UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
FOR THE QUARTERLY PERIOD ENDED:
MARCH 31, 2017

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

Commission File Number: 000-53586

 

THE PULSE BEVERAGE CORPORATION
(Exact name of registrant as specified in its charter)

 

Nevada

36-4691531

(State or other jurisdiction of incorporation of
organization)

(I.R.S. Employer Identification No.)

 

11678 N Huron Street, Northglenn, CO 80234
 (Address of principal executive offices, including zip code)

 

(720) 382-5476
(Telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES [X]   NO [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES [X]   NO [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

Large Accelerated Filer 

[   ] 

  

Accelerated Filer 

[   ] 

 

Non-accelerated Filer 

[   ] 

  

Smaller Reporting Company 

[X] 

        Emerging Growth Company [   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES [   ]  NO [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

252,533,022 shares of common stock, par value $0.00001, as of May 4, 2017.

 

 

 
 

 

 

THE PULSE BEVERAGE CORPORATION
FORM 10-Q

 

INDEX

 

PAGE

PART I—FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

1

 

 

Condensed Consolidated Balance Sheets as at March 31, 2017 (Unaudited) and December 31, 2016

1

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (Unaudited)

2

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (Unaudited)

3

 

 

Notes to Condensed Consolidated Financial Statements

4

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

17

 

 

Item 4. Controls and Procedures

17

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

17

 

 

Item 1A. Risk Factors

17

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

18

 

 

Item 3. Defaults Upon Senior Securities

18

 

 

Item 4. Mine Safety Disclosure

18

 

 

Item 5. Other Information

18

 

 

Item 6. Exhibits

19

 

 

Signature Page

20

 

 

Certifications

 

 

 

     Exhibit 31.1

 

     Exhibit 31.2

 

     Exhibit 32.1

 

 

 

 
 

 

 

FORWARD-LOOKING STATEMENTS

 

          This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report.  Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms.  Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements.  Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters.  Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed on April 17, 2017.

 

          YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

 

          The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q.  Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.  You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we anticipate.

 

Unless otherwise indicated, in this Form 10-Q, references to “we,” “our,” “us,” the “Company,” “Pulse” or the “Registrant” refer to The Pulse Beverage Corporation, a Nevada corporation.

 

 

 
 

 

  

The Pulse Beverage Corporation

Condensed Consolidated Balance Sheets

As of March 31, 2017 (Unaudited) and December 31, 2016

 

   

2017

   

2016

 

ASSETS

               
                 

Current Assets:

               
                 

Cash

  $ 2,596     $ 159,660  

Accounts receivable, net (Note 3)

    237,101       146,324  

Inventories (Note 4)

    661,018       781,468  

Prepaid expenses

    15,550       21,585  
                 

Total Current Assets

    916,265       1,109,038  

Property and equipment, net of accumulated depreciation of $333,696 and $310,604, respectively (Note 5)

    128,143       151,235  

Intangible assets, net of accumulated amortization of $62,675 and $61,927, respectively (Note 5)

    85,891       86,640  
                 

Total Assets

  $ 1,130,299     $ 1,346,913  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current Liabilities:

               
                 

Accounts payable and accrued expenses

  $ 630,441     $ 816,974  

Credit card indebtedness

    23,796       21,057  

Promissory notes payable (Note 6)

    46,071       71,587  

Loans payable (Note 7)

    1,631,064       1,792,384  

Convertible debentures (Note 8)

    89,635       2,025  

Derivative Liabilities (Note 9)

    206,906       93,206  
                 

Total Current Liabilities

    2,627,913       2,797,233  
                 

Stockholders’ Equity:

               
                 

Preferred stock, 1,000,000 shares authorized, $0.001 par value, 100,000 Series “A” preferred shares issued (Note 12)

    100       100  

Common stock, 500,000,000 shares authorized (See Note 10), $0.00001 par value 196,867,991 and 70,924,980 issued and outstanding, respectively

    1,968       709  

Additional paid-in capital

    16,526,011       15,243,587  

Deficit

    (18,025,693 )     (16,694,716 )
                 

Total Stockholders’ Equity

    (1,497,614 )     1,103,117  
                 

Total Liabilities and Stockholders’ Equity

  $ 1,130,299     $ 3,211,776  

  

(See accompanying notes to these unaudited condensed consolidated financial statements)

 

 
1

 

 

The Pulse Beverage Corporation

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2017 and 2016

(Unaudited) 

 

   

2017

   

2016

 

Gross Sales

  $ 368,442     $ 737,414  

Less: Promotional allowances and slotting fees

    (25,552 )     (47,772 )

Net Sales

    342,890       689,643  

Cost of Sales

    241,355       463,582  
                 

Gross Profit

    101,535       226,061  
                 

Expenses

               

Advertising, samples and displays

    16,870       20,327  

Asset impairment

    -       5,085  

Freight-out

    27,971       57,400  

General and administration

    231,408       230,070  

Salaries and benefits and broker/agent’s fees

    141,394       281,219  

Stock-based compensation

    -       3,939  
                 

Total Operating Expenses

    417,643       598,040  
                 

Net Operating Loss

    (316,108 )     (371,979 )
                 

Other Income (Expense)

               

Interest expense

    (82,504 )     (110,339 )
Accretion of discount on convertible debenture     (337,996 )     -  

Change in fair value of derivatives

    (594,369 )     -  
                 

Total Other Income (Expense)

    (1,014,869 )     (110,339 )
                 

Net Loss from Continuing Operations

    (1,330,977 )     (482,318 )

Loss from Discontinued Operations

    -       (74,949 )

Net Loss

  $ (1,330,977 )   $ (557,267 )
                 

Net Loss per Share from Continuing Operations – Basic and Diluted

    (0.01 )     (0.01 )

Net Loss per Share from Discontinued Operations – Basic and Diluted

    -       -  

Net Loss Per Share from Continuing Operations – Basic and Diluted

  $ (0.01 )   $ (0.01 )
                 

