Item 1. BUSINESS
In October 2013, the Dethrone License Agreement was terminated and the Company entered into a license agreement with Throwdown Industries Holdings, LLC, a Delaware limited liability company (“Throwdown Licensor”), pursuant to which the Licensor granted an exclusive, non-sublicenseable and non-assignable right to the Company to use its trademarks and other intellectual properties (“Throwdown Trademarks”) solely in connection with the development, manufacture, distribution, marketing and sale of sports performance drinks within the United States and Canada (the “Throwdown License”) as well as a one-time right of first refusal to license other types of beverages.
Effective November 14, 2013, the Company changed its name to High Performance Beverages Company in order to better reflect the direction and business of the Company.
On July 23, 2014, the Company filed a Certificate of Amendment with the Secretary of State of the State of Nevada to increase the number of authorized shares of common stock from 500,000,000 to 2,500,000,000 shares, effective immediately.
Dethrone License
The Dethrone License Agreement with Dethrone Royalty, Inc. is for five years and requires payments as follows:
The Dethrone License Agreement with Dethrone Royalty, Inc. specifies minimum levels of sales which, if not attained by the Company, gives Dethrone Royalty, Inc. the right to terminate the Dethrone License Agreement. These minimums are as follows:
The Dethrone License Agreement with Dethrone Royalty, Inc. also requires the Company to maintain various liability insurance coverage.
The Company’s officers have formulas that will be used for the initial products that are planned. They have undertaken efforts to raise the financing necessary to manufacture the initial products using outside contractors and implement marketing programs. The initial expenditures are being used for:
● Production of bottles, labels and caps,
● Purchase of inventory needed for beverage content,
● Marketing materials,
● Travel and business expenses, and
● Shipping costs of our first orders.
In October 2013, the Dethrone License Agreement was terminated.
Throwdown License
On October 10, 2013, the Company, entered into a license agreement (“Throwdown License Agreement”) with Throwdown Industries Holdings, LLC, a Delaware limited liability company (“Throwdown Licensor”), pursuant to which the Licensor granted an exclusive, non-sublicenseable and non-assignable right to the Company to use its trademarks and other intellectual properties (“Throwdown Trademarks”) solely in connection with the development, manufacture, distribution, marketing and sale of sports performance drinks within the United States and Canada (the “Throwdown License”) as well as a one-time right of first refusal to license other types of beverages. The Company’s rights under the Throwdown License Agreement are contingent upon Licensor’s prior written approval of any sports performance drinks developed or proposed by the Company to contain any of the Trademarks (“Throwdown Licensed Products”).
In consideration for the Throwdown License, the Company shall pay ten percent (10%) of the net revenue generated by all sales and other transfers of the Licensed Products during the term of the Throwdown License Agreement. Notwithstanding the foregoing, the Company shall pay the minimum royalties as set forth below:
* 2015 minimum Net Revenue shall be the greater of 120% of the actual 2014 Net Revenue or $1,600,000.00.
*** 2016 Minimum Net Revenue shall be the greater of 110% of the actual 2015 Net Revenue or $2,500,000.00. During any Extension Term and beyond 2016, the annual Minimum Net Revenue shall be at least 105% greater than the previous year.
In addition to the cash payment, the Company will also issue 5,437,603 shares of its common stock to the Throwdown Licensor. During each quarter of the term of the Agreement, the Throwdown Licensor shall have the option to convert a portion or all of the greater of the minimum quarterly payments or the actual earned royalties into shares of stock of the Company at an exercise price equal to the lesser of $0.03 per share or the VWAP for the ten (10) trading days prior to the end of the respective quarter during the term.
During the term of the Throwdown License Agreement, the Licensor will not grant any license that will enable any third party to directly compete with the Company by selling other sports performance drinks within the United States and Canada. The Throwdown License Agreement has an initial term of three (3) years and is automatically extended for one (1) additional three (3) year period unless either party elects not to extend the term.
In the event the Throwdown Licensor creates an independent and formal relationship with one of the Company’s athlete endorsers, the Throwdown Licensor agrees to pay the Company twenty five percent (25%) of any compensation paid to the athlete endorser for athlete endorser participation.
Either party may terminate the Throwdown License Agreement upon thirty (30) days written notice if the other party is in material breach of the Throwdown License Agreement and fails to cure or take reasonable steps to cure the breach within the given time period in accordance with the Throwdown License Agreement. In addition, the Licensor has the right to terminate the Throwdown License Agreement immediately upon occurrence of certain events pursuant to the Throwdown License Agreement.
In connection with the Throwdown License Agreement, the Company entered into a series of lock-up agreements (“Lock-up Agreement”) with certain shareholders pursuant to which the shareholders agree that they shall not transfer or dispose of any securities of the Company beneficially owned by them without prior written consent of Throwdown while the Throwdown License Agreement and the Lock-up Agreement are in effect.
Current Status
The company retained Allen Flavors to create two new additional flavors to be launched in the early part of the first calendar quarter of 2015. The Company will also use a newly developed look for their bottling and labeling as part of the new launch. In addition to a new product launch, the Company launched its first sweepstakes contest to be held from December 15, 2014 through January 31, 2015 to help market the new product launch.
As discussed above, in October 2013, the Company entered into the Throwdown License Agreement, pursuant to which the Throwdown Licensor granted the Throwdown Trademarks solely in connection with the development, manufacture, distribution, marketing and sale of sports performance drinks within the United States and Canada as well as a one-time right of first refusal to license other types of beverages.
We have also entered into contracts with several professional sports personalities (Jonathan Quick, Aldon Smith, Haloti Nagata, Taj Gibson, Pablo Sandavol, Matt Moulson and Salvador Perez) to represent us by endorsing our products. All contracts cover three years and require us to issue an aggregate of 3,070,000 restricted shares of common stock over the lives of the contracts plus up to an additional 2,460,000 contingent shares based on performance criteria. During the year ended July 31, 2014, we have recorded an aggregate Marketing Expense of $42,237 relating to the shares that are issuable.
Competition
Most of our competitors, which include well-known companies and established brands like Gatorade, have significantly greater financial and marketing resources than do we. We will compete in the marketplace using the name recognition of the athletes who endorse our beverages and the taste of the beverage
There are no assurances that our approach will be successful.
Intellectual Property
We have no patents or trademarks.
Employees
At July 31, 2014, our officers, Toby McBride and Michael J. Holley, are part-time contractors to us. There are no written contracts or agreements with Messrs. McBride and Holley.
Contractors and vendors will be used by us to conduct the manufacturing and distribution aspects of our business.
Item 1A.
Item 1A. RISK FACTORS
Risks Related to the Business
The Company has virtually no financial resources. Our independent registered auditors’ report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.
