UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2016

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

Commission File Number: 000-53586

THE PULSE BEVERAGE CORPORATION
(Exact name of registrant as specified in its charter)

Nevada 36-4691531
(State or other jurisdiction of incorporation of
organization)
(I.R.S. Employer Identification No.)

11678 N Huron Street, Northglenn, CO 80234
 (Address of principal executive offices, including zip code)

(720) 382-5476
(Telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]   NO [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [X]   NO [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

  Large Accelerated Filer [   ]   Accelerated Filer [   ]
  Non-accelerated Filer [   ]   Smaller Reporting Company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [   ]  NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
70,308,313 shares of common stock, par value $0.00001, as of May 13, 2016.


THE PULSE BEVERAGE CORPORATION
FORM 10-Q

INDEX

  PAGE
PART I—FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Condensed Consolidated Balance Sheets as at March 31, 2016 (Unaudited) and December 31, 2015 1
   
Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 (Unaudited) 2
   
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited) 3
   
Notes to Condensed Consolidated Financial Statements 4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 11
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
   
Item 4. Controls and Procedures 16
   
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings 16
   
Item 1A. Risk Factors 16
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
   
Item 3. Defaults Upon Senior Securities 17
   
Item 4. Mine Safety Disclosure 17
   
Item 5. Other Information 17
   
Item 6. Exhibits 17
   
Signature Page 18
   
Certifications  
   
     Exhibit 31.1  
     Exhibit 31.2  
     Exhibit 32.1  


FORWARD-LOOKING STATEMENTS

          This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report.  Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms.  Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements.  Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters.  Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 30, 2016.

           YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

          The forward-looking statements made in this report on Form 10-Q relate only to events or information as of the date on which the statements are made in this report on Form 10-Q.  Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.  You should read this report and the documents that we reference in this report, including documents referenced by incorporation, completely and with the understanding that our actual future results may be materially different from what we anticipate.

Unless otherwise indicated, in this Form 10-Q, references to “we,” “our,” “us,” the “Company,” “Pulse” or the “Registrant” refer to The Pulse Beverage Corporation, a Nevada corporation.


 

The Pulse Beverage Corporation
Condensed Consolidated Balance Sheets
As of March 31, 2016 (Unaudited) and December 31, 2015

    2016         2015  
ASSETS            
             
Current Assets:            
             
      Cash $ 324,946   $ 431,270  
      Accounts receivable, net (Note 3)   560,850     386,462  
      Inventories (Note 4)   945,291     988,910  
      Prepaid expenses   23,238     15,461  
                  
      Total Current Assets   1,854,325     1,822,103  
      Property and equipment, net of accumulated depreciation of $291,987 and $266,099, respectively (Note 5)   227,617     247,235  
      Intangible assets, net of accumulated amortization of $55,817 and $52,683, respectively (Note 5)   1,129,834     1,131,793  
             
Total Assets $ 3,211,776   $ 3,201,131  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
             
Current Liabilities:            
             
      Accounts payable and accrued expenses $ 1,055,343   $ 790,616  
      Credit card indebtedness   21,058     22,066  
      Loans payable (Note 6)   1,032,258     755,771  
             
Total Current Liabilities   2,108,659     1,568,453  
             
Stockholders’ Equity:            
             
        Preferred stock, 1,000,000 shares authorized, $0.001 par value, none issued   -     -  
        Common stock, 100,000,000 shares authorized, $0.00001 par value 68,924,980 and 68,447,202 issued and outstanding, respectively (Note 8)   689     684  
        Additional paid-in capital   14,906,861     14,879,160  
        Accumulated deficit   (13,804,433 )   (13,247,166 )
             
Total Stockholders’ Equity   1,103,117     1,632,678  
             
Total Liabilities and Stockholders’ Equity $ 3,211,776   $ 3,201,131  

                (See accompanying notes to these unaudited condensed consolidated financial statements)

1


 

The Pulse Beverage Corporation
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)

    2016     2015  
             
Gross Sales $ 793,316   $ 745,156  
Less: Promotional allowances and slotting fees   (50,772 )   (40,585 )
Net Sales   742,544     704,571  
Cost of Sales   507,809     491,041  
             
Gross Profit   234,735     213,530  
             
Expenses            
     Advertising, samples and displays   21,090     18,993  
     Asset impairment   5,085     -  
     Freight-out   78,400     74,845  
     General and administration   243,139     309,824  
     Salaries and benefits and broker/agent’s fees   330,010     316,263  
     Stock-based compensation   3,939     -  
             
Total Operating Expenses   681,663     719,925  
             
Net Operating Loss   (446,928 )   (506,395 )
             
Other Income (Expense)            
      Interest expense   (110,339 )   (442 )
             
Total Other Income (Expense)   (110,339 )   (442 )
             
Net Loss $ (557,267 ) $ (506,837 )
             
Net Loss Per Share – Basic $ (0.01 ) $ (0.01 )
             
Weighted Average Shares Outstanding – Basic   68,686,000     54,773,000  

                (See accompanying notes to these unaudited condensed consolidated financial statements)

2


 

The Pulse Beverage Corporation
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)

        2016     2015  
Cash Flow from Operating Activities            
     Net loss $ (557,267 ) $ (506,837 )
     Adjustments to reconcile net loss to net cash used in operations:            
          Amortization and depreciation   29,021     29,297  
          Asset impairment   5,085     -  
          Amortization of deferred financing fees   79,968     -  
          Shares and options issued for services   27,706     57,500  
     Changes in operating assets and liabilities:            
     Decrease (increase) in accounts receivable   (174,387 )   (89,870 )
     (Decrease) increase in prepaid expenses   (7,778 )   17,554  
     Decrease in inventories   38,536     80,078  
     Decrease in other assets   -     9,550  
     Increase (decrease) in accounts payable and accrued expenses   88,718     (54,353 )
             
