Item 1. Business
Company Overview
We specialize in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body. Our current focus is on the sale of our products under our H.A.R.D Nutrition label. To date, a substantial portion of our revenue has been derived from the sale of our products under this label. We currently have two distinct types of products that are sold under our H.A.R.D. Nutrition logo; our Functional Water System and nutritional supplements; however, due to limited capital resources we have suspended sales of our nutritional supplements products. The Functional Water System and nutritional supplements can each be further categorized into four sub-product lines; each line tailored to different health and daily needs: our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. Our H.A.R.D. Nutrition Functional Water System provides consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water System are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle. The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top compartment.
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. Since 2013, to conserve costs,our focus has been on selling our products through our website.
We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our acquisition of DC Brands, LLC. Our principal offices are located at 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.
BUSINESS
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 year ended December 31, 2012, we derived $128,905 representing 79% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2011, we derived $271,255 representing 83% of our revenue from sales of our Functional Water Systems.
The other products 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, 2011, we derived $57,447 representing 14% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2012, we derived $34,927 representing 21% 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.
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.
History
We were incorporated under the laws of the State of Colorado on April 29, 1998 as (“Telamerge”). Telamerge was originally formed for the purpose of, and engaged in the business of providing telemarketing services. Telamerge did not have meaningful business activity prior to its acquisition of DC Brands, LLC, a Florida limited liability company in 2004.
In 2002, DC Brands, LLC began the development and distribution of energy drinks under the labels “Dickens Energy Cider” and “Turn Left Energy Drink”. In August 2004, in connection with our new business plan and the anticipated acquisition of DC Brands, LLC, Telamerge changed its name to DC Brands International, Inc. DC Brands, LLC became our wholly owned subsidiary which is now inactive. In November 2004, DC Brands International, Inc. acquired all of the outstanding membership interests of DC Brands, LLC in exchange for the assumption of certain debt of DC Brands, LLC. On December 3, 2004, we effectuated a 120:1 forward split of our issued and outstanding shares of common stock. In 2006, we acquired the assets of Health Advantage Research and Development, Inc., a sports and fitness-based nutraceutical and supplement company.
In 2007, we changed the focus of our business away from carbonated energy drinks that contained sugar and caffeine to developing, marketing, distributing and selling health related products that are natural-based and contain vitamins. In July 2007, we acquired the assets of Hard Nutrition, Inc. and commenced production and marketing of our health drink/supplement combination under our current HARD Nutrition label. In September 2007, we effectuated a 10:1 reverse split of our issued and outstanding shares of common stock. Since we have outsourced our manufacturing and have no prior or future commitment for any specified quantity of products, we did not incur any manufacturing costs when we terminated production of the carbonated energy drinks; however as a result of such termination in 2008 we wrote off $2,924,000 of intellectual property related to formulas and other intangibles used in the carbonated energy drink business. Also in 2008 we wrote off an additional $8,541,669 of intellectual property related to the formulas and other intellectual property used in the carbonated energy drinks business and we incurred in excess of $200,000 in capital expenditures related to production and manufacturing expenses incurred in connection with our new line of business. In 2009, we commenced sales of our Functional Water Systems. In July 2011 we effectuated a 10:1 reverse split of our issued and outstanding shares of common stock. In June 2012 we effectuated a 200:1 reverse split of our issued and outstanding shares of common stock. In March of 2013, we received approval of our Board of Directors and shareholders owning a majority of our voting power outstanding to effectuate a 100:1 reverse split of our issued and outstanding shares of common stock, and is anticipated to be effectuated after obtainment of all regulatory approvals and requisite waiting periods.
Existing Products
We currently sell one distinct type of product under our H.A.R.D. Nutrition label, our Functional Water Systems. Until recently, we also sold our Nutritional Supplements under such label. Each product line is further divided into similar categories based upon its targeted results, namely our performance, strength and training products, wellness products, energy products and weight loss and diet products. Each product was developed to attain its desired result based upon our research of third party documented studies as to which vitamins and herbs are likely to produce our desired results. After establishing what we believe the general consensus is regarding a particular nutraceutical’s typical effects, we then create mixtures of products to help achieve the desired result. We don’t use any “secret” ingredients or seek to include any particularly unusual vitamins and herbs in our products but rather seek to rely on established expectations regarding the intended effects of such nutraceuticals, recognizing that such intended effects have not been confirmed in any respect by the U.S. Food and Drug Administration or any other governmental agency, and as such may, in fact, not be effective. We do not engage in formal testing of the achievement of desired results of our products but do receive feedback from existing customers which is recorded and referred to when modifying or creating new products. We believe what makes us unique is not necessarily the vitamin and herb combinations chosen by our herbalist in our products themselves, but rather our ability to deliver those chosen nutraceuticals in our patented flip-top cap together with each product in our Functional Water System rather than relying on delivering the vitamins and herbs in only liquid form as part of the actual drink, as our competitors do.
Our Functional Water Systems
Our Functional Water Systems are a unique combination of a functional beverage and a nutraceutical. Due to our unique bottle design we are able to provide consumers with a combination of a beverage and a nutraceutical supplement all in one convenient bottle. We currently manufacture nine unique water systems, each of which is designed to provide a specific functional benefit for the body and can be further categorized into one of our four subcategories based upon the functional benefit desired (performance, strength and training- fitness- wellness and beauty- weight loss and diet and energy). Each system includes supplements, vitamins and minerals that are enclosed in our proprietary licensed cap which is attached to our bottle filled with a lightly flavored water specially formulated to act as a catalyst for the enclosed supplements. When the supplements and flavored water are combined they provide the body with the nutrients needed to achieve the desired result. Wrapped around each bottle is a rubber bracelet with our message “Your life won’t change until you change your life” which we believe creates a unique brand loyalty and identification tool. It is hard for us to imagine someone wearing our bracelet going back to drinking flavored water pretending to have vitamins. The Functional Water Systems have a shelf life of one year, which is the shelf life in the industry for most of the products stored in PET bottles that contain vitamin additives. We conduct periodic tests of the color, flavor and desired results of our products in house. Each product contains a label with a date stamp that specifies the shelf life. Under our agreement with Acosta, Inc., Acosta, Inc. as part of its service will be responsible for maintaining stocked shelves of our products and checking expiration dates of products.
Our nine different systems are Health +, Fat Fighter, Get Over It, Whacked Energy, Think!, Win, Fix It, Cleanse +, and Rebuild and Recover. The Daily Basics is a wellness product that includes vitamins and supplements. The Fat Fighter falls under the diet and weight loss category. The Get Over It-Feel Better Now is a wellness product that is a blend of vitamins, herbs and minerals. The Get Over It water system is being marketed to combat hangovers. Whacked Energy and Wide Awake are part of our energy line. Win is geared towards athletes for use when conducting fitness training.. Fix It! is a combination of herbs and supplements. Cleanse+ is a 12 day total body cleansing system intended to be taken once every 90 days and Rebuild and Recover is a very potent combination of products targeted towards the serious athlete. All of our products contain ingredients that are intended to provide health related benefits. For example, many of the products in our energy line include Ginko biloba, which has been shown in several studies to help improve focus and help concentration and improve blood flow to the brain. (See Gessner B, Voelp A, and Klasser M in Arzneimittelforschung. 1985;35(9):1459-65.(1985);Adams LL, Gatchel RJ, Gentry C. Complementary and alternative medicine: applications and implications for cognitive functioning in elderly populations. Altern Ther HealthMed. 2001;7(2):52-61;Kleijnen, J and P. Knipschild. 1992. Ginkgo biloba for cerebral insufficiency. Br. J. Clin. Pharmac. 34:352358.)
