ITEM 1. BUSINESS
Our Business
We are a beverage company based in Northglenn, Colorado. We were formed in 2011 by beverage industry veterans for the purpose of exploiting niche markets in the beverage industry. We have developed, in-house, two beverage brands: Natural Cabana™ Lemonade and Limeade and Coconut Water and PULSE® brand of Heart Healthy functional beverages.
We began production of our Natural Cabana™ Lemonade in 2011 and since then, and with this initial product, have developed a nationwide distribution system through more than 141 distributors into 47 US States, Canada, Mexico, Panama, Bermuda and Ireland. After establishing a nationwide distribution system were able to secured listings with regional and national grocery and convenience chain stores such as: Albertsons, Kmart, Food City, Gelsons, Sprouts, Safeway, Whole Foods, HEB, Save Mart, Walgreens, Kroger, Price Chopper, 7-Eleven, Winco Foods and HyVee to name a few. We have been in operation with our first product, Natural Cabana™ Lemonade, for just over two years. We have expanded this brand into Limeade, which started selling on January 15, 2014, and into Natural Cabana™ Coconut Water, which started selling February 21, 2014.
The PULSE brand of Heart Healthy functional beverages, originally developed by Baxter Healthcare and previously designated with gender-specific formulations, will be introduced and marketed in a new, non-gender-specific formulation in the summer of 2014. We believe the new formulation will have significantly wider consumer appeal.
We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes over 80% Class “A” distributors such as United Natural Foods, Inc. and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.
Our principal executive offices are located at 11678 N Huron Street, Northglenn, Colorado 80234, and our telephone number at this address is (720) 382-5476. Our website is www.pulsebeverage.com. Information contained on our website is not a part of this Annual Report on Form 10-K. We completed our initial public offering on February 15, 2011. On April 11, 2011 our common stock started trading under the symbol “PLSB” on the OTCBB operated by the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the OTCQB operated by OTC Markets Group, Inc.
Overview and Mission
Our mission is to be one of the market leaders in the development and marketing of natural and functional beverage products that provide real health benefits to a significant segment of the population and are convenient and appealing to consumers. We have an experienced management team of beverage industry executives that has successfully launched and/or managed the distribution for more than twenty-five major brands over the past twenty years. The team has excellent relationships with distributors and buyers who supply thousands of retail outlets, supermarkets and convenience stores.
Non-carbonated beverages divide into a number of categories, including energy and sports drinks, teas, juices, lemonades, bottled water, coconut water and functional beverages. These beverage categories include a host of products that are fortified with vitamins, minerals and dietary supplements. PULSE® is targeted at the functional/nutritional beverage segment. Our goal is to evolve the functional/nutritional beverage category into more of a focus on providing true and meaningful health and wellness benefits in a convenient and good tasting format.
Products
Our initial product developed in-house was Natural Cabana™ Lemonade in five lower calorie flavors: original lemonade, mango, strawberry, cherry and island spice. During 2013 we replaced island spice with blueberry and added Natural Cabana™ Limeade. Also in 2013, we completed the negotiation and secured supply of premium coconut water with a Thailand manufacturer. We completed the design of this product, and on February 21, 2014, began selling Natural Cabana™ Coconut Water as an extension of our Natural Cabana™ beverage line.
Our second, flagship product is PULSE® brand of Heart Healthy functional beverages (“PULSE®”). Originally developed by Baxter Healthcare and previously designated with gender-specific formulations, PULSE® will be introduced and marketed in a new, non-gender-specific formulation in the second quarter of 2014. We believe the new formulation will have significantly wider consumer appeal.
To ensure that the flavor profiles and nutritional platforms of our products meet the needs of consumers’ taste, health and life-style, we contract the services of Catalyst Development Inc. (“Catalyst”), a highly respected beverage product development firm located in Burnaby, BC, Canada. Catalyst developed the formulations for PULSE® under license, for Baxter Healthcare Corporation. Catalyst’s owner, Ron Kendrick, is our Chief of Product Development and Operations and oversees our beverage development, inventory supply chain, and quality assurance through his team of three persons. Our product development team has ensured PULSE® is a lower calorie, great tasting functional beverage that provides the benefits we claim on PULSE® labels. We use a hot-fill process of production to allow the PULSE® product to have all natural ingredients without the use of preservatives.
Natural Cabana™ Lemonade and Limeade
Natural Cabana™ Lemonade is a line-up of refreshing, all-natural, “good-for-you”, ready-to-drink lemonades in a 20oz glass bottle in five flavors: Regular Lemonade, Blueberry Lemonade, Cherry Lemonade, Strawberry Lemonade and Mango Lemonade. In 2014 we introduced Natural Cabana™ Limeade. Natural Cabana™ Lemonade and Limeade offer reduced calories compared to competitors, without the use of artificial sweeteners or coloring. There is only one other all-natural lemonade in the marketplace that is offered in a smaller 16oz glass format. We are positioning Cabana™ as natural complements to food in an effort to broaden its appeal. We believe that the lemonade market is well established and that there is an immediate demand in North America and internationally.
Natural Cabana™ Lemonade and Limeade are targeted at the lemonade and limeade beverage segment to attract lemonade and fruit juice beverage drinkers of all ages, in particular the beverage consumers desiring a lower calorie, all natural, thirst quenching beverage for enjoyment and rehydration. Nationally, only a handful of companies market ready-to-drink lemonades. We believe Natural Cabana™ Lemonade and Limeade has competitive advantages over existing lemonade brands as follows: offered in a large format 20oz glass bottle, has 55 calories per 8oz. serving compared to over 100 calories in most competitors and is made of 100% all natural ingredients. The fact that Natural Cabana™ Lemonade and Limeade contains no preservatives or artificial sweeteners means that it can be sold in health food stores such as Whole Foods, GNC Live Well, Vitamin Cottage, Sunflower and others. The following is a summary of our competition in the lemonade segment:
Calypso® - many flavors, 20oz glass bottle, artificial coloring, high in calories, artificial sweeteners;
Hubert’s Lemonade® - all natural lemonade in a 16oz glass bottle;
Simply Lemonade® - one flavor in a 13.5oz plastic bottle using natural lemon juice and high in calories;
Arizona® Iced Tea - a lemonade/tea known as “Arnold Palmer” in a 24oz can; and
Country Time Lemonade® - one flavor in a 12oz can, high in calories.
Natural Cabana™ Coconut Water
We introduced our new line of coconut waters, Natural Cabana™ Coconut Water and Natural Cabana™ Pineapple Coconut Water, in the first quarter of 2014 as a major line extension to our Natural Cabana™ line of products. Additional coconut water lines may be introduced in the future.
Coconut water is one of the fastest growing beverage categories in the United States, with consumers and health experts recognizing its natural hydrating qualities, exceptional nutritional benefits and great taste. Coconut water contains high levels of electrolytes, vitamins and minerals and less sugar than many sports drinks.
While there are a number of competing brands in this cagtegory, we believe our established existing distribution network and exceptional taste of our coconut water products will give us a competitive advantage in the marketplace.
PULSE® brand of Heart Healthy functional beverages (“PULSE®”)
PULSE® is formulated as a Heart Healthy beverage, providing all natural functional ingredients without preservatives in a low calorie format. PULSE® offers consumers the nutrients they need in a 16oz glass bottle containing a great tasting functional beverage. Our packaging is vibrant and convenient and is water-based, which gives rise to our trademark: “PULSE: Nutrition Made Simple®.” The nutrients contained in PULSE® are backed by research and are scientifically demonstrated to promote health in each targeted health platform. The nutritional ingredients were specifically selected to provide the nutrition necessary to achieve targeted health benefits using patented liposome nano-dispersion technology that introduces the ingredients into PULSE® in a format that allows the body to absorb the nutrients. We own all the formulations, rights and trademarks relating to the PULSE® brand of functional beverages and specifically we own the right to use the following Side Panel Statement for PULSE® Heart Healthy: “Formulation developed under license from Baxter Healthcare Corporation”. This right is in perpetuity without royalties. All PULSE® labels contain structure/function claims that are followed by an * disclosing the following: This statement has not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure, or prevent any disease.
PULSE® is targeted toward adults who want to feel young and healthful. PULSE® brand mission and concept is supported by a growing consumer link between nutrition and wellness and the ever growing need for convenient solutions to rehydrate and to combat obesity. This fact ensures that PULSE® does not just attract the "baby boomer" category but includes all consumers who want health conscious beverages. There is a societal shift away from carbonated, diet and high sugar-content beverages that contain artificial sweeteners and preservatives. PULSE® is supported by a growing consumer link between nutrition and wellness in convenient solutions. There is an emergence of new product categories in the area of energy and sports drinks, teas, juices, flavored waters, lemonades and functional/nutritional beverages. Populations are aging, which influences the food and beverage industry, affecting everything from packaging and taste profiles to calories and contents.
PULSE® is proprietary formulated and scientifically effective in the recommended serving sizes as part of a daily health regimen. PULSE® formulas include functional ingredients that are widely considered to be critical to adult health including anti-oxidants, vitamins, minerals, soluble fiber and soy isoflavones. The following is a summary of our competition in the functional beverage segment:
Glaceau Vitamin Water® - numerous beverages/flavors, zero calories, mostly trace amounts of vitamins and elements;
Function® Drinks - three beverages/seven flavors, emphasis on detox/weight loss/energy, various antioxidants, mostly trace amounts of vitamins and elements;
Neuro® - eight beverages/formulations/flavors, lightly carbonated, proprietary blends and vitamins, small amounts of vitamins and elements; and
POM Wonderful® - pomegrante based beverage with claims to have heart and other health benefits - FDA has requested they remove those claims from their labels.
