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| DNAX > SEC Filings for DNAX > Form 10-Q on 18-May-2012 | All Recent SEC Filings |
18-May-2012
Quarterly Report
Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
Company Overview and History
DNA Brands, Inc. (hereinafter referred to as "us," "our," "we," the "Company" or "DNA") was incorporated in the State of Colorado on May 23, 2007 under the name Famous Products, Inc. Prior to July 6, 2010 we were a holding company operating as a promotion and advertising company. Our current business commenced in May 2006 in the State of Florida under the name Grass Roots Beverage Company, Inc. ("Grass Roots"). Initial operations of Grass Roots included development of our energy drinks, sampling and other marketing efforts and initial distribution in the State of Florida.
Effective July 6, 2010, we executed agreements to acquire all of the remaining assets, liabilities and contract rights of DNA Beverage Corporation of Boca Raton, Florida ("DNA Beverage"), and 100% of the common stock of DNA Beverage's wholly owned subsidiary Grass Roots Beverage Company, Inc. ("Grass Roots") in exchange for the issuance of 31,250,000 shares of our common stock. As part of the terms of these transactions, our former President agreed to voluntarily redeem 19,274,400 common shares back to us. The share issuance represented approximately 94.6% of our outstanding shares at the time of issuance.
Additionally, our officers and directors resigned their positions with us and were replaced by the former management team of DNA Beverage. Mr. Darren Marks became a director and our President and CEO, and Mr. Melvin Leiner became a director and our Executive Vice President, Secretary and COO/CFO. As a result of this transaction we changed our name to DNA Brands, Inc. Our principal offices are located at 506 NW 77th Street, Boca Raton, Florida, 33487, telephone (954) 970-3826. Our website is www.dnabrandsusa.com.
Presented below are our results of operations for the three month periods ended March 31, 2012 and 2011.
Results Of Operations
Comparison of Results of Operations for the three month periods ended March 31, 2012 and 2011
Revenue
Sales for the three month period ended March 31, 2012 were $82,209, compared to $265,817 during the three month period ended March 31, 2011. Our sales decreased 69.1% compared to the corresponding period in the prior year. This decrease is attributable to our changing customer base as we continue to test our products through a variety of distribution channels. We recently initiated the transfer and integration of our Florida-based product distribution from third party providers, considered customers, into our wholly-owned subsidiary Grass Roots. In addition, we have engaged in conversation with a number of new brands seeking statewide distribution. We can provide no assurances that we will not experience sales fluctuations quarter over quarter as we continue to introduce our product into new markets and distribution channels.
We expect that our ongoing sales and marketing efforts, our increasing brand recognition and the quality awards that we have received for our products will continue to generate incremental revenues for us. However, our ability to achieve increased revenue is largely dependent upon our success in raising additional capital. No assurances can be provided that we will successfully raise the funding necessary to support our marketing efforts, or that these efforts will generate increased revenues, see "Liquidity and Capital Resources" below.
Gross margin
We calculate gross margin by subtracting cost of goods sold from sales. Gross margin percentage is calculated by dividing the gross margin by sales.
Gross margin for the three month period ended March 31, 2012 was $35,956, compared to $85,103 during the three month period ended March 31, 2011. Gross margin percentage for the three month period ended March 31, 2012 was 43.7%, compared to 32.0% during the three month period ended March 31, 2011. Our gross margin decreased 74.4% compared to the corresponding period in the prior year as a direct result of our significant decline in sales revenue. However, our gross margin percentage increased 11.7% compared to the corresponding period in the prior year as we sold a higher percentage of our beverage products than our meat snacks in the current year. Our beverage products yield higher gross margins than our meat snacks.
Since we are in a growth phase and continue to test varying price structures, a small number of sales and transactions can impact our gross margin percentage either positively or negatively. We do not believe that the gross margin percentages for the three month periods ended March 31, 2012 and 2011 are necessarily indicative of future results if applied to larger sales volumes.
