NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012 and 2011
1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
On October 28, 2011, pursuant to an Exchange Agreement (“Agreement”), Dewmar International BMC, Inc. (fka Convenientcast, Inc.) the “Company”), a publicly reporting Nevada corporation, acquired DSD Network of America, Inc. (“DSD”), a Nevada corporation, in exchange for the issuance of 40,000,000 shares of common stock of Dewmar International BMC, Inc. (the “Exchange Shares”), a majority of the common stock, to the former owners of DSD. In conjunction with the Merger, DSD became a wholly-owned subsidiary of the Company.
For financial accounting purposes, this acquisition (referred to as the “Merger”) was a reverse acquisition of Dewmar International BMC, Inc. by DSD and was treated as a recapitalization. Accordingly, the financial statements were prepared giving retroactive effect of the reverse acquisition completed on October 28, 2011, and represent the operations of DSD prior to the Merger.
As of the time of the Merger, Dewmar International BMC, Inc. held minimal assets and was a developmental stage company. Following the Merger, the Company, through DSD, is a manufacturer of its Lean Slow Motion Potion™ brand relaxation beverage, which was launched by DSD in September of 2009. After the Merger, the Company operates through one operating segment.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and DSD, its only subsidiary. All material intercompany accounts and transactions have been eliminated. Certain amounts in prior periods have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash on deposit and money market accounts, which are readily convertible into cash and purchased with original maturities of three months or less. These investments are carried at cost, which approximates fair value.
The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”). Beginning December 31, 2010 through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to the depositor’s other accounts held by a FDIC-insured institution, which are insured for balances up to $250,000 per depositor until December 31, 2013. At December 31, 2012 and 2011 the amounts held in banks did not exceed the insured limits.
F-6
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable were composed of receivables from customers for sales of products. The Company performs credit evaluations prior to selling products or granting credit to its customers and generally does not require collateral.
The Company’s trade accounts receivable are typically collected within 60-120 days from the date of sale. The Company monitors its exposure to losses on trade accounts receivable and maintains an allowance for potential losses and adjustments. The Company determines its allowance for doubtful accounts based on the evaluation of the aging of accounts receivable and detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of its customers. Past due trade accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due. At December 31, 2012 and 2011 the allowance for doubtful accounts was $0 and $34,634, respectively.
Inventory Held by Third Party
Inventory costs are determined principally by the use of the first-in, first-out (FIFO) costing method and are stated at the lower of cost or market, including provisions for spoilage commensurate with known or estimated exposures which are recorded as a charge to cost of goods sold during the period spoilage is incurred.
Fixed Assets
Leasehold improvements, property and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for property acquisitions, development, construction, improvements and major renewals are capitalized. The cost of repairs and maintenance is expensed as incurred. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are generally 3 to 10 years. Leasehold improvements are amortized over the shorter of the lease term, which generally includes reasonably assured option periods, or the estimated useful lives of the assets. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in “Gain or Loss from Operations”.
The estimated useful lives are:
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Furniture and fixtures
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3-10 years
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Equipment
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3-7 years
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Vehicles
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3-7 years
|
Convertible Notes
The Company analyzes its convertible notes in accordance with FASB Accounting Standards Codification (“ASC”) Topic 470-20 and Topic 815 Derivatives and Hedging. If it is determined that the conversion feature is convertible to a variable number of shares, then the Company determines whether it is subject to the Derivatives and Hedging guidance in ASC Topic 815-20. Upon conclusion that it is within the guidance in Topic 815-20, the conversion feature is separated from the host contract and it is accounted for as a derivative instrument with its fair value estimated at every balance sheet date. Any change in the fair market value of the derivative, results in a gain or loss on derivative liability in the Company’s statement of operations. If any conversions of the original note occur prior to the settlement of the obligation, the pro-rata portion of the derivative liability is relieved in additional paid in capital after marking to market on the day prior to the conversion date.
F-7
Revenue Recognition Policy
The Company recognizes revenue when the product is received by and title passes to the customer. The Company’s standard terms are ‘FOB’ destination. If a customer receives any product that they consider damaged or unacceptable, the customer must document any such damages or reasons for it not to be accepted on the original invoice upon delivery and then inform the Company within 72 hours of receipt of the product. The Company does not accept returns of product for reasons other than damage.
We record estimates for reductions to revenue for customer programs and incentives, including price discounts, volume-based incentives, and promotions and advertising allowances. Products are sold with extended payment terms not to exceed 120 days. Revenue is shown net of sales allowances on the accompanying statements of operations.
Cost of Goods Sold
The Company’s cost of goods sold includes all costs of beverage production, which primarily consist of raw materials such as concentrate, aluminum cans, trays, shrink wrap, can ends, labels and packaging materials. Additionally, costs incurred for shipping, handling and warehousing charges are included in cost of goods sold. The Company does not bill customers for cost of shipping unless the Company incurs additional charges such as refusing initial shipment or not being able to receive shipment at their prescheduled time with the freight company.
Advertising Expense
The Company recognizes advertising expense as incurred. The Company recognized advertising expense of $28,549 and $116,002 the years ended December 31, 2012 and 2011, respectively.
Income Taxes
The Company accounts for its income taxes using the liability method, whereby deferred tax assets and liabilities are established for the future tax consequences of temporary differences between the financial statement carrying amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize the tax assets through future operations.