Net Cash Used in Operating Activities   (470,398 )   (457,081 )
             
Cash Flow to Investing Activities            
     Purchase of property and equipment   (6,269 )   (16,959 )
     Acquisition of intangible assets   (1,175 )   (4,003 )
             
Net Cash Used in Investing Activities   (7,444 )   (20,962 )
             
Cash Flow from Financing Activities            
     Proceeds from loans, net of debt issuance costs   430,860     -  
     Repayment of loans payable   (59,342 )   -  
     Proceeds from the sale of common stock, net of costs   -     860,000  
             
Net Cash Provided by Financing Activities   371,518     860,000  
             
(Decrease) Increase in Cash   (106,324 )   381,957  
             
Cash - Beginning of Period   431,270     49,517  
             
Cash - End of Period $ 324,946     431,474  
             
Non-Cash Financing and Investing Activities:            
             
     Shares issued for services $ 23,767   $ 57,500  
             
Supplemental Disclosures:            
             
     Interest paid $ 23,786   $ -  
     Income taxes paid   -     -  

                (See accompanying notes to these unaudited condensed consolidated financial statements)

3


 

The Pulse Beverage Corporation
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Nature of Operations

  Darlington Mines Ltd. (“Darlington”) was incorporated in the State of Nevada on August 23, 2006. On February 15, 2011 Darlington Mines Ltd. closed a voluntary share exchange transaction with a private Colorado company, The Pulse Beverage Corporation, which was formed on March 17, 2010. The Pulse Beverage Corporation became a wholly-owned subsidiary. On February 16, 2011 Darlington’s name was changed to “The Pulse Beverage Corporation”.

  We manufacture and distribute Natural Cabana® Lemonade, Limeade and Coconut Water and PULSE® Heart & Body Health functional beverages. Our products are distributed nationwide primarily through a series of distribution agreements with various independent local and regional distributors and on a warehouse direct basis with major retail chain stores. Our products are also distributed internationally in Canada, China and Mexico.

  As of March 31, 2016, we had cash of $324,946 and negative working capital of $254,334. On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan under the Amended Credit Facility having the same terms as the initial $900,000 loan. The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. We received $455,860, net of $44,140 of closing costs, on March 22, 2016 and will receive a further $250,000 once we collect an account receivable from our Mexico distributor. A further $250,000 will be received once we have met certain other performance criteria. In connection with this additional loan, we agreed to issue 10,558,069 shares of our restricted common stock to the Lender as an Advisory Fee. Notwithstanding the above, the Lender is restricted from receiving these shares to the extent that, after giving effect to the receipt of the shares, the Lender would beneficially own more than 4.99% of our common stock. Any shares not issued as a result of this limitation will be issued at a later date, and from time to time, when the issuance of these will not result in the Lender beneficially owning more than 4.99% of our common stock. We have the right to purchase these shares by paying $350,000 to the Lender on or before September 22, 2016.

  These additional sources of cash will allow us to meet our working capital needs through to the middle of 2017. We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our credit facility and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.

  As of May 13, 2016, we believe that our cash on hand, available working capital and financing alternatives will be sufficient to meet our anticipated cash needs through the first half of 2017 and is sufficient to alleviate the uncertainties relating to our ability to successfully execute on our business plan and finance our operations through the middle of 2017. Our financial statements for the periods presented were prepared assuming we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business.

  We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our credit facility and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.

2. Summary of Significant Accounting Policies

  Basis of presentation and consolidation

  The interim unaudited condensed consolidated financial statements for the three months ended March 31, 2016 and 2015 have been prepared in accordance with accounting principles generally accepted in the United States. Our fiscal year end is on December 31st. These financial statements include our accounts and the accounts of our wholly-owned subsidiaries, Natural Cabana SA de CV (A Mexico Subsidiary) and Natural Cabana Distribution Inc. (A US Subsidiary).

4


 
  The foregoing unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information using the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these condensed consolidated financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto included on Form 10-K for the year ended December 31, 2015. In our opinion, the unaudited interim condensed consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

  Operating results for the three months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

  Use of Estimates

  The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

  Cash and Cash Equivalents

  We maintain cash balances with financial institutions that may exceed federally insured limits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents include cash invested in money market accounts. As of March 31, 2016 and December 31, 2015, there were no cash equivalents. We place our cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. As of March 31, 2016 and December 31, 2015, we exceeded insurance limits by $nil and $86,711, respectively.

  Revenue Recognition

  Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50. All sales to distributors and customers are final; however, in limited instances, due to product quality issues or distributor terminations, we may accept returned product. To date, such returns have been de minimis.

  Seasonality

  Our sales are seasonal and we experience fluctuations in quarterly results as a result of many factors. Historically, we have generated a higher percentage of our revenues during the warm weather months of April through September. Timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another. As a result, we believe that period-to-period comparisons of results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance or results expected for the entire fiscal year.

  Recent Pronouncements

  We continually assess any new accounting pronouncements to determine their applicability to our operations and financial reporting. Where it is determined that a new accounting pronouncement affects our financial reporting, we undertake a study to determine the consequence of the change to our financial statements and assure that there are proper controls in place to ascertain that our financial statements properly reflect the change.