Weighted Average Shares Outstanding – Basic

    95,066,000       68,686,000  

 

(See accompanying notes to these unaudited condensed consolidated financial statements)

 

 

 
2

 

 

The Pulse Beverage Corporation

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2017 and 2016

(Unaudited)

 

    2017     2016  
Cash Flow from Operating Activities                

Net loss

  $ (1,330,977 )   $ (557,267 )

Adjustments to reconcile net loss to net cash used in operations:

               

Amortization and depreciation

    23,840       29,021  

Asset impairment

    -       5,085  

Change in fair value of derivative liability

    594,369       -  

Accretion of discount on convertible debenture

    337,996       -  

Amortization of deferred financing fees

    4,720       79,968  

Shares and options issued for services

    11,700       27,706  

Changes in operating assets and liabilities:

               

Increase in accounts receivable

    (90,776 )     (174,387 )

Decrease (increase) in prepaid expenses

    6,035       (7,778 )

Decrease in inventories

    120,450       38,536  

(Decrease) increase in accounts payable and accrued expenses

    (68,463 )     88,718  
                 

Net Cash Used in Operating Activities

    (391,106 )     (470,398 )
                 

Cash Flow to Investing Activities

               

Purchase of property and equipment

    -       (6,269 )

Acquisition of intangible assets

    -       (1,175 )
                 

Net Cash Used in Investing Activities

    -       (7,444 )
                 

Cash Flow from Financing Activities

               

Proceeds from loans

    44,500       430,860  

Repayment of loans payable

    (27,943 )     (59,342 )

Proceeds from convertible note

    243,000       -  

Repayment of promissory notes

    (25,515 )     -  
                 

Net Cash Provided by Financing Activities

    234,042       371,518  
                 

(Decrease) in Cash

    (157,064 )     (106,324 )
                 

Cash – Beginning

    159,660       431,270  
                 

Cash - Ending

  $ 2,596     $ 324,946  
                 

Non-Cash Financing and Investing Activities:

               
                 

Shares issued for services

  $ 11,700     $ 23,767  

Shares issued to settle debt

  $ 2,000     $ -  

Shares issued upon conversion of convertible debt

  $ 1,227,169     $ -  
                 

Supplemental Disclosures:

               
                 

Interest paid

  $ 9,559     $ 23,786  

Income taxes paid

    -       -  

 

(See accompanying notes to these unaudited condensed consolidated financial statements)

 

 

 
3

 

 

The Pulse Beverage Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.     Nature of Operations

 

Organizational history

 

Darlington Mines Ltd. (“Darlington”) was incorporated in the State of Nevada on August 23, 2006. On February 15, 2011 Darlington Mines Ltd. closed a voluntary share exchange transaction with a private Colorado company, The Pulse Beverage Corporation, which was formed on March 17, 2010, by and among us, The Pulse Beverage Corporation and the stockholders of The Pulse Beverage Corporation. The Pulse Beverage Corporation became a wholly-owned subsidiary. On February 16, 2011 Darlington’s name was changed to “The Pulse Beverage Corporation”.

 

Nature of business

 

We manufacture and distribute Natural Cabana® Lemonade, Limeade and Coconut Water. Our product line, PULSE® Heart & Body Health functional beverage has been discontinued in the short-term. Our products are distributed nationwide primarily through a series of distribution agreements with various independent local and regional distributors and on a warehouse direct basis with major retail chain stores.

 

Going concern

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities, and commitments in the normal course of business. We have generated significant revenues but have sustained substantial losses since inception and have never paid any dividends and are unlikely to pay dividends in the immediate or foreseeable future. Our continuation as a going concern is dependent upon our ability to obtain necessary debt and/or equity financing to fund our growth strategy, pay debt when due, to continue operations, and to attain profitability. As at March 31, 2017 we had a working capital deficit of $1,711,648 and a stockholders’ deficit of $18,025,693. All of these factors combined raises substantial doubt regarding our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Since our inception through March 31, 2017, we have obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business.

 

We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our debt and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.

 

2.     Summary of Significant Accounting Policies

 

Basis of presentation

 

The unaudited condensed consolidated interim financial statements for the three months ended March 31, 2017 and 2016 have been prepared in accordance with accounting principles generally accepted in the United States. Our fiscal year end is December 31st.

 

The foregoing unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information using the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included on Form 10-K for the year ended December 31, 2016. In our opinion, the unaudited condensed consolidated interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

 

 

 
4

 

 

Operating results for the three months ended March 31, 2017, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

 

Use of Estimates

 

The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Revenue Recognition

 

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50. All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor terminations, we may accept returned product. To date, such returns have been de minimis.

 

Seasonality 

 

Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. Historically, we have generated a higher percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the entire fiscal year.

 

Recent Pronouncements

 

We continually assess any new accounting pronouncements to determine their applicability to our operations and financial reporting. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect the change.

 

In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments. The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. It also provides guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

 

 
5

 

 

In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.” Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquired business recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquired business. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, first-out ("LIFO"). This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. It also provides guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

 

 
6

 

 

In February 2015, the FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis," which makes changes to both the variable interest model and voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities will need to re-evaluate their consolidation conclusions as well as disclosure requirements. This ASU is effective for annual periods beginning after December 15, 2015, and early adoption is permitted, including any interim period. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In January 2015, the FASB issued ASU 2015-01, "Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)," effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. This update eliminates from GAAP the concept of extraordinary items. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments. The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-40), effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

 

In March 2016, the FASB issued an accounting standards update which simplifies the accounting for share-based payment transactions, inclusive of income tax accounting and disclosure considerations. This guidance is effective for fiscal and interim periods beginning after December 15, 2016 and is required to be applied retrospectively to all impacted share-based payment arrangements. The adoption of this guidance is not expected to have a significant impact on our financial statements.

 

Recent Accounting Pronouncements Issued but Not Adopted as of March 31, 2017

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” on revenue recognition. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, we expect to adopt this guidance on January 1, 2018. We have not yet determined our approach to adoption or the impact the adoption of this guidance will have on our financial position, results of operations or cash flows, if any.