The Company’s federal and state income tax returns for the years ended 2009 through 2011 are open to examination. At December 31, 2012 and 2011, the Company evaluated its open tax years in all known jurisdictions. Based on this evaluation, the Company did not identify any uncertain tax positions. We will account for interest and penalties relating to uncertain tax positions in the current period statement of operations as necessary.
Fair value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivables and payables, accrued liabilities notes payable and derivative liabilities. The carrying values of these financial instruments approximate their respective fair values as they are either short-term in nature or carry interest rates that approximate market rates.
Fair Value Measurements
Generally accepted accounting principles in the United States (“US GAAP”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are as follows:
F-8
Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Other inputs that are observable, directly or indirectly, such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Unobservable inputs for which there is little or no market data and which we make our own assumptions about how market participants would price the assets and liabilities.
Our derivative liabilities have been valued as Level 3 instruments.
Share-Based Compensation
The Company recognizes all share-based payments to employees, including grants of Company stock options to Company employees, as well as other equity-based compensation arrangements, in the financial statements based on the grant date fair value of the awards. Compensation expense is generally recognized over the vesting period. During the years ended December 31, 2012 and 2011, the Company issued no stock options to employees.
Income (Loss) per Share
Basic net income (loss) per common share is computed by dividing net loss by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive.
Concentration of Risks
The Company’s operations and future business model are dependent in a large part on the Company’s ability to execute its business model. The Company’s inability to meet its sales objectives may have a material adverse effect on the Company’s financial condition.
During the years ended December 31, 2012 and 2011, most of the Company’s sales are derived from beverage distributors located in the Southern region of the United States. This concentration of sales may have a negative impact on total sales in the event of a decline in the local economies.
New Accounting Pronouncements
In May 2011, the FASB issued amendments to disclosure requirements for common fair value measurement. These amendments, effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is prohibited), result in common definition of fair value and common requirements for measurement of and disclosure requirements between US GAAP and IFRS. Consequently, the amendments change some fair value measurement principles and disclosure requirements. The implementation of this amended accounting guidance does not have a material impact on our consolidated financial position or results of operations.
In June 2011, the FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company does not expect the implementation of this amended accounting guidance to impact its consolidated financial statements.
F-9
In December 2011, the FASB deferred an effective date for amendments issued in June 2011 that relate to the presentation of reclassifications of items out of accumulated other comprehensive income. All other requirements in ASU issued in June 2011 are not affected, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. The implementation of this amended accounting guidance is not expected to impact on our consolidated financial position or results of operations.
3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has incurred net losses. The Company also had negative working capital. The Company’s operating results are subject to numerous factors, including fluctuation in the cost of raw materials, changes in consumer preference for beverage products and competitive pricing in the marketplace. These conditions give rise to substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to obtain additional financing or sale of its common stock as may be required and ultimately to attain profitability.
Management’s plan, in this regard, is to raise financing through debt and equity financing to augment the cash flow it receives from product sales and finance the continuing development for the next twelve months.
4 - INVENTORY
Inventory at December 31, 2012 consisted of raw materials of $11,197 and finished goods of $15,898. Inventory at December 31, 2011 consisted of finished goods in the amounts of $58,162. During the years ended December 31, 2012 and 2011, the Company recorded spoilage of $908 and $11,837, respectively and included this in cost of goods sold.
5 - FIXED ASSETS
Fixed assets consisted of the following as of December 31, 2012 and 2011:
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December 31,
2012
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December 31,
2011
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Vehicles
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$
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21,155
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$
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21,155
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Less: accumulated depreciation
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(8,570)
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(5,000)
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Fixed assets, net
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$
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12,585
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$
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16,155
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Depreciation expense for the years ended December 31, 2012 and December 31, 2011 was $3,570 and $3,337, respectively, and is recorded in general and administrative expenses.
F-10
6 - NOTES PAYABLE
On August 3, 2009, the Company executed an agreement (“Note Agreement”) with an unrelated entity that subsequently became one of the Company’s distributors, (“Unrelated Distributor”), which provided for the payment of raw goods directly to the Company’s suppliers by the agreement holder. The Unrelated Distributor made direct payments to suppliers for all raw materials purchased from August 2009 through February 2010. The Note Agreement set forth that interest was payable at a rate of $2.00 per case for all product sold to distributors within the state of Texas and $2.50 per case for all product sold to distributors outside the state of Texas. The Company also agreed that any product purchased by the agreement holder may be charged against any outstanding interest payments owed. As of December 31, 2011, the principle and interest amounts due under the agreement were $328,656, and were due on demand. On December 30, 2011, the Company and the unrelated third party agreed to exchange the principle and interest amounts due under the agreement for 1,250,000 restricted shares of the Company’s common stock, valued at $81,250. The Company recognized a $247,406 gain on extinguishment of debt as a result of the exchange.
On April 28, 2010, the Company executed a promissory note for $13,305 with Regions Bank. The loan is secured by the Company vehicle and requires monthly payments in the amount of $1,135. The loan bears 4.45% interest and was paid in full during 2011.