The Company has virtually no financial resources. We have negative working capital of $1,408,485 and a stockholders’ deficit of $6,542,451 at July 31, 2014. Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of and for the fiscal year ended July 31, 2014 that states that this lack of resources causes’ substantial doubt about our ability to continue as a going concern. No assurances can be given that we will generate sufficient revenue or obtain necessary financing to continue as a going concern.
The Company is and will continue to be completely dependent on the services of our senior officers, Toby McBride and Michael Jay Holley, the loss of whose services may cause our business operations currently contemplated to cease, and we will need to engage and retain qualified employees and consultants to further implement our strategy.
The Company’s operations and business strategy are completely dependent upon the knowledge and business connections of Toby McBride and Michael Jay Holley. They are under no contractual obligation to remain employed by us. If either or both should choose to leave us for any reason or if either becomes ill and is unable to work for an extended period of time before we have hired additional personnel, our operations will likely fail. Even if we are able to find additional personnel, it is uncertain whether we could find someone who could develop our business along the lines described in this prospectus. We will fail without the services of Messrs. McBride and Holley or an appropriate replacement(s).
We intend to acquire key-man life insurance on the lives of Messrs. McBride and Holley naming us as the beneficiary when and if we obtain the resources to do so and if they are insurable. We have not yet procured such insurance, and there is no guarantee that we will be able to obtain such insurance in the future. Accordingly, it is important that we are able to attract, motivate and retain highly qualified and talented personnel and independent contractors.
Many of our likely competitors have significantly greater financial and marketing resources than do we.
Many of our likely competitors have significantly greater financial and marketing resources than do we. Many of these competitors have sophisticated management, are in a position to purchase inventory at the lowest prices and have the ability to advertise in a wide variety of media, including television. There are no assurances that our brand will be successful.
Our license agreement with Throwndown Licensor specifies minimum levels of sales which must be met. If we lost that Throwdown License Agreement, our operations as currently planned are likely to fail.
Our Throwdown License Agreement with Throwdown Licensor specifies minimum levels of sales which, if not attained, gives Throwdown Licensor the right to terminate the Throwdown License Agreement. We will market our products very aggressively, but there are no assurances that we will be successful in meeting the targets set forth in the Throwdown License Agreement. In December 2014, the both parties to the contract agreed to terminate the licensing agreement.
We are subject to the periodic reporting requirements of the Exchange Act that will require us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs could reduce or eliminate our ability to earn a profit.
We are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. In order to comply with these requirements, our independent registered public accounting firm will have to review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel will have to review and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately predicted at this time because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will obviously be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly.
In no case will the proceeds of this offering be sufficient to assist us in any way to meet any portion of these incremental costs of being public.
Toby McBride and Michael Jay Holley, our principal officers, have no significant experience managing a public company and no meaningful accounting or financial reporting education or experience and, accordingly, our ability to meet Exchange Act reporting requirements on a timely basis will be dependent to a significant degree upon others.
Messrs. McBride and Holley have no significant experience managing a public company and no meaningful financial reporting education or experience. They are and will be heavily dependent on engaging and dealing with outside professional advisors, primarily lawyers and financial advisors/accountants who are and will not be affiliated with our independent auditors. We have no formal arrangements with professionals and cannot provide any assurances that we will be able to establish arrangements with professionals on terms or costs that are acceptable or affordable to us.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and 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 the assets of the Company;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
Having only two directors limits our ability to establish effective independent corporate governance procedures and increases the control of our president over operations and business decisions.
We have only two directors, who are also our principal executive officers. Accordingly, we cannot establish board committees comprised of independent members to oversee functions like compensation or audit issues. In addition, a tie vote of board members is decided in favor of the chairman, which gives him significant control over all corporate issues, including all major decisions on operations and corporate matters such as approving business combinations.
Until we have a larger board of directors that would include some independent members, if ever, there will be limited oversight of our president’s decisions and activities and little ability for minority shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of minority shareholders.
Risks Related to Our Common Stock
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through issuance of additional shares of our common stock.
We have no committed source of financing. Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares. In addition, if a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
The interests of shareholders may be hurt because we can issue shares of our common stock to individuals or entities that support existing management with such issuances serving to enhance existing management’s ability to maintain control of our Company.
Messrs. McBride and Holley own a significant majority of outstanding shares. In addition, our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued common shares. Such issuances may be issued to parties or entities committed to supporting existing management and the interests of existing management which may not be the same as the interests of other shareholders. Although transactions, other than those described in this prospectus, are not currently being contemplated or discussed, our ability to issue shares without shareholder approval serves to enhance existing management’s ability to maintain control of our Company or participate in other transactions, including entering into possible business combinations, without the support of other shareholders.
Our two principal officers control all corporate activities and can approve all transactions, including mergers, without the approval of other shareholders.
Messrs. McBride and Holley have a sufficient number of shares to control all corporate activities and can approve transactions, including possible mergers, issuance of shares and r compensation levels, without the approval of other shareholders. Their decisions may not be in the best interests of other shareholders.
Our articles of incorporation provide for indemnification of officers and directors at our expense and limit their liability that may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.
Our Articles of Incorporation at Article XI provide for indemnification as follows: "No director or officer of the Corporation shall be personally liable to the Corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer: (i) for acts or omissions which involve intentional misconduct, fraud or knowing violation of law; or (ii) the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes. Any repeal or modification of an Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation of the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification."
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
Currently, there is no established public market for our securities, and there can be no assurances that any established public market will ever develop or that our common stock will be quoted for trading and, even if quoted, it is likely to be subject to significant price fluctuations.
We have been granted a trading symbol (DRHC). However, there is not and there has never been any established trading market for our common stock. There is currently no established public market whatsoever for our securities.
Because of the anticipated low price of the securities being registered, many brokerage firms may not be willing to effect transactions in these securities. Purchasers of our securities should be aware that any market that develops in our stock will be subject to the penny stock restrictions.
Our shares may not become eligible to be traded electronically which would result in brokerage firms being unwilling to trade them.
We plan to try, through a broker-dealer and its clearing firm, to become eligible with the Depository Trust Company ("DTC") to permit our shares to trade electronically. If an issuer is not “DTC-eligible,” then its shares cannot be electronically transferred between brokerage accounts, which, based on the realities of the marketplace as it exists today (especially the OTCBB), means that shares of a company will not be traded (technically the shares can be traded manually between accounts, but this takes days and is not a realistic option for companies relying on broker dealers for stock transactions - like all companies on the OTCBB. What this boils down to is that while DTC-eligibility is not a requirement to trade on the OTCBB, it is a necessity to process trades on the OTCBB if a company’s stock is going to trade with any volume. There are no assurances that our shares will ever become DTC-eligible or, if they do, how long it will take.