We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009 at King Soopers. During the year ended December 31, 2012, we derived $128,905 representing 79% of our revenue from sales of our Functional Water Systems. During the year ended December 31, 2011, we derived $271,255 representing 83% of our revenue from sales of our Functional Water Systems
The H.A.R.D. Nutrition Functional Water Systems are primarily sold in retail establishments. In 2012 approximately 28% of our total revenue derived from sales of our H.A.R.D. Nutrition Functional Water beverages has been derived from sales to King Soopers supermarkets, which is a division of Kroger Foods through two distributors.
Our Nutritional Supplements
Our H.A.R.D. Nutrition Supplements have been sold primarily though our wholly owned subsidiary DC Nutrition, Inc. and are aimed at athletes and improving performance. We currently have approximately 300 products in this product line which we divide into the four categories previously discussed: performance and strength supplements, wellness products, energy supplements and the weight loss and diet products.
Our second largest product line in terms of sales revenue is our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 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, 2011, we derived $57,447 representing 14% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. The H.A.R.D. Nutritional Supplement products are primarily sold to retailers or by orders placed at our corporate headquarters, website and certain smaller retail establishments such as gyms and fitness centers.
Subsequent to year end and until such time as additional funding is received, we have suspended the sales of our Nutritional Supplement products.
During the last two years we did not spend any funds on research and development activities.
Marketing
Our current marketing focus is primarily on sales of our products through the internet. During 2012, the focus of our marketing had been the expansion of both our Functional Beverage and Nutritional Supplement lines into strategic locations in Southern California. In September 2012, we signed an agreement with LA Libations for the expansion of the marketing of our products both in other states as well as with national retailers. In December 2012 we signed a distribution agreement with LA Distribution for LA County. During 2011, the focus of our marketing was on our long form infomercial which aired nationally in November 2011. Prior thereto, our marketing focus had been exclusively in the Colorado area. We have used various forms of advertising as part of our marketing campaign. Our marketing strategy has included associations with well know public figures in the Colorado area in an effort to capitalize on their notoriety. In the past we had engaged in an aggressive radio marketing campaign in the Colorado area, which included the promotion of our products on the KOA radio station by Dave Logan, a former NFL player and one of the KOA announcers. Our promotional agreement with Mr. Logan terminated in 2011.
We have attended various trade shows. The H.A.R.D. Nutrition Functional Water System was introduced to the public in September 2008 at a Mr. Olympic Body Building Show in Las Vegas and at the National Convenience Stores Show in Chicago a few weeks later.
We began to market our products on television beginning May 2010. TV appearances include appearance on the local television show “Colorado & Company” as well as a profile on the “hay Stacks Colorado” segment during the Rachel Rae Show in May 2009. The company produced a 60 second commercial that talks about all of our products as well as 30 commercials discussing individual products.
In addition, to the radio and media campaign, the Company offers free seminars at its headquarters geared toward gyms and fitness centers where free product samples are distributed and educational information about the products and nutrition are disseminated.
Funding
To date, we have met substantially all of our financing needs through private sale of shares of our common stock and other equity securities and loans from investors.
On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman and Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. Subsequent to year end, HARDSave LLC, the terminated the Securities Purchase Agreement. In an effort to preserve cash, we have also restructured certain of our debt including $383,209 of debt owed to principals of HARDSave LLC, which was converted to 1,231_ shares of Series C Preferred Stock.
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. As a cost savings measure, we intend to subcontract the manufacture of the supplements that are included in the Functional Beverage systems as opposed to manufacturing them ourselves
We also entered into an exchange agreement with another former CEO, Richard Pearce, pursuant to which Mr. Pearce forgave $1 million of his outstanding debt and converted $2.775 million of his debt into Series E Preferred Stock.
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. The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement. In July 2011 we entered into a $10 million equity funding facility with Southridge Partners II, LP, which is subject to various conditions being met prior to our use of the facility; however, we have not yet met the conditions for use of the equity funding 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. Although we have received funding from one creditor and have oral commitments from others, we cannot guarantee that the funding provided will be sufficient to continue our current operations and we cannot guarantee that we will receive enough funding to allow us to recontinue our nutritional supplement product sales.
MANUFACTURING AND QUALITY CONTROL
Our products are manufactured by third parties and we are reliant upon these third parties to maintain proper quality control. Our manufacturer is required to maintain good manufacturing compliance. We also do our own random testing of our products to ensure that they meet our specific quality standards. Inasmuch as we do not manufacture the products, we are not subject to good manufacturing regulations, however we are subject to inspection of our corporate headquarters where the raw materials of our products are kept in inventory.
DISTRIBUTION
During 2012, the focus of our marketing has been the expansion of both our Functional Beverage and Nutritional Supplement lines into strategic locations in Southern California. We signed an agreement with LA Libations in September 2012 and they were driving that expansion as well as beginning the process of meeting with national retailers. In December 2012 we signed a distribution agreement with LA Distribution for LA County. Prior to June 2012, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain. Until recently, our distribution efforts have been limited due to our oral agreement with King Soopers not to provide products to other grocery stores. Given sufficient capital and attractive commercial prospects, we intend to expand our distribution effort throughout the United States. However establishing a successful distribution network nationwide will require the expenditure of substantial amounts of capital.
A substantial portion of our revenue derived from product sales was from products distributed by Cold Front Distribution. Although we anticipate that we will still have a portion of our products distributed by Cold Front Distribution and other distributors, especially those that are not warehouse direct sales, we do not anticipate that a substantial portion of our future revenue will be derived from product sale by such distributors. We do not have a written agreement with Cold Front Distribution and all sales are made based upon a purchase order negotiated at the time of sale.
Our future ability to establish a distribution network will be dependent upon our financial condition. Until such time as we have sufficient funding, either from product sales of fundraising, our planned distribution expansion will be suspended.
SOURCES AND AVAILABILITY OF RAW MATERIALS AND SUPPLIERS
Our raw materials are obtained from a variety of suppliers, some of which are located in foreign countries. We use in excess of 150 ingredients in our nine different Functional Water Systems. No one supplier is responsible for supplying in excess of 10% of our vitamins and herbs and we are not dependent upon any one supplier for the supply of any of our vitamins and herbs. We have identified at least a primary, secondary and tertiary supplier for each ingredient and believe that other suppliers are available if needed. Therefore at this time we are not dependent upon any one supplier for any of our ingredients. We do not have any written agreements with any of our suppliers and therefore we have no guarantees of minimum supply quantities. Although there is ample availability of each type of herb used in our products from a variety of suppliers, there is a limited number of suppliers that can provide the premium herbs of the quality that we use in our products at a reasonable price. Several factors that can affect the availability of quality herbs or their prices include inclement weather in the countries where the herbs are grown, embargos imposed by our government or natural catastrophes.
We currently rely on one manufacturer, Ball Corporation, for the supply of the bottles that are used in our products. However, we believe that alternative suppliers are readily available. We have an existing relationship with three different co-packers/bottlers to manufacture our products. We have also reviewed and approved two other co-packers/bottlers that we intend to use as our sales volume increases. We supply the ingredients to the co-packers and they manufacture our products in accordance with our specifications in the bottles we obtain from Ball Corporation and supply to the co-packer and then our label is affixed to the bottles. The labels are purchased from an independent third party. We place orders for our bottles and finished goods based upon our estimates of our future sales volume and reserve line time with our co-packers a few weeks in advance of our anticipated order fulfillment date. We do not have any written agreement with the supplier of our bottles, the co-packer or the manufacturer of our patented cap and enter into purchase orders that are at negotiated prices at the time each order is placed. Typically the payment terms for the co-packers on these orders is net thirty days. The payment terms for our bottles and the manufacture of our caps is typically cash on delivery. We own the tool used in the manufacturing process of our caps. Although there are several other manufacturers of bottles that we could use as well as co-packers, due to the unique nature of our cap, we would incur substantial start up costs for the transfer of the equipment needed to produce our caps if we were to use an alternative cap manufacturer. Due to the unique shape of our patented bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers. Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps. In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.