On August 30, 2012, the Company entered a second Contingently Convertible Promissory Note with Asher for an 8% convertible promissory note with an aggregate principal amount of $42,500 which together with any unpaid accrued interest due on June 4, 2013. $40,000 was funded on September 13, 2012 with $2,500 being recorded as legal fees for funds held by the note holder. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at the greater of (1) a variable conversion price calculated as 55% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with no floor stated in the conversion feature; or (2) a fixed price of $0.00009. The Company will analyze whether the variable conversion price results in need of bifurcation of the conversion feature into a separate derivative liability valued at fair market value on the date of the contingency of the conversion feature is settled which 180 days from inception of the note. The note contains an anti-dilution provision which causes the conversion price to decrease if the company issues any common stock at a lower price or with no consideration.
In October, 2012, the Company entered into a 10% Contingently Convertible Promissory Note with Birr Marketing Group, Inc. for $20,000 with a due date of April 1, 2013. After the due date of April 1, 2013, the note becomes convertible at a fixed price of $0.001 into the Company’s common shares at the Holder’s option. The Holder shall receive a royalty or commission of $0.50 per case of Easta Pink Lean that was produced as a result of monies allocated from this note.
In November, 2012, the Company entered into an 8% third Contingently Convertible Promissory Note with Asher for $30,000 which is due together with any unpaid accrued interest on August 29, 2013. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at the greater of (1) a variable conversion price calculated as 55% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with no floor stated in the conversion feature; or (2) a fixed price of $0.00009. The Company will analyze whether the variable conversion price results in need of bifurcation of the conversion feature into a separate derivative liability valued at fair market value on the date of the contingency of the conversion feature is settled which 180 days from inception of the note. The note contains an anti-dilution provision which causes the conversion price to decrease if the company issues any common stock at a lower price or with no consideration.
Subsequent to December 31, 2012, the Company entered into notes payable agreements with two vendors with balances of $56,500 of accounts payable. The notes payable are due on demand and bear no interest. At December 31, 2012, the Company has presented them in Notes Payable on the balance sheet.
F-11
7 - CONVERTIBLE NOTES PAYABLE
On June 27, 2012, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”) a Delaware Corporation for an 8% convertible promissory note with an aggregate principal amount of $32,500 which together with any unpaid accrued interest due on March 29, 2013. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at a variable conversion price calculated as 55% of the market
price
which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with no floor stated in the conversion feature. In July 2012, this convertible promissory note was funded in the amount of $30,000, with $2,500 being recorded as legal fees for amounts held by note holder. The Company analyzed the note on the date on which the contingent conversion feature was settled on December 24, 2012. The Company determined that the variable conversion price results in need of bifurcation of the conversion feature into a separate derivative liability valued at fair market value. On December 24, 2012, the Company estimated the fair market value of the derivative liability associated with the bifurcated conversion feature to be $25,209. The Company recorded a discount of $25,209. Through December 31, 2012, the Company amortized $1,858 into interest expense based on the term of the note. At December 31, 2012, the Company revalued the derivative liability and determined that the fair market value was $19,515 so therefore recorded a gain on derivative liability of $5,695. The assumptions used in determining the fair market value was based on a Black Scholes model using the following major assumptions: (1) conversion price of $0.0027 and $0.0037 per share; (2) volatility of 348%; (3) discount rates of 0.18% and (4) 0 assumed dividends. The note contains an anti-dilution provision which causes the conversion price to decrease if the company issues any common stock at a lower price or with no consideration.
On September 6, 2012, the Company entered into a Convertible Promissory Note with Continental Equities, LLC, a New York limited liability corporation for an 8% convertible promissory note in the aggregate principal amount of $21,500, which together with any unpaid accrued interest is due on June 15, 2013. $20,000 of the proceeds was funded directly to the company while $1,500 was recorded as legal expense for funds held by the note holder. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option beginning on the date of the note at a variable conversion price calculated as 55% of the market price which means the average of the lowest three trading prices during the ten trading day period ending on the latest complete trading day prior to the conversion date with the only mention of a “share cap” is that the number of shares of common stock issuable upon the conversion would not exceed 4.99% of the outstanding shares of the company at the time of conversion. Since the number of shares outstanding at any future date is undetermined by the Company, the Company determined that the conversion feature in this note qualified as an “embedded derivative,” and therefore separated the conversion feature from the host contract and estimated the fair market value at inception to be $34,119. As a result, the Company recorded a discount on the original note of $21,500 and recorded an immediate loss of $12,619. At December 31, 2012, the Company amortized into interest expense $8,844 leaving an unamortized discount associated with the convertible note of $12,656. At September 30, 2012, the fair market value of the derivative liability was determined to be $5,887 which resulted in a net gain on derivative liability of $15,613. The Company re-valued the derivative liability at December 31, 2012 and determined the fair market value to be $19,515; therefore a loss on the derivative liability was recorded of $13,627. The Company estimated the fair market value of the derivative liability using Black Scholes with the following main assumptions: (1) conversion price at December 31, 2012 of $0.0037; (2) volatility at December 31, 2012 of 348%%, respectively; (3) Discount rates of 0.18% and (4) $0 in assumed dividends.
On October 16, 2012, the Company entered into a 12% Convertible Promissory Note of $6,581 with Magna Corporation for the settlement of an existing trade payable of $4,500, which together with any unpaid accrued interest is due on September 24, 2013. At inception, $2,081 was recorded as a loss on settlement of accounts payable. This note together with any unpaid accrued interest is convertible at a 50% discount to market on the lowest three trading days prior to conversion. The Company evaluated the conversion feature and determined that it met the conditions for bifurcation into a separate derivative liability. The Company estimated the fair market value of the derivative liability to be $11,355 at inception. As such, the Company recorded an initial discount to the face value of the note of $6,581 with an immediate loss on derivative liability of $4,774.
