob Armstrong) and all members of the board resigned. Bob Armstrong has been named the acting C.E.O. and added to the board.
In April 2014 the Company announced a new focus, to become a financing provider and service provider to the growing Colorado marijuana industry. DC Brands, through its newly formed, 80% owned subsidiary, DC Brands Green Investments, LLC intends to provide accounting, security, compliance, payroll processing and tax payment services to fully licensed Colorado medical and recreational marijuana businesses.
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.
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, 2013 and 2012 filed in the Company’s Annual Report on Form 10K dated December 31, 2013, 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 March 31, 2013 and 2012 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) as well as its 80% owned subsidiary DB Brands Green Investments, LLC. All material intercompany transactions and balances have been eliminated.
Credit Risk and Customer Concentrations
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Financial instruments potentially subjecting the Company to concentrations of credit risk consist principally of accounts receivable.
As of March 31, 2014 and December 31, 2013 there were no accounts receivable.
Fair Value of Financial Instrument Estimates
In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the consolidated financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the consolidated balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended March 31, 2014 and 2013.
Recent Accounting Pronouncements
During the period ended March 31, 2014, 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.
| 2. | Commitments and Contingencies |
The Company currently has no leases or other contingencies.
As of March 31, 2014 and December 31, 2013, forty-one notes payable totaling $4,178,674, were past due. There are no default penalties or fees that may be sanctioned against the Company for not paying the notes upon maturity. The Company intends to restructure these notes into long-term debt or equity.
The Company settled notes payable and accrued interest payable totaling $171,783 and $22,324 during the three months ended March 31, 2014 and 2013, respectively by issuing 1,954,973,361 and 4,273,901 shares of common stock during the three months ended March 31, 2014 and 2013, respectively.
Transactions involving notes payable subsequent to March 31, 2014 are set forth in Note 8. 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 March 31, 2014 and December 31, 2013, 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.
Issuances of Common Stock
The Company issued common stock during the three months ended March 31, 2014 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 1,954,973,361 shares of common stock on twenty-eight different occasions during the three months ended March 31, 2014, upon partial conversion of five different notes.
Preferred Stock
The chart below details the number of preferred shares issued and conversion analysis.
| Shares Issued | | Series A | | | Series B | | | Series C | | | Series D | | | Series E | | | Series F | | | Series G | | | Total | |
| Issued as of 12/31/2013 | | | 91,111 | | | | 269 | | | | 1,641 | | | | 44,663 | | | | 2,776 | | | | 5,500 | | | | 6,000 | | | | 151,960 | |
| For conversion to debt | | | - | | | | (163 | ) | | | | | | | - | | | | - | | | | - | | | | - | | | $ | (439,836 | ) |
| Issued as of 3/31/2014 | | | 91,111 | | | | 106 | | | | 1,641 | | | | 44,663 | | | | 2,776 | | | | 5,500 | | | | 6,000 | | | | 151,980 | |
| % of Common Stock convertible into | | | 51.25 | % | | | 7.95 | % | | | 1.64 | % | | | 0.00 | % | | | 8.12 | % | | | 5.50 | % | | | 6.00 | % | | | 80.46 | % |
| | | Voting Only | | | | | | | | Upside Only | | | | | | | | | | | | | | |
| Common Stock if Series Converted converted | | | 2,586,425,966 | | | | 212,562,735 | | | | 41,085,621 | | | | | | | | 217,483,169 | | | | 143,307,631 | | | | 156,961,835 | | | | 3,357,826,957 | |
| Common stock if all Series converted at once | | | 7,801,821,228 | | | | 641,184,585 | | | | 123,932,669 | | | | | | | | 656,026,821 | | | | 432,280,117 | | | | 473,467,321 | | | | 10,128,712,740 | |
Transactions involving common stock subsequent to March 31, 2014 are set forth in Note 10. Subsequent Events.
| 6. | 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 were zero in both the three months ended March 31, 2014 and 2013.
| 7. | Related Party Transactions |
The Company had related party payables and note payable to former officers of $1,319,689 and $1,319,689 at March 31, 2014 and December 31, 2013, 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 $264,598 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.
Subsequent to March 31, 2014, the Company issued common stock as follows:
| | | Shares | | | Common Stock | | | Additional Paid in Capital | | | Amount | |
| For conversion of debt | | | 1,205,755,802 | | | $ | 1,205,756 | | | $ | - | | | $ | 1,205,756 | |
| | | | 1,205,755,802 | | | $ | 1,205,756 | | | $ | - | | | $ | 1,205,756 | |
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 March 31, 2014 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, 2013 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 March 31, 2014, we had incurred an accumulated deficit of $102,641,333. Our accumulated deficit through March 31, 2014 is primarily attributable to our issuance of stock compensation and losses from conversions of debt.
On April 4, 2014 we announced a new direction for the Company. We have positioned the Company to become a service provider to the expanding Colorado marijuana industry. DC Brands, through its newly formed, 80% owned subsidiary, DC Brands Green Investments, LLC intends to provide accounting, security, compliance, payroll processing and tax payment services to fully licensed Colorado medical and recreational marijuana businesses. During the past few months, we have been focused on finalizing funding commitments for our new line of business, developing our business plan, interviewing potential consultants as well as seeking third party customers for our service.