COMPETITION
The industries in which we operate are highly competitive. Not only do we compete with other manufacturers of functional beverages but we also compete with manufacturers of nutraceutical supplements and dietary supplements.
Our competition in the beverage industry includes products owned by multinational corporations with significant financial resources, including products such as Vitamin Water and Gatorade which are owned by Coca-Cola and Pepsi. Our energy drinks also compete with products such as Monster, Red Bull and Rockstar. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever.
We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Joint Juice, Slimfast and Nutrisystem. The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. These markets include manufacturers, distributors and physicians. Numerous manufacturers and distributors compete with us for customers throughout the United States in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies and health food stores. Many of the competitors are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. In addition, we will compete with several large pharmaceutical companies for therapeutic and symptomatic relief of disease symptoms. Many of these drug companies are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us. These drug companies also have substantially greater political influence and regulatory support for the use of their products in the treatment of diseases and wellness.
The market is highly sensitive to the introduction of new products. As a result, in order to remain competitive, we believe we will continually need to successfully introduce new products.
We are also subject to competition in the attraction and retention of employees. Many of our competitors have greater financial resources and can offer employees compensation packages that are difficult for us to compete with.
TRADEMARKS AND PATENT
We regard our patent, trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, suppliers and others to protect our proprietary rights.
Richard Pearce, our former President & Chief Executive Officer, and Jeremy J Alcamo, our former Executive VP., have received a design patent in the United States (US D 576,877S) for the flip-top cap compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap. The Patent was issued on September 16, 2008 and has a term of 14 years, terminating on September 15, 2022. In addition, the Company owns several copyrights and trademarks that are used in connection with its H.A.R.D. Nutrition product line. See “Certain Relationships and Related Transactions.”
The steps we take to protect our proprietary rights in our intellectual property and brand name may not be adequate to prevent the misappropriation of our intellectual property and brand name in the United States or abroad. Existing patent and trademark laws afford only limited practical protection for our intellectual property and product lines. However, because of the rapid pace of the natural product industry's development, we believe that the legal protection for our product is less significant to our success than the knowledge, technical expertise and marketing skills of our personnel, the frequency of product expansion and pace of market penetration.
INDUSTRY OVERVIEW
As noted in a September 2011 article in the Natural Products Insider titled Postmodern Nutrition: Functional Foods, Beverages, it appears that the functional foods industry has not been negatively impacted by the recent volatile stock market.
Nutrition Business Journal reported functional foods grew 4.6 percent in 2010, pulling in $39 billion in sales, as compared to $37.3 in 2009. Global Industry Analysts (GIA) is predicting the global market to exceed $130 billion by 2015.
According to Steve French, managing partner at Natural Marketing Institute (NMI), Baby Boomers have been acute growth drivers of functional foods because of their uncertainty about the future of health care (seven out of 10 Boomers said they’re taking a more active role when it comes to health), and in an attempt to delay aging and prevent disease. Boomers are interested in health-condition-specific products.
As noted in a March 2012 article in the Natural Products Insider titled Supplement Use on the Rise, Sixty-nine percent of U.S. adults take dietary supplements according to a survey commissioned by the Council for Responsible Nutrition (CRN), a trade association for the dietary supplement industry. Conducted by Ipsos Public Affairs, the survey indicates an upward trend in dietary supplement consumption, as consumer usage is up from 66 percent in 2010, 65 percent in 2009 and 64 percent in 2008.
The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance and well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and their derivative compounds. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients. However, they are subject to many regulations regarding labeling and advertising of such products. See “Regulation” below.
REGULATION
In the United States, we are subject to compliance with laws, governmental regulations, administrative determinations, court decisions and similar constraints. Although our products are not deemed to be drugs, they are deemed to be dietary supplements and therefore subject to all regulations regarding products and dietary supplements ingested by consumers. Such laws, regulations and other constraints exist at the federal, state and local levels in the United States and at all levels of government in foreign jurisdictions. These regulations include constraints pertaining to: (i) the manufacturing, processing, formulating, packaging, labeling, distributing and selling (ii) advertising of products and product claims (iii) transfer pricing, and (iv) method of use.
In the United States, the formulation, manufacturing, packaging, storing, labeling, advertising, distribution and sale of our Products are subject to regulation by various governmental agencies, which include, among others (i) the Food and Drug Administration (“FDA”), (ii) the Federal Trade Commission (“FTC”), and (iii) the Consumer Product Safety Commission. The most active regulation has been administered by the Food and Drug Administration, which regulates the formulation, manufacture and labeling of products pursuant to the Federal Food, Drug and Cosmetic Act (‘FDCA”) and regulations promulgated thereunder. Most importantly, the FDA has guidelines under the Dietary Supplement Health and Education Act (DSHEA) to enable the manufacturing, advertising, marketing, and sale of dietary supplements. In addition, the FTC has overlapping jurisdiction with the FDA to regulate the interstate labeling, promotion, advertising and sale of dietary supplements, over the counter drugs, and foods.
Compliance with applicable FDA and any state or local statutes is crucial. Although we believe that we are in compliance with applicable statutes, should the FDA amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. As a marketer of a product that is ingested by consumers, we are always subject to the risk that one or more of our products that currently are not subject to regulatory action may become subject to regulatory action. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us, or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.
The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, generally when a company adds an ingredient to a food, the FDCA requires that the ingredient either be determined by the Company to be generally regarded as safe (“GRAS”) by qualified experts or go through FDA’s review and approval process as a food additive.
The FDCA has been amended with respect to dietary supplements by the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). The DSHEA provides a statutory framework governing the safety, composition and labeling of dietary supplements. It regulates the types of statements that can be made concerning the effect of a dietary supplement. The DSHEA generally defines the term “dietary supplement” to include products that contain a “dietary ingredient” which may include vitamins, minerals, herbs or other botanicals, amino acids, and metabolites. Our products contain herbs and supplements currently consumed as part of a healthy and regular diet of human beings and therefore are considered dietary supplements. Under the DSHEA, a dietary supplement manufacturer is responsible for ensuring that a dietary supplement is safe before it is marketed. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be sold without FDA pre-approval and without notifying the FDA. The ingredients in our products were on the market before October 15, 1994 and therefore may be sold without FDA pre-approval.
With respect to labeling, DSHEA permits “statements of nutritional support” for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well being (but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). This, therefore, severely limits the direct advertising of the healthcare benefits of our products. A company making a statement of nutritional support must possess substantiating evidence for the statement, and disclose on the label that the FDA has not reviewed that statement and that the product is not intended to diagnose, treat, cure or prevent a disease.
We intend to label our products with statements of nutritional support and believe that we have adequate substantiating evidence to support such statements. However, the FDA may determine that a given statement of nutritional support that we or our licensees decide to make is a drug claim rather than an acceptable nutritional support statement. Such a determination would require deletion or substantiating proof of the drug claim.
In addition, DSHEA allows the dissemination of “third party literature”, publications such as reprints of scientific articles linking particular dietary, ingredients with health benefits. Third party literature may be used in connection with the sale of dietary supplements to consumers. Such a publication may be so used if, among other things, it is not false or misleading, no particular brand of dietary supplement is promoted and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with our products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug or as a “misbranded” product, causing us to incur substantial fines and penalties.
Our products and product related activities may also be subject to regulation by other regulatory agencies, including but not limited to the Federal Trade Commission (“FTC”), the Consumer Products Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Advertising of dietary supplement products is subject to regulation by the FTC under the Federal Trade Commission Act (“FTCA”). The FTCA prohibits unfair methods of competition and unfair or deceptive trade acts or practices in or affecting commerce. Furthermore, the FTCA provides that the dissemination or the causing to be disseminated of any false advertising pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Pursuant to this FTC requirement, we are required to have adequate substantiation of all material advertising claims made for our products. Failure to adequately substantiate claims may be considered either deceptive or unfair practices.