Compensation and benefits
Compensation and benefits for the three month period ended March 31, 2012 was $397,813, compared to $480,335 during the three month period ended March 31, 2011. The decrease in compensation and benefits of $82,522, or 17.2%, compared to the corresponding period in the prior year is attributable to a reduction in the number of our employees and a reduction in sales commissions as a result of our lower sales revenue.
Our two executive officers have deferred cash payment of their salaries since 2008. For three month period ended March 31, 2012 and 2011, we recorded $62,500 in compensation expense related to these deferrals. At March 31, 2012, the aggregate value of these salary deferrals totaled $732,500 and was included in accrued liabilities on our consolidated balance sheet as of March 31, 2012.
General and administrative
General and administrative expenses for the three month period ended March 31, 2012 were $203,503, compared to $231,557 during the three month period ended March 31, 2011. General and administrative expenses are primarily comprised of rent, utilities, insurance, travel and entertainment, and other expenses. Collectively, these expenses decreased $28,054, or 12.1%, compared to the corresponding period in the prior year due to reduced spending for travel and other administrative activities in accord with our reduced revenue levels.
Professional and outside services
Professional and outside services for the three month period ended March 31, 2012 were $209,276, compared to $205,468 during the three month period ended March 31, 2011. Professional and outside services are comprised primarily of accounting fees, legal fees, investor and public relations expenses and other miscellaneous services. Professional and outside services remained relatively similar to the levels we experienced in the prior year period, increasing by only $3,808 or 1.5%.
Selling and marketing expenses
Selling and marketing expenses for the three month period ended March 31, 2012 were $118,642, compared to $219,455 during the three month period ended March 31, 2011. The decrease in selling and marketing expenses over the prior year period is directly attributable to the lack of working capital.
We intend to continue to increase the number of our distribution chains; allowing us to utilize a greater number of vehicles to expand our sales territories. Furthermore, we continue to monitor our sponsorship opportunities with higher profile athletes in an effort to establish a larger national presence. There can be no assurances that these opportunities will materialize or that any such expenditures will enable us to increase revenue.
Interest expense
Interest expense for the three month period ended March 31, 2012 was $604,483, compared to $9,065 during the three month period ended March 31, 2011. The increase in interest expense over the prior year period is primarily attributable to the non-cash amortization of loan discounts related to convertible debentures.
During the three months ended March 31, 2012, we issued an aggregate principal value of $599,950 in convertible debentures. These debentures were issued with beneficial conversion features or other inducements to the lender to provide funding to us. As a result, we have recorded discounts against these loans that will be amortized over their terms. During the three months ended March 31, 2012, we recorded $568,226 in non-cash interest expense relative the loan discounts on these notes.
Net loss
We incurred a net loss for the three month period ended March 31, 2012 of $1,501,099 or ($0.03) per basic and fully diluted share, compared to a net loss of $1,066,677, or ($0.03) per basic and fully diluted share during the three month period ended March 31, 2011. Since our inception, we have generated material operating losses. A significant portion of our losses are non-cash in nature; however, our losses remain substantial even after excluding those items.
The weighted average number of basic and fully diluted shares outstanding for the three month periods ended March 31, 2012 and 2011 were 46,166,217 and 35,031,697 shares, respectively. There were no dilutive equivalents included in our calculation of fully diluted shares during either period since their inclusion would be anti-dilutive due to our net loss per share.
Liquidity and Capital Resources
At March 31, 2012, we had $45,144 in cash and cash equivalents.
During the three month period ended March 31, 2012, we recorded a net loss of $1,501,099 and had negative cash flows of $634,035 from our operating activities. At March 31, 2012, we had a working capital deficit of $2,908,099 and a stockholders' deficit of $3,999,765. We have relied, in large part, upon debt and equity financing to fund our operations. These matters collectively raise a substantial doubt about our ability to continue as a going concern.