Business Value Drivers
Profitable Growth - We believe “functional”, “image-based” and/or “better-for-you” brands properly supported by marketing and innovation, targeted to a broad consumer base, drive profitable growth. We are focused on maintaining and improving profit margins and believe that tailored branding, packaging, pricing and distribution channel strategies help achieve profitable growth. We are implementing these strategies with a view to achieving profitable growth.
International market development - The expansion into international markets with our Natural Cabana™ Lemonade and Limeade and Coconut Water, together with the introduction of PULSE® Heart Healthy functional beverages, remains a key value driver for our growth.
Cost Management - The principal focus of controlling cost inputs will continue to center around reducing input supply and production costs on a per-case basis, including raw material costs and co-packing fees. The reduction of days to collect accounts receivable and converting raw materials into finished goods and finished goods into accounts receivable remains a key area of focus.
Efficient Capital Structure - Our capital structure, without long-term debt, is intended to optimize our working capital to finance expansion, both domestically and internationally. We believe our strong capital position currently provides us with a competitive advantage.
We believe that, subject to increases in the costs of certain raw materials being contained, these value drivers, when properly implemented, will result in: (1) maintaining and increasing our gross profit margins; (2) providing additional leverage over time through reduced expenses as a percentage of net revenues; and (3) optimizing our cost of capital. The ultimate measure of success is and will be reflected in our current and future results of operations.
Gross and net sales, gross profits, operating income, net income and net income per share represent key measurements of the above value drivers. These measurements will continue to be a key management focus in 2014. See “Results of Operations” for a complete discussion of our current and future business.
Growth Strategy
We launched our Natural Cabana™ Lemonade ahead of PULSE® in order to establish a comprehensive nationwide and international distribution system. Lemonades are widely considered to be understood by beverage consumers as compared to a highly nutritional functional product such as PULSE®, which requires more education at the distribution and retail level.
Our growth strategy includes:
- completing a strategic acquisition of a successful beverage brand;
- expanding our domestic distributors and add to our international distributorships for all of our brands;
- increase awareness of our Natural Cabana™ Coconut Water brand;
- successfully re-introducing our re-designed and upgraded PULSE® brand of Heart Healthy functional beverages;
- securing additional chain, convenience and key account store listings for all our brands nationwide and internationally;
- increasing our direct-to-consumer online shopping;
- expanding our PULSE® brand by developing new proprietary formulations;
- completing the development of a third branded product that will compete in an additional segment of the beverage market; and
- eventually obtaining a NASDAQ or NYSE MKT listing for our shares.
Milestones
Milestones reached and building blocks set in place to date:
- we cost efficiently and methodically built a beverage company from the ground up and have overcome difficulties associated with start-up beverage companies relating to financing and product development and acceptance;
- we completed contracts with co-packers in three strategic locations: Oregon, Virginia and Texas, which has allowed us to produce and distribute our products nationwide cost efficiently;
- we have built a nationwide distribution system with 141 distributors servicing 47 US states, Canada, Mexico, Panama, Bermuda and Ireland. Once this “critical mass” of distributors was established we then approached, and secured listings for Cabana™ with large grocery and convenience store chains resulting in approved listings to date totaling over 17,000 retail outlets;
- our distribution infrastructure has been developed without large capital outlays, yet we have gained market acceptance for our Cabana™ brand where taste, calories, and all natural ingredients, rather than price, are the major rationale for a consumer purchase;
- we have expanded our Natural Cabana™ brand into Limeade and Coconut Water and began their distribution in early 2014 into our existing distribution system; and
- we completed the re-design and flavor profiles of PULSE®. Now that we have established a substantial portion of our distribution system, we will readily be able to introduce PULSE® into our existing distribution system through natural beverage distributers such as: United Natural Food, Inc. and Nature’s Best, the two largest natural food distributors. Existing distributors and chain stores have been made aware of the health benefits and introduction of PULSE®. Introduction to begin during the summer of 2014.
Industry Background
Non-alcoholic beverages are among the most widely distributed food products in the world and are being sold through more than 400,000 retailers in the United States, our core market. The United States has more than 2,600 beverage companies and 500 bottlers of beverage products. Collectively they account for more than $100 billion in annual sales. It is estimated that globally more than $300 billion worth of non-alcoholic beverages are sold annually. The beverage market is controlled by two giants, The Coca-Cola Company (“Coke”) and PepsiCo, combining for over 70% of the non-alcoholic beverage market. Carbonated beverage sales are slipping, while non-carbonated beverage sales are growing. Experts predict that beverage companies that only offer carbonated beverages will have to work hard to off-set flagging demand. Industry watchers believe that growth will be largely confined to non-carbonated beverages and will chiefly affect functional drinks. Functional, sports and energy drinks are expected to be the principal beneficiaries of this trend.
Industry watchers are particularly confident about the prospect for drinks that are functional and that offer therapeutic benefit and as such capitalize on the public’s growing interest in products that promise to improve health. Although we will face competition in our bid for market share, we believe, based on market research that our products, strong packaging, unique formulations and promotions will induce early trial and in the course of two years build a widespread and loyal following. We also believe that our products will have strong appeal in Europe and the Pacific Rim, in particular, China. Key drivers of the Chinese beverage market include rising inflows of foreign direct investment, growing levels of consumer spending power, an increasingly health conscious consuming public and the Chinese government’s market-focused economic policy. We believe our products will be accepted in China because of China’s growing desire for healthy products and its growing middle class and its interest in brands that come from North America.
Distribution Systems
Our distribution systems are comprised of the following types of distributors:
Direct Store Delivery (“DSD”)
DSDs primarily distribute beverages, chips, snacks and milk and provide pre-sales, delivery and merchandising services to their customers. Service levels are daily and weekly and they require 25% to 30% gross profit from sales to their customers. As of the date of this Report, we maintain a network of more than 141 distributors in over 47 states in America, nine provinces in Canada, Panama, Mexico, Bermuda and Ireland. We grant these independent distributors the exclusive right in defined territories to distribute finished cases of one or more of our products through written agreements. These agreements typically include compensation to those distributors in the event we provide product directly to one of our regional retailers located in the distributor’s region. We are also obligated to pay termination fees for cancellations of most of these written distributor agreements, which have terms generally ranging from one to three years. We have chosen, and will continue to choose, our distributors based on their perceived ability to build our brand franchise in convenience stores and grocery stores.
Direct to Retail Channel (“DTR”)
We have secured listings with large retail convenience store and grocery store chains where we ship direct to the chain stores warehousing system. Retailers must have warehousing and delivery capabilities. Services to retailer are provided by an assigned broker, approved by us, to oversee all needs which provide some pre-sale and merchandising services. Our direct to retail channel of distribution is an important part of our strategy to target large national or regional restaurant chains, retail accounts, including mass merchandisers and premier food-service businesses. Through these programs, we negotiate directly with the retailer to carry our products, and the account is serviced through the retailer’s appointed distribution system. These arrangements are terminable at any time by these retailers or us, and contain no minimum purchase commitments.
Production Facilities
We outsource the manufacturing and warehousing of our products to third party bottlers and independent contract manufacturers (“co-packers”). We purchase our raw materials from North American suppliers which deliver to our third party co-packers. We currently use three co-packers located in Forest Grove, Oregon, Marion, Virginia and Coppell, Texas to manufacture and package our products. Having three strategically located co-packers reduces our shipping rates and transport times. We intend to identify co-packers in Canada, Europe, and Asia to support the expansion of our products in those markets. Once our products are manufactured, we store the finished product in a warehouse adjacent to each co-packer or in third party warehouses. Our co-packers were chosen on the basis of their proximity to markets covered by our distributors. Most of the ingredients used in the formulation of our products are off-the-shelf and thus readily available. No ingredient has a lead time greater than two weeks. Other than minimum case volume requirements per production run for most co-packers, we do not have annual minimum production commitments with our co-packers. Our co-packers may terminate their arrangements with us at any time, in which case we could experience disruptions in our ability to deliver products to our customers. We continually review our contract packing needs in light of regulatory compliance and logistical requirements and may add or change co-packers based on those needs.
Raw Materials
Substantially all of the raw materials used in the preparation, bottling and packaging of our products are purchased by us or by our contract manufacturers in accordance with our specifications. The raw materials used in the preparation and packaging of our products consist primarily of juice concentrates, natural flavors, stevia, pure cane sugar, bottles, labels, trays and enclosures. These raw materials are purchased from suppliers selected by us or by our contract manufacturers. We believe that we have adequate sources of raw materials, which are available from multiple suppliers.
Currently, we purchase our flavor concentrate from four flavor concentrate suppliers. Generally, all natural flavor suppliers own the proprietary rights to the flavors. In connection with the development of new products and flavors, independent suppliers bear a large portion of the expense for product development, thereby enabling us to develop new products and flavors at relatively low cost. We anticipate that for future flavors and additional products, we may purchase flavor concentrate from other flavor houses with the intention of developing other sources of flavor concentrate for each of our products. If we have to replace a flavor supplier, we could experience disruptions in our ability to deliver products to our customers, which could have a material adverse effect on our results of operations.
Quality Control
We are committed to building products that meet or exceed the quality standards set by the U.S. and Canadian governments. Our products are made from high quality all natural ingredients. We ensure that all of our products satisfy our quality standards. Contract manufacturers are selected and monitored by our own quality control representatives in an effort to assure adherence to our production procedures and quality standards. Samples of our products from each production run undertaken by each of our contract manufacturers are analyzed and categorized in a reference library. The manufacturing process steps include source selection, receipt and storage, filtration, disinfection, bottling, packaging, in-place sanitation, plant quality control and corporate policies affecting quality assurance. In addition, we ensure that each bottle is stamped with a production date, time, and plant code to quickly isolate problems should they arise.