The FTC has recently issued a guidance document to assist supplement marketers of dietary supplement products in understanding and complying with the substantiation requirement.
The FTC is authorized to use a variety of processes and remedies for enforcement, both administratively and judicially including compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. State and local authorities can also regulate advertising and labeling for dietary supplements and conventional foods.
Our activities are also regulated by various agencies of the states and localities in which our products are sold, including, the Colorado Department of Public Health and Environment which in March 2010 performed[l2] an inspection of our warehouse facility, which entailed an inspection of our plant and grounds, sanitary operations (general maintenance and pest control) and our equipment and utensils and did not result in any corrective action to our product or ingredients.
In September 2011 the Food and Drug Administration (FDA) conducted a regulatory inspection of our facilities, and reviewed our manufacturing processes, ingredients, and labeling. No violations were issued, and we continue to follow FDA guidelines in our manufacturing and marketing. We were given a list of areas to improve, and have addressed those issues and believe that we are now in compliance. We continue to always strive to be in full compliance with Good Manufacturing Practices (GMP) in anticipation of future random inspections by the FDA.
We believe that current and reasonably foreseeable governmental regulation will have minimal impact on our business.
Employees
As of December 31, 2012, we had 7 full time and 2 part time employees. Subsequent to year end we have one employee.
ITEM 2.
ITEM 2. PROPERTY
As of 12/31/12 our principal office was located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033. This space consists of approximately 15,000 square feet. The lease provides that it terminates on April 30, 2013 and our base rent expense is approximately $15,000 per month, which includes a base rent and excludes certain payments for operating expenses. In an effort to reduce expenses, subsequent to year end we entered an agreement with the landlord to vacate these premises by February 28, 2013. The raw materials, pill making and warehouse equipment was liquidated and the remaining drink inventory was moved to an 800 sq. ft. warehouse in Wheat Ridge and the corporate office location was relocated to 1685 South Colorado Boulevard, #S291, Denver, CO 80222
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On February 19, 2013 a debtholder, filed a complaint in Jefferson County Court based upon a promissory note issued May 31, 2100 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 4.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable
ITEM 5.
ITEM 5. MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERS
Until January 13, 2011 our stock was traded solely on the pink sheets under the symbol DCBR. On January 13, 2011 our 15C211 form was approved by FINRA and our stock began trading on the OTC.BB exchange under the symbol DCBR
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2012 and 2011.
Holders
As of December 31, 2012, there were approximately 284 holders of record of our common stock. As of December 31, 2012 we had 637,172,528 shares of common stock outstanding.
Dividends
We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the Board of Directors may think are relevant. We do not anticipate having any earnings from which to pay dividends in the foreseeable future and currently intend to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Purchase of Equity Securities by the Small Business Issuer and Affiliated Purchasers
None
Sale of Unregistered Securities
The Company issued common stock during the twelve months ended December 31, 2012, as set forth below. The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.
The Company issued 155,000 shares of common stock during the twelve months ended December 31, 2012, related to services provided by two vendors. The shares were valued at prices ranging from $0.60 to $0.12 per share. The shares were collectively valued at $33,000. These issuances of shares qualified for exemption under Section 4(a)(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(a)(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act of 1933 for these issuances.
The Company issued 636,021,882 shares of common stock on two hundred twenty-three different occasions during the twelve months ended December 31, 2012, upon partial conversion of ten different notes.. The common stock was valued at $2.00 to $0.001 per share. The shares were collectively valued at $2,993,045. These securities were issued under Section 3(a)(9) of the Securities Act of 1933 .
Series B Preferred Stock
The Company issued 183.40 shares of Series B preferred stock in 2012. 20 shares of these shares were issued in conjunction with the issuance of $250,000 of debt. 163.4 shares were issued under an agreement with HARDSave LLC in the connection of their contribution of $630,000 of cash. The 269.40 shares of Series B preferred can be converted into 20.21% of the common stock of the company. As of 12/31/2012 the company would need to issue 161,395,801 shares of common shares if all of the Series B preferred was converted. As of 12/31/2012 the company would need to issue 1,643,298,900 shares of common shares to the Series B holders if all of the preferred shares in all series were converted. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 2,735 shares of Series C preferred stock in 2012. The Class C Preferred Stock has no dividend, liquidation or voting rights. The Class C Preferred Stock is convertible at any time after the 13th month after the date of its issuance into such number of shares of common stock of the Company as shall equal 1% of the outstanding common shares on the date of conversion divided by 1,000. The 2,735 shares of Series C were issued to 7 investors who converted a total of $1,110,314 of debt. . The 2,735 shares of Series C preferred can be converted into 2.71% of the common stock of the company. As of 12/31/2012 the company would need to issue 17,777,114 shares of common shares if all of the Series C preferred was converted. As of 12/31/2012 the company would need to issue 181,002,919 shares of common shares to the Series C holders if all of the preferred shares in all series were converted. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 46,284 shares of Series D preferred stock in 2012. 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. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 2,776 shares of Series E preferred stock in 2012. 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 12/31/2012 the company would need to issue 56,326,051 shares of common shares if all of the Series E preferred was converted. As of 12/31/2012 the company would need to issue 573,500,287 shares of common shares to the Series E holders if all of the preferred shares in all series were converted. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 5,500 shares of Series F preferred stock in 2012. 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 12/31/2012 the company would need to issue 37,115,300 shares of common shares if all of the Series F preferred was converted. As of 12/31/2012 the company would need to issue 377,900,359 shares of common shares to the Series F holders if all of the preferred shares in all series were converted. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
The Company issued 6,000 shares of Series G preferred stock in 2012. The Class G Preferred Stock has no dividend, liquidation or voting rights. The Class G Preferred Stock is convertible at any time after the 13th month into such number of shares of common stock of the Company as shall equal 1.0% of the outstanding common shares on the date of conversion divided by 1,000. The Company has the right to redeem the Class G Preferred at a redemption price of $1,250 per share. As of 12/31/2012 the company would need to issue 40,651,607 shares of common shares if all of the Series G preferred was converted. As of 12/31/2012 the company would need to issue 413,906,316 shares of common shares to the Series G holders if all of the preferred shares in all series were converted. These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.
Financial Operations Overview
In 2009 we began sales of our H.A.R.D. Nutrition Functional Water System. From our inception to December 31, 2012, we had incurred an accumulated deficit of $97,541,103. Our accumulated deficit through December 31, 2012 is primarily attributable to our issuance of stock compensation.
Since inception, we have primarily financed our operations from the sale of common stock and debt. If our anticipated sales for the next few months do not meet our expectations and we do not receive additional funding 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.
On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman and Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. Subsequent to year end, HARDSave LLC, the terminated the Securities Purchase Agreement. In an effort to preserve cash, we have also restructured certain of our debt including $383,209 of debt owed to principals of HARDSave LLC, which was converted to 1,231_ shares of Series C Preferred Stock.
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. As a cost savings measure, we intend to subcontract the manufacture of the supplements that are included in the Functional Beverage systems as opposed to manufacturing them ourselves
We also entered into an exchange agreement with another former CEO, Richard Pearce pursuant to which Mr. Pearce forgave $1 million of his outstanding debt and converted $2.775 million of his debt into Series E Preferred Stock.
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. The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement. In July 2011 we entered into a $10 million equity funding facility with Southridge Partners II, LP, which is subject to various conditions being met prior to our use of the facility; however, we have not yet met the conditions for use of the equity funding 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. Although we have received funding from one creditor and have oral commitments from others, we cannot guarantee that the funding provided will be sufficient to continue our current operations and we cannot guarantee that we will receive enough funding to allow us to recontinue our nutritional supplement product sales.