Net cash used in operations for the three month period ended March 31, 2012 was $634,035, compared to $778,082 during the three month period ended March 31, 2011. The improvement in net cash used in operating activities of $144,047 is primarily due to the improvement in our consolidated results of operations excluding non-cash expenses over the prior year period. We recorded a net loss of $1,501,099, as compared to $1,066,677 in the corresponding period of the prior year. After excluding our non-cash expenses, we realized a net cash improvement of $242,662 compared to our consolidated results over the prior year period. This is offset by the net cash used from the aggregate change in our operating assets and liabilities of $98,615 when compared to the prior year period.
No net cash was provided by or used in investing activities for the three month period ended March 31, 2012, compared to net cash provided of $3,398 during the three month period ended March 31, 2011.
Net cash provided by financing activities for the three month period ended March 31, 2012 was $679,179, compared to $790,659 during the three month period ended March 31, 2011. During the three months ended March 31, 2012, we raised $521,600 in new capital from debt sources, as compared to proceeds of $500,000 during the prior year period. We received proceeds from the issuance new equity, as described below, aggregating $158,920, as compared to $563,750 in the prior year period. Prior year efforts were reduced by $268,369 in net repayments of loans due to our officers.
In February 2011, we undertook a private offering of our convertible preferred stock whereby we offered up to 4,000,000 shares at an offering price of $0.25 per share to accredited investors. We sold an aggregate of 4,427,000 shares (including an over-allotment of 427,000 shares) and have received proceeds of $1,106,750 therefrom. This offering was closed to investors in the second quarter of 2011.
In February 2011, we issued a secured, convertible debenture to an existing shareholder in the principal amount of $500,000, which becomes due three years from the date of issuance. The debenture bears interest at 12% per annum and is payable quarterly beginning in May 2011. In addition to interest, as inducement for the maker to loan funds to us, the maker received 125,000 restricted shares of our common stock contemporaneously with the execution of the debenture. Further, we agreed to pay to the maker an annual transaction fee of $30,000 in equal installments on a quarterly basis beginning in May 2011. The balance due under the debenture is collateralized by all of our assets, including but not limited to inventory, receivables, vehicles and warehouse equipment. Lastly, we agreed to issue 750,000 shares of our common stock (the "Escrowed Shares"), in favor of the maker, to be held in escrow by a mutually agreeable party. In the event of failure to pay all or any portion of the principal and interest due under the debenture, including any and all rights to cure, the Escrowed Shares shall be released to the maker. The Escrowed Shares are not entitled to voting rights, or to receive any dividends if and when declared unless and until the Escrowed Shares are released.
In May 2011, we commenced a private offering of our common stock whereby we are offering up to 13,333,333 shares at an offering price of $0.45 per share, or $6,000,000, to accredited investors. We did not sell any shares under this offering dueing the three months ended March 31, 2012. As of the date of this report, we have sold an aggregate of 1,115,887 shares and have received proceeds of $527,150 therefrom.
In June 2011, we issued a convertible debenture to an existing shareholder in the amount of $125,000. The debenture bears interest at 12% per annum, which is payable in our common stock at the time of maturity. The debenture is convertible at any time prior to maturity into 150,000 shares of our common stock. This beneficial conversion feature was valued at $90,750, using Black-Sholes methodology, and recorded as a discount to the debenture. These costs will be amortized using the effective interest method over the term of the debenture and recorded as interest expense in our financial statements.
In July and August 2011, we issued a series of secured convertible debentures to accredited investors aggregating $275,000 in gross proceeds. All proceeds from these debentures were utilized solely for the purpose of funding raw materials and inventory purchases through the use of an escrow agent. The debentures bear interest at 12% per annum, payable in monthly installments. The debentures are convertible at any time prior to maturity at a conversion price equal to 80% of the average share price of the Company's common stock for the 10 previous trading days prior to conversion, but not less than $0.70. In addition, as further inducement for loaning the Company funds, the Company issued the lenders 68,750 restricted shares of its common stock and 137,500 common stock warrants exercisable at $1.25 per share.