For every run of product, our contract manufacturer undertakes extensive testing of product quality and packaging. This includes testing levels of sweetness, taste, product integrity, packaging and various regulatory cross checks. For each product, the contract manufacturer must transmit all quality control test results to us for reference following each production run. Testing also includes microbiological checks and other tests to ensure the production facilities meet the standards and specifications of our quality assurance sample submission to Catalyst Development Inc. for microbiological checks and other tests to ensure the production facilities meet the standards and specifications of our quality assurance program. Water quality is ensured through activated carbon and particulate filtration as well as alkalinity adjustment when required. Flavors are pre-tested before shipment to contract manufacturers from the flavor manufacturer. We are committed to ongoing product improvement with a view toward ensuring the high quality of our product through a stringent contract packer selection and training program.
Regulation
The production and marketing of our proprietary beverages are subject to the rules and regulations of various federal, provincial, state and local health agencies, including in particular Health Canada, Agriculture and Agri-Food Canada (AAFC) and the U.S. Food and Drug Administration (FDA). The FDA and AAFC also regulate labeling of our products. From time to time, we may receive notifications of various technical labeling or ingredient reviews with respect to our licensed products. We believe that we have a compliance program in place to ensure compliance with production, marketing and labeling regulations.
Packagers of our beverage products presently offer non-refillable, recyclable containers in the U.S. and various other markets. Legal requirements have been enacted in jurisdictions in the U.S. and Canada requiring that deposits or certain eco-taxes or fees be charged for the sale, marketing and use of certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other beverage container related deposit, recycling, eco-tax and/or product stewardship proposals have been introduced in various jurisdictions in the U.S. and Canada. We anticipate that similar legislation or regulations may be proposed in the future at local, state and federal levels, both in the U.S. and Canada.
New Product Development
Our product philosophy will continue to be based on developing products in those segments of the market that offer the greatest chance of success such as health, wellness and natural refreshment, and we will continue to seek out underserved market niches. We believe we can quickly respond, given our technical and marketing expertise, to changing market conditions with new and innovative products. We are committed to developing products that are distinct, meet a quantifiable need, are proprietary, lend themselves to at least a 30% gross profit, project a quality and healthy image, and can be distributed through existing distribution channels. We are identifying brands of other companies with a view to acquiring them or taking on the exclusive distributorship of their products.
Intellectual Property
We acquired all of the property and equipment, formulations, rights and trademarks associated with PULSE® from Health Beverage, LLC pursuant to an Asset Purchase Agreement that closed on January 31, 2011.
We own the following intellectual property:
- the right from Baxter Healthcare Corporation to use the following side panel (label) statement for PULSE® Heart Healthy Formula™: “PRODUCT FORMULATION DEVELOPED UNDER LICENSE FROM BAXTER HEALTHCARE CORPORATION”;
- water-based beverage formulations, specifications, manufacturing methods and related Canadian and US unregistered trademark for PULSE® - Heart Healthy™. This trademark is current in that they are being used currently and will not expire as long as we continue to use them;
- the trademark Cabana™ in connection with our Natural Cabana™ Lemonade, Limeade and Coconut Water.
We consider our trademarks, trade secrets and the license right described above to be of considerable value and importance to our business.
Segment Information
We have one operating segment: Non-carbonated beverages; and one reportable geographic segment: North America.
Research and Development
We have incurred $101,976 of research and development costs associated with the changing of PULSE® brand of functional beverages from gender specific formulations to a new, non-gender specific formulation. We believe the new formulation will have significantly wider consumer appeal.
Seasonality
Our sales may have some seasonality and we may experience fluctuations in quarterly results due to many factors. We expect to generate a greater percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the fiscal year.
Employees
As of December 31, 2013, we had twenty-two employees, including Robert E. Yates, who serves as our President and Principal Executive Financial and Accounting Officer.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock is risky. You should carefully consider the following risks, as well as the other information contained in this Form 10-K, before investing. If any of the following risks actually occur,, our business, business prospects, financial condition, cash flow and results of operations could be materially and adversely affected. In this case, the trading price of our common stock could decline, and you might lose part or all of your investment. We may amend or supplement the risk factors described below from time to time by other reports we file with the SEC in the future.
Risk Factors Relating to Our Company and Our Business
We rely on key members of management, the loss of whose services could adversely affect our success and development.
Our success depends to a certain degree upon certain key members of the management. These individuals are a significant factor in our growth and ability to meet our business objectives. We have an experienced management team of beverage industry executives who have successfully launched and/or managed the distribution for more than twenty-five major brands over the past twenty years. They have strong relationships with distributors and buyers who supply thousands of retail outlets, supermarkets and convenience stores. The loss of our key management personnel could slow the growth of our business, or it may cease to operate at all, which may result in the total loss of an investment in our securities.
Because we do not have long term contractual commitments with our distributors, our business may be negatively affected if we are unable to maintain these important relationships and distribute our products.
Our marketing and sales strategy depends in large part on the availability and performance of our independent distributors. We will continue our efforts to reinforce and expand our distribution network by partnering with new distributors and replacing underperforming distributors. We have entered into written agreements with many of our distributors in the U.S. and Canada, with terms ranging from one to three years. We currently do not have, nor do we anticipate in the future that we will be able to establish, long-term contractual commitments from some of our distributors. In addition, despite the terms of the written agreements with many of our top distributors, there are no minimum levels of purchases required under some of those agreements, and most of the agreements may be terminated at any time by us, generally with a termination fee. We may not be able to maintain our current distribution relationships or establish and maintain successful relationships with distributors in new geographic distribution areas. Moreover, there is the additional possibility that we may have to incur additional expenditures to attract and maintain key distributors in one or more of our geographic distribution areas in order to profitably exploit our geographic markets.
Our inability to maintain our distribution network or attract additional distributors will likely adversely affect our revenues and financial results.
Because we rely on our distributors, retailers and brokers that distribute our competitors’ products along with our own products, we have little control in ensuring our product reaches customers, which could cause our sales to suffer.
Our ability to establish a market for our products in new geographic areas, as well as maintain and expand our existing markets, is dependent on our ability to establish and maintain successful relationships with reliable distributors, retailers and brokers strategically positioned to serve those areas. Most of our distributors, retailers and brokers sell and distribute competing products, including non-alcoholic and alcoholic beverages, and our products may represent a small portion of their business. To the extent that our distributors, retailers and brokers are distracted from selling our products or do not employ sufficient efforts in managing and selling our products, including re-stocking retail shelves with our products, our sales and results of operations could be adversely affected. Our ability to maintain our distribution network and attract additional distributors, retailers and brokers will depend on a number of factors, some of which are outside our control. Some of these factors include: the level of demand for our brands and products in a particular distribution area; our ability to price our products at levels competitive with those of competing products; and our ability to deliver products in the quantity and at the time ordered by distributors, retailers and brokers.
If any of the above factors work negatively against us, our sales will likely decline and our results of operations will be adversely affected.
Because our distributors are not required to place minimum orders with us, we need to manage our inventory levels, and it is difficult to predict the timing and amount of our sales.
Our independent distributors are not required to place minimum monthly or annual orders for our products. In order to reduce inventory costs, independent distributors endeavor to order products from us on a “just in time” basis in quantities, and at such times, based on the demand for the products in a particular distribution area. Accordingly, there is no assurance as to the timing or quantity of purchases by any of our independent distributors or that any of our distributors will continue to purchase products from us in the same frequencies and volumes as they may have done in the past. In order to be able to deliver our products on a timely basis, we need to maintain adequate inventory levels of the desired products, but we cannot predict the number of cases sold by any of our distributors. If we fail to meet our shipping schedules, we could damage our relationships with distributors and/or retailers, increase our shipping costs or cause sales opportunities to be delayed or lost, which would unfavorably impact our future sales and adversely affect our operating results. In addition, if the inventory of our products held by our distributors and/or retailers is too high, they will not place orders for additional products, which would also unfavorably impact our future sales and adversely affect our operating results.
Our business plan and future growth is dependent in part on our distribution arrangements with retailers and regional retail accounts. If we are unable to establish and maintain these arrangements, our results of operations and financial condition could be adversely affected.
We currently have distribution arrangements with a few regional retail accounts to distribute our products directly through their venues. However, there are several risks associated with this distribution strategy. First, we do not have long-term agreements in place with any of these accounts and thus, the arrangements are terminable at any time by these retailers or us. Accordingly, we may not be able to maintain continuing relationships with any of these national accounts. A decision by any of these retailers, or any large retail accounts we may obtain, to decrease the amount purchased from us or to cease carrying our products could have a material adverse effect on our reputation, financial condition or results of operations. In addition, we may not be able to establish additional distribution arrangements with other national retailers.
Second, our dependence on national and regional retail chains may result in pressure on us to reduce our pricing to them or seek significant product discounts. Any increase in our costs for these retailers to carry our product, reduction in price, or demand for product discounts could have a material adverse effect on our profit margin.
Finally, our DTR distribution arrangements may have an adverse impact on our existing relationships with our independent regional distributors, who may view our DTR accounts as competitive with their business, making it more difficult for us to maintain and expand our relationships with independent distributors.
We rely on independent contract manufacturers of our products, and this dependence could make management of our marketing and distribution efforts inefficient or unprofitable.