Results of Operations
Year ended December 31, 2012 Compared to year ended December 31, 2011
Revenue- During the year ended December 31, 2012 we generated revenue of $120,893, a substantial portion of which is attributable to the sale of our H.A.R.D, Nutrition Functional Water System which commenced in August 2009. This represented an approximate 63% decrease from the prior year. This decrease was principally due toour inability to fill orders due to inventory shortages brought about by lack of working capital. During the same period of 2011, we had revenue of $328,701. Our gross margin decreased from $139,798 for the year ended December 31, 2011 to $-37,986 for the year ended December 31, 2012. The decline in our COGS in 2012 vs. 2011 was created primarily by a charge of $62,419 to write down the inventory to the levels that it was liquidated at subsequent to year end.
Sales of our H.A.R.D, Nutrition Functional Water System and H.A.R.D. Nutrition supplement accounted for 79% and 21% respectively of our revenue for the year ended December 31, 202. At least 28% of our sales of our H.A.R.D. Nutrition Functional Water System were attributed to indirect sales to King Soopers.
Expenses- Our total operating expenses for the year ended December 31, 2012 was $5,105,199 as compared to $5,079,955 for the year ended December 31, 2011.
General and administrative expenses were $3,549,993 and $3,151,663 for the years ended December 31, 2012 and December 31, 2011, respectively and included salaries, travel expenses, legal, accounting and other professional fees and occupancy related expenses. The majority of this increase was due to the booking of $1.8 million accrued bonus expense related to the severance agreement with Mr. Pearce in June 2012. Included in general and administrative expenses was stock based compensation expenses for services provided to vendors and employees of $33,000 and $125,973 for the year ended December 31, 2012 and 2011, respectively. The remaining general and administrative expenses $3,516,993 and $3,025,870 for the years ended December 31, 2012 and 2011, respectively included $883,435 and $1,434,668 for salaries, $1,800,122 and $0 for accrued bonuses, $61,115 and $110,963 for travel expenses, $538,505 and $1,204,051 for legal accounting and other professional expenses and $162,111 and $166,814 for occupancy related expenses.
Sales and marketing which consisted of advertising and other promotional expenses decreased when comparing 2012 and 2011. Sales and marketing expenses were $278,417 and $1,842,391 for the years ended December 31, 2012 and December 31, 2011, respectively and included stock based compensation for services provided by vendors and employees of $0 and $294,302 for the years ended December 31, 2012 and 2011, respectively. The remaining sales and marketing expenses, $278,417 and $1,548,089 for the years ended December 31, 2012 and 2011, respectively included $0 and $584,429, respectively for advertising including over $500,000 spent on the production of our long form infomercial in 2011.
Interest expense increased by approximately 137% from 2012 to 2011 due to the increased amount of debt carried by the company. We also had a reduction of interest expense in 2011 because of the interest expense related to warrant liability which was $1,063,800. The loss on retirement of debt decreased 22% from 2011 to 2012 due to a lower stock price and related spread on debt conversions.
Net loss for the year ended December 31, 2012 increased by approximately 27% to $10,127,685 as compared to $7,383,739 for the period ended December 31, 2011 and was primarily attributable to severance related expenses.
Liquidity and Capital Resources
Revenues
At December 31, 2012 we had cash and cash equivalents of $16,628 as compared to $15,939 at December 31, 2011. Our working capital deficit at December 31, 2012 was $7,592,035 and at December 31, 2011 was $5,485,147.
For the twelve months ended December 31, 2012 our cash used in operating activities was $1,447,424. Our primary sources and uses of cash from operating activities for the period were losses from operations, loss on retirement of debt, severance agreement expenses, amortization of debt discount, accrued bonus and accrued interest payable of $2,113,587.
Net cash used in investing activities for the twelve months ended December 31, 2012 was $0.
Net cash provided by financing activities for the twelve months ended December 31, 2012 was $1,448,113 which included $595,000 from the issuance of preferred stock and $889,265 from the issuance of notes.
Current and Future Financing Needs
We have incurred an accumulated deficit of $97,541,103 through December 31, 2012. We have incurred negative cash flow from operations since we started our business. At December 31, 2012, we had short term and long term debt of $5,311,636. On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman and Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. Subsequent to year end, HARDSave LLC, terminated the Securities Purchase Agreement. In an effort to preserve cash, we have also restructured certain of our debt including $383,209 of debt owed to principals of HARDSave LLC, which was converted to 1,231_ shares of Series C Preferred Stock.
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. As a cost savings measure, we intend to subcontract the manufacture of the supplements that are included in the Functional Beverage systems as opposed to manufacturing them ourselves
We have no commitment for additional funding other than the factoring arrangement. We have not met the conditions necessary for us to use our $10 million equity financing agreement that we have entered into. In addition, we have lease commitments of $ $69,260 for 2013. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our advertising and marketing campaign, and fees in connection with regulatory compliance and corporate governance. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements for the next few months. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital and if we do not have adequate working capital we may need to raise additional funds, whether through a stock offering or otherwise.
We also have note payable commitments with respect to various notes payable issued to unaffiliated third parties who are accredited investors. A summary of notes payable as of December 31, 2012 is as follows: At December 31, 2012 we had 44 notes outstanding, of which twenty four notes or 57% of the aggregate principal balance were past due. To date, demand for payment has been made by three of the note holders. Three notes in the aggregate principal amount of $563,156 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $368,879 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 December 31, 2012 of $1,450 bears interest at a rate of 10.25% per annum and matures on January 1, 2015. The revolving note can be converted into shares of common stock at 20% of the closing price of the stock on the day prior to conversion. During the year ended December 31, 2012, $1,307,555 was assigned to other lenders of which $535,465 is outstanding principle at the balance sheet date. The conversion rates for these assigned notes range from 50% - 70% of the average closing trade or bid price for the five to ten days prior to conversion; and others have a conversion rate the lower of a set dollar amount or 60 - 65% of the lowest two trade or bid prices for the 5-10 days prior to the conversion date.
We have 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 and 2012 with a 24 month maturity bearing interest at 12%. 106 shares of Series B preferred stock was issued in conjunction with these notes. We have two notes payable originated in 2011that converted a payable overdue to one of our vendors, the outstanding balance is $207,681. The note bears interest at 4% and has a maturity of 12/31/13. We have 1 note payable originated in 2012 with a principal balance of $45,000 originated in 2013 with a 9 month maturity bearing interest at 8%. This note requires 321,000,000 shares be reserved for the conversion of this debt. These notes are convertible into common stock after 6 months. We have one note payable originated in 2011 with an aggregate principal balance of $483,103 with a maturity date of January 1, 2014 bearing interest at 10.25%. We have 4 notes payable originated in 2011 and 2012 with an aggregate principal balance of $195,000, bearing 4% interest, which matures in 2012 and carries a 15% redemption premium.
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. We still have two notes with a principal balance of $1,090,556 that are related party payables owed to Richard Pearce and Jeremy Alcamo both former officers. The note to Mr. Pearce is a senior secured convertible note with a principal balance of $1,000,000. The note note to Mr. Alcamo bears interest at a rate of 10% and is callable with 366 days notice which classifies them as long term debt. Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of a debt or equity financing or any combination thereof and our receipt of gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Jeremy Alcamo.
A summary of notes payable as of December 31, 2012 is as follows:
A summary of notes payable as of December 31, 2011 is as follows:
At December 31, 2011 we had 46 notes outstanding, of which ten notes or 9% of the aggregate principal balance were past due. To date, no demand for payment has been made. Three notes in the aggregate principal amount of $563,156 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $462,873 bearing interest at a rate of 15% are owed to 7 investors in our private placements are past due and to date no demand for payment has been made. Notes in the aggregate principal amount of $ $926,142 owed to four investors with a maturity date of July 1, 2013. These notes bear interest at a range from 6% to 16% per annum. Three of these notes with a total principal amount of $592,933 are callable by holder anytime after January 1, 2012. The $5 million revolving note with a principal outstanding balance as of December 31, 2011 of $1,278,270 bears interest at a rate of 10.25% per annum and matures on January 1, 2015. The revolving note can be converted into shares of common stock at 20% of the closing price of the stock on the day prior to conversion. During the year ended December 31, 2011, $1,035,000 was assigned to other lenders of which $271,253 is outstanding principle at the balance sheet date. The conversion rates for these assigned notes range from 50% - 70% of the average closing trade or bid price for the five to ten days prior to conversion; and others have a conversion rate the lower of a set dollar amount or 60 - 65% of the lowest two trade or bid prices for the 5-10 days prior to the conversion date.