Any market that develops in shares of our common stock will be subject to the penny stock regulations and restrictions pertaining to low priced stocks that will create a lack of liquidity and make trading difficult or impossible.
Our shares will be considered a “penny stock.” Rule 3a51-1 of the Exchange Act establishes the definition of a "penny stock," for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification will severely and adversely affects any market liquidity for our common stock.
The market for penny stocks has experienced numerous frauds and abuses that could adversely impact investors in our stock.
Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
- Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
- Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
- "Boiler room" practices involving high pressure sales tactics and unrealistic price projections by sales persons;
- Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
- Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
Any trading market that may develop may be restricted by virtue of state securities “Blue Sky” laws that prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.
There is currently no established public market for our common stock, and there can be no assurance that any established public market will develop in the foreseeable future. Transfer of our common stock may also be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions prohibit the secondary trading of our common stock. We currently do not intend to and may not be able to qualify securities for resale in at least 17 states which do not offer manual exemptions (or may offer manual exemptions but may not to offer one to us if we are considered to be a shell company at the time of application) and require shares to be qualified before they can be resold by our shareholders. Accordingly, investors should consider the secondary market for our securities to be a limited one.
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control over us.
Our articles of incorporation allow us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
We do not expect to pay cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
Because none of our directors are independent directors, we do not currently have independent audit or compensation committees. As a result, these directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it more costly or deter qualified individuals from accepting these roles.
You may have limited access to information regarding our business because our obligations to file periodic reports with the SEC could be automatically suspended under certain circumstances.
As of effectiveness of our registration statement on August 18, 2011, we are required to file periodic reports with the SEC which will be immediately available to the public for inspection and copying. Except during the year that our registration statement becomes effective, these reporting obligations may (in our discretion) be automatically suspended under Section 15(d) of the Exchange Act if we have less than 300 shareholders and do not file a registration statement on Form 8A (which we have no current plans to file). If this occurs after the year in which our registration statement becomes effective, we will no longer be obligated to file periodic reports with the SEC and your access to our business information would then be even more restricted. After this registration statement on Form S-1 becomes effective, we will be required to deliver periodic reports to security holders. However, we will not be required to furnish proxy statements to security holders and our directors, officers and principal beneficial owners will not be required to report their beneficial ownership of securities to the SEC pursuant to Section 16 of the Exchange Act until we have both 500 or more security holders and greater than $10 million in assets. This means that your access to information regarding our business will be limited.
For all of the foregoing reasons and others set forth herein, an investment in the Company’s securities in any market which may develop in the future involves a high degree of risk. Any person considering an investment in such securities should be aware of these and other risk factors set forth in this Form 10-K.
Item 1B.
Item 1B. UNRESOLVED STAFF COMMENTS
None
Item 2.
Item 2. PROPERTIES
Our office and mailing address is 5137 E. Armor St., Cave Creek, AZ 85331. The space is provided to us by Mr. Holley. Mr. Holley incurs no incremental costs as a result of our using the space. Therefore, he does not charge us for its use. There is no written lease agreement.
Item 3.
Item 3. LEGAL PROCEEDINGS
We are not a party to any pending or, to our knowledge, threatened litigation of any type.
Item 4.
Item 4. MINE SAFETY DISCLOSURES
None
Part II
Item 5.
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES
Market Information
There is not a consistently active market for the shares of our common stock. The trading symbol for our common stock is TBEV. There can be no assurance that a liquid market will develop in the foreseeable future.
Transfer of our common stock may also be restricted under the securities or blue sky laws of certain states and foreign jurisdictions. Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time.
The following table sets forth the high and low bid quotations for our common stock as reported on the OTC markets for the periods indicated.
Holders
As of the close of business on January 20, 2015, there were 43 stockholders of record of our common stock, and 2,127,790,297 shares were issued and outstanding.
Dividends
We have never paid any cash dividends on shares of our common stock and do not anticipate that we will pay dividends in the foreseeable future. We intend to apply any earnings to fund the development of our business. The purchase of shares of common stock is inappropriate for investors seeking current or near term income.
Securities Authorized for Issuance under Equity Compensation Plans
Recent sales of unregistered securities.
On August 26, 2013, the Company sold an 8% Convertible Note in the principal amount of $42,500. The Note matures on May 21, 2014 and has an interest rate of 8% per annum until the Note becomes due. Any amount of principal or interest on the Note which is not paid when due shall bear interest at the rate of 22% per annum from the due date thereof.
On October 1, 2013, the Company sold an 8% Convertible Note in the principal amount of $32,500. The Note matures on June 19, 2014 and has an interest rate of 8% per annum until the Note becomes due.
On October 10, 2013, the Company sold a master promissory note with a principal balance of $48,000 for a purchase price of $40,000 at an original issuance discount of $4,000. The Company also agreed to pay $4,000 worth of legal, accounting and due diligence costs to the Investor. The Company issued to the investor, warrants to purchase shares of the Company’s common stock at an exercise price equal to the conversion price as provided in the master promissory note.
On October 10, 2013, the Company entered into a license agreement pursuant to which the Company issued 5,437,603 shares of its common stock to the licensor. During each quarter of the term of the agreement, the licensor shall have the option to convert a portion or all of the greater of the minimum quarterly payments due under the agreement or the actual earned royalties into shares of stock of the Company at an exercise price equal to the lesser of $0.03 per share or the VWAP for the ten (10) trading days prior to the end of the respective quarter during the term.
On February 14, 2014, the Company sold an Original Issue Discount Convertible Promissory Note in the principal amount of $75,000, dated February 11, 2014 for cash consideration of $50,000.
On March 6, 2014, the Company sold a 10% Convertible Redeemable Note in the principal amount of $22,000 pursuant to a Securities Purchase Agreement. The note matures on February 28, 2015 and has an interest rate of 10% per annum.
On April 1, 2014, the Company sold an Original Issue Discount Convertible Promissory Note in the principal amount of $75,000, dated March 25, 2014 for cash consideration of $50,000. The Company claims an exemption from the registration requirements of the Act for the private placement of the securities referenced herein pursuant to Section 4(2) of the Securities Act of 1933 since, among other things, the transaction did not involve a public offering.
On June 3, 2014, the Company sold a note with a principal purchase price of $10,000. The note is due on June 2, 2014. Interest accrues at the rate of 8% per annum, compounding daily. At any time from the date hereof until no payment and/or repayment of funds due to the holder of the June 2015 Note, all principal, accrued but unpaid interest and all other payments due under the June 2015 Note shall be convertible into shares of common stock of the Company, at a conversion price of $.0001 at the option of the Holder, in whole at any time and from time to time.