If our revenue from our operations is not sufficient to meet our ongoing expenses we will need additional financing.
Results of Operations
Quarter ended March 31, 2014 Compared to quarter ended March 31, 2013
Revenue- During the quarter ended March 31, 2013, we generated revenue of $1,105, a substantial portion 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 93% decrease from the prior year. During the same period of 2013, we had revenue of $16,370. Our gross margin decreased from $6,793 for the quarter ended March 31, 2013 to $1,105 for the quarter ended March 31, 2014. Our cost of goods sold decreased approximately 100% to $0 for the quarter ended March 31, 2014 from $9,577 for the quarter ended March 31, 2013. 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 March 31, 2014.
Expenses- Our total operating expenses, excluding depreciation and amortization, for the quarter ended March 31, 2014 were $58,013 as compared to $101,428 for the quarter ended March 31, 2013.
General and administrative expenses were $58,013 and $67,973 for the quarters ended March 31, 2014 and March 31, 2013, respectively and included salaries, legal, accounting and other professional fees and occupancy related expenses. Included in general and administrative for the quarter ended March 31, 2014 was $0 for salaries, $57,005 for legal accounting and other professional expenses and $1,008 for occupancy related expenses. Included in general and administrative expenses of $67,973 for the quarter ended March 31, 2013 was $48,601 for salaries, -11,361 for legal accounting and other professional expenses (including a refund of $20,000 previously paid) and $22,436 for occupancy related expenses
Sales and marketing consisted of advertising and other promotional expenses. Sales and marketing expenses were $0 and $33,455 for the quarters ended March 31, 2014 and March 31, 2013, respectively. No expense for advertising was paid in the first quarter of 2014 or 2013.
Interest expense for the quarter ended March 31 2014 decreased 29% to $261,043 from $365,249 for the quarter ended March 31, 2013. Net loss for the quarter ended March 31, 2013 decreased 63% to $317,921 as compared to $862,969 for the quarter ended March 31, 2013 and was attributable to an decreases in the loss on the retirement of debt to $0, during the three months ended March 31, 2014 in comparison to a loss on retirement of debt of $405,065 during the three months ended March 31, 2013.
Liquidity and Capital Resources
Revenues
At March 31, 2014 we had cash and cash equivalents of $3,103 as compared to $11 at December 31, 2013. Our working capital deficit at March 31, 2014 was $9,507,511 and at December 31, 2013 was $9,163,836.
For the three months ended March 31, 2014 our cash used in operating activities was $41,908. Our primary sources and uses of cash from operating activities for the period were losses from operations, loss on retirement of debt, amortization of debt discount and accrued interest payable.
Net cash provided by financing activities for the three months ended March 31, 2014 was $45,000.
Current and Future Financing Needs
We have incurred an accumulated deficit of $102,641,333 through March 31, 2014. We have incurred negative cash flow from operations since we started our business. At March 31, 2014, we had short term and long term debt of $6,346,993, which includes related party debt. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our new business strategy, including our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance.
We have no commitment for additional funding other than the $1 million commitment for our new marijuana related business. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our new line of business, the provision of financial and other services to the marijuana industry 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 revenue from the provision of services 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.
As of March 31, 2014 and December 31, 2013, forty-one notes payable totaling $4,178,674, 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, however there can be no assurance that it will be successful in doing so.
Related Party Notes
We have 1 note 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 CEO of DC Brands International, owns a majority of. 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 March 31, 2014 is as follows:
| | | Current | | | Long Term | | | Total | |
1 Note payable, originated in 2004, due in 2006, 6% interest rate, secured by assets of DC Brands, LLC, a wholly owned subsidiary | | $ | 538,887 | | | $ | - | | | $ | 538,887 | |
| | | | | | | | | | | | | |
1 Note payable originated in 2007, due in 2007, 36% interest, unsecured | | | 10,000 | | | | - | | | | 10,000 | |
| | | | | | | | | | | | | |
1 Note payable originated in 2007, due in 2008, 24% interest, unsecured | | | 14,267 | | | | - | | | | 14,267 | |
| | | | | | | | | | | | | |
6 Notes payable, originated in 2008, due at various dates from July to August 2010, 15% interest, unsecured | | | 368,879 | | | | - | | | | 368,879 | |
| | | | | | | | | | | | | |
10 Notes payable, originated in 2010, due from January 1, 2013 - 2015, 10.25% interest, unsecured | | | 646,571 | | | | 1,452 | | | | 648,023 | |
| | | | | | | | | | | | | |
8 Notes payable, originated in 2010 and 2011, due at various dates from July 2013 to March 2014, 16% interest, unsecured | | | 723,333 | | | | - | | | | 723,333 | |
| | | | | | | | | | | | | |
2 Notes payable, originated in 2011 and 2012, due Dec 31, 2013, 4% interest, unsecured | | | 197,682 | | | | - | | | | 197,682 | |
| | | | | | | | | | | | | |
6 Notes payable, originated in 2011 &2012, due to be repaid from a portion of gross sales beginning in Feb 2012, 12% interest, unsecured | | | 1,275,000 | | | | - | | | | 1,275,000 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2012, due June, 2013, 8% interest, unsecured | | | 25,080 | | | | - | | | | 25,080 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2011, due Jan 1, 2014, 10.25% interest, unsecured | | | 263,913 | | | | - | | | | 263,913 | |