We do not own the plants or the equipment required to manufacture and package our beverage products, and do not directly manufacture our products but instead outsource the manufacturing process to third party bottlers and independent contract manufacturers (co-packers). We do not anticipate bringing the manufacturing process in-house in the future. Currently, our products are prepared, bottled and packaged by three primary co-packers. Our ability to attract and maintain effective relationships with contract manufacturers and other third parties for the production and delivery of our beverage products in a particular geographic distribution area is important to the success of our operations within each distribution area. Competition for contract manufacturers’ business is intense, especially in the western U.S., and this could make it more difficult for us to obtain new or replacement manufacturers, or to locate back-up manufacturers, in our various distribution areas, and could also affect the economic terms of our agreements with our manufacturers. Our contract manufacturers may terminate their arrangements with us at any time, in which case we could experience disruptions in our ability to deliver products to our customers. We may not be able to maintain our relationships with current contract manufacturers or establish satisfactory relationships with new or replacement contract manufacturers, whether in existing or new geographic distribution areas. The failure to establish and maintain effective relationships with contract manufacturers for a distribution area could increase our manufacturing costs and thereby materially reduce profits realized from the sale of our products in that area. In addition, poor relations with any of our contract manufacturers could adversely affect the amount and timing of product delivered to our distributors for resale, which would in turn adversely affect our revenues and financial condition.
As is customary in the contract manufacturing industry for comparably sized companies, we are expected to arrange for our contract manufacturing needs sufficiently in advance of anticipated requirements. We continually evaluate which of our contract manufacturers to utilize based on the cost structure and forecasted demand for the particular geographic area where our contract manufacturers are located. To the extent demand for our products exceeds available inventory or the production capacity of our contract manufacturing arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely, we may produce more product than warranted by actual demand, resulting in higher storage costs and the potential risk of inventory spoilage. Our failure to accurately predict and manage our contract manufacturing requirements may impair relationships with our independent distributors and key accounts, which, in turn, would likely have a material adverse effect on our ability to maintain effective relationships with those distributors and key accounts.
Our business and financial results depend on the continuous supply and availability of raw materials.
The principal raw materials we use include glass bottles, labels, closures, flavorings, stevia, pure cane sugar and other natural ingredients. The costs of our ingredients are subject to fluctuation. If our supply of these raw materials is impaired or if prices increase significantly, our business would be adversely affected. Certain of our contract manufacturing arrangements allow such contract manufacturers to increase their charges based on certain of their own cost increases. While certain of our raw materials, like glass, are based on a fixed-price purchase commitment, the prices of any of the above or any other raw materials or ingredients may continue to rise in the future and we may not be able to pass any cost increases on to our customers.
We may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, glass, labels, flavors, and natural sweeteners, or sufficient packing arrangements, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain concentrates, supplements and sweeteners have been experienced and could, from time to time in the future, be experienced, which could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results.
Rising raw material, fuel and freight costs as well as freight capacity issues may have an adverse impact on our sales and earnings.
The recent volatility in the global oil markets has resulted in rising fuel and freight prices, which many shipping companies are passing on to their customers. Our shipping costs, and particularly fuel surcharges charged by our freight carriers, have been increasing and we expect these costs may continue to increase. Energy surcharges on our raw materials may continue to increase. Due to the price sensitivity of our products, we do not anticipate that we will be able to pass all of these increased costs on to our customers.
At the same time, the economy appears to be returning to pre-recession levels resulting in the rise of freight volumes which is exacerbated by carrier failures to meet demands and fleet reductions due to fewer drivers in the market. We may be unable to secure available carrier capacity at reasonable rates, which could have a material adverse effect on our operations.
We rely upon our ongoing relationships with our key flavor suppliers. If we are unable to source our flavors on acceptable terms from our key suppliers, we could suffer disruptions in our business.
Currently, we purchase our flavor concentrate from three suppliers, and we anticipate that we will purchase flavor concentrate from others with the intention of developing other sources of flavor concentrate for each of our products. The price of our concentrates is determined by our flavor houses, and may be subject to change. Generally, flavor suppliers hold the proprietary rights to their flavors. Consequently, we do not have the list of ingredients or formulas for our flavors and concentrates and we may be unable to obtain these flavors or concentrates from alternative suppliers on short notice. If we have to replace a flavor supplier, we could experience disruptions in our ability to deliver products to our customers or experience a change in the taste of our products, all of which could have a material adverse effect on our results of operations.
If we are unable to maintain brand image and product quality, or if we encounter other product issues such as product recalls, our business may suffer.
Our success depends on our ability to maintain brand image for our existing products and effectively build up brand image for new products and brand extensions. There can be no assurance, however, that additional expenditures on advertising and marketing will have the desired impact on our products’ brand image and on consumer preferences. Product quality issues, real or imagined, or allegations of product contamination, even when false or unfounded, could tarnish the image of the affected brands and may cause consumers to choose other products.
In addition, because of changing government regulations; or their implementation, or allegations of product contamination, we may be required from time to time to recall products entirely or from specific markets. Product recalls could affect our profitability and could negatively affect brand image.
The inability to attract and retain key personnel would directly affect our efficiency and results of operations.
Our success depends on our ability to attract and retain highly qualified employees in such areas as distribution, sales, marketing and finance. We compete to hire new employees, and, in some cases, must train them and develop their skills and competencies. Our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Any unplanned turnover, particularly involving our key personnel, could negatively impact our operations, financial condition and employee morale.
Our inability to protect our trademarks and trade secrets may prevent us from successfully marketing our products and competing effectively.
Failure to protect our intellectual property could harm our brand and our reputation, and adversely affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks, copyrights, licenses and trade secrets, could result in the expenditure of significant financial and managerial resources. We regard our intellectual property, particularly our trademarks and trade secrets to be of considerable value and importance to our business and our success. We rely on a combination of trademark and trade secrecy laws, confidentiality procedures and contractual provisions to protect our intellectual property rights. We are pursuing the registration of additional trademarks in the U.S., Canada and internationally. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our brands or profitably exploit our products.
As part of the licensing strategy of our brands, we enter into licensing agreements under which we grant our licensing partners certain rights to use our trademarks and other designs. Although our agreements require that the licensing partner’s use of our trademarks and designs is subject to our control and approval, any breach of these provisions, or any other action by any of our licensing partners that is harmful to our brands, goodwill and overall image, could have a material adverse impact on our business.
If we are unable to maintain effective disclosure controls and procedures and internal control over financial reporting, our stock price and investor confidence in us could be materially and adversely affected.
We are required to maintain both disclosure controls and procedures and internal control over financial reporting that are effective. Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can only provide reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential conditions. The failure of controls by design deficiencies or absence of adequate controls could result in a material adverse effect on our business and financial results.
Because we have a limited operating history and losses since inception, it is difficult to evaluate your investment in our stock.
We have been operating since February 15, 2011 and in production since September 22, 2011 and have not yet achieved positive cash flow from operations or profitability. Evaluation of our business will be difficult because we have a limited operating history. We have generated start-up losses to date while we build our distribution network, which could adversely affect our stock price. For the period from inception through December 31, 2013, we have accumulated losses in excess of $7.8 million. We face a number of risks encountered by early-stage companies, including our need to develop infrastructure to support growth and expansion; our need to obtain long-term sources of financing; our need to establish our marketing, sales and support organizations; and our need to manage expanding operations. Our business strategy may not be successful, and we may not successfully address these risks. If we are unable to obtain profitable operations, investors may lose their entire investment in us.
We may not be able to successfully manage growth of our business.
Our future success will be highly dependent upon our ability to successfully manage the anticipated expansion of our operations. Our ability to manage and support growth effectively will be substantially dependent on our ability to implement adequate financial and management controls, reporting systems and other procedures, and attract and retain qualified technical, sales, marketing, financial, accounting, and administrative and management personnel.
Our future success also depends upon our ability to address potential market opportunities while managing expenses to match our ability to finance our operations. This need to manage our expenses will place a significant strain on our management and operational resources. If we are unable to manage our expenses effectively, our business, results of operations and financial condition will be materially and adversely affected.
Risks associated with acquisitions
As part of our business strategy in the future, we could acquire beverage brands and related assets complementary to our core business operations. Any acquisitions by us would involve risks commonly encountered in acquisitions of assets. These risks would include, among other things, the following:
exposure to unknown liabilities of the acquired business;
acquisition costs and expenses could be higher than anticipated;
fluctuations in our quarterly and annual operating results could occur due to the costs and expenses of acquiring and integrating new beverage brands;
difficulties and expenses in assimilating the operations and personnel of any acquired businesses;
our ongoing business could be disrupted and our management’s time and attention diverted; and
inability to integrate with any acquired businesses successfully.
Risks Related to our Common Stock
"Penny Stock" rules may make buying or selling our securities difficult.
Trading in our securities is subject to the SEC’s “penny stock” rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could limit the liquidity and adversely affect the market price for our common stock.
Our securities are traded on the OTC Markets as a QB issuer, which may not provide us as much liquidity for our investors as more recognized senior exchanges such as the NYSE MKT and NASDAQ.
Our securities are quoted on the OTC Markets under the QB tier (“the OTC markets”). The OTC markets are inter-dealer, over-the-counter markets that provide significantly less liquidity than the NASDAQ Stock Market or other national or regional exchanges. Securities traded on these OTC markets are usually thinly traded, highly volatile, have fewer market makers and are not followed by analysts. The SEC’s order handling rules, which apply to NASDAQ-listed securities, do not apply to securities quoted on the OTC markets. Quotes for stocks included on the OTC markets are not listed in newspapers. Therefore, prices for securities traded solely on the OTC markets may be difficult to obtain and holders of our securities may be unable to resell their securities at or near their original acquisition price, or at any price.
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall.
Any future equity or debt issuances by us may have dilutive or adverse effects on our existing shareholders.
We may issue additional shares of common due to warrants or options being exercised that could dilute your ownership in our company. Moreover, any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on our shareholders, which could cause the market price of our common stock to decline.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any returns on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us. If we do not pay dividends, our common stock may be less valuable.
