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PLSB > SEC Filings for PLSB > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for PULSE BEVERAGE CORP

Form 10-Q for PULSE BEVERAGE CORP


14-Nov-2013

Quarterly Report


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

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this quarterly report. This section of this report, as well as other sections, includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. 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 based upon estimates, forecasts 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 us, or on our behalf. We disclaim any obligation to update forward-looking statements.


THREE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

The discussion that follows is derived from our unaudited interim condensed balance sheet as of September 30, 2013 and our audited balance sheet as of December 31, 2012 and the unaudited statements of operations for the three months ended September 30, 2013 and 2012.

For the three months ended September 30, 2013, our net loss under generally accepted accounting principles ("GAAP") was $736,000 (Q3-2012 - $767,000). We have increased our operating overhead to sustain our rapid growth and adding PULSEŽ to our product mix. After adjusting for stock-based compensation of $81,000 (Q3-2012 - $345,000) and for amortization and depreciation of $24,000 (Q3-2012 - $13,000) our adjusted net loss before depreciation and amortization and stock-based compensation ("Adjusted EBITDA" as explained below) was $631,000 or $0.01 per share (Q3-2012 - $409,000 or $0.01 per share). The reduction in stock-based compensation was due to the discontinuance of our equity incentive plan and the reduction in the cost of our options previously granted to officers, employees and consultants. We expect more reductions to stock-based compensation during Q4-2013.

We define Adjusted EBITDA as net loss before corporation income taxes, depreciation and amortization, stock-based compensation and one-time charges. We use Adjusted EBITDA to evaluate the underlying performance of our business. Our Adjusted EBITDA loss was, for the most part, an investment in the establishment of our distribution system. This loss is relatively low considering we have only been in operations for two years. Most emerging growth beverage companies incur significantly larger losses in the first few years of operations after commencing product launches.

We have been in operation with our first product, Natural CabanaŽ Lemonade, for two years. We have generated $6 million in operating revenue in a relatively short period of time on just over $8 million of financing raised to date. Of the $8 million in financing we have maintained working capital of just over $4.1 million, including $2.4 million in cash. Our growth in sales within a relatively short period of time combined with low start-up losses reflects the fact that we have employed our existing capital well. We have an excellent working capital ratio of nine to one.

Net Sales

Production and sales of our Natural CabanaŽ Lemonade started on September 23, 2011. The majority of our growth is from sales of Natural CabanaŽ Lemonade. During 2011 and 2012, our product development team completed the re-design, testing and flavor profiles of PULSEŽ functional beverages in three health platforms. On May 2, 2013 we completed our first commercial production of PULSEŽ at our Coppell, Texas co-packer and soon after began its introduction to our distributors and chain stores. Sales of PULSEŽ to our distributors has just begun.

During the three months ended September 30, 2013 grocery and convenience chain store listings for Natural CabanaŽ Lemonade increased by 3,000 listings to more than 17,000. We expect to add at least an additional 3,000 listings during the remainder of 2013 based on discussions we have underway.

During Q3-2013 case sales for Natural CabanaŽ Lemonade were 93,000 compared to 75,000 during Q3-2012, an increase of 24%. During Q3-2013 Gross sales for Natural CabanaŽ Lemonade were $1,043,000 compared to $846,000 during Q3-2012, an increase of 23%.

During Q3-2013 case sales for PULSEŽ were 5,000 compared to nil during Q3-2012. During Q3-2013 gross sales for PULSEŽ were $59,000. Initial store introduction of PULSE began in May 2013 on a limited base.

During Q3-2013, gross revenues, on sales of 93,000 cases of Natural CabanaŽ Lemonade and 5,000 cases of PULSEŽ (Q3-2012 - 75,000 cases of Natural CabanaŽ Lemonade and nil cases for PULSEŽ), before slotting fees and other promotional allowances, were $1,102,000 (Q3-2012 - $846,000), and net sales were $1,009,000 (Q3-2012 - $802,000) after slotting fees and other promotional allowances of $93,000 (Q3-2012 - $44,000). Slotting fees and other promotional allowances are approximately 8.5% of gross sales. This increase in case sales and revenues was accomplished during, what is considered, the initial beverage company start-up and product roll-out phase indicating a strong brand and strong consumer acceptance of Natural CabanaŽ Lemonade. We expect gross sales, net sales and slotting fees and promotional allowances to increase due to large chain and convenience store listings secured for Natural CabanaŽ Lemonade to date and expected to secure during the remainder of 2013 and the expansion of PULSEŽ.