We have 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16%. We have 6 notes payable with an aggregate principal balance of $1,077,000 originated in 2011 with a 24 month maturity bearing interest at 12%. 82 shares of Series B preferred stock was issued in conjunction with these notes. We have one note payable originated in 2011that converted a payable overdue to one of our vendors. The note bears interest at 4% and has a maturity of 12/31/13. We have 2 notes payable originated in 2011 with an aggregate principal balance of $85,500 originated in 2011 with a 9 month maturity bearing interest at 8%. These notes are convertible into common stock after 6 months. We have one note payable originated in 2011 with an aggregate principal balance of $252,500 originated in 2011 with a maturity date of December 31, 2015 bearing interest at 4%. We have 1 note payable originated in 2011 with an aggregate principal balance of $60,000, bearing 4% interest, which matures in 2012 and carries a 15% redemption premium.
We have 1 note payable originated in 2011 with an aggregate principal balance of $326,000 due in 2012 bearing interest at 6%. This note is from Cut & Dried Productions, LLC a company that Richard Pearce, the CEO of DC Brands International, owns a majority of. One of the 12 notes payable with an aggregate principal balance of $1,078,333 originated in 2010 and 2011 with a 36 month maturity bearing interest at 16% is due to Bob Armstrong, the CFO, in the amount of $5,000.We still have two notes with a principal balance of $1,650,840 that are related party payables owed to Richard Pearce and Jeremy Alcamo. They bear interest at a rate of 10% and are callable with 366 days notice which classifies them as long term debt. Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of a debt or equity financing or any combination thereof and our receipt of gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.
A summary of notes payable as of December 31, 2011 is as follows:
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, other than the 10 million equity financing agreement that we signed in 2011, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed. 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.
However, there can be no assurance that such creditors will continue to fund operations or that such funding will be sufficient.
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 during2011. There were no changes to any estimates or judgments that had a material impact on the financial presentation.
The critical accounting policies affecting our financial reporting are summarized in Note 1 to the consolidated financial statements included in this prospectus. Policies involving the most significant judgments and estimates are summarized below.
Accounts Receivable
Our accounts receivable are unsecured, and we are at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. We sell products generally on net 30 day terms. We do not normally charge financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when we have exhausted all reasonable means of collection. We did not have an allowance for doubtful accounts at December 31, 2012, or December 31, 2011 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 2011, there were no past due receivables.
Fair Value of Financial Instruments
Effective May 1, 2008, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") on "Fair Value Measurements" for assets and liabilities measured at fair value on a recurring basis. This guidance establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of this guidance did not have an impact on our financial position or operating results, but did expand certain disclosures.
The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the FASB requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities.
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions.
We did not have any Level 2 or Level 3 assets or liabilities as of December 31, 2012.
Cash and cash equivalents include money market securities and commercial paper and marketable securities representing certificates of deposits maturing in less than one year that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.
In addition, the FASB issued, "The Fair Value Option for Financial Assets and Financial Liabilities," effective for May 1, 2008. This guidance expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value option for any of our qualifying financial instruments, other than those subject to a recent acquisition.
Warrant Liability
The warrant liability is calculated using a Barrier Option Model with MonteCarlo Simulation from Global Derivatives.com. The current stock price, the stock volatility for the prior three months and the risk free rate (treasury bills) equal to the remaining term of the warrants are the inputs used in this valuation model. This model specifically addresses the fact that no additional shares of stock will need to be issued if our stock price hits the target (barrier) of $.50 or $.15. The stock volatility for any quarter is capped at 90% as volatilities greater than this produce an unreasonably low estimation of liability. This amount is adjusted quarterly based upon the changes in valuation provided by the model. There were no warrants outstanding as of December 31, 2011 as they had all expired or been paid off with the issuance of additional shares of common stock. The valuation model produced a $1,448,400 warrant liability as of December 31, 2010 respectively.
Equity-Based Compensation
The computation of the expense associated with stock-based compensation requires the use of a valuation model. The FASB issued accounting guidance requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation. We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options. We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards. This accounting guidance requires the recognition of the fair value of stock compensation in net income. Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.
Recently Issued Accounting Standards
During the year ended December 31, 2012, 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A
Disclosure Controls and Procedures
The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Form 10-K, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company’s management, including the acting Principal Executive Officer who is also our Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO who is also the CFO concluded that the Company’s disclosure controls and procedures are not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO who is also the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Management conducted an assessment of the Company’s internal control over financial reporting based on the framework and criteria established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control - Integrated Framework. Based on the assessment, management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting is not effective based on those criteria. The COSO framework requires rigid adherence to control principles that require sufficient and adequately trained personnel to operate the control system. The Company has insufficient accounting personnel for it to be able to segregate duties as required by COSO. The Company does not have sufficient resources to maintain all the reference material required to ensure that Company personnel are properly advised and trained to prepare complete disclosures in its financial information and as a result must rely on its independent registered public accounting firm to assist in these matters. Management is considering adding additional accounting staff, but at the present time does not have the financial resources to make the commitment.
The Company’s management, including its Chief Executive Officer and Principal Financial Officer, does not expect that the Company’s disclosure controls and procedures and its internal control processes will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As a result of internal control weaknesses, there were eleven post closing accounting entries made to the books and records. These entries were discovered through the joint efforts of management and the auditors. In addition, certain disclosures were added to this filing to fulfill the COSO requirements and the requirements of Regulation S-X.
Changes in Internal Control
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive Officers
The following table sets forth the name of our executive officers and directors and the position held by each as of April 15, 2013:
The background of our executive officers and former officers is as follows:
Bob Armstrong, Chief Financial Officer and acting Chief Executive Officer
Mr. Armstrong has been our Chief Financial Officer since May 3, 2010 and our acting Chief Executive officer since March 8, 2013 Mr. Armstrong joined the Company from Three Palms, LLC where he spent eleven years as CFO. His responsibilities included all activities related to client administration, accounting and reporting for over 40 hedge funds. Prior to Three Palms, Mr. Armstrong spent ten years as an independent financial consultant advising small and rapidly growing companies in all aspects of financial management. His clients included companies in the telecommunications and food service industries. Mr. Armstrong also spent four years as Assistant Treasurer for Nu-West Industries, Inc., a publicly traded chemical fertilizer manufacturer. Mr. Armstrong began his career as an auditor with Deloitte & Touche in Denver. Mr. Armstrong received a B.S. in Business Administration from The Ohio State University in 1984. Mr. Armstrong was named to the board on April 12, 2013.
FORMER OFFICERS
Stephen F. Horgan , President, Chief Executive Officer and Chairman of the Board of Directors
From June 5, 2012 to Jan 10 2013, Mr. Horgan served as our Chief Executive Officer and a member of the Board of Directors. Mr. Horgan has extensive experience as a senior executive in the beverage industry. In 2010, Mr. Horgan founded Brand Aspirations, an advertisement and investment company. Prior thereto, from 2005 through 2010, he worked at Coors Brewing and then Miller-Coors, where he was a lead customer officer and then Vice President of the Southeast Region. Prior thereto, he spent over twenty years at The Coca-Cola Company building a record innovation and success in operations, sales, customer management and commercialization. In 1997, Mr. Horgan was promoted to Vice President, after which he served in a variety of domestic and international markets including leading the creation and development of The Coca-Cola Company’s worldwide Walmart organization and business.