 

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. We are currently evaluating the impact of adopting this guidance.

 

 

 
7

 

 

In February 2016, the FASB issued an accounting standards update which modifies the accounting for leasing arrangements, particularly those arrangements classified as operating leases. This update will require entities to recognize the assets and liabilities arising from operating leases on the balance sheet. This guidance is effective for fiscal and interim periods beginning after December 15, 2018 and is required to be applied retrospectively to all leasing arrangements. We are currently assessing the effects this guidance may have on our financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). The standard clarifies the definition of a business by adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Under ASU 2017-01, to be considered a business, the assets in the transaction need to include an input and a substantive process that together significantly contribute to the ability to create outputs. Prior to the adoption of the new guidance, an acquisition or disposition would be considered a business if there were inputs, as well as processes that when applied to those inputs had the ability to create outputs. Early adoption is permitted for certain transactions. Adoption of ASU 2017-01 may have a material impact on our consolidated financial statements if we enter into future business combinations.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. ASU 2017-04 is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements.

 

3.     Accounts Receivable

 

Accounts receivable consists of the following as of:

 

March 31,

2017

(Unaudited)

   

December 31,

2016

 

Trade accounts receivable

  $ 224,549     $ 138,229  

Other

    12,552       8,095  
    $ 237,101     $ 146,324  

 

4.     Inventories

 

Inventories consists of the following as of:

 

   

March 31,

2017

(Unaudited)

   

December 31,

2016

 

Finished goods

  $ 163,079     $ 251,692  

Deposit on finished goods

    10,181       5,837  

Raw materials

    487,758       523,940  
    $ 661,018     $ 781,469  

 

5.     Property and Equipment and Intangible Assets

 

Property and equipment consists of the following as of:  

March 31,

2017

(Unaudited)

   

December 31,

2016

 

Manufacturing, warehouse, display equipment and molds

  $ 289,759     $ 289,759  

Office equipment and furniture

    41,581       41,581  

Mobile display unit and vehicles

    130,500       130,500  

Less: depreciation

    (333,696 )     (310,605 )

Total Property and Equipment

  $ 128,143     $ 151,235  

 

 

 
8

 

 

For the three months ended March 31, 2017 and 2016, depreciation expense was $23,092 and $25,887, respectively.  

 

Intangible assets consist of the following as of:  

March 31,

2017

(Unaudited)

   

December 31,

2016

 

Website

    62,675       62,675  

Less: amortization

    (62,675 )     (61,926 )

Trademarks – not amortized due to indefinite life

    85,891       85,891  

Total Intangible Assets

  $ 85,891     $ 86,640  

 

For the three months ended March 31, 2017 and 2016, amortization expense was $748 and $3,134, respectively. Estimated amortization expense to be recorded for the remainder of 2017 is $Nil.

 

6.     Promissory Notes Payable

 

The following promissory notes are unsecured as follows:

 

 

a)

Promissory Note #1 - $23,958 repayable in escalating monthly instalments ending June 24, 2017 until paid, interest is at 10%; and

 

 

b)

Promissory Note #2 - $22,114 – no specific repayment terms.

 

7.      Loans Payable

 

Loans payable consists of the following as of:  

March 31,

2017

(Unaudited)

   

December 31,

2016

 

Short-term loan (a) below

  $ 13,002     $ 14,069  

Short-term loan, related party (a) below

    106,599       120,374  

Senior Secured Revolving Note (b) below

    1,473,250       1,657,942  

Factoring loan (c) below

               

Total loans payable

  $ 1,592,851     $ 1,792,384  

 

 

a)

In September 2015, we received short-term loans totaling $145,000 of which $130,000 was received from a family trust of our Chief Executive Officer. These loans bear interest at 10%, are unsecured and due on demand. As of May 15, 2017, no demand for repayment has been received.

 

 

b)

On November 6, 2015, we entered into a Credit Agreement with TCA Global Credit Master Fund, LP (“TCA”). Under the terms of the Credit Agreement, TCA committed to lend up to $3,500,000 (the “Credit Facility”) pursuant to a senior secured revolving note (the “Note”). TCA has funded to date $1,750,000, $900,000 in fiscal 2015 and $850,000 in fiscal 2017. The Credit Facility is secured by a senior secured interest in all our assets. We are charged a 12% per annum rate of interest plus a 6% per annum administration fee on the daily loan balance outstanding. The Lender has the right, in the Event of Default, to convert any outstanding amounts under the Note into restricted shares of our common stock based on 85% of the weighted value average price of our common shares over the prior 5 trading days prior to conversion. However, the Lender may not convert any portion of the Note to the extent that after giving effect to the shares which would be received on conversion, the Lender would beneficially own more than 4.99% of our common stock. In connection with the Credit Facility and subsequent loans therein, we were obligated to pay a total of $500,000 in investment banking fees to TCA. As security for the initial fee of $150,000 we issued 3,000,000 common shares to TCA. These shares were sold for total proceeds of $119,550 leaving a total balance owing of $380,500. The original maturity of the Note was November 6, 2016. TCA has verbally agreed to extend the maturity date to a future date but as of May 15, 2017 we have not reached an agreement with TCA on this extension.

 

 

c)

We sold future receipts totaling $61,098 for proceeds of $44,500 pursuant to a Revenue Based Factoring Agreement dated February 20, 2017. We are required to repay $332 per business day for 184 business days. We have repaid a total of $8,632 to March 31, 2017.

