Statements of
Operations
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Gross Sales
|
$
|
793,316
|
|
$
|
745,156
|
|
$
|
48,160
|
|
Less: Promotional allowances and slotting fees
|
|
(50,772
|
)
|
|
(40,585
|
)
|
|
(10,187
|
)
|
Net Sales
|
|
742,544
|
|
|
704,571
|
|
|
37,973
|
|
Cost of Sales
|
|
507,809
|
|
|
491,041
|
|
|
16,768
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
234,735
|
|
|
213,530
|
|
|
21,205
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Advertising, samples and displays
|
|
21,090
|
|
|
18,993
|
|
|
2,097
|
|
Asset impairment
|
|
5,085
|
|
|
-
|
|
|
5,085
|
|
Freight-out
|
|
78,400
|
|
|
74,845
|
|
|
3,555
|
|
General and administration
|
|
243,139
|
|
|
309,824
|
|
|
(66,685
|
)
|
Salaries and benefits and broker/agent’s fees
|
|
330,010
|
|
|
316,263
|
|
|
13,747
|
|
Stock-based compensation
|
|
3,939
|
|
|
-
|
|
|
3,939
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
681,663
|
|
|
719,925
|
|
|
(38,262
|
)
|
Net Operating Loss
|
|
(446,928
|
)
|
|
(506,395
|
)
|
|
59,467
|
|
Total Other Expenses (Income)
|
|
(110,339
|
)
|
|
(442
|
)
|
|
(109,897
|
)
|
Net Loss
|
$
|
(557,267
|
)
|
$
|
(506,837
|
)
|
$
|
(50,430
|
)
|
Net
Sales
During 2016 our
overall gross revenues, including all SKU’s, increased by $48,160 to $793,316
(2015 - $745,156). This was mainly due to starting up our own Southern
California distributorship, Natural Cabana Distribution Inc., in February,
2016. Through this subsidiary we began selling our Natural Cabana®
Lemonades/Limeades and Coconut Waters. On April 30, 2016 we shut this operation
down and moved it over to a new, well established independent distributor in
Southern California. In February and March our gross sales through this
distributorship was $55,902.
During 2016
gross revenues, on sale of 50,638 cases (2015 – 55,153 cases) of Natural
Cabana® Lemonade/Limeade, declined by $32,248 to $605,771 (2015 - $638,019).
During 2016
gross revenues, on sale of 13,346 cases (2015 – 10,538 cases) of Natural
Cabana® Coconut Water, increased by $24,976 to $131,644 (2015 - $106,668).
During 2016
gross revenues, on sale of nil cases (2015 – 17 cases) of PULSE® Heart &
Body Health, decreased by $469 to $nil (2015 - $469). We intend on repackaging
PULSE Heart & Body Health into a more attractive package and re-introducing
this brand into the Southern California marketplace and China.
During
2016 our overall net sales, after promotional allowances and slotting fees,
increased by $37,973 (5.4%) to $742,544 (2015 - $704,571). During 2016,
promotional allowances and slotting fees, increased by $10,187 to $50,772 (2015
- $40,585). As a percentage of gross sales, promotional allowances and slotting
fees increased to 6.4% (2015 – 5.45%). During 2016 we increased our
accrual for promotional programs due to past experience.
11
Overall our net
sales were less than planned. We were delayed in switching over to our new
coconut water supplier, and as a result net sales of
coconut water did not increase as quickly as planned. The majority of our
existing distributors, and recently secured retail chains, delayed ordering
until we received this product in early December, 2015. Additionally, the
remainder of new accounts secured did not order coconut water until March and
April, 2016 so as to kick off new displays in cold sections leading up to the
warmer months. We introduced a smaller 11.2oz six-pack coconut water which some
big box retailers find easier to sell; this should increase net sales in 2016. We
expect overall net sales to increase as we expand our markets internationally
into Mexico, China and Canada and as we introduce a 16.9oz control branded
lemonade/limeade in April, 2016. Our China distributor began
ordering Lemonade/Limeade in September and our Mexico distributor has shipped
its first order of 15,000 cases of Natural Cabana® Coconut Water, which sale
was recorded in 2015. Due to changes in food laws in Mexico during the process
of shipping product from Asia, we must overlay labels with a new information
label. This has delayed the reorder in Mexico until the second quarter of 2016.