Our stock price is volatile and you may not be able to sell your shares for more than what you paid.
Our stock price has been subject to significant volatility, and you may not be able to sell shares of common stock at or above the price you paid for them. The trading price of our common stock has been subject to fluctuations in the past. During the year ended December 31, 2013, our common stock traded at prices as low as $0.40 per share and as high as $1.47 per share.
The market price of the common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:
quarterly variations in operating results;
our ability to control costs and improve cash flow;
announcements of technological innovations or new products by us or by our competitors;
changes in investor perceptions; and
new products or product enhancements by us or our competitors.
The stock market in general has continued to experience volatility which may further affect our stock price.
Risk Factors Relating to Our Industry
We compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success.
Our business is substantially dependent upon awareness and market acceptance of our products and brands by our target market. In addition, our business depends on acceptance by our independent distributors and retailers of our brands as beverage brands that have the potential to provide incremental sales growth.
Competition from traditional non-alcoholic beverage manufacturers may adversely affect our distribution relationships and may hinder development of our existing markets, as well as prevent us from expanding our markets.
The beverage industry is highly competitive. Due to our small size, it can be assumed that many of our competitors have significantly greater financial, technical, marketing and other competitive resources. We compete against giant names like The Coca-Cola Company and PepsiCo, which combine for over 70% of the non-alcoholic beverage market. We compete with other beverage companies not only for consumer acceptance but also for shelf space in retail outlets and for marketing focus by our distributors, all of whom also distribute other beverage brands. Our products compete with a wide range of drinks produced by a relatively large number of manufacturers, most of which have substantially greater financial, marketing and distribution resources than ours.
Increased competitor consolidations, market-place competition, particularly among branded beverage products, and competitive product and pricing pressures could impact our earnings, market share and volume growth. If, due to such pressure or other competitive threats, we are unable to sufficiently maintain or develop our distribution channels, we may be unable to achieve our current revenue and financial targets. Competition, particularly from companies with greater financial and marketing resources than ours, could have a material adverse effect on our existing markets, as well as on our ability to expand the market for our products.
We compete in an industry characterized by rapid changes in consumer preferences and public perception, so our ability to continue developing new products to satisfy our consumers’ changing preferences will determine our long-term success.
Failure to introduce new brands, products or product extensions into the marketplace as current ones mature and to meet our consumers’ changing preferences could prevent us from gaining market share and achieving long-term profitability. Product lifecycles can vary and consumers’ preferences change over time. Although we try to anticipate these shifts and develop new products to introduce to our consumers, there is no guarantee that we will succeed.
Our business is subject to many regulations and noncompliance is costly.
The production, marketing and sale of our beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial condition and results of operations. Similarly, any adverse publicity associated with any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations are subject to change from time to time and while we closely monitor developments in this area, we have no way of anticipating whether changes in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling, environmental, tax or otherwise, could have a material adverse effect on our financial condition and results of operations.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Our principal executive offices are located at 11678 N Huron Street, Northglenn, Colorado 80234. We lease these facilities on a month-to-month basis at a cost of $4,000 per month. We also sub-lease product development space located at Unit # 22 - 8980 Fraserwood Court, Burnaby, BC, Canada V5J 5H7 at a cost of $1,400 per month. We believe these facilities are suitable for our current needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may be involved in legal proceedings from time to time. As of the date hereof, except as set forth herein, there are no known legal proceedings against us. No governmental agency has instituted proceedings, served, or threatened us with any complaints.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Prior to April 5, 2011, there was no public trading market for our securities. On April 5, 2011, our common stock was quoted under the symbol “PLSB” on the OTC BB operated by FINRA and the OTCQB operated by OTC Markets Group, Inc.
The following table sets forth the range of high and low bid prices for our common stock for each applicable quarterly period. The table reflects inter-dealer prices without retail mark-up, mark-down or commissions and may not represent actual transactions.
Fiscal Year Ended December 31, 2013:
Fiscal Year Ended December 31, 2012:
The closing price of our common stock on the OTC BB on March 28, 2014 was $0.62 per share.
The shares quoted are subject to the provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the Exchange Act"), commonly referred to as the "penny stock" rule.
Number of Shareholders
As of March 31, 2014 there were 51,720,596 shares of our common stock issued and outstanding and approximately 3,000 shareholders. The transfer agent of our common stock is V-Stock Transfer, LLC, 77 Spruce Street, Ste 201, Cedarhurst, NY 11516.
Dividends
We have never paid cash dividends or distributions to our equity owners. We do not expect to pay cash dividends on our common stock, but instead, intend to utilize available cash to support the development and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including but not limited to, future operating results, capital requirements, financial condition and the terms of any credit facility or other financing arrangements we may obtain or enter into, future prospects and in other factors our Board of Directors may deem relevant at the time such payment is considered. There is no assurance that we will be able or will desire to pay dividends in the near future or, if dividends are paid, in what amount.
Stock Repurchases
There were no shares repurchased during the fourth quarter of 2013.
Securities Issued in Unregistered Transactions
During the quarter ended December 31, 2013, we issued the following securities in unregistered transactions:
On December 5, 2013 we issued 35,211 common shares having a fair value of $25,000 pursuant to a services agreement. We relied on exemptions from registration under Section 4(2) of the Securities Act and/or by Rule 506 of Regulation D promulgated under the Securities Act.
Subsequent Sales of Unregistered Securities
Subsequent to December 31, 2013, we issued the following securities in unregistered transactions:
On January 27, 2014 we issued 66,461 common shares having a fair value of $25,000 pursuant to a services agreement. We relied on exemptions from registration under Section 4(2) of the Securities Act and/or by Rule 506 of Regulation D promulgated under the Securities Act.
On February 19, 2014 we issued 20,436 common shares having a fair value of $15,000 pursuant to a services agreement. We relied on exemptions from registration under Section 4(2) of the Securities Act and/or by Rule 506 of Regulation D promulgated under the Securities Act.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion that follows is derived from our audited balance sheets as of December 31, 2013 and 2012 and the audited statements of operations and cash flows for the years ended December 31, 2013 (‘2013”) and December 31, 2012 (“2012”).
Statement of Operations
Net Sales
We began production of Natural Cabana™ Lemonade in 2011, since then, and with this initial product, we have developed nationwide distribution systems through more than 141 distributors in 47 US States, Canada, Mexico, Panama, Bermuda and Ireland. We have secured listings with regional and national grocery and convenience chain stores such as Albertsons, Kmart, Food City, Gelsons, Sprouts, Safeway, Whole Foods, HEB, Save Mart, Walgreens, Kroger, Price Chopper, 7-Eleven, Winco Foods and HyVee and others. We have now been in operation with our first product, Natural Cabana™ Lemonade, for just over two years. We have expanded this brand into Limeade, which started selling on January 15, 2014, and into Natural Cabana™ Coconut Water, which started selling February 21, 2014.
The PULSE® brand of Heart Healthy functional beverages, originally developed by Baxter Healthcare and previously designated with gender-specific formulations, will be re-introduced and marketed in a new, non-gender-specific formulation in the second quarter of 2014. We believe the new formulation will have significantly wider consumer appeal.
We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes more than 80% Class “A” distributors such as United Natural Foods, Inc. and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.
During 2013 gross revenues, on sale of 327,000 cases (2012 - 227,000 cases) of Natural Cabana™ Lemonade, before slotting fees and other promotional allowances, increased by $1,134,307 to $3,637,873 (2012 - $2,504,566). During 2013 our gross revenues, on sale of 5,588 cases (2012 - nil cases) of PULSE®, before slotting fees and other promotional allowances, was $82,017 (2012 - $nil). Net sales for all products were $3,328,862 (2012 - $2,295,840) after slotting fees and other promotional allowances of $391,028 (2012 - $207,726). During 2013 promotions and slotting increased by 2.2% to 10.5% (2012 - 8.3%), as a percentage of gross revenues.
Cost of Sales
Cost of sales for 2013 increased by $730,602 to $2,271,270 (2012 - $1,540,668) due to an increase in sales growth. As a percentage of net revenue, cost of sales for 2013 was 68% (2012 - 67%). Cost of sales includes raw materials, co-packing services and lab testing. We expect all cost variables to decrease as we source raw materials at a lower cost because of volume discounts, ship our product within a 500 mile radius of our co-packers and due to lower cost glass from a Midwest supplier.
Gross Profit
Gross profit for 2013 increased by $302,420 to $1,057,592 (2012 - $755,172) due to increased sales. Gross profit for 2013 was 32% (2012 - 33%). The 1% decrease was due to $30,973written-off due to the discontinuance of our Island Spice flavor.
Expenses
Advertising, samples and displays
During 2013 advertising, samples and display expenses increased by $113,151 to $289,440 (2012 - $176,289). As a percentage of net sales, this expense was 7.9% compared with 7% in 2012. This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. We incurred increased expenses in the area of in-store demonstrations as each chain store began its initial promotion. We expect this expense to increase in proportion to increases in sales mainly due to the introduction of Natural Cabana™ Coconut Water and the re-introduced PULSE® brand of Heart Healthy functional beverages and due to an overall increase in distribution reach both in the United States and internationally.
Freight-out
During 2013 freight-out increased by $117,265 due to the increase in case sales. On a per case basis, freight-out increased by $0.02 per case to $1.12 (2012 - $1.10). We expect freight-out on a per case basis to decrease due the lower shipping cost of Natural Cabana™ Coconut Water and the lower shipping cost of our PULSE® brand of Heart Healthy functional beverages.