We expect the remainder of 2013 revenues for both products to increase significantly due to timing of shipments into our distribution system and the increased number of regional and national chain and convenience store listings secured for Natural CabanaŽ Lemonade and the rollout of PULSEŽ into many of the same stores. Our distribution system reached nationwide 'critical-mass' during the latter part of 2012. These factors allowed us to approach and secure listings for our Natural CabanaŽ Lemonade from US national and regional grocery and convenience store chains. However, centralized purchasing for large grocery and convenience store chains has resulted in delays for implementation of shelf-settings and product placements.


Cost of Sales and Gross Profit

As a percentage of net revenue, our cost of sales for Q3-2013 was 66% as compared to 64% for Q3-2012 and our resulting gross profit for Q3-2013 was 34% of net revenue as compared to 36% for Q3-2012.

Cost of sales and gross profit is expected to improve due to future planned higher volumes and better efficiencies at our co-packers. Cost of sales includes raw materials, co-packing fees, warehousing finished product and lab testing. We expect all cost variables to decrease as we source raw materials at a lower cost because of volume discounts; ship our product within a 500 mile radius of our co-packers and due to lower cost glass from a mid-west supplier. We expect gross profit, as a percentage of net revenue to normalize at 40% when PULSEŽ has a higher weighting of net sales.

Advertising, samples and displays

During Q3-2013, we incurred $112,000 (Q3-2012 - $37,000) in advertising, samples, sales displays and in-store sampling programs. This expense includes magazine advertising, samples shipped to distributors, in-store sampling, display racks and ice barrels, sell sheets, shelf strips and door decals. We expect this expense to increase in proportion to increase in sales as we increase our sales budget due to the expanding introduction of PULSEŽ at the store level which will require in-store sales and sampling programs and due to an overall increase in distribution both in the United States and internationally.

Freight-out

During Q3-2013, we incurred $115,000 or $1.18 per case as compared to $1.16 per case during Q3-2012 and $1.20 per case during Q2-2013. Freight per case is expected to decrease as we ship out of three co-packing facilities strategically placed closer to our distribution points. Our goal is to achieve less than $1.00 per case of shipping to distributors.

General and administrative ("G&A")

During Q3-2013 we incurred $311,000 in G&A (Q3-2012 - $223,000), an increase of $88,000. The largest increase was in travel and meals which increased by $32,000 to $95,000 from $63,000. This increase was due to adding salespeople and more travel by all salespeople and executives. Legal and professional fees increased by $5,000 to $32,000 due to more distribution agreements being entered into. Office expenses and insurance increased by $63,000 to $84,000 due to increased overhead. Amortization and depreciation, which is an add-back under Adjusted EBITDA increased by $12,000 to $24,000 due to higher amortization of intangible assets due to higher case sale levels.

We expect general and administrative expenses to moderately increase during the remainder of 2013.

Salaries and benefits and broker/agent's fees

During Q3-2013 salaries and benefits and broker and agent's fees increased by $125,000 to $373,000 (Q3-2012 - $248,000). This was due to an overall increase in administration and sales personnel. We expect this cost to remain relatively constant during the remainder of 2013 and 2014.

Shareholder, broker and investor relations

During Q3-2013 shareholder, broker and investor relations expense decreased by $20,000 to $93,000 (Q3-2012 - $113,000); due to reducing overall investor, stockholder and public relations activities.

We entered into a Letter Agreement with an investment bank to assist with certain services. We paid them $16,000 and have accrued $11,000 for the future issuance of 22,896 common share purchase warrants having an average exercise price of $1.05 expiring in three years. A total of 33,727 warrants at an average exercise price of $1.19 have been accrued to September 30, 2013.

We entered into a Services Agreement with a consulting firm to introduce us into the brokerage community. We paid them $15,000 and common shares valued at $24,000, for total compensation of $39,000. We also paid a shareholder and investor relations consulting firm $9,000, and replaced the firm effective September 1, 2013, paying the new firm $7,500 and issuing 125,000 common shares having a fair value of $109,000 of which $9,000 was charged to operations during the three months ended September 30, 2013 and $100,000 is included in prepaid expenses.


NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

The discussion that follows is derived from our unaudited interim statements of operations for the nine months ended September 30, 2013 ("2013") and 2012
("2012".)