Jeremy Alcamo, Executive VP. and Director
Mr. Alcamo officially joined the team in October of 2006 and served thru October 5, 2012. As Executive VP, he oversaw operations. In this capacity, Mr. Alcamo assists in coordinating the manufacturing and shipping of the drinks in addition to the ordering and purchasing of point-of-sale materials. Prior to working at DC Brands, Mr. Alcamo worked for Colorado-based companies Avanti Petroleum; a franchisee of Total Petroleum convenience stores; and Palo Alto; a franchisee of Taco Bells, Pizza Huts and Kentucky Fried Chickens. He also worked with Richard Pearce previously at ThermaProducts, where he was responsible for the company’s accounting and product development. Mr. Alcamo is a graduate of Regis University and has a Bachelor’s degree in professional accounting and Business Administration.
Mr. Alcamo brings a strong business background to our company, having worked with various companies in the Colorado area. He brings significant financial and operational management, as well as financial reporting expertise to the Board. Mr. Alcamo resigned from the company October 5, 2012 but remains on the board at yearend.
Wade Brantley, Director of Investor Relations and Director
Mr. Brantley joined the Company in January, 2010 and served thru January 23, 2013. For the five years prior to joining the Company, Mr. Brantley was an Associate Vice President in Investments with Wells Fargo Financial Advisors. Mr. Brantley has over twenty five years of combined experience in the government and capital markets arenas. Mr. Brantley is the director of Investor Relations and responsible for shareholder communications and stock related issues, as well as monitoring the compliance and regulatory requirements applicable to DC Brands as a publicly traded entity.
Mr. Brantley received his Masters Degree from Drake University’s College of Business and Public Administration. He completed the Executive Certification for Investment Management Analyst through the Wharton School of Business and the Investment Management Consultants Association. His experiences include structuring debt and equity financing for public and private projects, and small business development. He has served as an elected official on the board of a special district, as well as an appointed executive director to a general improvement taxing district. Mr. Brantley has been appointed to several community based committees for development and planning of public facilities.
Mr. Brantley brings a strong business background to our company, having worked in the financial service industry for over twenty five years. His experiences have resulted in a broad understanding of the operational, financial and strategic issues facing public and private companies.
Robert Nikkel, Chief Herbalist
Mr. Nikkel has been with DC Brands, LLC, the company that we acquired in 2004, for the last ten years and served thru January 23, 2013. He has been involved in the manufacture of pharmaceutical and herbal medicine since 1987. Mr. Nikkel concentrates his work on the use of Eastern medicine, specifically the concept of wellness based upon total lifestyle, for athletes in sports to perfect performance lifestyle and the supplements to support them. He has written over 300 formulas that are assets of the Company that include formulas to treat illness as well as formulas to increase athletic performance.
Peter Papilion , Director
Peter Papilion has been a director since November, 2005 and served thru February 8, 2013. From 1998 until the present he has been a director of Global Sourcing with G&G Outfitters, Inc., a global company engaged in the sale of promotional items worldwide. His responsibilities include sourcing production facilities worldwide for branded merchandise and OEM products.
Mr. Papillion brings significant knowledge and experience to the Board. He has significant experience in marketing and promotional activities. His extensive management experience is an important aspect of his service on this Board.
On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman and Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. Subsequent to year end, HARDSave LLC, the terminated the Securities Purchase Agreement. In an effort to preserve cash, we have also restructured certain of our debt including $383,209 of debt owed to principals of HARDSave LLC, which was converted to 1,231 shares of Series C Preferred Stock.
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. As a cost savings measure, we intend to subcontract the manufacture of the supplements that are included in the Functional Beverage systems as opposed to manufacturing them ourselves.
We may seek merger partners if we do not derive sufficient revenue from the current line of business. Bob Armstrong has been named the acting C.E.O. and as of the filing date of this report is the sole director.
DIRECTORS
Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting of shareholders following their election. To date, none of our directors have received any compensation from us, whether in the form of cash or securities, for their service as directors. We currently have one director, Alan Fishman, who also controls the entity that has the power to vote a majority of our outstanding equity.
Directors’ Term of Office
Directors will hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board of directors.
Audit Committee
Our board of directors currently serves as our audit committee. The audit committee is responsible for recommending independent auditors and reviewing management actions in matters relating to audit functions. The committee reviews, with independent auditors, the scope and results of its audit engagement, the system of internal controls and procedures and reviews the effectiveness of procedures intended to prevent violations of laws.
The audit committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and the auditors prior to filing of officers’ certifications with the SEC to receive information concerning, among other things, significant deficiencies in the design or operation of internal controls.
Due to its control of a majority of our voting shares, our Board Member is not deemed “independent” in accordance with rule 4200(a)(14) of the Nasdaq Marketplace Rules. Our board of directors does not have an “audit committee financial expert,” within the meaning of that phrase under applicable regulations of the Securities and Exchange Commission, serving on the audit committee. The board of directors believes that each member is financially literate and experienced in business matters and is capable of (1) understanding generally accepted accounting principles (“GAAP”) and financial statements, (2) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (3) analyzing and evaluating our financial statements, (4) understanding our internal controls and procedures for financial reporting, and (5) understanding audit committee functions, all of which are attributes of an audit committee financial expert. However, the board of directors believes that no audit committee member has obtained these attributes through the experience specified in the SEC's definition of “audit committee financial expert.” Further, as is the case with many small companies, it would be difficult for us to attract and retain board members who qualify as “audit committee financial experts,” and competition for such individuals is significant. The board of directors believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated “audit committee financial expert.”
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who beneficially own more than 10 percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s common stock. Such officers, directors and persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file with the SEC.
Based solely on a review of the copies of such forms that were received by the Company, or written representations from certain reporting persons that no Form 5s were required for those persons, the Company is not aware of any failures to file reports or report transactions in a timely manner during the Company’s fiscal year ended December 31, 2010.
Code of Ethics
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller. Such code of ethics is posted on the Company’s internet website, which is located at www.hardnutrition.com.
ITEM 11. EXECUTIVE COMPENSATION
During the year ended December 31, 2012 and 2011 we did not issue any options or shares of restricted stock to any named officers or directors in connection with their employment or service to the Company and there are no outstanding equity awards as of December 31, 2012 or 2011.
Executive Compensation
The following table sets forth all compensation awarded, earned or paid for services rendered to our executive officers that exceeded $100,000 during each of the fiscal years ended December 31, 2012 and 2011.
Summary Compensation Table
(1) Salary shown in the table represents salary earned by Mr. Pearce. Mr. Pearce deferred salary of $596,538 and $394,541 in 2012 and 2011, respectively.
(2) Salary shown in the table represents salary earned by Mr. Alcamo. Mr. Alcamo deferred salary of $73,396 and $71,134 in 2012 and 2011, respectively.
(3) In 2012 Mr. Pearce received $1,900,000 for final two years of his contract under a severance agreement. Amount was allocated to investor, lawyers, and employees. Other amounts consists of expenses to provide Mr. Pearce an automobile.