In January 2012, the Company issued 6,000 shares of convertible, preferred stock for net proceeds of $6,000. The preferred shares are convertible into common stock at a rate no lower than $0.30, or 3.33 shares of common stock to 1.00 share of preferred stock. These shares were immediately converted into 20,000 shares of the Company's common stock.
In February 2012, we issued a convertible debenture to an existing shareholder in the amount of $75,000. The debenture bears interest at 12% per annum, which is payable in our common stock at the time of maturity. The debenture is convertible at any time prior to maturity into 280,000 shares of our common stock. As further inducement, we issued the lender 280,000 common stock warrants exercisable at $1.50 per share. If unexercised, the warrants will expire on January 31, 2017. Using the Black-Scholes model, the warrants were valued at $63,620 and recorded as a discount to the principal amount of the debenture. This discount will be amortized using the effective interest method over the term of the debenture and recorded as interest expense in our financial statements.
In February and March 2012, we converted $524,950 of loans payable to our officers into convertible debentures. These debentures were offered by our officers to certain accredited investors and the proceeds therefrom were deposited with the Company. The debentures have no maturity date and bear no interest. The debentures are convertible at any time into 3,499,667 shares of our common stock. We determined that this term created a beneficial conversion feature. Using the Black-Scholes model, the beneficial conversion feature was valued at $524,950, the ceiling of its intrinsic value. Due to the nature of the debentures, the full value of the beneficial conversion feature was immediately recorded as interest expense in our financial statements.
Until we are successful in obtaining additional equity capital we will likely continue to rely upon related-party debt, issuance of additional debentures from our shareholders or equity financing in order to ensure the continuing existence of our business. We were indebted to our management in the amounts of $1,225,038 at March 31, 2012. Additionally we are working on generating new sales from additional retail outlets, distribution centers or through sponsorship agreements, and allocating sufficient resources to continue with advertising and marketing efforts. There can be no assurances that these efforts will be successful. If these efforts are not successful, it could have a material adverse impact.
Trends
Our emphasis over the next twelve months will continue to focus on building the brand recognition of our products and increasing sales revenue. We have been actively involved in discussions with potential investors to provide us with additional equity funding. Assuming we are successful in raising new capital funding, we will continue to increase our expansion efforts by completing the build out of Florida to achieve at least 60% market penetration and intensify our marketing efforts in Southern California and Wisconsin. Additionally, we intend to expand our operations into New York and Texas. The states of California, Florida, New York and Texas represent four of the top five convenience store outlets within the United States.
Increasing brand awareness will be initiated through a significant public relations and advertising program, including news releases, demographically targeted cable television advertising, increased "cans in hand" sampling, events and billboard advertisements. We will look to continue to develop and expand the areas where our products are currently distributed through the enhanced program as well.
In October 2011, we announced that we intend to expand our operations at our Grass Roots subsidiary by expanding our operations to represent additional brands. Our goal at Grass Roots is to provide distribution opportunities to beverage and snack companies that are having difficulty establishing a presence in the State of Florida. We believe that this expansion of operations will be successful because distribution dominated by the Coke and Pepsi systems are off limits and closed to these brands. Complicating the issue is that fact that there are few "third tier" distributors in Florida. Many of the state's small distributors have either gone out of business or were acquired by large beer houses. In a state the size of Florida the lack of independents makes full coverage almost an impossible task. Grass Roots Beverages is an authorized vendor for several national chain retailers, including Walgreens and Circle-K, and has an approximate total of 3,000 retail accounts which we believe makes us a viable and attractive alternative to those brands seeking to obtain a foothold in Florida. There can be no assurances that we will be successful and generate incremental revenue or profits with this expansion.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three month period ended March 31, 2012.
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