During 2013 our net loss under generally accepted accounting principles ("GAAP") was $2,116,000 (2012 - $2,160,000). We have increased our operating overhead to sustain our rapid growth and adding PULSEŽ to our product mix. After adjusting for stock-based compensation of $395,000 (2012 - $1,002,000) and for amortization and depreciation of $66,000 (2012 - $27,000) our adjusted net loss before depreciation and amortization and stock-based compensation (Adjusted EBITDA) was $1,655,000 or $0.03 per share (2012 - $1,131,000 or $0.03 per share). The significant reduction in stock-based compensation was due to the discontinuance of our equity incentive plan and the reduction in the cost of our options previously granted to officers, employees and consultants. We expect more significant reductions to stock-based compensation during 2014.

Net Sales

Production and sales of our Natural CabanaŽ Lemonade started on September 23, 2011. The majority of our growth is from sales of Natural CabanaŽ Lemonade. During 2011 and 2012, our product development team completed the re-design, testing and flavor profiles of PULSEŽ functional beverages in three health platforms. On May 2, 2013 we completed our first commercial production of PULSEŽ at our Coppell, Texas co-packer and soon after began its introduction to our distributors and chain stores. Sales of PULSEŽ to our distributors has just begun.

During 2013 grocery and convenience chain store listings for Natural CabanaŽ Lemonade increased by 9,000 listings to more than 17,000. We expect to add at least an additional 3,000 listings during the remainder of 2013 based on discussions we have underway.

During 2013 case sales for Natural CabanaŽ Lemonade were 295,000 compared to 192,000 during 2012, an increase of 54%. During 2013 gross sales for Natural CabanaŽ Lemonade were $3,304,000 compared to $2,179,000 during 2012, an increase of 52%.

During 2013 case sales for PULSEŽ were 6,000 compared to nil during 2012. During 2013 gross sales for PULSEŽ were $76,000. Initial store introduction of PULSE began in May, 2013 on a limited base.

During 2013, our gross revenues, on sales of 295,000 cases of Natural CabanaŽ Lemonade and 6,000 cases of PULSEŽ (2012 - 192,000 cases of Natural CabanaŽ Lemonade and nil cases for PULSEŽ), before slotting fees and other promotional allowances, were $3,380,000 (2012 - $2,179,000), and net sales were $3,128,000 (2012 - $2,058,000) after slotting fees and other promotional allowances of $252,000 (2012 - $120,000). Slotting fees and other promotional allowances are approximately 7.5% of gross sales.

Cost of Sales and Gross Profit

As a percentage of net revenue, our cost of sales for 2013 and 2012 was 65% and our resulting gross profit was 35%. We expect all cost variables to decrease as we source raw materials at a lower cost because of volume discounts; ship our product within a 500 mile radius of our co-packers and due to lower cost glass from a mid-west supplier. We expect gross profit, as a percentage of net revenue to normalize at 40% when PULSEŽ has a higher weighting of net sales.

Advertising, samples and displays

During 2013, we incurred $243,000 (2012 - $76,000) in advertising, samples, sales displays and in-store sampling programs. This expense includes magazine advertising, samples shipped to distributors, in-store sampling, display racks and ice barrels, sell sheets, shelf strips and door decals. We expect this expense to increase in proportion to increase in sales as we increase our sales budget due to the expanding introduction of PULSEŽ at the store level which will require in-store sales and sampling programs and due to an overall increase in distribution both in the United States and internationally.

Freight-out

During 2013, we incurred $346,000 or $1.15 per case as compared to $1.13 per case during 2012. Freight per case is expected to decrease as we ship out of three co-packing facilities strategically placed closer to our distribution points. Our goal is to achieve less than $1.00 per case of shipping to distributors.

General and administrative ("G&A")

During 2013 we incurred $903,000 in G&A (2012 - $607,000), an increase of $296,000. The largest increase was in travel and meals which increased by $141,000 to $293,000 from $152,000. This increase was due to adding salespeople and more travel by all salespeople and executives. Legal and professional fees increased by $23,000 to $116,000 due to more distribution agreements being entered into. Office expenses and insurance increased by $81,000 to $151,000 due to increased overhead. Amortization and depreciation, which is an add-back under Adjusted EBITDA increased by $39,000 to $66,000 due to higher amortization of intangible assets due to higher case sale levels. Social marketing increased by $14,000 during 2013 as compared to $nil in 2012.