 

 

 
9

 

 

8.      Convertible Notes

 

Convertible notes consist of the following:  

March 31,

2017

(Unaudited)

   

December 31,

2016

 
                 

Face value of convertible notes

  $ 179,661     $ 80,750  

Less discounts

    (106,661 )     (80,750 )

Revaluation of notes

    21,864       9,630  
      94,864       9,630  

Less: unamortized debt issuance costs

    (5,229 )     (7,605 )

Net carrying value

  $ 89,635     $ 2,025  

 

 

a)

On October 7, 2016, we issued a convertible note in the principal amount of $80,750 due on demand on or after October 7, 2017. We received a total amount of $75,000, net of debt issuance costs of $7,500. The note has a cash redemption premium of 115% of the principal amount in the first 30 days following the execution date, of 125% for days 31-90 following the execution date, and 135% after the 91st day. After 180 days, cash redemption is only available upon approval by the holder at a cash redemption premium of 140%. The note bears interest at 9% per annum and is convertible into common shares at a 40% discount to the average of the three lowest trading prices during the previous 20 trading days to the date of conversion. The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $90,575 resulted in a discount to the note payable of $80,750 and the recognition of a loss on derivatives of $9,825. During the year ended December 31, 2016, we recorded accretion of $9,630. During the three months ended March 31, 2017, we recorded accretion of $9,492 increasing the carrying value of the note to $19,122. During the three months ended March 31, 2017, the Company recognized a loss of $65,023 on the change in fair value of the derivative liability. Accrued interest as at March 31, 2017 was $35,923 including default interest of $33,750. The convertible note was assigned to another lender subsequent to March 31, 2017. Refer to Note 13 (b);

 

 

b)

On January 11, 2017, we borrowed $43,000 from Power Up Lending Group, Ltd (Power Up). The loan is evidenced by a promissory note which bears interest at 8% per year, due on October 17, 2017. On July 10, 2017 Power Up may convert the promissory note into our common shares. On March 10, 2017, we borrowed an additional $30,000 from Power Up. This additional loan is evidenced by a promissory note which bears interest at 8% per year, due on December 30, 2017. On July 10, 2017 Power Up may convert the $43,000 promissory note into our common shares and on September 6, 2017 Power Up may convert the $30,000 promissory note into our common shares. The conversion price of these loans is 61% of the average of the three lowest trading prices of our common shares during the 15-day trading period ending on the last trading day prior to the date of conversion. The derivative treatment would not become applicable until the promissory notes become convertible on July 10, 2017 and December 30, 2017. We have reserved 40,000,000 common shares for future issuances pursuant to a Reservation Letter dated January 11, 2017. As at March 31, 2017, the carrying value of the note was $73,000. ;

 

 

c)

On January 25, 2017, we entered into a Settlement Agreement with certain creditors whereby Rockwell Capital Inc. purchased debts from our creditors totaling $250,738 (the “Claim Amount”). In return Rockwell Capital Inc. can convert the Claim Amount into free-trading common shares pursuant to Section 3(a) (10) of the Securities Act at a 40% discount of the 3 lowest traded prices over the prior 10 days. To date a total of $250,738 has been settled and converted into 78,459,168 common shares. In connection with the Settlement Agreement we issued 625,000 common shares having a fair market value of $6,425 for a registered broker dealer to act on our behalf. The Claim Amount has been fully converted as at March 28, 2017; The initial fair value of the conversion feature of $181,673 resulted in a discount to the note payable of $181,673. Upon the conversion of the Claim Amount, the Company recognized unamortized discount of $181,673 as interest expense. The fair value of $517,530 for the derivative liability was reclassified to additional paid-in capital upon the conversion of Claim Amount. During the three months ended March 31, 2017, the Company recognized a loss of $335,857 on the change in fair value of the derivative liability.

 

 

 
10

 

 

 

d)

On January 26, 2017, we entered into a Debt Purchase Agreement (“DPA”) with Old Main Capital, LLC (“Old Main”) to assign up to $1,727,484 of principal owed to TCA Global Credit Master Fund LP (“TCA”) in exchange for up to $1,722,484 pursuant to terms of the DPA. To evidence this DPA we entered into a 10% Senior Replacement Convertible Promissory Note for any purchases made from TCA by Old Main. To date Old Main has purchased $170,000 of such debt by paying TCA a total of $163,000 and paying legal fees of $7,000 to legal counsel for Old Main and TCA. Old Main has the right to convert this amount into our common shares at a 35% discount of the average of the two lowest traded prices in the prior 30 days. As at March 31, 2017, a total of $144,089 was converted into 46,153,843 common shares leaving a convertible debt balance of $25,911 as at March 31, 2017. During the three months ended March 31, 2017, we recorded accretion of $2,742 increasing the carrying value of the note to $2,742. The initial fair value of the conversion feature of $334,420 resulted in a discount to the note payable of $170,000 and the recognition of a loss on derivatives of $164,420. Upon the conversion of the Claim Amount, the Company recognized unamortized discount of $141,633 as interest expense. The fair value of $314,811 for the derivative liability was reclassified to additional paid-in capital upon the conversion of Claim Amount.  During the three months ended March 31, 2017, the Company recognized a loss of $29,068 on the change in fair value of the derivative liability. Subsequently Old Main paid TCA $50,000 to paydown interest and principal owing to TCA. We also incurred $10,000 of costs relating to associated regulatory matters. Old Main subsequently converted $81,889 into 34,765,031 common shares at an aggregate price of $0.002 per share. We have reserved 246,153,846 common shares for future issuances pursuant to a Reservation Letter dated February 8, 2017 of which a balance of 165,234,972 remains unused. Refer to Note 13 (a) and (c).