F-12
·
On October 16, 2012, Magna exercised its conversion option to convert $1,500 of the principle of the note into 1,153,846 of common stock. As such, the Company accelerated $1,500 of the discount into interest expense. The Company determined that the fair market value of the derivative liability on the date of the conversion had not changed materially, so no further gain or loss was recorded. The pro-rata portion of the derivative liability associated with the converted portion of the note of $2,588 was recorded into Additional paid in capital.
·
On November 7, 2012, Magna exercised its 2
nd
conversion option to convert $3,.000 of the principle of the note into 1,714,286 of common stock As such the Company accelerated $3,000 of the discount into interest expense. The Company determined that the fair market value of the remaining derivative liability on the date of the conversion was $6,867 and therefore recorded a gain on derivative liability of $1,900. After conversion the pro-rata portion of the derivative liability associated with the converted portion of the note of $3,130 was recorded into Additional paid-in-capital.
·
On November 20, 2012, Magna exercised its 3rd conversion option to convert the remaining balance of $2,081 into 2,081,250 shares of common stock. As such the Company accelerated the remaining $2,081 of the discount into interest expense. The Company determined that the fair market value of the derivative liability on the date of the conversion was $8,143; therefore a loss of $4,407 was recorded. After the conversion, remaining balance of $8,143 of the derivative liability was recorded into additional paid in capital.
As of December 31, 2012, the Magna note and derivative liability was $0.
8 - INCOME TAXES
No provision for federal income taxes has been recognized for the years ended December 31, 2012 and 2011, as the Company incurred a net operating loss for income tax purposes in each year and has no carryback potential.
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2012 and 2011 were as follows:
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December 31,
2012
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December 31,
2011
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Deferred tax assets:
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Net operating loss
|
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$
|
188,051
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$
|
26,338
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|
|
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188,051
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|
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26,338
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|
Less valuation allowance
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|
|
(188,051)
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|
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(26,338)
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|
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$
|
-
|
|
|
$
|
-
|
The Company has provided a full valuation allowance for net deferred tax assets as it is more likely than not that these assets will not be realized. At December 31, 2012, the Company had net operating loss carry forwards of approximately $553,092 for federal income tax purposes. These net operating loss carry forwards begin to expire in 2024.
F-13
Income tax expense differed from the amounts computed by applying the U.S. federal statutory tax rate of 34% to pretax income from continuing operations as a result of the following:
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Year ended December 31,
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2012
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|
|
2011
|
|
Computed “expected” income tax expense (benefit)
|
|
$
|
(1,400,994)
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|
$
|
(26,338)
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|
Increase (reduction) resulting from:
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|
|
|
|
|
|
|
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Permanent difference
|
|
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1,239,281
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
161,713
|
|
|
|
26,338
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|
Income tax expense
|
|
$
|
-
|
|
|
$
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-
|
9 - STOCKHOLDERS’ DEFICIT
On September 18, 2012, the Company increased the authorized number of shares to 500,000,000, with 450,000,000 being common shares and 50,000,000 being preferred shares.
On March 15, 2013, the Company increased the authorized number of shares to 2,500,000,000, with 2,450,000,000 being common shares and 50,000,000 being preferred shares.
Preferred Stock
On December 6, 2012, the Company agreed to issue 50,000,000 shares of Class A Preferred stock to Dr. Moran for services rendered. The holders of the preferred stock shall be entitled to participate in dividends upon board approval and do not get liquidation preferences. The shares are convertible into 10 shares of common stock. Based on this, the Company determined the fair market value of the preferred shares to be equal to $3,150,000 based on the common stock trading price on the date of the resolution and recorded such as stock based compensation. The shares were treated as if converted into common shares to determine the fair market value.
Common Stock
During the year ended December 31, 2012, the Company entered into an agreement to issue 438,000 shares of common stock in exchange for release of a related party receivable of $38,800. The fair market value of the shares issued was $43,800; therefore the Company recorded a $5,000 loss on the extinguishment of debt.
During the year ended December 31, 2012, the Company exchanged 300,000 shares of restricted common stock for consulting services. The value was determined using the market value of the shares issued which was $39,000 resulting in an Additional Paid in Capital amount of $38,700.
During the year ended December 31, 2012, the Company entered into a two consulting agreements with the commitment to issue a total of 110,000 shares at the signing of the agreement in April 2012. As of December 31, 2012, the shares had not been issued, but the Company recorded a common stock payable with a corresponding increase in stock based compensation for $15,026.
During the year ended December 31, 2012, the Company entered into a consulting agreement with the commitment to issue a total of 2,000,000 shares at the signing of the agreement in April 2012. As of December 31, 2012, the shares had been issued, and the Company recorded stock based compensation in the amount of $300,000 which is the market value of the shares to be issued under the consulting arrangements.
During the year ended December 31, 2012, the Company entered into a consulting agreement with the commitment to issue a total of 5,000,000 common shares upon execution of the agreement. As of December 31, 2012, the shares have not been issued and the Company recorded a common stock payable with a corresponding increase in stock based compensation for $13,500.