Our distributor will initially distribute Natural Cabana® Coconut
Water to more than 3,000 stores in Mexico including: Soriana, 7-Eleven,
Calimax, Circlulo K, Dax, Smart & Final, and Farmacia Roma. We are planning
to introduce a Natural Cabana® Lemonade/Limeade (“Limonada”) in a 16.9oz glass “PULSE
bottle” format for the Mexico market later in 2016.
We introduced our Natural Cabana® Lemonade in 2012 and since then
have developed a multi-national comprehensive distribution system through more than
150 distributors in 48 States, Canada, Mexico, Panama, Bermuda and Ireland. By
establishing a multi-national distribution system, we have secured, in four
years, more than 20,000 listings for our Lemonades/Limeades and more than 5,000
listings for our Coconut Water. Some of the more notable regional and national
grocery and convenience chain stores are: Albertsons/Safeway, Walmart, Kroger/Fred
Meyer/Ralphs, Kmart, Circle K, Walgreens, 7-Eleven, Whole Foods, H-E-B, Hy-Vee
Supermarket, Save Mart Supermarkets, Hannaford, Food City, Raley's Supermarkets,
Price Chopper Supermarkets, WinCo Foods, and Gelson’s Supermarket.
We have been in
operation with our first product, Natural Cabana® Lemonade, for almost four
years. We expanded this brand into Limeade, which started selling in January,
2014, and into Coconut Water, which started selling in March, 2014.
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 such as Sysco, The Sygma
Network, UNFI and distributors for Anheuser Busch, Miller Coors, Pepsi,
Coca-Cola, RC/7-Up and Cadbury Schweppes.
Due
to seasonality, our first quarter is generally slow to develop due to timing of
orders which generally start in April and May.
Cost
of Sales
During
2016 cost of sales increased by $16,768 to $507,809 (2015 – $491,041). As a
percentage of net revenue, cost of sales for 2016 decreased 1.3% to 68.39% (2015
– 69.69%). The increase in cost of sales is due to the distributorship we
started in February, 2016; cost of sales was $44,227 (2015 - $nil). We expect
cost of sales for the production of Natural Cabana® Lemonade/Limeade to remain
stable throughout 2016 due to fairly stable raw material costs. We expect cost
of sales for Natural Cabana® Coconut Water to significantly reduce due to the
lower cost of coconut water sourced from our new Asian manufacturer and lower
ocean-shipping costs.
Gross
Profit
During
2016 gross profit increased by $21,204 to $234,735 (2015 - $213,530). Gross
profit for 2016, as a percent of net sales, increased 1.3% to 31.61% (2015 – 30.31%).
A portion of this increase, $8,675, was due to the distributorship we started
up in February, 2016. We expect gross profit for the sale of Natural Cabana®
Lemonade/Limeade to remain stable throughout 2016 due to fairly stable sales
prices, promotional programs and raw material costs. We expect gross profit for
Natural Cabana® Coconut Water to significantly increase due to the lower cost
of coconut water sourced from our new Asian manufacturer and lower
ocean-shipping costs. We also expect an increase in gross profit as we
re-introduce PULSE®, a higher margin brand. We expect all of these factors to
have a positive effect on our gross profit.
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 2016
advertising, samples and displays expense increased by $2,097 to $21,090 (2015
- $18,993). As a percentage of net sales, this expense increased to 2.84% (2015
– 2.7%). We
reduced this cost due to less display racks and barrels being needed in 2015.
We expect this expense to increase in proportion to increases in sales mainly
due to the expansion of Natural Cabana® Coconut Water and the re-introduction
of PULSE® Heart & Body Health functional beverages and due to an overall
increase in distribution reach both in the United States and internationally.
Asset
impairment
During
2016 our asset impairment expense was $5,085 due to the expiry of old coconut
water (2015 - $nil).
12
Freight-out
During
2016, freight-out increased by $3,555 to $78,400 (2015 - $74,845). On a per
case basis, excluding $21,000 of fleet expense incurred in our new distribution
business which closed April 30, 2016, freight-out decreased by $0.24 per case
to $0.90 (2015 - $1.14). We expect freight-out, on a per case
basis, to decrease due to lower transportation costs in the United States.