On June 6, 2014, the Company sold a note with a principal purchase price of $60,000. The note is due on June 2, 2014. Interest accrues at the rate of 8% per annum, compounding daily. At any time from the date hereof until no payment and/or repayment of funds due to the holder of the June 2015 Note, all principal, accrued but unpaid interest and all other payments due under the June 2015 Note shall be convertible into shares of common stock of the Company, at a conversion price of $.0001 at the option of the Holder, in whole at any time and from time to time.
On June 6, 2014, the Company sold a note with a principal purchase price of $60,000. The note is due on June 2, 2014. Interest accrues at the rate of 8% per annum, compounding daily. At any time from the date hereof until no payment and/or repayment of funds due to the holder of the June 2015 Note, all principal, accrued but unpaid interest and all other payments due under the June 2015 Note shall be convertible into shares of common stock of the Company, at a conversion price of $.0001 at the option of the Holder, in whole at any time and from time to time.
No underwriter participated in the issuance of our shares, and no underwriting discounts or commissions were paid to anyone.
Item 6.
Item 6. SELECTED FINANCIAL DATA
We are considered to be a smaller reporting company, as defined by Rule 229.10(f)(1), and, therefore, are not required to provide the information required by this Item.
Item 7.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of and for the fiscal years ended July 31, 2014 and 2013 that states that our lack of resources causes substantial doubt about our ability to continue as a going concern.
Results of Operations for the year ended July 31, 2014
General, administrative and other expenses consist of professional fees, office supplies and travel expenses relating to the introduction of the new product line. The increase of $98,726 during the year ended July 31, 2014, from $485,527 at July 31, 2013 to $584,253 at July 31, 2014, is primarily due to a increase in professional fees of approximately $246,000.
Marketing costs relate to the costs of press releases and meetings with individuals considered important to the marketplace introduction of our new product line. The decrease of $940,400 during the year ended July 31, 2014, from $982,637 at July 31, 2013 to $42,237 at July 31, 2014, is primarily due to share based compensation paid to professional athletes under product endorsement agreements of $942,400 in the prior year.
Product development costs consist of costs for planning for product packaging, samples and similar introductory costs. The decrease of $37,077 during the year ended July 31, 2014, from $37,077 at July 31, 2013 to $0 at July 31, 2014, is due to the reduced need for product development as our products have been launched and are on the market.
Compensation increased by $872,627, from $364,004 during the year ended July 31, 2013 to $1,236,631 during the year ended July 31, 2014. The increase was primarily due to $375,946 in share based in the current period and none in the prior year and an increase in cash compensation expense of $740,432. All cash compensation was paid to Messrs. Holley and McBride and one sales manager.
Other income (expense) increased ($1,554,573) during the year ended July 31, 2014 compared to the year ended July 31, 2013, when other income (expense) was $(362,759). The increase is due to interest expense of ($796,668), the change in derivative liability of ($1,084,287) and inventory write off impairment of (36,177)
Net loss for the year ended July 31, 2014 increased by $1,565,700, from ($2,213,273) during the year ended July 31, 2013 to ($3,778,972) during the fiscal year ended July 31, 2013, primarily due to share based compensation expense, deferred financing cost and note discount amortization, interest expense and change in derivative liability.
Results of Operations for the year ended July 31, 2013
General, administrative and other expenses consist of professional fees, office supplies and travel expenses relating to the introduction of the new product line. The increase of $419,292 during the year ended July 31, 2013, from $66,235 at July 31, 2012 to $485,527 at July 31, 2013, is primarily due to amortization of deferred financing costs of $303,893 that were not incurred in the prior year, an increase in professional fees of $18,774, bad debt expense of $37,042, license fees of $13,959, royalty fees of $25,624, and commissions of $20,000.
Marketing costs relate to the costs of press releases and meetings with individuals considered important to the marketplace introduction of our new product line. The increase of $976,774 during the year ended July 31, 2013, from $5,863 at July 31, 2012 to $982,637 at July 31, 2013, is primarily due to share based compensation paid to professional athletes under product endorsement agreements of $942,400 and an increase in advertising costs of $29,801.
Product development costs consist of costs for planning for product packaging, samples and similar introductory costs. The decrease of $8,336 during the year ended July 31, 2013, from $45,413 at July 31, 2012 to $37,077 at July 31, 2013, is due to the reduced need for product development as our products have been launched and are on the market.
Compensation increased by $344,004, from $20,000 during the year ended July 31, 2012 to $364,004 during the year ended July 31, 2013. The increase was due to $321,504 in share based in the current period and none in the prior year and an increase in cash compensation expense of $42,500. All cash compensation was paid to Messrs. Holley and McBride and one sales manager.
Other income (expense) increased ($362,759) during the year ended July 31, 2013 compared to the year ended July 31, 2012, when other income (expense) was zero. The increase is due to interest expense of $120,329 and the change in derivative liability of $242,430.
Net loss for the year ended July 31, 2013 increased by $2,075,737, from ($137,536) during the year ended July 31, 2012 to ($2,213,273) during the year ended July 31, 2013, primarily due to share based compensation expense, deferred financing cost and note discount amortization, interest expense and change in derivative liability.
Other
As a corporate policy, we will incur few cash obligations that we cannot satisfy with known resources, of which there are currently none except as described in “Liquidity” below.
Liquidity and Capital Resources
The Company has financed its operations through the private placement of debt and its common stock.
We will continue to seek financing as necessary but cannot give any assurances that we will be successful in doing so.
We are a public company and, as such, have incurred and will continue to incur additional significant expenses for legal, accounting and related services. Once we become a public entity, subject to the reporting requirements of the Exchange Act of '34, we will incur ongoing expenses associated with professional fees for accounting, legal and a host of other expenses including annual reports and proxy statements, if required.
Seasonality
We do not yet have a basis to determine whether our business will be seasonal.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, obligations under any guarantee contracts or contingent obligations. We also have no other commitments, other than the costs of being a public company that will increase our operating costs or cash requirements in the future.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), the Company is not required to provide the information required by this Item.
Item 8.
Item 8. FINANCIAL STATEMENTS
Our consolidated financial statements as of July 31, 2014 and the fiscal year then ended start on page.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Management’s Annual Report on Internal Control over Financial Reporting
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer, in his role as CEO and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of July 31, 2014. Based upon such evaluation, the Chief Executive Officer has concluded that, as of July 31, 2014, the Company’s disclosure controls and procedures were ineffective. This conclusion by the Company’s Chief Executive Officer and does not relate to reporting periods after July 31, 2014.