F-14
On October 27, 2012, the Company entered into a twelve month consulting agreement with the commitment to issue a total of 10,000,000 shares per month. As of December 31, 2012, the Company owed 20,000,000 shares under this agreement. As such, the Company recorded a common stock payable for $104,000 equal to the fair market value or trading price of the company’s stock on the last day of the month for November and December 2012, with a corresponding increase in stock based compensation. See Subsequent Events Note 13, where 10,000,000 shares were issued in January 2013.
During the year ended December 31, 2012, the Company determined that $3,681 in accounts payable were related to the former shareholders and therefore were written off with an increase in additional paid in capital
During the year ended December 31, 2012, the Company issued a total of 4,949,382 shares of common stock in connection with the conversion of $6,581 of convertible notes payable. See Note 7: Convertible Notes payable.
On November 7, 2012, the Company agreed to convert $50,000 of accrued salary for Dr. Marco Moran into 19,047,619 shares of common stock. The number of shares issued was calculated using a 25% discount to the trading price on the agreement date. The fair market value of the shares on the date of the agreement was $66,667, however these shares have not been issued as of the issuance of these financial statements and the $50,000 of accrued salary is still recorded as of December 31, 2012.
During the year ended December 31, 2012, a shareholder agreed to issue some of his shares to a third party for services rendered on behalf of the Company. The fair market value of these services totaled $4,375. The Company recorded this as a contribution to capital and an increase in stock based compensation.
On November 7, 2011, the Company entered into an Advisory Services Agreement (“Advisory Agreement”) with an unrelated investment advisory company (the “Advisor”), whereas the Advisor agreed to perform certain advisory services in exchange for 50,000 shares, valued at $4,500 ($0.09 per share), of the Company’s common stock, to be delivered within 10 days after execution of the Advisory Agreement, in addition to reimbursement by the Company for the $4,500 DTC Application fee. The shares issued pursuant to the Advisory Agreement are restricted shares. The term of the Advisory Agreement commenced on November 7, 2011 and was set to expire upon the Company’s receipt of either an approval or a denial of their DTC Eligibility Request by DTC. On March 14, 2012, the Company completed the final approved DTC opinion and became DTC eligible on April 26, 2012. .
On December 30, 2011, the Company issued 1,250,000 restricted shares, valued at $81,250 ($0.065 per share) to settle its outstanding note payable to an unrelated third party (the “Exchange”). The exchange price was determined to be 50% below the average ten (10) day trading price of the Company’s unrestricted shares of common stock prior to the conversion date. Pursuant to the exchange, the unrelated third party released the Company from its obligation to repay outstanding principle and interest due, aggregating $328,656 at the time of the exchange. The Company recognized a $247,406 gain on extinguishment of debt as a result of the exchange. See Note 6.
10 - RELATED PARTY TRANSACTIONS
Sales to Related Party Distributor
During the years ended December 31, 2012 and 2011, the Company engaged with a distributor that is wholly-owned by the Company’s CEO (the “Distributor”). The Distributor is responsible for shipping out product samples, transferring small quantities of product to local distributors at the request of the Company, sales of product to local retailers or small wholesalers and for the fulfillment of online sales orders. The Company may withdraw cases of product from the Distributor at the Company’s will for Company use, for which the Company will provide the Distributor with a credit memo based on a per-case price equal to the price paid by the Distributor to the Company.
F-15
The Distributor pays the Company on a per case basis which is consistent with terms between the Company and third party distributors. Since the Company uses a substantial amount of the Distributor’s inventory as samples and promotions, the Company offers the Distributor credit terms of “on consignment.” During the years ended December 31, 2012 and 2011 the Company recognized revenue from product sales to the Distributor of $14,240 and $13,162 respectively, which represented 2.7% and 0.97%, respectively, of total product revenue recognized by the Company. At December 31, 2012 and 2011, accounts receivable from the Distributor was $6,329 and $3,000, respectively.
Shipping Reimbursements from Related Party
At December 31, 2012 and 2011, the Company had outstanding accounts receivable of $8,932 and $5,603, respectively, from a company, Wet & Wild, Inc. owned by the CEO’s wife. These receivables represent shipping reimbursements erroneously billed to DSD by logistics and shipping companies. The Company paid these invoices and then in turn generated invoices to the company owned by the CEO’s wife for reimbursement.
Advances to Related Party
Prior to December 31, 2011, the Company advanced $49,484 to a company owned by the CEO’s wife. As of December 31, 2012 and 2011, that Company had repaid $40,152 of these advances resulting in outstanding advances due of $9,332 as of these dates.
Acquisition of Fixed Assets from Related Party
During the year ended December 31, 2011, the Company purchased two used vehicles from companies owned by the CEO for a total of $7,850.
Advances from Related Party
During the year ended December 31, 2011, the Company received related party advances from a company majority owned by the CEO and of which the CEO was the sole officer and director in the aggregate amount of $38,800. On March 7, 2012, the Company issued 438,000 restricted shares of common stock to settle the $38,800 advances from third parties that were outstanding at December 31, 2011.
Other
During 2011, the Company paid consulting and research related fees on behalf of High Margins, Inc. another company owned by the CEO. Amounts receivable at December 31, 2012 was $4,569.
During 2012, the Company made payments of $9,353 to his wife and daughter for reimbursement of medical insurance costs and other consulting services performed for the Company.