Additionally, there will be limited freight-out charges associated with
delivering our products to our Mexico distributor at the ports of entry in
Mexico and our China distributor receiving our products at the port of exit in
the United States.
Contribution
to fixed expenses
Beverage
companies are often compared on a contribution to fixed expense basis which
includes gross profit less variables such as advertising, samples and displays
and freight-out. This line item is not GAAP and therefore it is not disclosed
separately in our financial statements. During 2016
contribution to fixed expense increased by $15,553 to $135,245 (2015 - $119,692).
As a percentage of net sales, this item increased 1.22% to 18.21% (2015 – 16.99%).
Excluding the negative contribution of the distribution business of $13,089
contribution to fixed expense increased by $28,642 to $148,334 and, as a
percentage of net sales, increased 4.52% to 21.51%. We expect contribution to
fixed expenses to increase due to the reasons disclosed under each item above.
General
and administrative
General and
administration expenses for 2016 and 2015 consist of the following:
|
|
2016
|
|
|
2015
|
|
|
Increase
(Decrease)
|
|
Advisory, board and consulting fees
|
$
|
26,250
|
|
$
|
30,000
|
|
$
|
(3,750
|
)
|
Amortization and depreciation
|
|
29,021
|
|
|
29,297
|
|
|
(276
|
)
|
Legal, professional and regulatory fees
|
|
42,781
|
|
|
60,206
|
|
|
(17,425
|
)
|
Office, rent and telephone
|
|
81,675
|
|
|
59,796
|
|
|
21,879
|
|
Shareholder, broker and investor relations
|
|
6,645
|
|
|
63,522
|
|
|
(56,877
|
)
|
Travel, meals and trade shows
|
|
56,767
|
|
|
67,003
|
|
|
(10,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
243,139
|
|
$
|
309,824
|
|
$
|
(66,685
|
)
|
During
2016, general and administrative expenses decreased by $66,685 to $243,139 (2015
- $309,824). Shareholder, broker and investor relations decreased by $56,877 to
$6,645 (2015 - $63,522). In 2015 a total of $57,500 was the value of common
shares issued to a consultant. Starting in April, 2016 we hired an investor
relations consultant at a rate of $4,000 per month plus 83,333 common shares. Legal,
professional and regulatory fees decreased by $17,425 to $42,781 (2015 -
$60,206) due to a reduction in accounting fees paid in Mexico and due to the
balance of the 2015 audit fee not billed. Travel, meals and trade shows
decreased by $10,236 to $56,767 (2015 - $67,003) due to an overall effort to
decrease this expense category and overhead in general. Office, rent and
telephone increased by $21,879 to $81,675 (2015 - $59,796) due to warehouse
rent of $9,000 paid for our new distributor in Southern California and due to
administration/collection fees of $12,364 associated with the TCA loan paid to
TCA.
Salaries and benefits and broker/agent’s fees
During
2016 salaries and benefits and broker/agent’s fees increased by $13,747 to $330,010
(2015 - $316,263). 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. Offsetting these
decreases were salaries and benefits paid for our distributorship staff,
totalling $48,791, and due to fees paid to a new corporate director/officer
totalling $25,000. These two costs will not be incurred going forward as, on
April 30, 2016 we closed the distributorship and the director/officer resigned.
Without these two one-time costs our salaries and benefits expense would have
decreased by $60,044 to $256,219. Going into the remainder of 2016 we expect
this cost to be less than $225,000 per quarter.
Stock-based
compensation
During
2016 we incurred $3,939 of stock-based compensation due to the value of vested
stock options (2015 - $nil). We have no further unrecognized stock-based
compensation cost to record.
Other
Income (Expense)
During
2016 we incurred interest expense of $110,339 (2015 - $442, net of interest
income of $304). During 2016 we accrued an additional $4,904 on $145,000 of
short-term bridge loans received in September, 2015 and we incurred interest of
$24,728 on our TCA loan balance. We also incurred interest of $737 associated
with credit card indebtedness during the year. Additionally, associated with
the closing of the Credit Facility discussed in Note 6, we incurred $525,370 of
debt issuance costs which is being amortized to interest expense over the term
of the loan to November 6, 2016. A total of $47,961 was charged to interest
expense during the year ended December 31, 2015 and $79,970 was charged to
interest expense during the quarter ended March 31, 2016.