5


 
  During the first quarter of 2015, we adopted FASB’s guidance on reporting discontinued operations and disclosures of disposals of components of an entity. This standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for annual reporting periods ending after December 15, 2014. Early adoption was permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of this guidance has not had a material impact on our financial position, results of operations or cash flows.

  During the fourth quarter of 2015, we adopted ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, and amortization of those costs should be reported as interest expense. This ASU is effective for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. We adopted this change concurrently with our senior secured revolving loan together with related costs during the fourth quarter of 2015.

  In November 2015, the FASB issued (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes .” Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and a net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in our consolidated balance sheet. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. We have adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against our net deferred tax assets.

  In November 2014, the FASB issued ASU 2014-16, "Derivatives and Hedging (Topic 815)." Entities commonly raise capital by issuing different classes of shares, including preferred stock, that entitle the holders to certain preferences and rights over the other shareholders. The specific terms of those shares may include conversion rights, redemption rights, voting rights, and liquidation and dividend payment preferences, among other features. One or more of those features may meet the definition of a derivative under GAAP. Shares that include such embedded derivative features are referred to as hybrid financial instruments. The objective of this update is to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

  In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. It also provides guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

  In May 2015, the FASB issued ASU 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)," which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Further, the amendments remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The new guidance should be applied on a retrospective basis to all periods presented. We adopted this guidance on January 1, 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

6


 
  In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.” Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquired business recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquired business. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. We adopted this guidance in the first quarter 2016. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

  Recent Accounting Pronouncements Issued But Not Adopted as of March 31, 2016

  In July 2015, the FASB issued ASU 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which applies to inventory that is measured using first-in, first-out ("FIFO") or average cost. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using the last-in, first-out ("LIFO") method. This ASU is effective for annual and interim periods beginning after December 15, 2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. We do not expect the adoption of this guidance to have an impact on our consolidated financial statements.

  In January 2016, the FASB issued an accounting standard update which requires, among other things, that entities measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in earnings. Under the standard, entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified today as available for sale as a component of other comprehensive income. For equity investments without readily determinable fair values the cost method of accounting is also eliminated, however subject to certain exceptions, entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment and plus or minus adjustments for observable price changes, with all such changes recognized in earnings. This new standard does not change the guidance for classifying and measuring investments in debt securities and loans. The standard is effective for us on July 1, 2018 (the first quarter of our 2019 fiscal year). We are currently evaluating the anticipated impact of this standard on our financial statements.

  In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of adopting ASU No. 2016-02 on our consolidated financial statements.

  In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. We have not yet determined the impact of ASU 2016-08 on our consolidated financial statements.

7


 
  In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. We are currently evaluating the impact of adopting ASU No. 2016-09 on our consolidated financial statements.

  In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which provides further guidance on identifying performance obligations and improves the operability and understandability of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. We have not yet determined the impact of ASU 2016-10 on our consolidated financial statements.

3. Accounts Receivable

  Accounts receivable consists of the following as of:
  March
31, 2016
(Unaudited)
    December 31, 2015  
  Trade accounts receivable $ 701,045   $ 534,727  
  Less: Allowance for doubtful accounts   (142,756 )   (156,090 )
  Trade accounts receivable - net   558,289     378,637  
  Value added tax recoverable   2,561     2,290  
  Due from suppliers of services   -     5,535  
  Total accounts receivable, net of allowance $ 560,850   $ 386,462  

4. Inventories

  Inventories consists of the following:
     March
31, 2016

(Unaudited)
 
December 31, 2015  
  Finished goods $ 290,158   $ 344,764  
  Raw materials   655,133     644,146  
  Total inventory $ 945,291   $ 988,910  

5. Property and Equipment and Intangible Assets

  Property and equipment consists of the following as of :
  March
31, 2016

(Unaudited)
    December 31, 2015  
  Manufacturing, warehouse, display equipment and molds $ 343,523   $ 337,253  
  Office equipment and furniture   41,581     41,581  
  Mobile display unit and vehicles   134,500     134,500  
  Less: depreciation   (291,987 )   (266,099 )
  Total property and equipment $ 227,617   $ 247,235  

  For the three months ended March 31, 2016 and 2015, depreciation expense was $25,887 and $22,059, respectively.

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  Intangible assets consists of the following as of :   March
31, 2016

(Unaudited )
    December 31, 2015  
  Formulations, rights and patents $ 969,696   $ 969,696  
  Website   62,675     62,675  
  Less: amortization   (55,817 )   (52,682 )
  Trademarks – not amortized due to indefinite life   153,280     152,104  
  Total intangible assets $ 1,129,834   $ 1,131,793  

  For the three months ended March 31, 2016 and 2015, amortization expense was $3,134 and $7,238, respectively.