 

9.      Derivative Liabilities

 

The embedded conversion option of the convertible debenture described in Note 8 contains a conversion feature that qualifies for embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities:

 

   

March 31,

2017

(Unaudited)

   

December 31,

2016

 
                 

Balance, beginning

  $ 93,206     $ -  

Original discount limited to proceeds of notes

    351,673       80,750  

Fair value of derivative liabilities in excess of note proceeds received

    164,420       9,825  

Change in fair value of embedded conversion option

    429,948       2,631  

Conversion of derivative liability

    (832,341 )     -  

Balance, ending

  $ 206,906     $ 93,206  

 

We use Level 3 inputs for our valuation methodology for the embedded conversion option liabilities as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions. The model incorporates the price of a share of our common stock (as quoted on the Over the Counter Markets), volatility, risk free rate, dividend rate and estimated life. Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:

 

   

Expected

Volatility

   

Risk-free

Interest Rate

   

Expected

Dividend

Yield

   

Expected Life

(in years)

 
                                       

At issuance

  133% - 256%     0.52% - 1.04%       0 %   0.15 - 1.00  
                                       

At March 31, 2017

  264% - 316%     0.91% - 1.03%       0 %   0.52 - 0.94  

 

10.   Common Stock

 

On April 24, 2017, an Information Statement was filed with the Securities and Exchange Commission pursuant to Section 14C of the Securities Exchange Act of 1934, to notify our shareholders of a proposed amendment to our Articles of Incorporation. We proposed an amendment to our Articles of Incorporation that would increase the number of authorized shares of our common stock from 500,000,000 to 5,000,000,000 (the “Authorized Increase Amendment”). The Authorized Increase Amendment was unanimously adopted and approved on April 23, 2017 by written consent of our Board of Directors. The Authorized Increase Amendment will become effective on or after May 29, 2017.

 

 

 
11

 

 

Equity transactions during the three months ended March 31, 2017:

 

 

a)

On January 25, 2017, in connection with the Settlement Agreement described in Note 7 we issued 625,000 common shares having a fair market value of $6,425 for a registered broker dealer to act on our behalf;

 

 

b)

Between February 15, 2017 and March 31, 2017, a total of $144,089 of the Old Main debt was converted into 46,153,843 common shares at an aggregate average price of $0.003 per share;

 

 

c)

Between January 27, 2017 and March 31, 2017, a total of $250,738 of the Rockwell Capital Inc. Settlement Agreement Claim Amount was settled and converted into 78,459,168 common shares at an aggregate average price of $0.003 per share;

 

 

d)

On March 13, 2017, we issued 200,000 common shares to settle $2,000 of creditor debt. These shares were valued at $0.01 per common shares;

 

 

e)

On March 13, 2017, we issued 500,000 common shares at a fair value of $0.01 per share to a service provider pursuant to a Consultant Agreement. The fair market value of these shares, being $5,000 was charged to operations.

 

Equity transactions during the three months ended March 31, 2016:

 

On January 31, 2016, we issued 238,889 common shares and on February 29, 2016 we issued 238,889 common shares having an aggregate fair value of $40,611 pursuant to an employment contract with an officer/director. This contract expired on March 8, 2016.

 

11.   Warrants

 

At March 31, 2017, we had 3,548,330 common stock purchases warrants outstanding having an average exercise price of $0.45 per common share. Subsequent to March 31, 2017 all of these warrants expired unexercised.

 

12.   Preferred Stock

 

There are 1,000,000 shares of preferred stock, par value $0.001, issuable in series with rights, preferences and limitations to be determined by the Board of Directors from time to time. On December 9, 2016, our Board of Directors created a series of Preferred Shares, $0.001 par value per share, designated as Series “A” Preferred Shares. The number of shares constituting Series “A” Preferred Shares is 300,000. Each Series “A” Preferred Share entitles the holder to 1,000 votes on all matters submitted to a vote of our shareholders. On December 9, 2016, we issued 100,000 Series “A” Preferred Shares to our Chief Executive Officer for $400. Subsequent to March 31, 2017 we issued a further 200,000 Series “A” Preferred Shares to our Chief Executive Officer for $800.

 

13.   Subsequent Events

 

Subsequent to March 31, 2017 we have entered into the following debt and equity transactions:

 

 

a)

On April 3, 2017, we entered into an additional financing arrangement with Old Main Capital, LLC, (“Old Main”), and delivered an installment Convertible Promissory Note (the “Note”) to Old Main. Under the terms of the Note, Old Main loaned us $200,000 on April 4, 2017 and an additional $50,000 on April 26, 2017. Each loan under the Note is due nine months from date of advance and bears interest at 10% per annum. In addition, pursuant to an original issue discount provision, the principle of the Note was increased above the $250,000 received by us to $294,117, which provides additional consideration to the Lender. In addition, the principle and accrued interest on the Note is convertible in whole or in part at the option of Old Main into our common shares at a conversion price per share equal to 65% of the average of the two lowest traded prices for our common shares in the 30 days preceding conversion. We have reserved 120,000,000 common shares for future issuances pursuant to a Reservation Letter dated April 7, 2017;

 

 

b)

On April 19, 2017 GHS Investments, LLC (“GHS”), pursuant to an Assignment Agreement between us, the lender (See Note 8 (a)), and GHS, satisfied our obligations to the lender in the amount of $118,231 which included principal of $80,750 and accrued regular and default interest of $37,481. GHS has the right to convert this amount into our common shares at a 40% discount of the average of the three lowest traded prices in the prior 20 days. To date a total of $47,216 was converted into 20,800,000 common shares at an average aggregate price of $0.002. We have reserved 40,000,000 common shares for future issuances pursuant to a Reservation Letter dated April 17, 2017 of which a balance of 19,200,000 remains unused; and

 

 

c)

On April 25, 2017 Old Main paid TCA $50,000 to paydown interest and principal owing to TCA. We also incurred $10,000 of costs relating to associated regulatory matters. Old Main subsequently converted $81,889 into 34,765,031 common shares at an aggregate price of $0.002 per share.

 

 

Subsequent to March 31, 2017 we issued a further 200,000 Series “A” Preferred Shares to our Chief Executive Officer for $800.

 

 
12

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The discussion that follows is derived from our interim unaudited Condensed Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 2017 (“2017”) and March 31, 2016 (“2016”).