We expect general and administrative expenses to moderately increase during 2014.

Salaries and benefits and broker/agent's fees

During 2013 salaries and benefits and broker and agent's fees increased by $432,000 to $1,043,000 (2012 - $611,000). This was due to an overall increase in administration and sales personnel. We expect this cost to remain relatively constant during 2014.

Shareholder, broker and investor relations

During 2013, shareholder, broker and investor relations expense decreased by $76,000 to $301,000 (2012 - $377,000); due to reducing overall investor, stockholder and public relations activities.

We entered into a Letter Agreement with an investment bank to assist us in certain services. We paid them $24,000 and have accrued $19,000 for the future issuance of 33,727 common share purchase warrants having an average exercise price of $1.19 expiring in three years.

We entered into a Services Agreement with a consulting firm to introduce us into the brokerage community. We paid them $40,000 and common shares valued at $148,000, for total compensation of $188,000. We also paid a shareholder and investor relations consulting firm $27,000 and issued common shares valued at $18,000, for total compensation of $45,000. The consulting firm has been replaced effective September 1, 2013 and we paid the new firm $7,500 and issued 125,000 common shares having a fair value of $109,000 of which $9,000 was charged to operations during the nine months ended September 30, 2013 and $100,000 is included in prepaid expenses.

LIQUIDITY AND CAPITAL RESOURCES

The discussion that follows is derived from our unaudited interim condensed balance sheet as of September 30, 2013 and our audited balance sheet as of December 31, 2012 and our unaudited interim statements of operations for the three months and nine months ended September 30, 2013 and 2012 and our unaudited interim statements of cash flows for the nine months ended September 30, 2013 and 2012.

Overview

During the nine months ended September 30, 2013, we increased our cash position from $745,000 as of December 31, 2012 to $2,415,000 as of September 30, 2013. As of September 30, 2013, we had working capital of approximately $4,111,000 which included cash of $2,415,000, customer accounts receivable of $800,000, finished goods inventory of $538,000, raw materials inventory of $684,000 and other current assets of $217,000. We have no debt of any kind other than accounts payable of $474,000 and accrued expenses of $72,000.

We believe our current working capital is sufficient to cover operating losses we expect to incur until we achieve profitability, and to fund the expected growth of inventory and accounts receivable due to expected case sale levels of our Natural CabanaŽ Lemonade and PULSEŽ. We believe we have enough working capital to bring both products to profitability.

Our net loss for the nine months ended September 30, 2013 represents an investment in our distribution system which, into 2013, allows us to distribute our product nationwide into regional and national chain stores as well as internationally in Canada, Mexico, Panama, Bermuda and now Ireland through Master License Agreements. During the first part of 2012, we did not have the critical mass to secure chain store listings. It wasn't until the latter part of 2012 that we were in a position to obtain such listings. As at November 14, 2013 we have secured more than 17,000 chain store listings for Natural CabanaŽ Lemonade, an increase of 10,000 since the start of the year.

As of September 30, 2013, Pulse had 141 distributors across 47 states in the United States, in addition to distribution in Canada, Mexico, Panama, Bermuda and Ireland.

Introduction of PULSEŽ

The PULSEŽ brand was originally formulated by a major healthcare company who spent in excess of $10 million in its initial development and marketing. The PULSEŽ brand is designed to be scientifically impactful by incorporating ingredients which are essential to adult health, including liposome nano-dispersion technology that assists the body to best absorb the nutrition. We commenced our PULSEŽ brand product roll-out in selected markets such as Los Angeles fitness gyms, a health food chain in North Carolina, Gelson's in Southern California, and certain regional Walgreens. The acceptance of the product has been very good at the consumer level. It has become apparent in the roll-out of PULSE that is necessary to simplify the message to the beverage consumer as to the health benefits and the importance of these health benefits to promote living healthier lives longer. Towards this end, we have made a decision to redesign the label with a more simplified and direct message for the consumer.


