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DRHCE > SEC Filings for DRHCE > Form 10-Q on 25-Jun-2013All Recent SEC Filings

Show all filings for DETHRONE ROYALTY HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for DETHRONE ROYALTY HOLDINGS, INC.


25-Jun-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

In February 2012, the Company approved a 31.25 for 1 forward split of its common stock effective March 17, 2012. All share and per share disclosures give retroactive effect to this forward split.

Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of and for the fiscal years ended July 31, 2012 and 2011 that states that our lack of resources causes substantial doubt about our ability to continue as a going concern.

Operations

We were founded as an unincorporated DBA in February 1997 and were incorporated as a C corporation under the laws of the State of Nevada on October 11, 2010. The incorporation effort included the Company issuing 10,000,000 shares of common stock to Patricia G. Skarpa, who founded and managed the business which had been operating continuously as a DBA since February 1997, and 300,000 shares to Hallie Beth Skarpa, our other director, for services rendered. These services involving the incorporation planning were valued at $10,300. Hallie Beth Skarpa is the daughter of Patricia G. Skarpa. The day-to-day operations of the Company did not change as a result of the change in legal structure.

On January 10, 2012, the Company incorporated a wholly-owned subsidiary, TO Sports Innovation, Inc. ("TO"), in Nevada. TO was inactive until March 15, 2012. Its name was changed to Dethrone Beverage, Inc. ("DB").

In April 2012, DB entered into an exclusive license agreement with Dethrone Royalty, Inc. giving DB the right to use the Dethrone trademark worldwide in connection with the manufacture and sale of sports performance or energy drinks along with any other non-alcoholic beverage under the trade name, Dethrone Beverages.

The License Agreement with Dethrone Royalty, Inc. is for five years and requires payments as follows:

Year Royalty
1 12% of Gross Profit
2 $50,000 plus 8% of Gross Profit 3 $100,000 or 6% of Gross profit, whichever is higher 4 $150,000 or 6% of Gross profit, whichever is higher 5 $200,000 or 6% of Gross profit, whichever is higher

The License Agreement with Dethrone Royalty, Inc. specifies minimum levels of sales which, if not attained by DB, gives Dethrone Royalty, Inc. the right to terminate the License Agreement. These minimums are as follows:

Year Minimum Sales
1 $ -0-
2 $ 3,000,000
3 $ 6,000,000
4 $ 9,000,000
5 $ 12,000,000

The License Agreement with Dethrone Royalty, Inc. also requires DB to maintain various liability insurance coverage.

The Company's officers have formulas that will be used for the initial products that are planned. They have undertaken efforts to raise the financing necessary to manufacture the initial products using outside contractors and implement marketing programs. The initial expenditures are being used for:

Production of bottles, labels and caps,

Purchase of inventory needed for beverage content,

Marketing materials,

Travel and business expenses, and

Shipping costs of our first orders.

Spinoff and Related Matters

On March 26, 2012, the Company entered into a Spinoff Agreement with Patricia G. Skarpa and Hallie Beth Skarpa, who were its officers and directors, as well as its largest shareholders, under which the Company agreed to sell all of the assets relating to the segment of its business that provided commercial cleaning services to office buildings in exchange for all of the liabilities, as defined, of the commercial cleaning business and the return by Patricia G. Skarpa and Hallie Beth Skarpa of an aggregate of 265,625,000 shares of the Company's common stock. As a result of the Spinoff Agreement the Company ceased to be engaged in providing commercial cleaning services to office buildings, and the commercial cleaning operations became a discontinued operation for financial reporting purposes.

On March 26, 2012, Patricia G. Skarpa and Hallie Beth Skarpa entered into agreements with Toby McBride and Michael Jay Holly under which they agreed to sell 28,125,000 shares of common stock to each (or an aggregate of 56,250,000 shares).

Concurrent with the execution of the Spinoff Agreement described above, the Board of Directors elected Toby McBride and Michael J. Holly as Directors. Mr. McBride was also appointed as President and Chief Executive Officer, and Mr. Holly was appointed Vice President and Secretary.

Messrs. Holley and McBride each devote 100% of their time to us.

Upon electing Messrs. McBride and Holly to the Board of Directors, Patricia G. Skarpa and Hallie Beth Skarpa each resigned their positions as officers and directors effective immediately. The resignations of Patricia G. Skarpa and Hallie Beth Skarpa were not in connection with any known disagreement with us on any matter.