11 - LEGAL PROCEEDINGS
The Company is aggressively defending itself in all of the below proceedings. The Company’s management believes the likelihood of future liability to the Company for these contingencies is remote, and the Company has not recorded any liability for these legal proceedings at December 31, 2012 and December 31, 2011. While the results of these matters cannot be predicted with certainty, the Company’s management believes that losses, if any, resulting from the ultimate resolution of these proceedings will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
F-16
During January 2011, a claim was filed against DSD by Corey Powell, in Ascension Parish, LA 23rd Judicial District Court. Corey Powell was a former distributor of LEAN, a relaxation beverage marketed by DSD. Powell filed suit to recover allegedly unpaid commissions, “invasion fees” and “finder’s fees.” The commissions related to payments allegedly owed for Powell’s direct sale of LEAN product to wholesalers and retailers. The invasion fees relate to payments allegedly owed to Powell when the LEAN product was sold by other wholesalers in his geographic territory. The finders’ fees relate to payments allegedly owed to Powell for introducing investors to the DSD management. Discovery is ongoing. Written discovery has been propounded and depositions have been taken to better understand the nature and basis for the plaintiff’s claims and to build DSD’s defenses. DSD has vigorously contested each and every one of the plaintiff’s allegations and has instructed counsel to proceed to trial on the merits. There have been negotiations between the counsels for the parties regarding dropping approximately half of the original claims. However no trial date has been set.
On February 14, 2011, a claim was filed against DSD by Charles Moody, in Caddo Parish, LA First Judicial Court seeking in excess of $100,000 in damages. Charles Moody loaned DSD approximately $63,000 in June 2009. In exchange, Moody received a Promissory Note containing the terms and conditions of the repayment of the loan. Based upon the understanding of the parties, DSD began making monthly payments to Moody in January 2010 in satisfaction of the loan. In December 2010, final payment of the remaining balance of the loan was paid to Moody in full and final satisfaction of the Promissory Note. Moody filed suit to recover “late fees” allegedly owed under the Promissory Note. DSD contends the Promissory Note was satisfied with the final payment in December 2010; Moody contends that repayment should have begun in November 2009, and that because it did not, late fees are owed. This matter was settled for a payment of $8,000 by DSD on July 27, 2012 with no admission of guilt or liability by either party.
On November 9, 2011, Charles Moody and DeWayne McKoy filed a claim against DSD and Marco Moran, CEO, in Bossier Parish, LA 26th Judicial Court. Charles Moody and Dewayne McKoy, allegedly both shareholders of DSD, brought an action against Dr. Moran alleging that he engaged in various acts of misconduct and breaches of his fiduciary duties to the corporation which damaged them as minority shareholders. Moody and McKoy also seek damages from Dr. Moran for dilution and/or loss of value of their shareholder interest in DSD as a result of his alleged misconduct. DSD is a nominal defendant in this derivative action, as required by Louisiana law. Initial pleadings have been filed and exceptions to the plaintiff’s claims have been asserted. Discovery has not yet commenced. DSD vigorously denies that its officers or directors engaged in any conduct which may have harmed minority shareholders.
During December 2011, Innovative Beverage Group Holdings (“IBGH”) filed a claim against Dewmar International BMC, Inc., Unique Beverage Group, and LLC. and Marco Moran, CEO of the Company, in Harris County, TX 61st Judicial District Court, whereas the plaintiff asserted certain allegations. On February 24, 2012, the Company filed a motion for summary judgment to dismiss these frivolous allegations due to lack of proper evidence. On April 12, 2012 Dewmar International BMC, Inc was given written notice of its non-suit without prejudice from Innovative Beverage Group, Inc. This releases Dewmar International BMC, Inc. from any and all liability. On June 27, 2012, Innovative Beverage Group Holdings (“IBGH”) filed the same claims against Dewmar International BMC, Inc., DSD Network of America, Inc. and Marco Moran CEO of the Company, in Harris County, Texas 127th Judicial District Court, whereas plaintiff asserted that the Defendants engaged in various acts of unfair business practices that caused harm to IBGH. The company’s and Marco Moran have filed an Answer and Counterclaim in this matter on October 31, 2012. Discovery has not yet begun in this matter. Written discovery will be propounded and depositions will have to be taken to better understand the nature and basis for the plaintiff’s claims and to build the Company’s defenses. The Company has vigorously contested each and every one of the plaintiff’s allegations and has instructed counsel to proceed to trial on the merits.
On March 22, 2012 Plaintiff, DSD NETWORK OF AMERICA, INC. (hereinafter “DSD”) filed suit against Defendants DeWayne McKoy, Charles Moody, Corey Powell and Peter Bianchi in United States District Court; District of Nevada for a combined thirteen claims accusing this group of defendants in colluding against the Company. Answers have been received from McKoy, Moody and Powell and Powell has filed a counterclaim. DSD vigorously denies all the claims in Powell’s counterclaim. Bianchi failed to answer and was defaulted however Bianchi has filed a Motion to Set Aside the Default and Powell and Bianchi have filed Motions to Dismiss. Rulings on these Motions are still pending.
F-17
12 - COMMITMENTS AND CONTINGENCIES
Employment Agreement
On January 1, 2011, the Company entered into employment agreement with Dr. Moran (“Employee”) to serve as President and Chief Executive Officer of the Company. The employment commenced on January 1, 2011 and runs for the period through January 1, 2015. The Company will pay Employee, as consideration for services rendered, a base salary of $120,000 per year.