Management’s Report on Internal Control Over Financial Reporting
Under the supervision and with the participation of our Chief Executive Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of July 31, 2014 based on the framework stated by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, due to our financial situation, we will be implementing further internal controls as we become operative so as to fully comply with the standards set by the Committee of Sponsoring Organizations of the Treadway Commission.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of 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 due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Based on its evaluation as of July 31, 2014 weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the monitoring and review of work performed by our Chief Executive Officer and lack of segregation of duties. In the preparation of audited financial statements, footnotes and financial data all of our financial reporting is carried out by our Chief Executive Officer, and we do not have an audit committee to monitor or review the work performed. The lack of segregation of duties results from lack of accounting staff with accounting technical expertise necessary for an effective system of internal control. As soon as our finances allow, we will hire sufficient accounting staff and implement appropriate procedures for monitoring and review of work performed by our Chief Executive Officer.
This annual report does not include an attestation report of the Company s registered public accounting firm regarding internal control over financial reporting. Management s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
(b) Changes in Internal Control Over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the year ended July 31, 2014, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
No event occurred during the fourth quarter of the fiscal year ended July 31, 2014 that would have required disclosure in a report on Form 8-K.
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Our management consists of:
Toby McBride has over 18 years of experience in the beverage industry. He has been involved in the launch of product brands, Sobe, Arizona Iced Tea and Xyience. He began his career with Whole Foods as a National Buyer and left Whole Foods to join Sobe.
Michael Holley has been in the beverage industry for over 16 years. He has been involved in the launch of product brands, Arizona Iced Tea and Xyience. He began his career in the wine and spirits industry launching new products and calling on key accounts.
Possible Potential Conflicts
The market on which our shares of common stock are quoted does not currently have any director independence requirements.
No member of management will be required by us to work on a full time basis. Accordingly, certain conflicts of interest may arise between us and our officer(s) and director(s) in that they may have other business interests in the future to which they devote their attention, and they may be expected to continue to do so although management time must also be devoted to our business. As a result, conflicts of interest may arise that can be resolved only through their exercise of such judgment as is consistent with each officer's understanding of his/her fiduciary duties to us.
Currently we have only two officers and directors and will seek to add additional officer(s) and/or director(s) as and when the proper personnel are located and terms of employment are mutually negotiated and agreed, and we have sufficient capital resources and cash flow to make such offers.
Code of Business Conduct and Ethics
In September 2010 we adopted a Code of Ethics and Business Conduct which is applicable to our future employees and which also includes a Code of Ethics for our chief executive and principal financial officers and any persons performing similar functions. A code of ethics is a written standard designed to deter wrongdoing and to promote:
- honest and ethical conduct,
- full, fair, accurate, timely and understandable disclosure in regulatory filings and public statements,
- compliance with applicable laws, rules and regulations,
- the prompt reporting violation of the code, and
- accountability for adherence to the code.
A copy of our Code of Business Conduct and Ethics has been filed with the Securities and Exchange Commission as Exhibit 14.1 to our Registration Statement which was declared effective on August 18, 2011.
Board of Directors
All directors hold office until the completion of their term of office, which is not longer than one year, or until their successors have been elected. Both directors’ terms of office expire on August 31, 2015. All officers are appointed annually by the board of directors and, subject to existing employment agreements (of which there are currently none) and serve at the discretion of the board. Currently, directors receive no compensation for their role as directors but may receive compensation for their role as officers.
As long as we have an even number of directors, tie votes on issues are resolved in favor of the chairman’s vote.
Involvement in Certain Legal Proceedings
Except as described below, during the past five years, no present director, executive officer or person nominated to become a director or an executive officer of the Company:
1. had a petition under the federal bankruptcy laws or any state insolvency law filed by or against, or a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
2. was convicted in a criminal proceeding or subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3. was subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him/her from or otherwise limiting his/her involvement in any of the following activities:
i. acting as a futures commission merchant, introducing broker, commodity trading advisor commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
ii. engaging in any type of business practice; or
iii. engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws; or
4. was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of an federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3) (i), above, or to be associated with persons engaged in any such activity; or
5. was found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and for which the judgment has not been reversed, suspended or vacated.
Committees of the Board of Directors
Concurrent with having sufficient members and resources, the Company’s board of directors will establish an audit committee and a compensation committee. We believe that we will need a minimum of five directors to have effective committee systems. The audit committee will review the results and scope of the audit and other services provided by the independent auditors and review and evaluate the system of internal controls. The compensation committee will manage any stock option plan we may establish and review and recommend compensation arrangements for the officers. No final determination has yet been made as to the memberships of these committees or when we will have sufficient members to establish committees.
All directors will be reimbursed by the Company for any expenses incurred in attending directors' meetings provided that the Company has the resources to pay these fees. The Company will consider applying for officers and directors liability insurance at such time when it has the resources to do so.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ended July 31, 2014 and 2013, compensation awarded to or paid to, or earned by, our Chief Executive Officer (the “Named Executive Officer”).
There is no formal employment arrangement with Messrs. McBride or Holley at this time. Their compensation is not been fixed or based on any percentage calculations. They will make all decisions determining the amount and timing of their compensation and, for the immediate future, will receive the level of compensation that permits us to have sufficient resources to meet our obligations. Their compensation amounts will be formalized if and when their annual cash compensation exceeds $150,000.
All compensation has been paid in cash and was based on the amount of cash available to pay compensation after other expenses had been paid.
Grants of Plan-Based Awards Table
None of our named executive officers received any grants of stock, option awards or other plan-based awards. The Company has never issued these types of awards.
Options Exercised and Stock Vested Table
None of our named executive officers has ever been granted or exercised any stock options,
Outstanding Equity Awards at Fiscal Year-End Table
The Company has entered into endorsement agreements with several professional sports personalities (Jonathan Quick, Aldon Smith, Haloti Nagata, Taj Gibson, Pablo Sandavol, Matt Moulson and Salvador Perez) to represent us by endorsing our products. All contracts cover three years and require us to issue an aggregate of 3,070,000 restricted shares of common stock over the lives of the contracts plus up to an additional 2,460,000 contingent shares based on performance criteria. During the year ended July 31, 2014, we have recorded an aggregate Marketing Expense of $42,237 relating to the shares that are issuable.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of January 20, 2015, we had 2,127,790,297 shares of common stock outstanding which are held by 43 shareholders of record. The chart below sets forth the ownership, or claimed ownership, of certain individuals and entities. This chart discloses those persons known by the board of directors to have, or claim to have, beneficial ownership of more than 5% of the outstanding shares of our common stock as of January 20, 2014; of all directors and executive officers of the Company; and of our directors and officers as a group.
(1) The address for purposes of this table is the Company’s address which is 5137 E. Armor St., Cave Creek, AZ 85331.