Current Status

We have begun distribution of our product as of first calendar quarter of 2013, distributing 21 pallets. Currently we have two flavors of one product and will distribute in California to convenience stores, gas stations, grocery stores and gyms. We currently work with a beverage manufacturer in Florida and several companies for packaging materials. Our initial purchase required payment upfront. Thereafter we will get net 30 day payment terms. We will ship product to two distributors with net 30 day terms.

We have also entered into an agreement with Dethrone Royalty, Inc. which:

Enables us to change our corporate name to Dethrone Royalty Holdings, Inc. ("DRH"), which we did in August 2012.

Have the right to match any offer that Dethrone Royalty, Inc. receives to be acquired.

Dethrone Royalty, Inc. and the Company will create links to each other's websites.

Dethrone Royalty, Inc. will produce and distribute lines of shirts/clothing for each sports figure signed as endorsers by the Company and market the shirts through its normal distribution channels. The Company will receive commissions equal to 12.5% of the net sales generated by these shirts.

We have also entered into contracts with several professional sports personalities (Jonathan Quick, Aldon Smith Haloti Nagata and Taj Gibson) to represent us by endorsing our products. All contracts cover three years and require us to issue an aggregate of 3,500,000 restricted shares of common stock over the lives of the contracts plus up to an additional 1,800,000 contingent shares based on performance criteria. We have recorded an aggregate Marketing Expense of $188,000 relating to the shares that are issuable for Year One of each of the agreements.

The Company is also negotiating an agreement with the agent who introduced the sports figures to the Company and may issue an additional 750,000 restricted shares of common stock to that agent and has letters of intent with additional sports figures (Pablo Sandavol, Matt Mulson, Kevin Shattenberg and Mike Goldberg) for endorsement agreements. There are no assurances that agreements described in letters of intent will result in executed contracts.

Nine Months Ended April 30, 2013 compared with Nine Months Ended April 30, 2012

                                                     2013           2012

           REVENUES                              $     43,303     $       -
           COST OF GOODS SOLD                          35,499             -
           GROSS PROFIT                                 7,804             -

           OPERATING EXPENSES                       1,280,702        21,839

           OTHER INCOME (EXPENSE)
            Consulting Income                           9,980
            Interest expense and finance costs       (158,125 )           -

           LOSS FROM CONTINUING OPERATIONS         (1,421,043 )     (21,839 )

Revenue

Revenue increased by $43,303 for the nine months ended April 30, 2013, compared to $0 for the nine months ended April 30, 2012. This increase in revenues was the result of the company commencing substantive operatiosn.

Operating Expenses

Operating expense increased by $1,258,863 to $1,280,702 for the nine months ended April 30, 2013, compared to $21,839 for the nine months ended April 30, 2012. This decrease in G&A expenses was primarily due to the commencement of substantive operations and share based compensation.

Marketing - for the nine months ended April 30, 2013 includes $188,000 relating to the shares that are issuable for Year One of each of the agreements with the four athletes who have agreed to endorse our products.

Compensation - all compensation has been paid to Messrs. McBride and Holley.

Interest expense and finance costs consist of $148,958 of amortization of deferred loan costs in connection with the issuance of the 2,500,000 shares associated with receiving a loan for $100,000 and interest of $4,167 on that loan.

Liquidity

Private capital has been sought from former business associates of our two officers or private investors referred to us by those business associates.

On May 4, 2012, the Company sold 400,000 newly-issued restricted shares of common stock for $50,000 ($0.125 per share).

In August 2012, the Company raised $12,000 for 120,000 restricted shares of common stock, and $100,000 for 670,000 restricted shares of common stock. The stock certificate for these shares was issued in November 2012.

On November 15, 2012, the Company entered into a Senior Secured Promissory Note (the "Note") with an unaffiliated party (the "Third Party") under which the Company received a one-year loan with a principal balance of $100,000. The loan bears interest at 20% per annum with interest payments due quarterly. In addition, the Company issued 2,500,000 shares of restricted common stock to the lender and Messrs. Holley and McBride pledged their 56,250,000 shares of the Company's common stock as collateral. If the Company goes into default of the provisions of the loan, it becomes convertible into the Company's common stock at a price of $.001 per share (or up to 100 million shares). If a default occurs, the lender will have the ability of becoming the controlling shareholder of the Company. The Company recorded a deferred loan cost in the amount of $325,000 in connection with the issuance of the 2,500,000 shares and has reflected amortization of those costs in the form of interest expense in the amount of $148,958 for the nine months ended April 30, 2013. On June 20, 2013, the Company and the Third party entered into an Amended and Restated Senior Secured Convertible Promissory Note (the "Amended Note") which amended certain terms of the Note. Pursuant to the Amended Note, the Company's repayment of the principal balance of the Amended Note is secured by all the assets of the Company. In addition, the provisions of the Note whereby Mssrs. Holley and McBride pledged 56,250,000 of their shares of common stock of the Company were removed.