| | | | | | | | | | | | | |
4 Notes payable, originated in 2011 & 2012, due in 2012 4% interest and a 15% redemption premium | | | 149,442 | | | | - | | | | 149,442 | |
| | | | | | | | | | | | | |
2 Note payable, originated in 2011, due in 2012 6% interest | | | 264,598 | | | | - | | | | 264,598 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2012, due in 2012 6% interest | | | 25,000 | | | | - | | | | 25,000 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2013, due in 2015 4% interest | | | - | | | | 439,835 | | | | 439,835 | |
| | | | | | | | | | | | | |
6 Notes payable, originated in 2013, due in 2014 0% - 10% interest | | | 192,500 | | | | - | | | | 192,500 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2013, due in 2013 0% interest | | | 45,000 | | | | - | | | | 45,000 | |
| | | | | | | | | | | | | |
| | | | 4,740,152 | | | | 441,287 | | | | 5,181,439 | |
| Unamortized discount | | | (255,486 | ) | | | (122,177 | ) | | | (377,663 | ) |
| | | | | | | | | | | | | |
| | | $ | 4,484,666 | | | $ | 319,110 | | | | 4,803,776 | |
| | | | | | | | | | | | | |
| Related party notes | | | | | | | | | |
1 Note payable, originated in 2010, callable with 366 day notice, 10% interest, unsecured | | | 90,556 | | | | - | | | | 90,556 | |
| | | | | | | | | | | | | |
1 Note payable, originated in 2012, convertible into, common stock after 90 days. 10.25% interest rate, secured by all assets of DC Brands International Inc. | | | 1,000,000 | | | | - | | | | 1,000,000 | |
OUR PLAN OF OPERATIONS
OPERATING MODEL AND REPORTING STRUCTURE
DC BRANDS INTERNATIONAL, INC.
We, together with our 80% owned subsidiary DC Brands Green Investments, LLC intend to specialize in providing financing, accounting, security, compliance, payroll processing and tax payment services to fully licensed Colorado medical and recreational marijuana businesses. In the past, we had been engaged 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 and more recently specialized tea products. In May 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 believed that there was synergy between us and Village Tea and we had intended to provide various services to Village Tea such as aiding Village Tea with their manufacturing and bottling needs. Prior to May 2013, our focus had 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 had suspended the sale of our nutritional supplements in 2013 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. However, due to limited resources we have temporarily discontinued manufacturing and marketing of our H.A.R.D. Nutrition products.
The H.A.R.D. Nutrition Functional Water Systems provide consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water Systems are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle. The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top cap compartment. During the year ended December 31, 2013, we derived $10,460 representing 100% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2012, we derived $85,966, representing 79% of our revenue, from sales of our Functional Water Systems.
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 year ended December 31, 2012, we derived $34,927 representing 21% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2013, we derived $0 representing 0% of our revenue from sales of our H.A.R.D. Nutritional Supplement products.
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.
Our principal offices are located at 1685 South Colorado Blvd, Suite S291, Denver, Colorado 80222. Our telephone number is (720)281-7143.
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 March 31, 2014.
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 2013 or the first quarter of 2014. 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.
Fair Value of Financial Instruments
In accordance with the reporting requirements of ASC Topic 825, Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at the balance sheet dates, nor gains or losses reported in the statements of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held during the three months ended March 31, 2014 and the year ended December 31, 2013.
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 March 31, 2014, 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 is also its 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 is also its CFO concluded that due to a lack of segregation of duties, the Company’s disclosure controls and procedures are not effective as of March 31, 2014 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 its 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 March 31, 2014 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 requesting payment of the $125,000 debt plus accrued interest owed. They received a judgment but as there are no unencumbered assets no further action has been taken.
On May 9, 2013 a debtholder, filed a complaint in United States District Court for Colorado requesting payment of the $750,000 debt plus accrued interest owed. They received a judgment but as there are no unencumbered assets no further action has been taken.
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 January through March 2014 we issued to four debtors an aggregate of 1,954,973,361 shares of our common stock in conjunction with pay down of debt. These issuances were exempt from registration in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended (the “Act”).
Subsequent to March 31, 2014 we issued 1,205,755,802 shares of our common stock in conjunction with the conversion of debt. These issuances were exempt from registration in reliance on Section 3(a)(9) of the Act.
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 |
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: May 15, 2014 | DC BRANDS INTERNATIONAL, INC. (Registrant) |
| | | |
| | By: | /s/ Robert H. Armstrong |
| | | Robert H. Armstrong Chief Executive Officer (Principal Executive Officer) |