(2) Applicable percentage ownership is based on 2,127,790,297 shares of common stock outstanding as of January 20, 2015 together with securities exercisable or convertible into shares of common stock within 60 days of January 20, 2015 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of January 20, 2015 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
Shareholder Matters
As an issuer of "penny stock," the protection provided by the federal securities laws relating to forward looking statements does not apply to us as long as our shares continue to be penny stocks. Although the federal securities law provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any claim that the material provided by us, including this Annual Report on Form 10-K, contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
As a Nevada corporation, we are subject to the Nevada Revised Statutes ("NRS" or "Nevada law"). Certain provisions of Nevada law create rights that might be deemed material to our shareholders. Other provisions might delay or make more difficult acquisitions of our stock or changes in our control or might also have the effect of preventing changes in our management or might make it more difficult to accomplish transactions that some of our shareholders may believe to be in their best interests.
Directors' Duties. Section 78.138 of the Nevada law allows our directors and officers, in exercising their powers to further our interests, to consider the interests of our employees, suppliers, creditors and customers. They can also consider the economy of the state and the nation, the interests of the community and of society and our long-term and short-term interests and shareholders, including the possibility that these interests may be best served by our continued independence. Our directors may resist a change or potential change in control if they, by a majority vote of a quorum, determine that the change or potential change is opposed to or not in our best interest. Our board of directors may consider these interests or have reasonable grounds to believe that, within a reasonable time, any debt which might be created as a result of the change in control would cause our assets to be less than our liabilities, render us insolvent, or cause us to file for bankruptcy protection
Amendments to Bylaws - Our articles of incorporation provide that the power to adopt, alter, amend, or repeal our bylaws is vested exclusively with the board of directors. In exercising this discretion, our board of directors could conceivably alter our bylaws in ways that would affect the rights of our shareholders and the ability of any shareholder or group to effect a change in our control; however, the board would not have the right to do so in a way that would violate law or the applicable terms of our articles of incorporation.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Our office and mailing address is 5137 E. Armor St., Cave Creek, AZ 85331. The space is provided to us by Mr. Holley who incurs no incremental costs as a result of our using the space. Therefore, he does not charge us for its use. There is no written lease agreement.
Director Independence; Committees of the Board of Directors
Our Board of Directors is comprised of two individuals, one of whom is integral to the operations of our company, we do not have a majority of independent directors as that term is defined under Rule 4200(a) (15) of the NASDAQ Marketplace Rules, even though that definition does not currently apply to us, because we are not listed on the NASDAQ. We anticipate that if we expand our Board of Directors in the future, that we will seek to include members who are independent. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors.
Our Board of Directors has not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, or any committee performing a similar function. The functions of those committees are being undertaken by the entire board as a whole. Our board of directors does not believe that it is necessary to have such committees because it believes the functions of such committees can be adequately performed by our Board of Directors as a whole. Further, since our securities are not listed on an exchange, we are not subject to any qualitative requirements mandating the establishment of any particular committees.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our shareholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our shareholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given the nature of our operations and lack of directors and officers insurance coverage, we do not anticipate that any of our shareholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees.
None of our directors is an "audit committee financial expert" within the meaning of Item 407(d)(5) of Regulation S-K. In general, an "audit committee financial expert" is an individual member of the audit committee or Board of Directors who:
● understands generally accepted accounting principles and financial statements,
● is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
● has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
● understands internal controls over financial reporting, and
● understands audit committee functions.
We believe that the members of our Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees: We have incurred fees totaling $28,077 and $13,550 for the fiscal year ended July 31, 2014 and 2013 with LL Bradford for audit services for the annual audit of the Company’s financial statements included as part of our Form 10-K filing and audit related services including the quarterly reviews associated with our Form 10-Q filings.
Tax Services Fees: Tax fees consist of fees billed for professional services for tax compliance. These services include assistance regarding federal, state, and local tax compliance. Tax fees were not incurred during the fiscal years ended July 31, 2014 and 2013.
All Other Fees: Other fees, which were not incurred, would include fees for products and services other than the services reported above.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
* Filed herein.
** To be filed by amendment
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
High Performance Beverages Company
By: /s/ Toby McBride
Toby McBride
Chief Executive Officer, President
(Principal Executive Officer),
Treasurer (Principal Accounting
and Financial Officer) and
Chairman of the Board
January 22, 2015
Pursuant to the requirements of 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/ Toby McBride
Chief Executive Officer, President
(Principal Executive Officer),
January 22, 2015
Toby McBride
Treasurer (Principal Accounting
and Financial Officer) and Chairman of the Board
/s/ Michael Holley
President and Director
January 22, 2015
Michael Holley
HIGH PERFORMANCE BEVERAGES COMPANY
CONSOLIDATED BALANCE SHEETS
JULY 31, 2014 AND 2013
See accompanying notes to the consolidated financial statements.
HIGH PERFORMANCE BEVERAGES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JULY 31, 2014 AND 2013
See accompanying notes to the consolidated financial statements.
HIGH PERFORMANCE BEVERAGES COMPANY
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE PERIOD FROM JULY 31, 2011 through JULY 31, 2014
See accompanying notes to the consolidated financial statements.
HIGH PERFORMANCE BEVERAGES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 31, 2014 AND 2013
See accompanying notes to the consolidated financial statements.
HIGH PERFORMANCE BEVERAGES COMPANY
Notes to the Consolidated Financial Statements
NOTE 1 - ORGANIZATION
High Performance Beverages Company (formerly known as Dethrone Royalty Holdings, Inc., formerly Exclusive Building Services, Inc.) (the “Company”) was founded as an unincorporated DBA in February 1997 and was incorporated as a C corporation under the laws of the State of Nevada on October 11, 2010.
In October 2013, the Company entered into a license agreement with Throwdown Industries Holdings, LLC, a Delaware limited liability company (“Throwdown Licensor”), pursuant to which the Licensor granted an exclusive, non-sublicenseable and non-assignable right to the Company to use its trademarks and other intellectual properties (“Throwdown Trademarks”) solely in connection with the development, manufacture, distribution, marketing and sale of sports performance drinks within the United States and Canada (the “Throwdown License”) as well as a one-time right of first refusal to license other types of beverages.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Company’s consolidated financial statements are prepared using the accrual method of accounting. These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Dethrone Beverage, Inc. All significant inter-company balances and transactions have been eliminated upon consolidation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Cash Equivalents
For purposes of the balance sheet and statement of cash flows, the Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Inventory Valuation
Inventories are stated at the lower of cost or market value under the first-in, first-out method. The Company regularly assesses slow-moving, excess and obsolete inventory and maintains balance sheet reserves in amounts required to reduce the recorded value of inventory to lower of cost or market.
Stock-based Compensation
The Company follows ASC 718-10, Stock Compensation, which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. The Company has not adopted a stock option plan and has not granted any stock options.