6. Loans Payable

  Loans payable consists of the following:    March 31, 2016
(Unaudited)
    December 31, 2015  
  Short-term loan – (a) below $ 15,000   $ 15,000  
  Short-term loan – related party – (a) below   130,000     130,000  
      145,000     145,000  
  Senior Secured Revolving Note – (b) below   1,284,699     844,040  
  Less: unamortized debt issuance costs   (397,441 )   (233,269 )
  Net carrying value   887,258     610,771  
    $ 1,032,258   $ 755,771  

  a) In September, 2015 we received short-term loans totaling $145,000 of which $130,000 was received from a family trust of our Chief Executive Officer. These loans are unsecured and are due on demand. Interest of $6,743 has been accrued at March 31, 2016 and included in accrued expenses. As of May 13, 2016 no demand for payment has been received.

  b) On November 6, 2015, we entered into a Credit Agreement with TCA Global Credit Master Fund, LP (the “Lender”). Under the terms of the Credit Agreement, the Lender has committed to lend a total of $3,500,000 (the “Credit Facility”) to us pursuant to a senior secured revolving note (the “Note”). The initial tranche of $650,000 was funded on November 6, 2015 and a second tranche of $250,000 was funded on December 22, 2015 for a total of $900,000 advanced against this Credit Facility. This loan matures on November 6, 2016 unless extended by the Lender. We must meet specific monthly collateral requirements to further draw upon the Credit Facility. The Credit Facility is secured by a senior secured interest in all of our assets. We are charged a 12% per annum rate of interest plus a 6% per annum administration fee on the daily loan balance outstanding. Repayment terms are 20% of gross receipts. Associated with the closing of the Credit Facility we incurred $281,230 of debt issuance costs which is being amortized to interest expense over the term of the loan to November 6, 2016. The Lender has the right, in the Event of Default, to convert any outstanding amounts under the Note into restricted shares of the Company’s common stock based on 85% of the weighted value average price of our common shares over the prior 5 trading days prior to conversion. However, the Lender may not convert any portion of the Note to the extent that after giving effect to the shares which would be received on conversion, the Lender would beneficially own more than 4.99% of our common stock. In connection with the Credit Facility, we are obligated to pay a $150,000 facility fee which is included in accounts payable and accrued liabilities. As security for this fee we issued 3,000,000 shares of restricted common stock to the Lender who has the right to sell enough shares to recover its fee. These shares are issued and outstanding as of March 31, 2016, however, the value will be recognized as the related liability is extinguished. Any excess shares not sold by the Lender will be returned to us for cancellation. We have the right to purchase these shares by paying the $150,000 facility fee to the Lender.

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  On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan having the same terms as the initial $900,000 loan described above. The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. We received $430,860, net of $69,140 of closing costs, on March 22, 2016 and will receive a further $250,000 once we collect an account receivable from our Mexico distributor. A further $250,000 will be received once we have met certain other performance criteria. In connection with this additional loan, we agreed to pay $350,000 to the Lender as an Advisory Services Fee by issuing 10,558,069 shares of our restricted common stock to the Lender. Notwithstanding the above, the Lender is restricted from receiving these shares to the extent that, after giving effect to the receipt of the shares, the Lender would beneficially own more than 4.99% of our common stock. Any shares not issued as a result of this limitation will be issued at a later date, and from time to time, when the issuance of these will not result in the Lender beneficially owning more than 4.99% of our common stock. We have accrued $175,000 pursuant to an agreement with the Lender and we will accrue an additional $87,500 once the next $250,000 is released to us and an additional $87,500 once the final $250,000 is released to us. We have the right to buy back these shares, if and when issued, by paying the $350,000 facility fee to the Lender.

7. Stock-based Compensation

  During the three months ended March 31, 2016 a further 67,230 directors stock options vested. These vested stock options were valued at $0.0585 which were estimated at the date of vesting using the Black-Scholes option-pricing model. A total of $3,939 (2015 - $nil) was charged to operations as stock-based compensation expense during the three months ended March 31, 2016. There is no further unrecorded stock-based compensation to record in a future period.

8. Common Stock

  We have 100,000,000 shares of common stock authorized at a par value of $0.00001.

  Equity transactions during the quarter ended March 31, 2016:

  On January 31, 2016 we issued 238,889 common shares and on February 29, 2016 we issued 238,889 common shares having an aggregate fair value of $40,611 pursuant to an employment contract with an officer/director. This contract expired on March 8, 2016 and pursuant to the contract the officer/director is to return 50% of shares issued. A total of 210,548 shares are to be returned for cancellation. These shares were valued at $0.08 per share or $16,844 in total which amount was deducted from additional paid in capital.

  Equity transactions during the quarter ended March 31, 2015:

  On March 27, 2015 we sold 10,050,000 Units at $0.10 per Unit for cash proceeds of $1,005,000 of which $100,000 was received as at December 31, 2014, $860,000 was received in cash and $45,000 was shares for debt. Each Unit consisted of one share of restricted common stock and one-half of a warrant. Each whole warrant allows the holder to purchase one additional share at a price of $0.20 per share at any time between March 10, 2016 and May 27, 2016.

9. Warrants

  At March 31, 2016 we had 4,789,997 common stock purchases warrants outstanding having an average exercise price of $0.53 per common share and having an average expiration date of .81 years. During the three months ended March 31, 2016 warrants to acquire 16,290,083 common shares expired unexercised.

10. Subsequent Events

  On April 12, 2016 we issued 133,333 shares having a fair market value of $10,333 pursuant to two service contracts.

  On May 5, 2016 we issued 1,000,000 shares having a fair market value of $100,000 to settle $100,000 of debt owing to two advisory board members.

  On May 11, 2016 we issued 250,000 shares having a fair market value of $37,500 pursuant to a Strategic Advisory Services Agreement.

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

The discussion that follows is derived from our interim unaudited Condensed Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 2016 (“2016”) and 2015 (“2015”).