 

Statements of Operations

 

2017

   

2016

   

Increase

(Decrease)

   

Increase

(Decrease) Percentage

 

Gross Sales

  $ 368,442     $ 737,414     $ (368,972 )     (50 %)

Less: promotion/slotting

    (25,552 )     (47,772 )     (22,220 )     (47 %)

Net Sales

    342,890       689,643       (346,753 )     (50 %)

Cost of Sales

    241,355       463,582       (222,227 )     (48 %)
                                 

Gross Profit

    101,535       226,061       (124,526 )     (55 %)
                                 

Expenses

                               

Advertising, samples and displays

    16,870       20,327       (3,457 )     (17 %)

Asset impairment

    -       5,085       (5,085 )     (100 %)

Freight-out

    27,971       57,400       (29,429 )     (51 %)

General and administration

    231,408       230,070       1,338       1 %

Salaries, benefits and agent’s fees

    141,394       281,219       (139,825 )     (50 %)

Stock-based compensation

    -       3,939       (3,939 )     (100 %)
                                 

Total Operating Expenses

    417,643       598,040       (180,397 )     (30 %)
                                 

Net Operating Loss

    (316,108 )     (371,979 )     (55,871 )     (15 %)

Interest expense

    (82,504 )     (110,339 )     (27,835     (25 %)
Accretion of discount on convertible debenture     (337,996 )     -       337,996       N/A  

Change in fair value of derivatives

    (594,369 )     -       594,369       N/A  
                                 

Net Loss from Continuing Operations

    (1,330,997 )     (482,318 )     848,679       176 %

Loss from Discontinued Operations

    -       (74,949 )     (74,949 )     (100 %)

Net Loss

  $ (1,330,997 )   $ (557,267 )   $ 773,730       138 %

 

Net Sales

 

We introduced Natural Cabana® Lemonade in a 20oz glass bottle in 2012 and since then have developed a multi-national comprehensive distribution system. During fiscal 2016, we began eliminating a number of weaker, non-performing and slow-paying distributors and now have approximately 70 distributors and 20 wholesalers. This was a strategic decision as we moved our sales model concentration from direct store delivery through distributors to warehouse direct to retail which has led to reductions in overhead associated with direct store delivery distributors. The continued decrease in net sales during 2017 compared to 2016 was expected. Our plan is to grow net sales from a more profitable fixed expense base and to increase sales prices, reduce promotional programs, reduce freight-out which, collectively, will increase our contribution margin.

 

As part of the restructure we switched our packaging for Natural Cabana® Lemonade/Limeade from a 20oz glass bottle to a 16.9oz European style glass bottle used in the making of Citrus Tree and Pulse Heart Health. This change has been well received in the market place and we expect to continue to deliver our products in this packaging.

 

Some of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway/Tom Thumb Markets, Walmart, Kroger/King Soopers/City Markets, Stater Bros, Food Max, Houchens/IGA/IGA Express/IGA Cross Roads, Kmart, 7-Eleven, United C-stores, Weis Markets, King Kullen, Dierbergs Markets, Hy-Vee Supermarket, WinCo Foods, Price Less Markets, Gristede’s Foods, Toot n Totem, Travel America, Walgreens, Smashburger, Bolla Markets, Shop-Rite Grocery, Natural Foods, Flash Foods and Associated Foods.

 

 

 
13

 

 

We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes over 85% Class “A” distributors and wholesalers such as Sysco, The Sygma Network, UNFI and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.

 

We have been in operation with our first product, Natural Cabana® Lemonade, for almost five years. We expanded this brand into Limeade, which started selling in January 2014, and into Coconut Water, which started selling in March 2014.

 

During 2017, our aggregate gross revenues compared to 2016 decreased by $368,972 to $368,442 (2016 - $737,414). During the last six months of 2016 we determined that it was necessary to re-structure how we organized our business to lower our overhead and increase our productivity so that we could, in the future, sell more product at a lower cost. In the short-term this, coupled with our cash crunch, impacted our ability to sell and deliver product which had a short-term negative impact on our sales. We believe that over the long-term these structural changes will enhance shareholder value. The impact of these decisions will be evident in all aspects of our business.

 

During 2017 gross revenues, on sale of 21,834 cases (2016 – 50,638 cases) of Natural Cabana® Lemonade/Limeade, declined by $345,460 to $260,311 (2016 - $605,771). In April 2016, we introduced our Lemonade/Limeade formula in a 16.9oz glass bottle package under a private label “Citrus tree” for Acme Markets. During 2017, we did not sell any of the 1,376 cases of product on hand.

 

During 2017 gross revenues, on sale of 9,252 cases (2016 – 13,346 cases) of Natural Cabana® Coconut Water, decreased by $23,512 to $108,132 (2016 - $131,644). During 2016, we introduced a smaller 11.2oz six-pack coconut water which some big box retailers find easier to sell.

 

During 2017 our aggregate net sales, after promotional allowances and slotting fees, decreased by $346,753 to $342,890 (2016 - $689,643). During 2017, promotional allowances and slotting fees, decreased by $22,219 to $25,552 (2016 - $47,772). As a percentage of gross sales, promotional allowances and slotting fees increased to 6.94% (2016 – 6.48%).

 

Cost of Sales

 

During 2017 cost of sales decreased by $222,227 to $241,355 (2016 – $463,582). This decrease was due to lower sales. As a percentage of net revenue, cost of sales increased to 70% from 67%. We expect cost of sales for the production of Natural Cabana® Lemonade/Limeade to remain stable throughout 2017 due to fairly stable raw material costs.

 

Gross Profit

 

During 2017, gross profit decreased by $124,525 to $101,535 (2016 - $226,061). This decrease was due to lower sales. As a percentage of net revenue, gross profit declined during 2017 to 30% from 31% during 2016. We expect gross profit for the sale of Natural Cabana® Lemonade/Limeade to remain stable throughout 2017 due to stable sales prices, promotional programs and raw material costs.

 

Expenses

 

Advertising, samples and displays

 

This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. During 2017 advertising, samples and displays expense decreased by $3,457 to $16,870 (2016 - $20,327).

 

Freight-out

 

During 2017, freight-out decreased by $29,429 to $27,971 (2016 - $57,400). On a per case basis, freight-out remained constant at $0.90 per case. We expect freight-out, on a per case basis, to decrease due to lower transportation costs due to smaller packaging and due to the move to warehouse direct from direct to consumer.