As additional compensation, Employee is eligible to receive one percent of the issued and outstanding shares of the Company if the gross revenues hit specified milestones for each fiscal year under the agreement. The Company will provide additional benefits to Employee during the employment term which include, but are not limited to, health and life insurance benefits, vacation pay, expense reimbursement, relocation reimbursement and a Company car. The Company may also include Employee in any benefit plans which it now maintains or establishes in the future for executives. If Employee dies, the Company will pay the designated beneficiary an amount equal to two years’ compensation, in equal payments over the next twenty four months.
In the event Employee’s employment is constructively terminated within five years of the commencement date, Employee shall receive a termination payment, which will be determined according to a schedule based upon the number of years since the commencement of the contract, within a range of $120,000 to $400,000. Additionally, Employee shall continue to receive the additional benefits mentioned above for a period of two years from the termination date. If the constructive termination date is later than five years after the commencement date, Employee shall receive the lesser amount of an amount equal to his aggregate base salary for five years following the date of the termination date, or an amount equal to his aggregate base salary through the end of the term. Additionally, Employee shall continue to receive the additional benefits mentioned above during the period he is entitled to receive the base salary.
During the years ended December 31, 2012 and 2011, the Company incurred $120,000, and $120,000 in base salary to Dr. Moran, respectively, which were included as a component of general and administrative expenses. The Company recorded total accrued payroll to Dr. Moran in the amounts of $390,000 and $333,000, in accounts payable and accrued liabilities on its consolidated balance sheets at December 31, 2012 and 2011, respectively. On November 7, 2012, the Company agreed to convert $50,000 of accrued salary for Dr. Marco Moran into 19,047,619 shares of common stock. The number of shares issued was calculated using a 25% discount to the trading price on the agreement date. The fair market value of the shares on the date of the agreement was $66,667 which resulted in recognition of loss on settlement of accrued salaries of $16,667 for the difference in the amount of accrued salary and the fair market value of the shares issued
On December 6, 2012, the Company issued 50,000,000 shares of Class A Preferred stock to Dr. Moran for services rendered. The shares are convertible into 10 shares of common stock. Based on this, the Company determined the fair market value of the preferred shares to be equal to $3,150,000 based on the common stock trading price on the date of the resolution and recorded such as stock based compensation. The shares were treated as if converted into common shares to determine the fair market value.
Lease Operating Expenses
The Company leased office spaces in Clinton, MS and Houston, TX under non-cancelable operating leases during 2012 and 2011. Rent expense was $23,898 and $22,729 for the years ended December 31, 2012 and 2011, respectively.
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The following is a schedule of future minimum lease payments under non-cancelable operating leases at December 31, 2012:
|
|
|
| |
|
Years Ending
December 31,
|
|
Future
Minimum
Lease
Payments
|
|
2013
|
|
$
|
30,638
|
|
2014
|
|
|
12,375
|
|
2015
|
|
|
12,375
|
|
2016
|
|
|
12,375
|
|
2017
|
|
|
10,312
|
|
|
|
|
|
|
Total
|
|
$
|
78,075
|
Broker/Sales Agreements
On March 1, 2012, the Company entered into a distribution and brokerage agreement with Brand Builderz, USA, LLC (BBUSA), a Limited Liability Company organized under the laws of the State of Maine, to sell, market, manage and assist in distributing products in its designated territory. The Company was to pay a minimum monthly retainer fee until sales commissions reach at least a pre-determined amount for at least two consecutive months. The company will pay commissions of a pre-determined percentage of gross sales collected, pay an invasion fee of less than one dollar ($1.00) per physical case of product sold within the territory of BBUSA by a third party. Due to breach of contract by BBUSA, this Agreement was discontinued on May 22, 2012. BBUSA failed to generate any sales therefore was never paid any commissions or invasion fees.
On April 9, 2012, The Company entered into an agreement with NA Beverages, LLC, a Nevada Limited Liability Company (the Consultant), to provide advice, analysis, sales and recommendations. The Consultant shall be paid at an annual base salary based upon sales performance, receive a commission of a set percentage of gross sales of all fully paid invoices received from the Consultant’s customers and provide a monthly bonus of up to twenty-five hundred dollars ($2,500) for arranging, conducting and reporting of meetings with buyers and or similar business related personnel. Either the Company or the Consultant may terminate the agreement with at least thirty (30) says prior written notice with no specific reasons given. This agreement was terminated on August 1, 2012.
On November 15, 2012, the Company entered into a business development agreement with Globalization Accelerator, LLC (“Global XLR”) to assist the company in improving sales and product placement. The Company agreed to provide Global XLR: (i) a commission of 4% of gross sales revenue; (ii) a 4.90% equity stock option at the purchase price of $49,000 if Global XLR generates $3,000,000 of gross revenue within any 12 consecutive month period or less, and (iii) pay a finder’s fee of 3% of the gross investment amount for any source of funding introduced to the Company.
Distributor Agreements
On July 5, 2012, the Company entered into a distribution agreement with Hooper Sales Co., Inc. a corporation organized under the laws of the state of Arkansas to exclusively sell, market, manage and assist in distributing products in its designated territory in Arkansas and Mississippi. The Company will provide an invasion fee up to $4.00 per case if products are sold within said territory by any other approved distributor or wholesaler to which the Company chooses to directly ship product.