General and administrative
General and administration expenses for the fiscal year ended December 31, 2013 and 2012 consists of the following:
During 2013, general and administrative expenses increased by $320,228 to $1,122,522 (2012 - $802,294). We increased our budget in the area of travel by $161,833 due to our increased effort to secure large grocery and convenience store chains. We also increased our office, rent and telephone correspondingly with our increase in sales growth and due to increases in personnel, space, and product liability insurance. We reduced our advisory, board and consulting fees by $33,042 due to the resignation of Francis Chiew from our board, and the elimination of one advisor. Legal, professional and regulatory fees increased by $19,909 due to increased usage of our legal counsel in the area of contracts. Amortization and depreciation increased by $57,266 due to the increased amortization of intangibles as a function of case sales. We expect general and administrative expenses to moderately increase in 2014 in the areas of travel, office and trade shows.
Research and development
We have incurred $101,976 of research and development costs associated with the changing of PULSE® brand of functional beverages from gender specific formulations to a new, non-gender specific formulation. We believe the new formulation will have significantly wider consumer appeal.
Salaries and benefits and broker/agent’s fees
Salaries and benefits and broker/agent’s fees increased by $495,280 to $1,383,137 (2012 - $887,857). This was due to an increase in salespeople and office staff due to our significant increase in sales growth. We expect to increase this cost during 2014, as we hire additional regional and district managers and additional staff for the introduction of the newly formatted PULSE® brand of Heart Healthy functional beverages and the roll-out of our Natural Cabana™ Coconut Water. During 2013 commissions increased by $5,020 to $11,721 (2012 - $6,701); these were paid to two commission agents. During 2014 we will begin paying commissions to all of our salespeople.
Shareholder, broker and investor relations
Shareholder, broker and investor relations expense decreased by $70,427 to $388,703 (2012 - $459,130). This decrease was due to our efforts to reduce costs in this area.
Other Income (Expense)
During 2013, we incurred an asset impairment charge of $115,385 (2012 - $483,208) for manufacturing and display equipment we no longer intend to use. During 2013 we recognized a forgiveness of debt gain of $6,486 (2012 - $9,971). We received $15,536 (2012 - $1,814) of net interest income from interest earned on our cash balances and long-term note receivable less interest expense of $1,166 (2012 - $6,486).
Net Loss
The net loss for 2013 decreased by $323,522 to $3,182,261, or $0.06 per share, compared with a net loss for 2012 of $3,505,783, or $0.10 per share. Net loss for 2013 was, for the most part, an investment in the establishment of an extensive nationwide and international distribution system; costs associated with increasing our brands’ awareness, the development of our Natural Cabana™ Coconut Water brand and to secure grocery and convenience store chain listings, which increased by 10,000 points of retail distribution to 17,000 listings from 7,000 listings at December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Overview
During 2013 we increased our cash position from $744,906 to $1,774,993, an increase of $1,030,087. During 2013 we increase our working capital position from $1,417,441 to $3,188,542, an increase of $1,771,101. As at December 31, 2013, our working capital consisted of: cash of $1,774,993; customer accounts receivable of $382,334; other receivables of $49,065; inventories of $1,187,978 (including finished product of $453,282 and raw materials of $734,696); and other current assets of $195,589. We have no debt other than accounts payable of $393,847 and accrued expenses of $7,571, and no long-term debt.
During 2013 our net loss was $3,182,261 (2012 - $3,505,783). This net loss is attributed to our investment in our nationwide and international distribution system and to secure listings in 17,000 (2012 - 11,000) points of distribution including grocery and convenience store chains.
The following table sets forth the major sources and uses of cash for our last two fiscal years ended December 31, 2013 and 2012:
Cash Used in Operating Activities
During 2013 we used $2,920,457 for operating activities. This was made up of the net loss of $3,182,261 less adjustments for non-cash items such as: an asset impairment charge of $115,385, shares and options issued for services of $790,987, amortization and depreciation of $94,674 and forgiveness of debt of $6,486 and bad debt allowance of $13,680; all totaling $978,240. After non-cash items, the net loss was $2,204,021. We also used $746,436 in net increases in operating assets and liabilities. We used $242,324 due to an increase in accounts receivable and $453,381 due to increases in inventory levels, both due to a significant increase in sales. We used $13,561 to decrease accounts payable and accrued expenses, and we used $37,170 prepaying expenses such as slotting fees.
During 2012 we used $1,681,044 for operating activities. This was made up of our net loss of $3,505,783 less adjustments for non-cash items such as: an asset impairment charge of $483,208, shares and options issued for services of $1,646,736, amortization and depreciation of $37,407 and forgiveness of debt of $9,971 all totaling $2,157,380. After non-cash items our net loss was $1,348,403. We also used $332,643 in net increases in operating assets and liabilities. We used $181,453 due to an increase in our customer accounts receivable and $355,257 due to increases in inventory levels, both due to a significant increase in our sales. We received $183,418 due to an increase in accounts payable and accrued expenses mainly due to credit extended by our suppliers.
Cash Used in Investing Activities
During 2013 we used $108,056 for investing activities. A total of $36,640 was spent on label cutting dies, warehouse machinery, office equipment, coolers and delivery vehicles. We spent $45,575 on formulation, testing, trademarking and label design associated with bringing our brands into commercial production. We spent $30,925 on upgrading our corporate website and on line sales presence. We received $5,084 in principal repayments against our long-term loan due from Catalyst Development, Inc.
During 2012 we used $273,580 for investing activities. We loaned $63,000 to our co-packer in Texas to allow them to acquire a specific piece of equipment to run our PULSE® product in February, 2013. This loan is being repaid on a per-case reduction in co-packing fees. We spent $116,479 on bottle molds and tray cutting dies. We spent $9,944 on computer and warehouse equipment. We spent $89,042 on formulations, testing, trademarks and packaging. We received $4,885 in principal repayments against our long-term loan due from Catalyst Development, Inc.
Cash Provided by Financing Activities
During 2013 we received $4,058,600 from financing activities: $3,946,100, net of $156,600 share issuance costs, and issued 10,256,750 $0.40 Units; $100,000 and issued 125,000 $0.80 Units; $12,500 and issued 25,000 shares pursuant to stock options exercised.
During 2012 we received $2,611,612 from financing activities. We received a $250,000 loan from an unrelated third party, which carried a 6% interest rate, and was converted into equity. In addition we received $2,361,612, net of $164,688 of share issuance costs, and issued 7,231,666 common shares and 7,231,666 common share purchase warrants.
Additional Capital
As of December 31, 2013, we had $3,188,542 in working capital, including $1,774,994 in cash. We have more than 20 million warrants outstanding to purchase up to 20 million common shares at an average exercise price of $0.62 per common share which could, if exercised, raise us in excess of $12.5 million. We have no assurance, however, that we will ever see this additional money, as the warrant holders must first choose to exercise their warrants.
OFF BALANCE-SHEET ARRANGEMENTS
We have not had, and at December 31, 2013, do not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:
Use of Estimates
The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates.
Intangible Assets
Intangible assets are comprised primarily of the cost of formulations of our products and of trademarks that represent our exclusive ownership of Natural Cabana®, PULSE® and PULSE: Nutrition Made Simple®, all used in connection with the manufacture, sale and distribution of our beverages. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the year ended December 31, 2013, the estimated fair values of trademarks and other intangible assets exceeded their respective carrying values.
Stock-based Compensation
We account for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the statement of operations based on their fair values at the date of grant.
We account for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date.
We calculate the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. We estimate forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, we monitor both stock option and warrant exercises as well as employee termination patterns.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
There have been no recently issued Accounting Pronouncements that impact us.
ITEM 7. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Pulse Beverage Corporation
Northglenn, Colorado
We have audited the accompanying balance sheet of The Pulse Beverage Corporation (the “Company”) as of December 31, 2013 and 2012, and the related statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2013 and 2012. The Pulse Beverage Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Pulse Beverage Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years ended December 31, 2013 and 2012 in conformity with accounting principles generally accepted in the United States of America.
/s/ L.L. Bradford & Company, LLC
L.L. Bradford & Company, LLC
Las Vegas, Nevada
March 31, 2014
The Pulse Beverage Corporation
Balance Sheets
As of December 31, 2013 and 2012
(See Notes to Financial Statements)
The Pulse Beverage Corporation
Statements of Operations
Years Ended December 31, 2013 and 2012
(See Notes to Financial Statements)
The Pulse Beverage Corporation
Statements of Cash Flows
Years Ended December 31, 2013 and 2012
(See Notes to Financial Statements)
The Pulse Beverage Corporation
Statement of Stockholders’ Equity
Years Ended December 31, 2013 and 2012
(See Notes to Financial Statements)
The Pulse Beverage Corporation
Notes to Financial Statements
1. Nature of Operations
The Pulse Beverage Corporation manufactures and distributes Natural Cabana™ Lemonade and Limeade, Natural Cabana™ Coconut Water and PULSE® brand of Heart Healthy functional beverages.
2. Summary of Significant Accounting Policies
The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit in overnight deposit accounts and investments in money market accounts.
Accounts receivable
We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our bad debt loss history and an overall assessment of past due trade accounts receivable outstanding. Accounts receivable is reported as the customers’ outstanding balances less any allowance for doubtful accounts. We record an allowance for doubtful accounts based on specifically identified amounts that are believed to be uncollectible. An additional allowance is recorded based on certain percentages of aged receivables, which are determined based on historical experience and assessment of the general financial conditions affecting our customer base. If actual collections experience changes, revisions to the allowance may be required. After all attempts to collect a receivable have failed, the receivable is written-off against the allowance. The allowance for doubtful accounts was $13,680 as at December 31, 2013 (2012 - $nil).