 

General and administrative

 

Overall, we have rationalized our overhead to align our expenses to a new strategic way of conducting our business utilizing more warehouse direct distribution and utilizing strong international distributors that distribute, market and promote our brands in their territories. This reduces the amount of overhead we require to operate our business.

 

 

 
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During 2017, general and administrative expenses remained the same at $231,408 (2016 - $230,070). Shareholder, broker and investor relations increased by $26,218 to $32,862 (2016 - $6,645). This was due to more investor relations work to improve the market for our common shares. Legal, professional and regulatory fees increased by $17,848 to $53,047 (2016 - $35,199) due to more legal fees associated with the financings closed during 2017. Travel decreased by $25,592 to $19,842 (2016 - $45,434) due to an overall effort to decrease this expense category and overhead in general.

 

Salaries and benefits and broker/agent’s fees

 

During 2017 salaries and benefits and broker/agent’s fees decreased by $139,825 to $141,394 (2016 - $281,219). During the latter part of 2015 and into 2016 we rationalized the number and placement of salespeople in the field. We concentrated on chain store listings and international expansion which is where we see the majority of our growth coming from. These areas of future growth are generally handled by our two senior officers. Going into the remainder of 2017 we expect this cost to be less than $140,000 per quarter.

 

Stock-based compensation

 

We did not incur any stock-based compensation expense during 2017. During 2016 we incurred $3,939 of stock-based compensation due to the value of vested stock options. We have no further unrecognized stock-based compensation cost to record.

 

Other Income (Expense)

 

During 2017, we incurred interest expense of $82,504 (2016 - $110,339). This was mainly made up of interest paid or payable to TCA of $36,014 and regular and default interest paid or payable to JSJ Investments of $38,298. During 2017, we incurred a change in fair value of derivatives of $594,369 (2016 – $nil) and accretion of discount on convertible debenture of $337,996 (2016 - $nil) .

 

Net Loss

 

Net loss for 2017 increased by $773,730 to $1,330,977 (2016 - $557,267). This increase was mainly due to a $310,161 increase of interest expense and a $594,369 increase in change in fair value of derivatives, which was partially offset by a $139,825 reduction in salaries during 2017. We expect our quarterly net losses to turn into quarterly net income during the middle of 2017 due to increased net sales and gross profit and reduced expenses as discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The discussion that follows is derived from our interim unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2017 (“2017”) and March 31, 2016 (“2016”).

 

Overview

 

During 2017, our cash position decreased by $157,064 to $2,596 and our working capital decreased by $23,453 to negative $1,711,648 from negative $1,688,195. As at March 31, 2017, our current assets consisted of: cash of $2,596; accounts receivable of $237,101; inventories of $661,018 (including finished product of $163,079, inventory deposit of $10,181 and raw materials of $497,939); and prepaid expenses of $15,550. Our current liabilities include accounts payable of $560,198, accrued expenses of $70,243, credit card indebtedness of $23,796, convertible debentures of $89,635, derivative liability of $206,906, and loans payable of $1,631,064.

 

The following table sets forth the major sources and uses of cash for 2017 and 2016:

 

   

2017

   

2016

 

Net cash used in operating activities

  $ (391,106 )   $ (470,398 )

Net cash used in investing activities

    -       (7,444 )

Net cash provided by financing activities

    234,042       371,518  

Net increase (decrease) in cash

  $ (157,064 )   $ 106,324  

 

Cash Used in Operating Activities

 

During 2017, we used cash of $391,106 in operating activities. This was made up of the net loss of $1,330,977 less adjustments for non-cash items such as: shares and options issued for services of $11,700, amortization and depreciation of $23,840, amortization to interest expense of debt issuance costs of $4,720, loss on change in fair value of derivative liability of $594,369 and accretion of discount on convertible debenture of $337,996; all totaling $972,625. After non-cash items, the net cash loss was $358,352 compared to a cash loss during 2016 of $415,487. Our net cash used in operating activities as a result of changes in operating assets and liabilities was $32,754 due to an increase in accounts receivable of $90,776, a decrease in inventories of $120,450, a decrease in prepaid expenses of $6,035 and a decrease in accounts payable and accrued expenses of $68,463.

 

 

 
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During 2016, we used cash of $470,398 in operating activities. This was made up of the net loss of $557,267 less adjustments for non-cash items such as: asset impairment of $5,085, amortization of debt issuance costs of $79,968, shares and options issued for services of $27,706, amortization and depreciation of $29,021; all totaling $141,780. After non-cash items, the net loss was $415,435. Our net cash used in operating activities as a result of changes in operating assets and liabilities was $54,911 due to an increase in accounts receivable of $174,387, a decrease in inventories of $38,536, an increase in prepaid expenses of $7,778 and an increase in accounts payable and accrued expenses of $88,718. We had a 16.9oz glass bottle inventory of more than 1,000,000 bottles on hand as at December 31, 2016. We produced 15,226 cases of 16.9oz lemonade/limeade on March 20, 2017 and used up 188,000 bottles costing $65,000. During 2017, the cost of these bottles used in production will not use up cash resources. We can produce another 72,000 cases with bottles on hand costing $300,000.

 

Cash Used in Investing Activities

 

During 2017, we did not use any cash in investing activities.

 

During 2016, we used cash of $7,444 in investing activities, which consisted of $6,269 spent on moulds and $1,175 spent on a trademark.

 

Cash Provided by Financing Activities

 

During 2017, we received $234,042 from financing activities, which consisted of $44,500 received pursuant to a Revenue Factoring Loan Agreement, $243,000 received pursuant to convertible notes, which were offset by $27,943 repayment of loans payable and $25,515 repayment of promissory notes.

 

During 2016, we received $371,518 from financing activities, which consisted of $430,860 received pursuant to the first tranche of Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement whereby we were approved for an additional $1,000,000 loan having the same terms as the initial $900,000 loan, which was offset by $59,342 repayment of loans payable.