Statements of Operations

    2016     2015     Increase
(Decrease)
 
                   
Gross Sales $ 793,316   $ 745,156   $ 48,160  
Less: Promotional allowances and slotting fees   (50,772 )   (40,585 )   (10,187 )
Net Sales   742,544     704,571     37,973  
Cost of Sales   507,809     491,041     16,768  
                   
Gross Profit   234,735     213,530     21,205  
Expenses                  
      Advertising, samples and displays   21,090     18,993     2,097  
      Asset impairment   5,085     -     5,085  
      Freight-out   78,400     74,845     3,555  
      General and administration   243,139     309,824     (66,685 )
      Salaries and benefits and broker/agent’s fees   330,010     316,263     13,747  
      Stock-based compensation   3,939     -     3,939  
                   
Total Operating Expenses   681,663     719,925     (38,262 )
Net Operating Loss   (446,928 )   (506,395 )   59,467  
Total Other Expenses (Income)   (110,339 )   (442 )   (109,897 )
Net Loss $ (557,267 ) $ (506,837 ) $ (50,430 )

Net Sales

During 2016 our overall gross revenues, including all SKU’s, increased by $48,160 to $793,316 (2015 - $745,156). This was mainly due to starting up our own Southern California distributorship, Natural Cabana Distribution Inc., in February, 2016. Through this subsidiary we began selling our Natural Cabana® Lemonades/Limeades and Coconut Waters. On April 30, 2016 we shut this operation down and moved it over to a new, well established independent distributor in Southern California. In February and March our gross sales through this distributorship was $55,902.

During 2016 gross revenues, on sale of 50,638 cases (2015 – 55,153 cases) of Natural Cabana® Lemonade/Limeade, declined by $32,248 to $605,771 (2015 - $638,019).

During 2016 gross revenues, on sale of 13,346 cases (2015 – 10,538 cases) of Natural Cabana® Coconut Water, increased by $24,976 to $131,644 (2015 - $106,668).

During 2016 gross revenues, on sale of nil cases (2015 – 17 cases) of PULSE® Heart & Body Health, decreased by $469 to $nil (2015 - $469). We intend on repackaging PULSE Heart & Body Health into a more attractive package and re-introducing this brand into the Southern California marketplace and China.

During 2016 our overall net sales, after promotional allowances and slotting fees, increased by $37,973 (5.4%) to $742,544 (2015 - $704,571). During 2016, promotional allowances and slotting fees, increased by $10,187 to $50,772 (2015 - $40,585). As a percentage of gross sales, promotional allowances and slotting fees increased to 6.4% (2015 – 5.45%). During 2016 we increased our accrual for promotional programs due to past experience.

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Overall our net sales were less than planned. We were delayed in switching over to our new coconut water supplier, and as a result net sales of coconut water did not increase as quickly as planned. The majority of our existing distributors, and recently secured retail chains, delayed ordering until we received this product in early December, 2015. Additionally, the remainder of new accounts secured did not order coconut water until March and April, 2016 so as to kick off new displays in cold sections leading up to the warmer months. We introduced a smaller 11.2oz six-pack coconut water which some big box retailers find easier to sell; this should increase net sales in 2016. We expect overall net sales to increase as we expand our markets internationally into Mexico, China and Canada and as we introduce a 16.9oz control branded lemonade/limeade in April, 2016. Our China distributor began ordering Lemonade/Limeade in September and our Mexico distributor has shipped its first order of 15,000 cases of Natural Cabana® Coconut Water, which sale was recorded in 2015. Due to changes in food laws in Mexico during the process of shipping product from Asia, we must overlay labels with a new information label. This has delayed the reorder in Mexico until the second quarter of 2016. Our distributor will initially distribute Natural Cabana® Coconut Water to more than 3,000 stores in Mexico including: Soriana, 7-Eleven, Calimax, Circlulo K, Dax, Smart & Final, and Farmacia Roma. We are planning to introduce a Natural Cabana® Lemonade/Limeade (“Limonada”) in a 16.9oz glass “PULSE bottle” format for the Mexico market later in 2016.

We introduced our Natural Cabana® Lemonade in 2012 and since then have developed a multi-national comprehensive distribution system through more than 150 distributors in 48 States, Canada, Mexico, Panama, Bermuda and Ireland. By establishing a multi-national distribution system, we have secured, in four years, more than 20,000 listings for our Lemonades/Limeades and more than 5,000 listings for our Coconut Water. Some of the more notable regional and national grocery and convenience chain stores are: Albertsons/Safeway, Walmart, Kroger/Fred Meyer/Ralphs, Kmart, Circle K, Walgreens, 7-Eleven, Whole Foods, H-E-B, Hy-Vee Supermarket, Save Mart Supermarkets, Hannaford, Food City, Raley's Supermarkets, Price Chopper Supermarkets, WinCo Foods, and Gelson’s Supermarket.

We have been in operation with our first product, Natural Cabana® Lemonade, for almost four years. We expanded this brand into Limeade, which started selling in January, 2014, and into Coconut Water, which started selling in March, 2014.

We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes over 85% Class “A” distributors such as Sysco, The Sygma Network, UNFI and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up and Cadbury Schweppes.

Due to seasonality, our first quarter is generally slow to develop due to timing of orders which generally start in April and May.

Cost of Sales

During 2016 cost of sales increased by $16,768 to $507,809 (2015 – $491,041). As a percentage of net revenue, cost of sales for 2016 decreased 1.3% to 68.39% (2015 – 69.69%). The increase in cost of sales is due to the distributorship we started in February, 2016; cost of sales was $44,227 (2015 - $nil). We expect cost of sales for the production of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable raw material costs. We expect cost of sales for Natural Cabana® Coconut Water to significantly reduce due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs.