Inventories are stated at the lower of cost to manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand, production availability and/or our ability to sell the product(s)concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market and economic conditions or other factors that may result in cancellations of advance orders or reductions in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Property and Equipment
Property and equipment includes bottle molds, manufacturing equipment, office equipment, warehouse equipment and display coolers which are all stated at historical cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets which are estimated to be five years.
Long-Lived Assets
Intangible Assets
Intangible assets are comprised primarily of the cost of formulations of our products and of trademarks that represent our exclusive ownership of Natural Cabana®, PULSE® and PULSE: Nutrition Made Simple®, all used in connection with the manufacture, sale and distribution of our beverages. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the year ended December 31, 2013, the estimated fair values of trademarks and other intangible assets exceeded their respective carrying values.
Revenue Recognition
Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50.
We comply with the provisions of ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. See Note 14.
Financial Instruments
We have financial instruments whereby the fair value of the financial instruments could be different from that recorded on a historical basis. Our financial instruments consist of cash, accounts and loans receivables, accounts payable and accrued expenses. The carrying amounts of our financial instruments approximate their fair values as of December 31, 2013 and 2012 due to their short-term nature.
We follow ASC subtopic 740-10 for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Concentration of Business and Credit Risk
Stock-based Compensation
We account for stock-based payments to employees in accordance with ASC 718, “Stock Compensation” (“ASC 718”). Stock-based payments to employees include grants of stock, grants of stock options and issuance of warrants that are recognized in the statement of operations based on their fair values at the date of grant.
We account for stock-based payments to non-employees in accordance with ASC 718 and Topic 505-50, “Equity-Based Payments to Non-Employees.” Stock-based payments to non-employees include grants of stock, grants of stock options and issuances of warrants that are recognized in the consolidated statement of operations based on the value of the vested portion of the award over the requisite service period as measured at its then-current fair value as of each financial reporting date.
We calculate the fair value of option grants and warrant issuances utilizing the Black-Scholes pricing model. The amount of stock-based compensation recognized during a period is based on the value of the portion of the awards that are ultimately expected to vest. ASC 718 requires forfeitures to be estimated at the time stock options are granted and warrants are issued to employees and non-employees, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term “forfeitures” is distinct from “cancellations” or “expirations” and represents only the unvested portion of the surrendered stock option or warrant. We estimate forfeiture rates for all unvested awards when calculating the expense for the period. In estimating the forfeiture rate, we monitor both stock option and warrant exercises as well as employee termination patterns.
The resulting stock-based compensation expense for both employee and non-employee awards is generally recognized on a straight-line basis over the requisite service period of the award.
Basic and Diluted Net Income (Loss) Per Share
Recent Pronouncements
In July 2012, the FASB issued ASU 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"), which permits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for us for annual and interim indefinite-lived intangible asset impairment tests performed beginning October 1, 2012. We believe the adoption of ASU 2012-02 will not have a material impact on our financial statements.
We continually assess any new accounting pronouncements to determine their applicability to us. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect the change.
3. Accounts Receivable
Accounts receivable consist of the following as of December 31:
5. Loan Receivable - Related Party
6. Property and Equipment and Intangible Assets
On July 17, 2012 we received $250,000 pursuant to a short-term bridge loan from an unrelated party. This loan bore interest at 6% per annum and was unsecured and due on demand. On December 21, 2012 the principal portion of this loan was converted into 625,000 of our $0.40 Units. Each unit contained one common share and one warrant. Each warrant is exercisable at $0.65 and expires December 21, 2015. During the year accrued interest of $6,486 was forgiven.
The fair value of stock options granted was calculated using the Black-Scholes option-pricing model based on the following assumptions:
Risk-Free Interest Rate: Based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the options being valued;
Dividend Yield: Based on the projection of future stock prices and dividends expected to be paid;
Expected Term: Represents the period of time that stock options are expected to be outstanding based on historic exercise behaviour; and
Expected Volatility: Based on our historical stock prices for a period of time equal to the expected term of the award.
The following table summarizes the continuity of our stock options:
Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
The effective tax rate on the net loss before income taxes differs from the U.S. statutory rate as follows:
We have a net operating loss carryover of $5,110,650 available to offset future income for income tax reporting purposes, which will expire in various years through 2033, if not previously utilized. However, our ability to use the carryover net operating loss may be substantially limited or eliminated pursuant to Internal Revenue Code Section382.
Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense but to identify them for tax purposes. During the years ended December 31, 2013 and 2012, there was no income tax or related interest and penalty items in the income statement, or liabilities on the balance sheet. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. We are no longer subject to U.S. federal income tax examinations by tax authorities for years beginning October 1, 2008 or state income tax examination by tax authorities for years beginning October 1, 2009. We are not currently involved in any income tax examinations.
ASC Topic 820-10 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). ASC Topic 820-10 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 on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability. The three levels of the fair value hierarchy under ASC Topic 820-10 are described below:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that an entity has the ability to access.
Level 2 - Valuations based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 - Valuations based on inputs that are supportable by little or no market activity and that are significant to the fair value of the asset or liability. We have no level 3 assets or liabilities.
The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of December 31, 2013:
The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:
The Company has evaluated all subsequent events through the date these financial statements were issued and determined that there are no subsequent events to record and the following subsequent events to disclose: we issued 66,461 common shares valued at $50,000 pursuant to a service agreement.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the last two fiscal years, we have had no disagreements with our accountants on accounting and financial disclosure.
Item 9a.
Item 9a. Controls And Procedures
Evaluation of Disclosure Controls and Procedures
Robert E. Yates, who is both our chief executive officer and our chief financial officer, is responsible for establishing and maintaining our disclosure controls and procedures. Disclosure controls and procedures are those procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to the our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2013. Based on that evaluation it was concluded that our disclosure controls and procedures were effective as of December 31, 2013.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the SEC, internal control over financial reporting is a process designed by, or under the supervision of our principal executive officer and principal financial officer and implemented by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2013 we conducted an evaluation, under the supervision and with the participation of our chief executive officer (our principle executive officer) and our chief financial officer (also our principal financial and accounting officer) of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based upon this assessment, management concluded that our internal control over financial reporting was effective.
There were no changes in our internal controls over financial reporting that occurred during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for non-accelerated filers set forth in Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The names, ages, and respective positions of our directors, executive officers, and key employees are set forth below.
Robert E. Yates
Mr. Yates is the current president, chief executive officer, chief financial officer and treasurer and has served in those positions since February 15, 2011. Mr. Yates has also been a director of the Company since February 15, 2011. Mr. Yates is qualified to be a director of the Company based on his extensive experience in the beverage industry.
Mr. Yates is a seasoned business executive with experience in growing and managing businesses. From 2006 to 2009, Mr. Yates served as a General Manager of Mobility Works, in Cincinnati, Ohio, a company engaged in providing specialty equipment and handicapped accessible vehicles in support of disabled populations. From 1993 to 2005, Mr. Yates was in charge of a start-up operation for Vancol with his areas of responsibility: product development, plant production and the distribution of Vancol’s many products in both the United States and Canada. Under his guidance, Vancol’s sales rose from less than $10 million to $50 million in three years. Over the last twenty years, Mr. Yates’ beverage portfolio has included such brands as Monster; AriZona Tea; Rock Star, Vitamin Water, Perrier, Everfresh Juices, Ocean Spray, Miller Beer, Honest Tea and Fiji Water. In addition, Mr. Yates successfully launched his own brand, Quencher, which he built into a 2 million case brand in two years. Mr. Yates completed a management course at Oglethorpe University in Atlanta, Georgia, and has an associate’s degree in business administration from Highland Park College, in Highland Park, Michigan and completed a Professional Personnel Management Course with the US Air Force.
Parley Sheya
Mr. Sheya has been a director of the Company since July 1, 2011. Mr. Sheya is qualified to be a director of the Company based on his extensive experience in the beverage industry.
Mr. Sheya brings over twenty-nine years of international executive sales and distribution management experience in the beverage industry. He has an extensive track record in the development of brands and in building beverage brand sales and distribution systems from the ground up to multi-million case sales. He was sales manager for a beverage brand called Kwencher®. Mr. Sheya has managed a broad range of beverage brands including: Jolt Cola®, Hires Root Beer®; Crush® Soda; Bubble-Up®; Country Time Lemonade®; Hansen’s Natural Sodas and Juices; New York Seltzer® and Evian Water®. From 2007 to 2008 Mr. Sheya was a self-employed beverage consultant and from 2008 to 2009 was the key account manager for New Leaf Brands Inc. managing national sales for Inspiration Beverage and from 2010 to June 2011 was sales manager for Bing Energy Drink.
Our directors serve until our next annual stockholders meeting or until their successors are duly elected and qualified. Officers hold their positions at the will of the board of directors.
Committees
Our company currently does not have nominating, compensation or audit committees or committees performing similar functions, nor does our company have a written nominating, compensation or audit committee charter. Our directors believe that it is not necessary to have such committees, at this time, because the functions of such committees can be adequately performed by the board of directors.
Our company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our President and director, Robert E. Yates, at the address appearing on the first page of this annual report.
Involvement in Certain Legal Proceedings
In December, 2006 Robert E. Yates filed for personal bankruptcy in Federal Bankruptcy Court in Denver, Colorado. His personal bankruptcy was finalized in February, 2007. In May, 2005 Vancol Industries filed for bankruptcy under Chapter 7 of the Bankruptcy Code. Mr. Yates resigned his position as an executive officer of Vancol Industries in 2005.
Other than as set forth above, no director, executive officer, significant employee or control person of the Company has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than ten percent beneficial shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To the best of our knowledge based solely on a review of Forms 3, 4, and 5 (and any amendments thereof) received by us during or with respect to the year ended December 31, 2013, the following persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during fiscal year ended December 31, 2013:
Code of Ethics
We have not adopted a formal code of ethics that applies to our directors, officers or employees since we only have fifteen employees including our two officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation earned by Executive Officers during the last two fiscal years.