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On July 5, 2012, the Company entered into a distribution agreement with Mikeska Distributing Co, a corporation organized under the laws of the State of Texas to exclusively sell, market, manage and assist in distributing products in its designated territory in Texas. The Company will provide an invasion fee up to $4.00 per case if products are sold within said territory by any other approved distributor or wholesaler to which the Company chooses to directly ship product.
On July 16, 2012, the Company entered into a distribution agreement with New Age Distributing, a corporation organized under the laws of the State of Arkansas to sell and assist in distributing products in its designated territory of Arkansas. The Company will provide an invasion fee up to $4.00 per case if products are sold within said territory by any other approved distributor or wholesaler to which the Company chooses to directly ship product.
Consulting Agreements
On October 15, 2012 the Company entered into a consulting agreement with Chad Tendrich for general business consulting for a period of 12 months. The Company agreed to deliver 8,500,000 shares of restricted common stock as compensation. The shares are not considered earned until delivered to the consultant. As of December 31, 2012, the shares were not considered earned nor delivered. The shares were issued to the consultant in January 2013.
On October 27, 2012, the Company entered into a consulting agereement with Dash Consulting, LLCto provide bookkeeping and invoicing consulting for a period of 12 months. As compensation, the Company agreed to deliver 10,000,000 shares of restricted common stock per month. The Company has accrued the obligation on a monthly basis over the time period the service is rendered. As of December 31, 2012, the Company has accrued 20,000,000 shares at the total estimated fair market value of $104,000. In January 2013, the Company issued 10,000,000 shares under this contract. As of March 31, 2013, shares owed are an additional 30,000,000 shares.
On November 12, 2012, the Company entered into a consulting agreement with Derrick Brooks to become a medical and healthcare consultant to the Company for a period of 12 months. The Company agreed to deliver 3,000,000 shares of restricted common stock as compensation. The shares are not considered earned until delivered to the Consultant. As of December 31, 2012, the shares were not considered earned until delivered. . The shares were issued in January 2013.
On November 15, 2012, the Company entered into a consulting agreement with Christy Favorite to conduct wellness programs for the Company for a period of 12 months. The Company agreed to deliver 5,000,000 shares of restricted common stock as compensation. The shares are not considered earned until delivered to the Consultant. As of December 31, 2012, the shares were not considered earned until delivered. The shares were issued in January 2013.
Other
On August 1, 2012, the Company entered into an investor relations consulting agreement with Empire Relations Group, Inc. (“Empire”),
a
corporation organized under the laws of the State of New York. Under the terms of the agreement, the Company will pay Empire a non-refundable guaranteed consulting fee of $15,000 if Empire introduces the Company to at least $30,000 in capital either through equity investment, loans, notes, debt settlements or any other type of financing which results in an increase in the net cash position of the Company
13 - SUBSEQUENT EVENTS
Stockholders’ Equity
During January 2013, the Company issued 31,500,000 shares of common stock in accordance to consulting services agreements for services rendered.
F-20
Convertible Notes
On January 15, 2013, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”) a Delaware Corporation for an 8% convertible promissory note with an aggregate principal amount of $53,000 which together with any unpaid accrued interest due on September 17, 2013. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at a variable conversion price calculated as the greater of (i) the variable conversion price of 48% of the market price calculated as the average of the lowest three trading prices for the common stock during the 10 trading day period prior to the conversion date or (ii) the fixed price of $0.0009. This convertible promissory note was funded in the amount of $50,000, with $3,000 being recorded as legal fees for amounts held by note holder. The note contains an anti-dilution provision which causes the conversion price to decrease if the Company issues any common stock at a lower price or with no consideration.
On February 19, 2013, the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. (“Asher”) a Delaware Corporation for an 8% convertible promissory note with an aggregate principal amount of $32,500 which together with any unpaid accrued interest due on November 21, 2013. This convertible note together with any unpaid accrued interest is convertible into shares of common stock at the holder’s option 180 days from inception at a variable conversion price calculated as the greater of (i) the variable conversion price of 55% of the market price calculated as the average of the lowest three trading prices for the common stock during the 10 trading day period prior to the conversion date or (ii) the fixed price of $0.0009. This convertible promissory note was funded in the amount of $30,000, with $2,500 being recorded as legal fees for amounts held by note holder. The note contains an anti-dilution provision which causes the conversion price to decrease if the Company issues any common stock at a lower price or with no consideration.
Conversions of Convertible Notes Payable
On January 11, 2013, Asher converted $12,000 of its outstanding notes payable entered into on June 27, 2012 into 3,750,000 shares of common stock at a conversion price of $0.0032. After conversion, a principal balance of $20,500 remained.
On February 1, 2013, Asher converted an additional $12,100 of its outstanding notes payable entered into on June 27, 2012 into 5,761,905 shares of common stock at a conversion price of $0.0021. After conversion, a principal balance of $8,400 remained.
On February 14, 2013, Asher converted the remaining $8,400 of its outstanding notes payable entered into on June 27, 2012 together with unpaid interest of $1,300 into 4,850,000 shares of common stock at a conversion price of $0.0020. After conversion, a principal balance of $0 remained on the June 27, 2012 notes payable.
On March 6, 2013, Continental converted $5,000 of its outstanding convertible notes payable entered into in August 2012 into 1,567,398 shares of common stock at a conversion price of $0.0032. After conversion, a principal balance of $16,500 remained.
F-21