13
Net
Loss
Net
loss for 2016 increased by $50,430 to $557,267, or $0.01 per share, compared
with a net loss for 2015 of $506,837, or $0.01 per share. This increase
was due to TCA fees and interest totalling $119,955 (2015 - $nil) and due to
the net loss incurred in our start-up distributorship in Southern California of
$74,897. Excluding these costs our net loss for 2016 would have decreased by
$144,474 to $362,363. We expect our monthly net losses to turn into monthly net
income during the middle of 2016 due to increased net sales and gross profit
and reduced expenses as discussed above.
Net
losses to date, for the most part, continue to be the result of a concentrated
effort to establish and increase brand awareness and to establish and improve
upon our extensive nationwide and international distribution systems. Our net
losses are also due to the development of our brands including: PULSE® Heart
& Body Health, Natural Cabana® Lemonade and Limeade and Coconut Water and
to secure distribution and chain store listings.
Non-GAAP
financial information not disclosed in the financial statements
During
2016 our net loss, after adjustments to bring GAAP to net loss before
corporation income taxes, depreciation and amortization, stock-based
compensation and one-time charges (Adjusted EBITDA), increased by $75,363 to $495,404
(2015 - $420,040).
LIQUIDITY
AND CAPITAL RESOURCES
The discussion
that follows is derived from our interim unaudited Condensed Consolidated
Balance Sheets as of March 31, 2016 and December 31, 2015 and the interim unaudited
Condensed Consolidated Statements of Operations and Cash Flows for the three
months ended March 31, 2016 “2016”) and 2015 (“2015”).
Overview
During 2016 our cash
position decreased by $106,324 to $324,946 and our working capital decreased by
$507,984 to negative $254,334) from $253,650. As at March 31, 2016, our
working capital consisted of: cash
of $324,946; accounts receivable of $560,850; inventories of $945,291
(including finished product of $290,157 and raw materials of $655,133); and prepaid
expenses of $23,238. Our
current liabilities include accounts payable of $451,279, accrued expenses of $373,094,
and other current amounts due of $230,970, credit card indebtedness of $21,058
and loans payable of $1,032,258.
The
following table sets forth the major sources and uses of cash for our first
quarter 2016 and 2015:
|
2016
|
|
2015
|
|
Net
cash used in operating activities
|
|
($470,398)
|
|
|
($457,081)
|
|
Net
cash used in investing activities
|
|
(7,444)
|
|
|
(20,962)
|
|
Net
cash provided by financing activities
|
|
371,518
|
|
|
860,000
|
|
Net
increase (decrease) in cash
|
|
($106,324)
|
|
|
$381,957
|
|
Cash
Used in Operating Activities
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 (2015 - $nil), amortization of debt issuance costs of
$79,968 (2015 - $nil), shares and options issued for services of $27,706 (2015
- $57,500), amortization and depreciation of $29,021 (2015 - $29,297); all
totaling $141,780 (2015 - $86,797). After non-cash items, the net loss was $415,435
(2015 - $420,040). Our net cash used in operating activities as a result of
changes in operating assets and liabilities was $49,049 (2015 - $37,041) due to
an increase in accounts receivable of $174,387 (2015 - $89,870), a decrease in
inventories of $38,536 (2015 – decrease of $80,078), an increase in prepaid
expenses of $7,778 (2015 – decrease of $17,554) and an increase in accounts
payable and accrued expenses of $88,718 (2015 – decrease of $54,353).
Cash
Used in Investing Activities
During
2016 we used cash of $7,444 (2015 - $20,962) in investing activities. In 2016 a
total of $6,269 was spent on moulds and $1,175 was spent on a trademark. In
2015 a total of $11,459 was spent on moulds and dies and $5,500 on a delivery
van for Northern California. We spent $4,003 on formulation and testing
associated with bringing our PULSE® Heart & Body Health brand into
commercial production.
14
Cash
Provided by Financing Activities
On March 22, 2016, we entered into Amendment
No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended
Credit Facility”) whereby we were approved for an additional $1,000,000 loan
having the same terms as the initial $900,000 loan. In March 2016 we received a
first tranche of $430,860, net of $69,140 of closing costs.