FUTURE GROWTH AND EXPANSION PLANS

ş completion of development of an extension to our Natural CabanaŽ Lemonade l beverage line to complement our existing product mix
ş expand exposure of our online shopping presence
ş complete negotiations with distribution partners in Asia for distribution of our products
ş increase brand awareness of our products through public relations
ş securing additional distributors, chain stores, convenience stores and key account listings for our brands across United States and into additional international markets
ş expanding our PULSEŽ brand by developing new proprietary formulations

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2013 and 2012:

                                               2013           2012
                                                $              $
Net cash used in operating activities       (2,300,000 )   (1,280,000 )
Net cash used in investing activities          (88,000 )     (155,000 )
Net cash provided by financing activities    4,059,000      1,583,000
Net increase in cash                         1,671,000        148,000

Cash Used in Operating Activities

During the nine months ended September 30, 2013, we used $2,300,000 (2012 - $1,280,000) in operating activities. This was made up of our net loss of $2,116,000 (2012 - $2,160,000) less adjustments for non-cash items such as: an asset impairment charge of $7,000, shares and options issued for services of $667,000 (2012 - $1,103,000), and amortization and depreciation of $66,000 (2012 - $27,000) all totaling $740,000 (2012 - $1,119,000). We used $924,000 (2012 - $239,000) in net changes in operating assets and liabilities. We used $601,000 (2012 - $385,000) due to an increase in our accounts receivable and $488,000 (2012 - $384,000) due to increases in inventory levels; both due to a significant increase in our sales and inventory build-up to meet sales orders. Accounts payable and accrued expenses increased $223,000 (2012 - $557,000) due to normal credit extended to us by our suppliers. We used 57,000 (2012 - $28,000) due to increases in prepaid expenses.

Cash Used in Investing Activities

During the nine months ended September 30, 2013 we used $88,000 (2012 - $155,000) in investing activities. During the latter part of fiscal 2012 we loaned $70,500 to our co-packer in Texas to allow it to acquire a specific piece of equipment to run our products. This loan is being repaid at a rate of $0.18 per-case reduction in co-packing fees and is expected to be fully repaid at some point in 2013. We spent $36,000 on die cuts, coolers, office equipment and two delivery vehicles. We spent $13,000 on formulation costs associated with bringing PULSEŽ into commercial production. These costs were associated with third party lab testing and consultants to document and review our PULSEŽ formulas. We also spent $15,000 advancing our trademarks for PULSEŽ and Natural CabanaŽ and we spent $28,000 to develop and launch our new website including on-line shopping capabilities.

During 2011, we loaned $200,000 to Catalyst Development Inc., a related party, pursuant to a Letter Agreement of which $4,000 was repaid during the nine months ended September 30, 2013.

Cash Provided by Financing Activities

During the nine months ended September 30, 2013, we received $4,059,000 from financing activities. We received $3,946,000, net of $157,000 of share issuance costs, and issued 10,256,750 common shares and 10,256,750 common share purchase warrants pursuant to our $0.40 Unit offering. We received $100,000 and issued 125,000 common shares and 125,000 common share purchase warrants pursuant to our $0.80 Unit offering. We received $12,500 and issued 25,000 common shares pursuant to a stock option being exercised by a consultant at $0.50 per share.

During the nine months ended September 30, 2012, we received $1,583,000 from financing activities. We received $250,000 pursuant to a short-term bridge loan which was converted into 625,000 $0.40 units in December, 2012. We also received $1,333,000, net of offering costs, from two equity financings as follows:
received $857,000 pursuant to our 2012 $0.30 Unit offering and issued a total of 2,856,666 $0.30 Units. Each $0.30 Unit consisted of one share of common stock and one five-year share purchase warrant to acquire one common share at $0.45; issued, between July 6, 2012 and September 13, 2012 a total of 1,025,000 Units at $0.40 per Unit for $410,000. Each Unit consisted of one share of common stock and one three-year share purchase warrant to acquire one common share at $0.60 per share expiring in 2015. We also received $100,000 pursuant to our $0.40 Unit offering. These Units were issued in December, 2012.


Additional Capital

We have in excess of $4.1 million in working capital and $2.4 million in cash as at September 30, 2013, as such, we do not need additional capital to finance the growth of our operations. We also have in excess of 20,000,000 warrants outstanding at an average exercise price of $0.62 per common share which could, if exercised, raise us in excess of $12.5 million. We have no assurance, however, that our warrant holders will exercise their warrants prior to their expiry dates.

OFF BALANCE-SHEET ARRANGEMENTS

We have not had, and at September 30, 2013, 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 critical accounting policies involving the most complex, difficult and subjective estimates and judgments are: revenue recognition, stock based compensation and use of estimates as discussed in Note 2 to the interim unaudited condensed financial statements included in Item 1 to this Form 10Q.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There have been no recently issued Accounting Pronouncements that impact us.

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