Gross Profit

During 2016 gross profit increased by $21,204 to $234,735 (2015 - $213,530). Gross profit for 2016, as a percent of net sales, increased 1.3% to 31.61% (2015 – 30.31%). A portion of this increase, $8,675, was due to the distributorship we started up in February, 2016. We expect gross profit for the sale of Natural Cabana® Lemonade/Limeade to remain stable throughout 2016 due to fairly stable sales prices, promotional programs and raw material costs. We expect gross profit for Natural Cabana® Coconut Water to significantly increase due to the lower cost of coconut water sourced from our new Asian manufacturer and lower ocean-shipping costs. We also expect an increase in gross profit as we re-introduce PULSE®, a higher margin brand. We expect all of these factors to have a positive effect on our gross profit.  

Expenses

Advertising, samples and displays

This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. During 2016 advertising, samples and displays expense increased by $2,097 to $21,090 (2015 - $18,993). As a percentage of net sales, this expense increased to 2.84% (2015 – 2.7%). We reduced this cost due to less display racks and barrels being needed in 2015. We expect this expense to increase in proportion to increases in sales mainly due to the expansion of Natural Cabana® Coconut Water and the re-introduction of PULSE® Heart & Body Health functional beverages and due to an overall increase in distribution reach both in the United States and internationally.

Asset impairment

During 2016 our asset impairment expense was $5,085 due to the expiry of old coconut water (2015 - $nil).

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Freight-out

During 2016, freight-out increased by $3,555 to $78,400 (2015 - $74,845). On a per case basis, excluding $21,000 of fleet expense incurred in our new distribution business which closed April 30, 2016, freight-out decreased by $0.24 per case to $0.90 (2015 - $1.14). We expect freight-out, on a per case basis, to decrease due to lower transportation costs in the United States. Additionally, there will be limited freight-out charges associated with delivering our products to our Mexico distributor at the ports of entry in Mexico and our China distributor receiving our products at the port of exit in the United States.

Contribution to fixed expenses

Beverage companies are often compared on a contribution to fixed expense basis which includes gross profit less variables such as advertising, samples and displays and freight-out. This line item is not GAAP and therefore it is not disclosed separately in our financial statements. During 2016 contribution to fixed expense increased by $15,553 to $135,245 (2015 - $119,692). As a percentage of net sales, this item increased 1.22% to 18.21% (2015 – 16.99%). Excluding the negative contribution of the distribution business of $13,089 contribution to fixed expense increased by $28,642 to $148,334 and, as a percentage of net sales, increased 4.52% to 21.51%. We expect contribution to fixed expenses to increase due to the reasons disclosed under each item above.

General and administrative

General and administration expenses for 2016 and 2015 consist of the following:

    2016     2015     Increase
(Decrease)
 
      Advisory, board and consulting fees $ 26,250   $ 30,000   $ (3,750 )
      Amortization and depreciation   29,021     29,297     (276 )
      Legal, professional and regulatory fees   42,781     60,206     (17,425 )
      Office, rent and telephone   81,675     59,796     21,879  
      Shareholder, broker and investor relations   6,645     63,522     (56,877 )
      Travel, meals and trade shows   56,767     67,003     (10,236 )
                   
  $ 243,139   $ 309,824   $ (66,685 )

During 2016, general and administrative expenses decreased by $66,685 to $243,139 (2015 - $309,824). Shareholder, broker and investor relations decreased by $56,877 to $6,645 (2015 - $63,522). In 2015 a total of $57,500 was the value of common shares issued to a consultant. Starting in April, 2016 we hired an investor relations consultant at a rate of $4,000 per month plus 83,333 common shares. Legal, professional and regulatory fees decreased by $17,425 to $42,781 (2015 - $60,206) due to a reduction in accounting fees paid in Mexico and due to the balance of the 2015 audit fee not billed. Travel, meals and trade shows decreased by $10,236 to $56,767 (2015 - $67,003) due to an overall effort to decrease this expense category and overhead in general. Office, rent and telephone increased by $21,879 to $81,675 (2015 - $59,796) due to warehouse rent of $9,000 paid for our new distributor in Southern California and due to administration/collection fees of $12,364 associated with the TCA loan paid to TCA.

Salaries and benefits and broker/agent’s fees

During 2016 salaries and benefits and broker/agent’s fees increased by $13,747 to $330,010 (2015 - $316,263). During the latter part of 2015 and into 2016 we rationalized the number and placement of salespeople in the field. We concentrated on chain store listings and international expansion which is where we see the majority of our growth coming from. These areas of future growth are generally handled by our two senior officers. Offsetting these decreases were salaries and benefits paid for our distributorship staff, totalling $48,791, and due to fees paid to a new corporate director/officer totalling $25,000. These two costs will not be incurred going forward as, on April 30, 2016 we closed the distributorship and the director/officer resigned. Without these two one-time costs our salaries and benefits expense would have decreased by $60,044 to $256,219. Going into the remainder of 2016 we expect this cost to be less than $225,000 per quarter.

Stock-based compensation

During 2016 we incurred $3,939 of stock-based compensation due to the value of vested stock options (2015 - $nil). We have no further unrecognized stock-based compensation cost to record.

Other Income (Expense)

During 2016 we incurred interest expense of $110,339 (2015 - $442, net of interest income of $304). During 2016 we accrued an additional $4,904 on $145,000 of short-term bridge loans received in September, 2015 and we incurred interest of $24,728 on our TCA loan balance. We also incurred interest of $737 associated with credit card indebtedness during the year. Additionally, associated with the closing of the Credit Facility discussed in Note 6, we incurred $525,370 of debt issuance costs which is being amortized to interest expense over the term of the loan to November 6, 2016. A total of $47,961 was charged to interest expense during the year ended December 31, 2015 and $79,970 was charged to interest expense during the quarter ended March 31, 2016.