On
March 27, 2015 we sold 10,050,000 Units at $0.10 per Unit for cash proceeds of
$1,005,000 of which $100,000 was received during the year ended December 31,
2014. On May 27, 2015 we sold an additional 750,000 Units at $0.10 per Unit for
cash proceeds of $45,000, and debt settlement of $30,000. Each Unit consisted
of one share of restricted common stock and one-half of a warrant. Each whole
warrant allows the holder to purchase one additional share at a price of $0.20
per share at any time between March 10, 2016 and May 27, 2016.
Additional Capital
As of March 31, 2016, we had cash of $324,946 and negative
working capital of $254,334. On
March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving
Credit Facility Agreement (the “Amended Credit Facility”) whereby we were
approved for an additional $1,000,000 loan having the same terms as the initial
$900,000 loan. The Amended and Restated Senior Secured Revolving Convertible
Promissory Note matures November 6, 2016 unless extended by the Lender. We
received $430,860, net of $69,140 of closing costs, on March 22, 2016 and will
receive a further $250,000 once we collect an account receivable from our
Mexico distributor. A further $250,000 will be received once we have met
certain other performance criteria. In connection with this additional loan, we
agreed to issue 10,558,069 shares of our restricted common stock to the Lender
as an Advisory Fee. Notwithstanding the above, the Lender is restricted from
receiving these shares to the extent that, after giving effect to the receipt
of the shares, the Lender would beneficially own more than 4.99% of our common
stock. Any shares not issued as a result of this limitation will be issued at a
later date, and from time to time, when the issuance of these will not result
in the Lender beneficially owning more than 4.99% of our common stock. We have
the right to purchase these shares by paying $350,000 to the Lender on or
before September 22, 2016.
These additional sources of cash will allow us to meet
our working capital needs through to the middle of 2017. 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 credit facility 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.
As of May 13, 2016, we believe that our cash on hand,
available working capital and financing alternatives will be sufficient to meet
our anticipated cash needs through the first half of 2017 and is sufficient to
alleviate the uncertainties relating to our ability to successfully execute on
our business plan and finance our operations through the middle of 2017. Our
financial statements for the periods presented were prepared assuming we will
continue in operation for the foreseeable future and will be able to realize assets
and settle liabilities and commitments in the normal course of business.
OFF
BALANCE-SHEET ARRANGEMENTS
We have not had,
and at March 31, 2016, do not have, any off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our discussion
and analysis of our financial condition and results of operations are based
upon our financial statements that have been prepared in accordance with
generally accepted accounting principles in the United States of America
("US GAAP"). This preparation requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and the disclosure of contingent assets and liabilities.
US GAAP provides the framework from which to make these estimates, assumption
and disclosures. We choose accounting policies within US GAAP that management
believes are appropriate to accurately and fairly report our operating results
and financial position in a consistent manner. Management regularly assesses these
policies in light of current and forecasted economic conditions. While there
are a number of significant accounting policies affecting our financial
statements, we believe the following critical accounting policies involve the
most complex, difficult and subjective estimates and judgments:
Use of Estimates
The preparation of financial statements in accordance
with United States generally accepted accounting principles requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses in the reporting period. We regularly evaluate estimates
and assumptions related to the useful life and recoverability of long-lived
assets, stock-based compensation, and deferred income tax asset valuation
allowances. We base our estimates and assumptions on current facts, historical
experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments 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.
15
Intangible
Assets
Intangible
assets are comprised primarily of the cost of formulations of our products and
trademarks that represent our exclusive ownership of Natural Cabana®, PULSE®
and PULSE: Nutrition Made Simple®, all used in connection with the manufacture,
sale and distribution of our beverages. We evaluate our trademarks annually for
impairment or earlier if there is an indication of impairment. If there is an
indication of impairment of identified intangible assets not subject to amortization,
we compare the estimated fair value with the carrying amount of the
asset. An impairment loss is recognized to write-down the intangible
asset to its fair value if it is less than the carrying amount. The fair value
is calculated using the income approach. However, preparation of estimated
expected future cash flows is inherently subjective and is based on our best
estimate of assumptions concerning expected future conditions. Based on our
impairment analysis performed for the three months ended March 31, 2016, 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.