In calculating the value of warrants and stock options granted in the year ended July 31, 2013, the fair value of warrants and options is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of 0 percent; expected volatility at the time of grant based on peer group data since the Company has no historical information; risk-free interest rate on the grant date, and expected life,
Use of Estimates and Assumptions
Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Loss per Share
Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic and diluted net income per common share has been calculated by dividing the net income for the period by the basic and diluted weighted average number of common shares.
Income Taxes
The Company operated as an unincorporated business until September 2010. Therefore, the results of its operations were included in the personal income tax returns of its owner. No pro forma provision for income taxes assuming the Company had been taxed as a C corporation for federal and state income tax purposes has been presented because the Company did not have pretax income in any period presented.
Going forward income taxes will be provided in accordance with ASC 740, Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carry forwards. Deferred tax expense (benefit) results from the net change during the year of deferred tax assets and liabilities.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
No provision was made for Federal income tax.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
Revenue Recognition
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Subsequent Events
The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company evaluates subsequent events from the date of the balance sheet through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them with the SEC on the EDGAR system.
Fair Value Considerations
We follow ASC 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157 and related guidance. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.
There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. We use Level 1 inputs for our fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement date. We use Level 2 inputs for our fair value measurements whenever there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market. We use observable market data whenever available.
Derivative Liabilities
The Company, in accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the embedded derivate associated with convertible notes payable are accounted for as liabilities during the term of the related notes payable.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Reclassifications
Certain comparative figures have been reclassified to conform to the current year presentation.
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As reflected in the accompanying consolidated financial statements, the Company had negative net working capital and a net stockholders’ deficit at July 31, 2014 and had no reliable source of ongoing debt or equity financing.
The Company is emphasizing a new product line involving the manufacture and sale of sports performance or energy drinks along with any other non-alcoholic beverage under the Trade Name, Dethrone Beverages. However, there are uncertainties as to whether the Company will obtain sufficient financing to introduce and distribute the planned product or, if distributed, there will be sufficient market demand for the products.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
HIGH PERFORMACE BEVERAGE COMPANY
(Formerly Dethrone Royalty Holdings, Inc.)
Notes to the Financial Statements
NOTE 4 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following:
HIGH PERFORMACE BEVERAGE COMPANY
(Formerly Dethrone Royalty Holdings, Inc.)
Notes to the Financial Statements
NOTE 4 - CONVERTIBLE NOTES PAYABLE (cont'd)
HIGH PERFORMACE BEVERAGE COMPANY
(Formerly Dethrone Royalty Holdings, Inc.)
Notes to the Financial Statements
NOTE 4 - CONVERTIBLE NOTES PAYABLE (cont'd)
HIGH PERFORMACE BEVERAGE COMPANY
(Formerly Dethrone Royalty Holdings, Inc.)
Notes to the Financial Statements
NOTE 4 - CONVERTIBLE NOTES PAYABLE (cont'd)
NOTE 5 - DERIVATIVE LIABILITY
The convertible notes payable issued on in by the company contain a variable conversion feature (the Variable Conversion Feature) that gives rise to a derivative liability. We have measured this derivative at fair value and recognized the derivative value as a current liability and recorded the derivative value on our consolidated balance sheet. The derivative is valued primarily using models based on unobservable inputs that are supported by little to no market activity. These inputs represent management’s best estimate of what market participants would use in pricing the liability at the measurement date and thus are classified as Level 3. Changes in the fair values of the derivative are recognized in earnings in the current period. During the year ended July 31, 2014, the Company recorded a derivative liability of $1,189,287 related to the Variable Conversion Feature and recognized a change in the derivative liability of due to conversions of $156,709 and change in derivative liability due to pricing of $(1,084,287). The balance of the derivative liability was $1,189,287 and $242,430 at July 31, 2014 and 2013, respectively.
NOTE 6 - EQUITY
The Company is authorized to issue 2,500,000,000 shares of common stock and 1,000,000 shares of preferred stock.
In connection with the sale of the Debenture, on April 30, 2013 (the “Initial Exercise Date”) the Company issued the purchaser of the Debenture a warrant to purchase 3,726,708 shares of the Company’s common stock at an exercise price of $.03 per share (subject to adjustment as provided in the debenture). The Warrant is exercisable on a cashless basis (as provided in the Warrant) and as a result there is no assurance that any part of the Warrant will be exercised for cash. The warrant terminates three years from the Initial Exercise Date and on such date the Warrant shall be automatically exercised via cashless exercise. The fair market value of the warrant on the date of issuance was 37,267 using the Black-Scholes formula assuming volatility of 122.22%, and a discount rate of 0.32%.
In June 2013, the Company issued 1,409,585 shares of common stock under endorsement contracts. The shares were valued at $376,000.
A summary of warrant activity for the year ended July 31, 2014 is presented below:
During the year ended July 31, 2014 the company issued 340,267,609 shares of common stock related to conversions of convertible debt during the year. The stock was valued at $305,688.
During the year ended July 31, 2014 the Company issued 65,500,000 of common stock in the form of compensation for officers of the companies. The stock was valued at $375,946
During the year ended July 31, 2014 the Company issued 5,437,603 shares of common stock for compensation for services rendered. The stock was valued at $924,392.
During the year ended July 31, 2014 the Company issued 2,175,000 shares of common stock for $27,500.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company neither owns nor leases any real or personal property. The Company's office is provided to it by an officer who incurs no incremental costs as a result of the Company using the space. Therefore, he does not charge for its use. There is no written lease agreement, and no obligation for him to continue this arrangement.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Throwdown License Agreement
On October 10, 2013, the Company entered into a license agreement (“Throwdown License Agreement”) with Throwdown Industries Holdings, LLC, a Delaware limited liability company (“Licensor”), pursuant to which the Licensor granted an exclusive, non-sublicenseable and non-assignable right to the Company to use its trademarks and other intellectual properties (“Trademarks”) solely in connection with the development, manufacture, distribution, marketing and sale of sports performance drinks within the United States and Canada (the “License”) as well as a one-time right of first refusal to license other types of beverages. The Company’s rights under the License Agreement are contingent upon Licensor’s prior written approval of any sports performance drinks developed or proposed by the Company to contain any of the Trademarks (“Licensed Products”).
In consideration for the License, the Company shall pay ten percent (10%) of the net revenue generated by all sales and other transfers of the Licensed Products during the term of the License Agreement. Notwithstanding the foregoing, the Company shall pay the minimum royalties as set forth below:
* 2015 minimum Net Revenue shall be the greater of 120% of the actual 2014 Net Revenue or $1,600,000.00.
*** 2016 Minimum Net Revenue shall be the greater of 110% of the actual 2015 Net Revenue or $2,500,000.00. During any Extension Term and beyond 2016, the annual Minimum Net Revenue shall be at least 105% greater than the previous year.