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Net Loss

Net loss for 2016 increased by $50,430 to $557,267, or $0.01 per share, compared with a net loss for 2015 of $506,837, or $0.01 per share. This increase was due to TCA fees and interest totalling $119,955 (2015 - $nil) and due to the net loss incurred in our start-up distributorship in Southern California of $74,897. Excluding these costs our net loss for 2016 would have decreased by $144,474 to $362,363. We expect our monthly net losses to turn into monthly net income during the middle of 2016 due to increased net sales and gross profit and reduced expenses as discussed above.

Net losses to date, for the most part, continue to be the result of a concentrated effort to establish and increase brand awareness and to establish and improve upon our extensive nationwide and international distribution systems. Our net losses are also due to the development of our brands including: PULSE® Heart & Body Health, Natural Cabana® Lemonade and Limeade and Coconut Water and to secure distribution and chain store listings.

Non-GAAP financial information not disclosed in the financial statements

During 2016 our net loss, after adjustments to bring GAAP to net loss before corporation income taxes, depreciation and amortization, stock-based compensation and one-time charges (Adjusted EBITDA), increased by $75,363 to $495,404 (2015 - $420,040).

LIQUIDITY AND CAPITAL RESOURCES

The discussion that follows is derived from our interim unaudited Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015 and the interim unaudited Condensed Consolidated Statements of Operations and Cash Flows for the three months ended March 31, 2016 “2016”) and 2015 (“2015”).

Overview

During 2016 our cash position decreased by $106,324 to $324,946 and our working capital decreased by $507,984 to negative $254,334) from $253,650. As at March 31, 2016, our working capital consisted of: cash of $324,946; accounts receivable of $560,850; inventories of $945,291 (including finished product of $290,157 and raw materials of $655,133); and prepaid expenses of $23,238. Our current liabilities include accounts payable of $451,279, accrued expenses of $373,094, and other current amounts due of $230,970, credit card indebtedness of $21,058 and loans payable of $1,032,258.

The following table sets forth the major sources and uses of cash for our first quarter 2016 and 2015:

      2016       2015  
Net cash used in operating activities   ($470,398)     ($457,081)  
Net cash used in investing activities   (7,444)     (20,962)  
Net cash provided by financing activities   371,518     860,000  
Net increase (decrease) in cash   ($106,324)     $381,957  

Cash Used in Operating Activities

During 2016 we used cash of $470,398 in operating activities. This was made up of the net loss of $557,267 less adjustments for non-cash items such as: asset impairment of $5,085 (2015 - $nil), amortization of debt issuance costs of $79,968 (2015 - $nil), shares and options issued for services of $27,706 (2015 - $57,500), amortization and depreciation of $29,021 (2015 - $29,297); all totaling $141,780 (2015 - $86,797). After non-cash items, the net loss was $415,435 (2015 - $420,040). Our net cash used in operating activities as a result of changes in operating assets and liabilities was $49,049 (2015 - $37,041) due to an increase in accounts receivable of $174,387 (2015 - $89,870), a decrease in inventories of $38,536 (2015 – decrease of $80,078), an increase in prepaid expenses of $7,778 (2015 – decrease of $17,554) and an increase in accounts payable and accrued expenses of $88,718 (2015 – decrease of $54,353). 

Cash Used in Investing Activities

During 2016 we used cash of $7,444 (2015 - $20,962) in investing activities. In 2016 a total of $6,269 was spent on moulds and $1,175 was spent on a trademark. In 2015 a total of $11,459 was spent on moulds and dies and $5,500 on a delivery van for Northern California. We spent $4,003 on formulation and testing associated with bringing our PULSE® Heart & Body Health brand into commercial production.    

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Cash Provided by Financing Activities

On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan having the same terms as the initial $900,000 loan. In March 2016 we received a first tranche of $430,860, net of $69,140 of closing costs.

On March 27, 2015 we sold 10,050,000 Units at $0.10 per Unit for cash proceeds of $1,005,000 of which $100,000 was received during the year ended December 31, 2014. On May 27, 2015 we sold an additional 750,000 Units at $0.10 per Unit for cash proceeds of $45,000, and debt settlement of $30,000. Each Unit consisted of one share of restricted common stock and one-half of a warrant. Each whole warrant allows the holder to purchase one additional share at a price of $0.20 per share at any time between March 10, 2016 and May 27, 2016.

Additional Capital

As of March 31, 2016, we had cash of $324,946 and negative working capital of $254,334. On March 22, 2016, we entered into Amendment No. 1 to the Senior Secured Revolving Credit Facility Agreement (the “Amended Credit Facility”) whereby we were approved for an additional $1,000,000 loan having the same terms as the initial $900,000 loan. The Amended and Restated Senior Secured Revolving Convertible Promissory Note matures November 6, 2016 unless extended by the Lender. We received $430,860, net of $69,140 of closing costs, on March 22, 2016 and will receive a further $250,000 once we collect an account receivable from our Mexico distributor. A further $250,000 will be received once we have met certain other performance criteria. In connection with this additional loan, we agreed to issue 10,558,069 shares of our restricted common stock to the Lender as an Advisory Fee. Notwithstanding the above, the Lender is restricted from receiving these shares to the extent that, after giving effect to the receipt of the shares, the Lender would beneficially own more than 4.99% of our common stock. Any shares not issued as a result of this limitation will be issued at a later date, and from time to time, when the issuance of these will not result in the Lender beneficially owning more than 4.99% of our common stock. We have the right to purchase these shares by paying $350,000 to the Lender on or before September 22, 2016.