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity Incentive Plan Compensation
($)
Nonqualified Deferred Compensation Earnings
($)
All Other Comp- ensation
($)
Total
($)
Robert E. Yates
President, Chief
Executive Officer,
Treasurer and Chief
Financial Officer
102,000
10,500
nil
81,238
Nil
Nil
Nil
193,738
102,000 10,000 83,200 289,730 Nil Nil Nil 484,930
Parley Sheya
Vice President, Secretary
and National Sales
Manager
100,000
8,000
nil
36,557
Nil
Nil
Nil
144,557
104,166 5,000 41,600 130,216 Nil Nil Nil 280,982
Performance Awards
On April 27, 2012 we had granted performance equity compensation awards to certain officers, directors and consultants (the “Performance Equity Recipients”). We were to issue up to 2,400,000 common shares to Performance Equity Recipients on the basis of 480,000 common shares for each 200,000 cases of any of our products sold to a maximum of 2,400,000 common shares issuable. As at September 28, 2012 we had sold 200,000 cases of product and thus, our Performance Equity Recipients earned, and were issued on December 21, 2012, 480,000 common shares having a fair value of $249,600 of which 160,000 common shares, valued at $83,200, were issued to our Chief Executive Officer, Robert E. Yates, and 80,000 common shares, valued at $41,600, were issued to Parley Sheya. Our Performance Equity Plan was cancelled with retro-active effect to September 28, 2012. There are no further performance equity awards outstanding.
We do not maintain any plans in respect of the retirement of our directors and executive officers.
Stock Incentive Plan
Pursuant to a Special Meeting of Shareholders of our company, held on July 29, 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan") under which we are authorized to grant up to a total of 4,500,000 shares of common stock. Further, the 2011 Plan authorizes our Board of Directors to grant options, restricted stock awards, performance stock awards and stock appreciation rights as compensation for services rendered.
During our fiscal year ended December 31, 2012 we granted stock options under the 2011 Plan. In total, 3,200,000 stock options were awarded as follows:
on April 27, 2012 we granted stock options to our two senior officers/directors to purchase 1,450,000 common shares at $0.50 per common share expiring on or before April 30, 2017. A total of 1,000,000 stock options were awarded to our Chief Executive Officer, Robert E. Yates, which were valued at $370,608 of which $289,370 was recorded as stock-based compensation during the year ended December 31, 2012 and $81,238 was recorded as stock-based compensation during the year ended December 31, 2013. A total of 450,000 stock options were awarded to our Vice President, Parley Sheya, which were valued at $166,774 of which $130,216 was recorded as stock-based compensation and $36,558 was recorded as stock-based compensation during the year ended December 31, 2013. There is no unrecognized stock-based compensation as at December 31, 2013;
on April 27, 2012 we granted stock options to Francis Chiew to purchase 100,000 common shares at $0.50 per common share expiring on or before April 30, 2017. These options were valued at $37,061 of which $28,937 was recorded as stock-based compensation during the year ended December 31, 2012. As a result of Mr. Chiew’s resignation on May 2, 2013, the remaining unvested stock options, totaling 25,000, were forfeited and on August 2, 2013, being 90 days after Mr. Chiew resigned, the vested and unexercised stock options, totaling 75,000 were cancelled. Due to the forfeiture of 25,000 common shares the original valuation was reduced and, in fiscal 2013, a total of $1,141 was taken as a reduction of previously booked stock-based compensation. There is no unrecognized stock-based compensation as at December 31, 2013;
on April 27, 2012 we granted stock options to an employee and three consultants to purchase 1,550,000 common shares at $0.50 per common share expiring on or before April 30, 2017. These options were originally valued at $844,320 of which $448,171 was recorded as stock-based compensation during the year ended December 31, 2012 and $396,149 was recognized during the year ended December 31, 2013. There is no unrecognized stock-based compensation as at December 31, 2013; and
on July 31, 2012 we granted a stock option to a consultant to purchase 100,000 common shares at $0.50 per common share on or before July 30, 2017. A total 25% vested immediately with a further 25% vesting on each of January 31, 2013, July 30, 2013 and January 31, 2014. These options were valued at $49,826 of which $17,341 was recorded as stock-based compensation during the year ended December 31, 2012 and $32,319 was recorded during the year ended December 31, 2013. There is unrecognized stock-based compensation of $166 to record in fiscal 2014.
As at December 31, 2013 all incentive stock options had vested except for 25,000 stock options vesting January 31, 2014. We issued 25,000 common shares at $0.50 per share for cash pursuant to a consultant exercising a stock option.
The table below summarizes all unexercised options, stock that has not vested, and equity incentive plan awards for each named executive officer as of December 31, 2013:
Compensation of Directors
The table below summarizes all compensation of our directors for the year ended December 31, 2013:
We did not pay our directors, who also act as senior management/officers, any fees or other compensation for acting as directors during our fiscal year ended December 31, 2013 and 2012.
On March 15, 2011, we entered into a Director’s Agreement with Francis Chiew which provided for a fee of $5,000 per quarter. During fiscal 2012 Mr. Chiew elected to convert unpaid fees of $25,833, including $5,833 owing from 2011, into 47,222 $0.30 Units and 29,167 $0.40 Units. Each Unit consisted of one common share and one warrant. Each warrant allows the holder to acquire one common share at an average exercise price of $0.53. The warrants expire between January 25, 2015 and December 21, 2015. During fiscal 2013 Mr. Chiew elected to convert unpaid fees of $3,333 into 8,333 $0.40 Units. Each Unit consisted of one common share and one warrant. Each warrant allows the holder to acquire one common share at an exercise price of $0.65 expiring February 22, 2016. Our directors are reimbursed for reasonable travel and other out-of-pocket expenses incurred in attending meetings of the board.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of March 31, 2014 by: (i) each person (including any group) known to us to own more than 5% of any class of our voting securities, (ii) each of our directors, (iii) each of our officers and (iv) our officers and directors as a group. Except as otherwise indicated, each shareholder listed possess sole voting and investment power with respect to the shares shown.
Name and address
Amount and nature
of beneficial ownership
Percent of class¹
Robert E. Yates² - 11580 Quivas Way, Westminster, CO 80234
4,160,000 8.04%
Parley Sheya - 11678 N Huron St, Northglenn, CO 80234
613,333 1.19%
All executive officers and directors as a group (2 persons)
4,773,333 9.24%
¹ Based on 51,720,596 shares of common stock issued and outstanding as of March 31, 2014.
² A total of 51,333 common shares are held of record by Jonni K. Yates, the wife of Mr. Robert E. Yates.
Securities Authorized For Issuance under Compensation Plans
The table set forth below present’s information relating to our equity compensation plans as of the date of December 31, 2013:
Plan Category
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding column (a))
Equity Incentive Plan
3,075,000
$0.50
1,300,000
We issued 25,000 common shares at $0.50 per share for cash pursuant to a consultant exercising a stock option.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related Party Transactions
Transactions with our Chief of Product Development, Ron Kendrick:
Transactions with Francis Chiew who resigned from our board on May 2, 2013:
Review, Approval and Ratification of Related Party Transactions
Our Board of Directors has responsibility for establishing and maintaining guidelines relating to any related party transactions between us and any of our officers or directors. Any related party transaction with a director or officer must be referred to the non-interested directors, if any, for approval. We intend to adopt written guidelines for the board of directors which will set forth the requirements for review and approval of any related party transactions.
Director Independence
We periodically review the independence of each director. Pursuant to this review, our directors and officers, on an annual basis, are required to complete a detailed questionnaire to determine if there are any transactions or relationships between any of the directors or officers (including immediate family and affiliates) and us. If any transactions or relationships exist, we then consider whether such transactions or relationships are inconsistent with a determination that the director is independent.
Conflicts Relating to Officers and Directors
To date, we do not believe that there are any conflicts of interest involving our officers or directors. With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to us by L.L. Bradford & Company, LLC during 2013; and by our former auditors Weaver, Martin & Samyn LLP during 2012, for professional services rendered for the fiscal years ended December 31, 2013 and 2012:
Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of our interim financial statements included in quarterly reports and services that are normally provided by our auditors in connection with statutory and regulatory filings or engagements.
Audit Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under "Audit Fees".
Tax Fees consist of fees billed for professional services for tax compliance, tax advice and tax planning.
All Other Fees consist of fees for products and services other than the services reported above. There were no management consulting or other services provided in fiscal 2013 or 2012.
Pre-Approval Policies and Procedures
We currently do not have a designated Audit Committee, and accordingly, our Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. Our Board of Directors may also pre-approve particular services on a case-by-case basis.
Our Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Documents filed as part of this Report are as follows:
1) Financial Statements: The financial statements, related notes and report of independent registered public accounting firm are included in Item 8 of Part II of this 2013 Annual Report on Form 10-K.
2) Financial Statement Schedules: All schedules have been omitted because they are not applicable or not required, or the required information is included in the financial statements or notes thereto.
3) Exhibits: The required exhibits are included at the end of this Report and are described in the exhibit index.
EXHIBIT INDEX
*Provided herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2014
The Pulse Beverage Corporation
By:
Name: Robert E. Yates
Title: Chief Executive Officer (principal executive officer)
In accordance with the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Robert E. Yates
Robert E. Yates
President, Chief Executive Officer, Principal
Financial and Accounting Officer, Treasurer and
Director
March 31, 2014
/s/ Parley Sheya
Parley Sheya
Director and Secretary
March 31, 2014