In addition to the cash payment, the Company will also issue 5,437,603 shares of its common stock to the Licensor. During each quarter of the term of the Agreement, the Licensor shall have the option to convert a portion or all of the greater of the minimum quarterly payments or the actual earned royalties into shares of stock of the Company at an exercise price equal to the lesser of $0.03 per share or the VWAP for the ten (10) trading days prior to the end of the respective quarter during the term.
The Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business. The Company will rigorously defend itself in any such lawsuits that may arise in the future.
NOTE 10 - SUBSEQUENT EVENTS
On August 04, 2014, a note holder exercised their right to convert $13,595 in principal into 19,420,978 shares of the Company’s $0.001 par value common stock.
On August 06, 2014, issued 2,000,000 shares of the Company’s $0.001 par value common stock with a current market value of $3,200.
On August 06, 2014, issued 500,000 shares of the Company’s $0.001 par value common stock with a current market value of $800.
On August 06, 2014, issued 1,500,000 shares of the Company’s $0.001 par value common stock with a current market value of $2,400.
On August 06, 2014, issued 2,000,000 shares of the Company’s $0.001 par value common stock with a current market value of $3,200.
On August 06, 2014, issued 20,000,000 shares of the Company’s $0.001 par value common stock with a current market value of $36,000.
On August 06, 2014, issued 3,000,000 shares of the Company’s $0.001 par value common stock with a current market value of $4,800.
On August 06, 2014, issued 25,000,000 shares of the Company’s $0.001 par value common stock with a current market value of $45,000.
NOTE 10 - SUBSEQUENT EVENTS (cont'd)
On August 07, 2014, a note holder exercised their right to convert $14,611 in principal into 20,873,189 shares of the Company’s $0.001 par value common stock.
On August 12, 2014, a note holder exercised their right to convert $10,850 in principal into 15,000,000 shares of the Company’s $0.001 par value common stock.
On August 13, 2014, a note holder exercised their right to convert $16,123 in principal into 21,496,986 shares of the Company’s $0.001 par value common stock.
On August 14, 2014, an investor purchased 5,000,000 shares of the Company’s $0.001 par value common stock for $500 in cash.
On August 20, 2014, a note holder exercised their right to convert $3,200 in principal into 32,000,000 shares of the Company’s $0.001 par value common stock.
On August 20, 2014, a note holder exercised their right to convert $3,183,000 in principal into 31,830,000 shares of the Company’s $0.001 par value common stock.
On August 20, 2014, a note holder exercised their right to convert $3,700 in principal into 3,700,000 shares of the Company’s $0.001 par value common stock.
On August 29, 2014, a note holder exercised their right to convert $6,000 in principal into 7,142,857 shares of the Company’s $0.001 par value common stock.
On September 10, 2014 a note holder exercised their right to convert a warrant with a current market value of $12,575, this exercise resulted in the issuance 28,073,409 shares of the Company’s $0.001 par value common stock.
On September 17, 2014 a note holder exercised their right to convert $5,100 in principal into 17,000,000 shares of the Company’s $0.001 par value common stock.
On September 22, 2014, a note holder exercised their right to convert $5,370 in principal into 17,900,000 shares of the Company’s $0.001 par value common stock.
On September 26, 2014, a note holder exercised their right to convert $5,640 in principal into 18,800,000 shares of the Company’s $0.001 par value common stock.
On September 26, 2014, a note holder exercised their right to convert ($510,000) in principal into (5,100,000) shares of the Company’s $0.001 par value common stock.
On October 14, 2014, a note holder exercised their right to convert $5,000 in principal into 50,000,000 shares of the Company’s $0.001 par value common stock.
On October 20, 2014, a note holder exercised their right to convert $909 in principal into 9,090,909 shares of the Company’s $0.001 par value common stock.
On October 20, 2014, a note holder exercised their right to convert $13,500 in principal into 19,281,553 shares of the Company’s $0.001 par value common stock.
On October 23, 2014, a note holder exercised their right to convert $16,000 in principal into 80,000,000 shares of the Company’s $0.001 par value common stock.
On October 24, 2014, a note holder exercised their right to convert $86,300 in principal into 86,300,000 shares of the Company’s $0.001 par value common stock.
On October 24, 2014, a note holder exercised their right to convert $4,925 in principal into 49,250,000 shares of the Company’s $0.001 par value common stock.
On October 27, 2014, a note holder exercised their right to convert $4,545 in principal into 45,454,545 shares of the Company’s $0.001 par value common stock.
On October 28, 2014, a note holder exercised their right to convert $6,000 in principal into 60,000,000 shares of the Company’s $0.001 par value common stock.
NOTE 10 - SUBSEQUENT EVENTS (cont'd)
On October 31, 2014, a note holder exercised their right to convert $6,100 in principal into 61,000,000 shares of the Company’s $0.001 par value common stock.
On November 3, 2014, a note holder exercised their right to convert $6,050 in principal into 60,500,000 shares of the Company’s $0.001 par value common stock.
On November 4, 2014, a note holder exercised their right to convert $14,700 in principal into 14,700,000 shares of the Company’s $0.001 par value common stock.
On November 5, 2014, a note holder exercised their right to convert $13,955 in principal into 13,954,546 shares of the Company’s $0.001 par value common stock.
On November 12, 2014, a note holder exercised their right to convert $42,762 in principal into 42,761,666 shares of the Company’s $0.001 par value common stock.
On November 24, 2014, a note holder exercised their right to convert $29,283 in principal into 29,282,825 shares of the Company’s $0.001 par value common stock.
NOTE 11 - RESTATEMENT
On March 21, 2014, in the process of preparing its quarterly report on Form 10-Q for the quarter ended January 31, 2014, the Company’s management became aware that the Company’s financial statements in the annual report for the year ended July 31, 2012 erroneously did not give effect to shareholder advances for the payment of accounting fees and improperly treated shares issued for services as a liability as opposed to equity. In addition, the Company determined that during the fiscal year ended July 31, 2013, it had (1) erroneously excluded from the derivative liability valuation a contract entered into late in the fiscal year that allowed for the settlement of the Company’s financial obligations under the contract in the Company’s common stock, based upon the price of the Company’s stock at the time of settlement; and, (2) excluded the value of common stock to be issued for services performed from the financial statements resulting in an understatement of compensation expense.
The following tables summarize the effect of corrections on the consolidated financial statements as of the year ended July 31, 2013:
NOTE 11 - RESTATEMENT (cont’d)
Statement of Operations
The following tables summarize the effect of corrections on the consolidated financial statements as of the year ended July 31, 2012:
NOTE 11 - RESTATEMENT (cont’d)
Statement of Operations