These additional sources of cash will allow us to meet our working capital needs through to the middle of 2017. We intend to continually monitor and adjust our business plan as necessary to respond to developments in our business, our markets and the broader economy. We believe our credit facility and equity financing alternatives will be made available to us to support our working capital needs in the future. These alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.

As of May 13, 2016, we believe that our cash on hand, available working capital and financing alternatives will be sufficient to meet our anticipated cash needs through the first half of 2017 and is sufficient to alleviate the uncertainties relating to our ability to successfully execute on our business plan and finance our operations through the middle of 2017. Our financial statements for the periods presented were prepared assuming we will continue in operation for the foreseeable future and will be able to realize assets and settle liabilities and commitments in the normal course of business.

OFF BALANCE-SHEET ARRANGEMENTS

We have not had, and at March 31, 2016, do not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our financial statements, we believe the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments:

Use of Estimates

The preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period. We regularly evaluate estimates and assumptions related to the useful life and recoverability of long-lived assets, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments as to the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates.

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Intangible Assets

Intangible assets are comprised primarily of the cost of formulations of our products and trademarks that represent our exclusive ownership of Natural Cabana®, PULSE® and PULSE: Nutrition Made Simple®, all used in connection with the manufacture, sale and distribution of our beverages. We evaluate our trademarks annually for impairment or earlier if there is an indication of impairment. If there is an indication of impairment of identified intangible assets not subject to amortization, we compare the estimated fair value with the carrying amount of the asset.  An impairment loss is recognized to write-down the intangible asset to its fair value if it is less than the carrying amount. The fair value is calculated using the income approach. However, preparation of estimated expected future cash flows is inherently subjective and is based on our best estimate of assumptions concerning expected future conditions. Based on our impairment analysis performed for the three months ended March 31, 2016, the estimated fair values of trademarks and other intangible assets exceeded their respective carrying values.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 2 to our unaudited interim consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Robert E. Yates, who is both our chief executive officer and our chief financial officer, is responsible for establishing and maintaining our disclosure controls and procedures.  Disclosure controls and procedures are those procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2016. Based on that evaluation, it was concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Changes in internal controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties described in Item 1A of our 2015 Form 10-K.  In our judgment, there were no material changes in the risk factors as previously disclosed in Item 1A of our 2015 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Securities Issued in Unregistered Transactions

On January 31, 2016 we issued 238,889 common shares and on February 29, 2016 we issued 238,889 common shares having an aggregate fair value of $40,611 pursuant to an employment contract with an officer/director.

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Subsequent Sales of Unregistered Securities

Subsequent to March 31, 2016, we issued the following securities in unregistered transactions:

On April 12, 2016 we issued 133,333 shares of common stock having a fair market value of $10,333 pursuant to two service contracts.

On May 5, 2016 we issued 1,000,000 shares of common stock having a fair market value of $100,000 to settle $100,000 of debt owing to two advisory board members.

On May 11, 2016 we issued 250,000 shares of common stock having a fair market value of $37,500 pursuant to a Strategic Advisory Services Agreement.

We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933 with respect to the issuance of the shares listed above. The persons who acquired these securities were sophisticated investors who were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons acquired these securities for their own accounts. The shares cannot be sold unless pursuant to an effective registration statement or an exemption from registration. No commissions were paid to any person in connection with the issuance of these securities.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

None. 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The following documents are included herein:

Exhibit No. Document Description
2.1 (1) Share Exchange Agreement dated February 15, 2011
2.2 (1) Articles of Merger dated February 17, 2011
3.1 (2) Articles of Incorporation as amended
3.2 (2) Bylaws
31.1 Certification of Principal Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certification of Principal Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant Section 906 of the Sarbanes-Oxley Act of 2002 *
101 .INS XBRL Instance Document*
101 .SCH XBRL Taxonomy Extension Schema Document*
101 .CAL XBRL Taxonomy Calculation Linkbase Document*
101 .DEF XBRL Taxonomy Extension Definition Linkbase Document*
101 .LAB XBRL Taxonomy Label Linkbase Document*
101 .PRE XBRL Taxonomy Presentation Linkbase Document*

*Provided herewith

(1) Incorporated by reference from our report on Form 8-K filed February 22, 2011.
(2) Incorporated by reference from our Registration Statement on Form SB-2 filed December 7, 2007.

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 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

    THE PULSE BEVERAGE CORPORATION
     
     
Date: May 13, 2016 BY: /s/  Robert E. Yates                         
    Robert E. Yates, Principal Executive and Financial Officer




Exhibit 31.1

OFFICER’S CERTIFICATE PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert Yates, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Pulse Beverage Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2016

  /s/ Robert Yates
  Robert Yates
  Principal Executive Officer




Exhibit 31.2

OFFICER’S CERTIFICATE PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert Yates, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Pulse Beverage Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2016

  /s/ Robert Yates
  Robert Yates
  Principal Financial Officer




Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
S ADOPTED PURSUANT TO
 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of The Pulse Beverage Corporation (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert Yates, Chief Executive Officer and Chief Financial Officer, on the date indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of  my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.

Date: May 13, 2016 By:   /s/ Robert Yates  
    Robert Yates  
    Principal Executive and Financial Officer