Employment Agreements
On October 1, 2004, we entered into a ten year Employment Agreement with Richard Pearce which expires in October 2014. The Employment Agreement appoints Mr. Pearce as our President and Chief Executive Officer and requires that Mr. Pearce devote his full time to the business of the Company in exchange for compensation increasing from a base salary of $250,000 for the first year to $1,000,000 the tenth year of the term of the Employment Agreement. The agreement also provides that so long as Mr. Pearce is serving as our President and Chief Executive Officer that he is to also serve as one of our directors. Mr. Pearce is entitled to a life insurance policy at our expense, of which we are a 50% beneficiary and a person designated by him is the other 50% beneficiary. To date, such policy has not been purchased. Upon execution of the agreement, Mr. Pearce was issued 100,000 shares of our Series A Preferred Stock which entitled Mr. Pearce to such number of votes as shall equal 56.25% of the voting power of our outstanding stock; however subsequent to the issuance Mr. Pearce exchanged 5% of his voting power for 40,000,000 shares of common stock. Mr. Pearce now holds 91,111 shares of Series A Preferred Stock that have the right to vote 51.25% of the outstanding voting shares. The agreement is subject to termination without cause upon the vote of three quarters of the shareholders and board and with cause upon the determination of an arbitrator and only after Mr. Pearce has been notified at least three times of his breach. In the event of a termination with or without cause, Mr. Pearce is entitled at his option to be paid in full the current value of all monies and other forms of compensation owed, at that time, under the employment agreement throughout its then remaining term or to the same on a periodic basis (consistent with whatever periodic payments are owed as of that time). Cause is defined as willful and malicious misappropriation of customer assets for personal gain to Mr. Pearce, willful and flagrant disregard of reasonable written instructions of the board of directors involving those consistent with Mr. Pearce’s position and title as determined by an independent professional arbitrator and only after not less than 3 written notices from the Chairman of the Board to follow the policies and procedures of the board of directors. We may also suffer treble damages if we attempt to remove Mr. Pearce from office by threat of actual litigation which does not meet the criteria for cause.
Mr. Pearce resigned as our Chief Executive officer and a member of our Board of Directors on June 5, 2012 and was provided with a severance agreement. Set forth below is a summary of the material terms of his severance agreement::
●
Mr. Pearce irrevocably and voluntarily resigned for the purposes of retirement from his position as Chairman and Chief Executive Officer of the Company and from the Board of Directors of the Company and all of its subsidiaries or affiliates as of the Effective Date of the Severance Agreement.
●
As of June 5, 2012, Mr. Pearce will have no further obligation or authority to perform duties and functions on behalf of DC Brands and/or its subsidiaries or affiliates and will refrain from performing such duties or functions; however, Mr. Pearce agreed to cooperate with DC Brands as necessary for the business of DC Brands when requested by the President, Chief Executive Officer and/or Chairperson of the Board.
●
The Company will pay Mr. Pearce all accrued and unpaid base salary and expense reimbursement owed to him to date of Four Million Seven Hundred Seventy-Five Thousand Eight Hundred Thirty-Four Dollars ($4,775,834) in accordance with the terms of a secured convertible promissory note (the “Note”), which will be secured by the property, equipments and intellectual property of the Company and provide for the ability to convert to common stock at a sixty percent (60%) discount to market.
●
Mr. Pearce shall have the right to receive at no cost to him up to Five Hundred Dollars ($500) worth of Hard Nutrition products for his personal use (based upon the cost of the products to the Company) per month until such time as the Note is paid in full.
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Mr. Pearce shall have the right to utilize the services of Mr. Peter Stump at the rate of Twenty Five Dollars ($25) per hour so long as such retention of Mr. Stumpp does not adversely interfere with his performance of his duties for the Company.
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The Company agreed to issue to Cut & Dried Productions, LLC (“Cut & Dried”) a promissory note in the principal amount of the short term loans from Cut & Dried which is approximately Four Hundred Thousand Dollars ($400,000)), which note shall provide that the loan is to be repaid at the rate of One Hundred Thousand Dollars ($100,000) per month until paid in full and to issue additional notes evidencing debt as well as to make certain future bonus payments.
●
For a period commencing on the Effective Date of the Agreement and ending June 5, 2013, Mr. Pearce agreed not to, directly or indirectly, either for himself or any other person, own, manage, control, materially participate in, invest in, permit his name to be used by, act as consultant or advisor to, render material services for (alone or in association with any person, firm, corporation or other business organization) or otherwise assist in any manner any business which is a competitor of DC Brands and/or its subsidiaries or affiliates.
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The Severance Agreement also contains additional provisions which are customary for agreements of this type. These include confidentiality provisions.
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In connection with the foregoing and in consideration of the undertakings of the Company, Mr. Pearce executed a Release pursuant to which he agreed not to sue DC Brands, its affiliates, subsidiaries, divisions, and related parties. The Severance Agreement contained a similar release from DC Brands to Mr. Pearce.
●
Mr. Pearce’s resignation was not due to any disagreement with the Company on any matter relating to its operations, policies or practices.
On May 1, 2010, we entered into a three year employment agreement with Jeremy Alcamo. The Employment Agreement appoints Mr. Alcamo as our Executive Vice President and requires that Mr. Alcamo devote the time he deems necessary to the performance of the business of the Company in exchange for an annual salary of $125,000 subject to increases each year which shall be at least 5% per year. The Company has the right to terminate the Employment Agreement upon Mr. Alcamo’s death or disability or for cause as defined in the agreement. Mr. Alcamo has the right to terminate the Employment Agreement for good reason as defined in the agreement which includes a material breach by the Company and a change of control. In the event of a termination by Mr. Alcamo for good reason, or by the Company without cause, Mr. Alcamo is entitled to receive his monthly salary for an additional six months in addition to any accrued bonus, vacation pay and expense reimbursement.
Mr. Alcamo left the company October 5, 2012.
We currently maintain no other agreements for employment with any of our other executive officers or employees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We determine beneficial ownership based on the rules of the Securities and Exchange Commission. In general, beneficial ownership includes shares over which a person has sole or shared voting or investment power and shares which the person has the right to acquire within 60 days. Unless otherwise indicated, the persons listed below have sole voting and investment power over the shares beneficially owned. As of December 31, 2011 we had 199,113,770 shares of common stock outstanding.
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding, including for purposes of computing the percentage ownership of the person holding such option, warrant or convertible security, but not for purposes of computing the percentage of any other holder. HARDSave LLC is managed by Alan Fishman and Dave Coppfer who was added to the board in November 2012. HARDSave LLC owns the 91,111 shares of Series A Preferred Stock that provides them 51.25% voting control. The above calculations assume that all outstanding shares of preferred stock are converted.
(2) Shares ownership is based on information contained in a Schedule 13G filed with the SEC on April 2, 2013 Steve Hicks has control over the shares held by Southridge Partners II LP. The address of the holder is 90 Grove Street, Suite 206, Ridgefield CT 06877
(3) Shares ownership is based on information contained in a Schedule 13G filed with the SEC on April 2, 2013 Robert Roever has control over the shares held by Capitoline Ventures II, LLC. The address of the holder is 244 West 54th Street, New York, New York 10019
All common shares have been retroactively adjusted for the 200 for 1 reverse stock split authorized by the board on May 21, 2012 and effective June 28, 2012.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had related party payables of $1,319,689 and $1,413,569 at December 31, 2012 and 2011, respectively consisting primarily of notes payable to former officers in 2012 and primarily of deferred salaries payable and royalties payable to its officers in 2011. 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 June5, 2012 we entered into a severance agreement with Richard Pearce. See Item 11 for a summary of the material terms of the Severance Agreement.
On October 8, 2012 we entered into a Securities Purchase Agreement with HARDSave LLC, an entity managed by Alan Fishman Dave Coppfer, former directors, which allowed it to invest up to a potential $1,250,000 pursuant to which it invested an additional $595,000 in our company and had the right to invest an additional $655,000 as needed to execute the national expansion business plan developed by our prior President, Stephen Horgan. Subsequent to year end, HARDSave LLC, the terminated the Securities Purchase Agreement. In an effort to preserve cash, we have also restructured certain of our debt including $383,209 of debt owed to principals of HARDSave LLC, which was converted to 1,231_ shares of Series C Preferred Stock.
We also entered into an exchange agreement with another Richard Pearce pursuant to which Mr. Pearce forgave $1 million of his outstanding debt and converted $2.775 million of his debt into Series
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees including expenses billed to us for the years ended December 31, 2011 and 2010, for professional services performed by Turner, Stone and Company were as follows:
ITEM 15. EXHIBITS
(a) Financial Statements
1. These financial statements are set forth in Item 8.