At any time after the date of issuance and until the Amended Note is no longer outstanding, the Amended Note shall be convertible, in whole or in part into shares of the Company's common stock (each a "Conversion Share") at the rate of $0.001 per share for a maximum of 100 Million shares of the Company's common stock (subject to adjustments), at any time and at the option of the Holder.

The Amended Note will be Senior to all notes, debentures and any loan entered into by the Company for the term of the Amended Note until the Amended Note is repaid in full.

The Company may, only with the prior consent of the Holder, pre-pay the Amended Note within 180 days by paying 115% of the Principal due plus all accrued interest. From day 181 to 365 the Amended Note can be pre-paid by paying 100% of the Amended Note plus all accrued interest.

With respect to the issuance of the Amended Note, the Company claims an exemption from the registration requirements of the Act for the private placement of the securities referenced herein pursuant to Section 4(2) of the Securities Act of 1933 since, among other things, the transaction did not involve a public offering.

Convertible Notes

On February 27, 2013, the Company entered into a $335,000 convertible loan agreement. The agreement provides for a $35,000 original issue discount. The lender, at its discretion, may provide funds up to $300,000 to the Company. It provided $60,000 at the closing of the agreement on April 30, 2013. All loans under the agreement are payable in full one year after the funds are issued together with a prorated portion of the original issue discount. All amounts outstanding under the agreement become convertible, at the lender's discretion, into shares of the Company's common stock starting 180 days from the execution date of the agreement. The conversion rate per share is the lower of (i) $0.044 or (ii) 60% of the lowest trade price during the 25 trading days prior to a conversion notice. The lender has agreed that it will not execute any short trades and, at no time, will hold more than 4.9% of the Company's outstanding common stock.

If the Company repays all amounts outstanding under the agreement within 90 days of the execution date, there will be no interest amounts due. If it does not pay all amounts due within 90 days of the execution date, it cannot make any other prepayments of the amounts outstanding without the consent of the lender. In addition, there will be a one-time interest charge of 12% of the amounts outstanding. The Company must also register all shares that are issuable under the agreement in any Registration Statement that it files with the SEC for any purpose.

The Company is negotiating with other potential funding sources, the proceeds from which, if received, would repay all amounts due under this agreement within 90 days of the execution date. If all amounts are repaid within the 90 day period, the agreement will be considered terminated and all convertibility features would no longer exist.

Upon an Event of Default (as defined in the Debenture), the outstanding principal amount of the Debenture plus accrued but unpaid interest, liquidated damages and other amounts owing on the Debenture through the date of the acceleration shall become at the Debenture holder's election immediately due and payable in cash at the Mandatory Default Amount (as defined in the Debenture).
Commencing five days after the occurrence of an Event of Default that results in the eventual acceleration of the Debenture, the interest rate on the Debenture shall accrue at an interest rate equal to the lesser of 22% per annum or the maximum rate permitted under applicable law.

In connection with the sale of the Debenture, on April 30, 2013 the Company issued the purchaser of the Debenture a warrant to purchase 3,726,708 shares of the Company's common stock at an exercise price of $.03 per share (subject to adjustment as provided in the debenture). The Warrant is exercisable on a cashless basis (as provided in the Warrant) and as a result there is no assurance that any part of the Warrant will be exercised for cash. The warrant terminates three years from the Initial Exercise Date and on such date the Warrant shall be automatically exercised via cashless exercise.

This convertible debenture was repaid subsequent to the end of the quarter.

We will continue to seek financing for working capital as necessary but cannot give any assurances that we will be successful in doing so.

We are a public company and, as such, have incurred and will continue to incur additional significant expenses for legal, accounting and related services.

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Critical Accounting Policies

The preparation of financial statements and related notes requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities.

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements.

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. There are no critical policies or decisions that rely on judgments that are based on assumptions about matters that are highly uncertain at the time the estimate is made. The financial statements include a summary of the significant accounting policies and methods used in the preparation of our financial statements.

Seasonality

We do not yet have a basis to determine whether our business will be seasonal.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, obligations under any guarantee contracts or contingent obligations. We also have no other commitments, other than the costs of being a public company that will increase our operating costs or cash requirements in the future

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