 

Additional Capital

 

Our continuation as a going concern is dependent upon our ability to obtain necessary debt and/or equity financing to fund our growth strategy, pay debt when due, to continue operations, and to attain profitability. As at March 31, 2017 we had a working capital deficit of $1,711,648 and a stockholders’ deficit of $18,025,693. All of these factors combined raises substantial doubt regarding our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Since our inception through March 31, 2017, we have obtained funds primarily from the issuance of common stock and debt. Management believes this funding will continue, and is continually seeking new investors. Management believes the existing shareholders and lenders and prospective new investors will provide the additional cash needed to meet our obligations as they become due, and will allow the development of our core business.

 

We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our debt and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.

 

OFF BALANCE-SHEET ARRANGEMENTS

 

We have not had, and at March 31, 2017, do not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies considering current and forecasted economic conditions. While there are several significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

 

 

 
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Use of Estimates

 

The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates.

 

Intangible Assets

 

Intangible assets are comprised primarily of the cost of trademarks that represent our exclusive ownership of “Natural Cabana®”, used in connection with the manufacture, sale and distribution of our products. We do not amortize trademarks as they have an indefinite life; we amortize our website over a period of 5 years on a straight-line basis. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the three months ended March 31, 2017, the estimated fair values of trademarks and other intangible assets exceeded their respective carrying values.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

See Note 2 to our unaudited interim consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Robert E. Yates, who is both our chief executive officer and our chief financial officer, is responsible for establishing and maintaining our disclosure controls and procedures.  Disclosure controls and procedures are those procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2017. Based on that evaluation, it was concluded that our disclosure controls and procedures were ineffective as of December 31, 2016.

 

Changes in Internal Control over Financial Reporting

 

The Certifying Officers have also indicated that there were no changes in internal controls over financial reporting during the three months ended March 31, 2017.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties described in Item 1A of our 2016 Form 10-K.  In our judgment, there were no material changes in the risk factors as previously disclosed in Item 1A of our 2015 Form 10-K.

 

 

 
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

Securities Issued in Unregistered Transactions during the three months ended March 31, 2017

 

a)

On January 25, 2017, in connection with the Settlement Agreement described in Note 7 we issued 625,000 common shares having a fair market value of $6,425 for a registered broker dealer to act on our behalf;

 

b)

Between February 15, 2017 and March 31, 2017, a total of $144,089 of the Old Main debt was converted into 46,153,843 common shares at an aggregate average price of $0.003 per share;

 

c)

Between January 27, 2017 and March 31, 2017, a total of $250,738 of the Rockwell Capital Inc. Settlement Agreement Claim Amount was settled and converted into 78,459,168 common shares at an aggregate average price of $0.003 per share;

 

d)

On March 13, 2017, we issued 200,000 common shares to settle $2,000 of creditor debt. These shares were valued at $0.01 per common shares;

 

e)

On March 13, 2017, we issued 500,000 common shares at a fair value of $0.01 per share to a service provider pursuant to a Consultant Agreement. The fair market value of these shares, being $5,000 was charged to operations.

 

Subsequent Sales of Unregistered Securities

 

Subsequent to March 31, 2017, we issued the following securities in unregistered transactions:

 

a)

On April 19, 2017 GHS Investments, LLC (“GHS”), pursuant to an Assignment Agreement between us, the lender (See Note 8 (a)), and GHS, satisfied our obligations to the lender in the amount of $118,231 which included principal of $80,750 and accrued regular and default interest of $37,481. GHS has the right to convert this amount into our common shares at a 40% discount of the average of the three lowest traded prices in the prior 20 days. To date a total of $47,216 was converted into 20,800,000 common shares at an average aggregate price of $0.002. We have reserved 40,000,000 common shares for future issuances pursuant to a Reservation Letter dated April 17, 2017 of which a balance of 19,200,000 remains unused.

 

b)

On April 25, 2017 Old Main paid TCA $50,000 to paydown interest and principal owing to TCA. We also incurred $10,000 of costs relating to associated regulatory matters. Old Main subsequently converted $81,889 into 34,765,031 common shares at an aggregate price of $0.002 per share.

 

Subsequent to March 31, 2017 we issued a further 200,000 Series “A” Preferred Shares to our Chief Executive Officer for $800.

 

We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance of the shares listed above. The persons who acquired these securities were sophisticated investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons acquired these securities for their own accounts. The shares cannot be sold unless pursuant to an effective registration statement or an exemption from registration. No commissions were paid to any person in connection with the issuance of these securities.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

 

None. 

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 

 
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ITEM 6. EXHIBITS.

 

The following documents are included herein:

 

Exhibit No. 

Document Description 

2.1(1) 

Share Exchange Agreement dated February 15, 2011

2.2(1) 

Articles of Merger dated February 17, 2011

3.1(2) 

Articles of Incorporation as amended

3.2(2) 

Bylaws

31.1

Certification of Principal Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 *

31.2 

Certification of Principal Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 *

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 *

101 .INS

XBRL Instance Document*

101 .SCH

XBRL Taxonomy Extension Schema Document*

101 .CAL

XBRL Taxonomy Calculation Linkbase Document*

101 .DEF

XBRL Taxonomy Extension Definition Linkbase Document*

101 .LAB

XBRL Taxonomy Label Linkbase Document*

101 .PRE

XBRL Taxonomy Presentation Linkbase Document*

 

*Provided herewith 

 

(1)

Incorporated by reference from our report on Form 8-K filed February 22, 2011.

  

(2)

Incorporated by reference from our Registration Statement on Form SB-2 filed December 7, 2007.

  

 

 
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 SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

THE PULSE BEVERAGE CORPORATION 

 

 

 

 

 

 

Date: May 19, 2017

BY:

/s/ Robert E. Yates

 

 

Robert E. Yates, Principal Executive and Financial Officer

 

 

 

 

 

 

 

 

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