Registration No. 333-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DNA BRANDS, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 5149 26-0394476
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(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
Incorporation or
organization)
506 NW 77th Street
Boca Raton, Florida, 33487
(954) 978-8401
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Darren Marks
Chief Executive Officer
DNA BRANDS, INC.
506 NW 77th Street
Boca Raton, Florida, 33487
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(Name, address, including zip code, and telephone
number, including area code, of agent for
service)
Copies to:
William T. Hart, Esq.
Hart & Trinen, LLP
1624 Washington St.
Denver, CO 80203
Tel: (303) 839-0061
As soon as practicable after the effective date of this Registration Statement
--------------------------------------------------------------------------------
(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company:
|_| Large accelerated filer |_| Accelerated filer
|_| Non-accelerated filer |X| Smaller Reporting
(Do not check if a company
smaller reporting company)
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class Amount to Offering Aggregate Amount of
of Securities be Price Per Offering Registration
to be Registered Registered Share(1) Price Fee(2)
------------------- ---------- ------------- ------------ ------------
Common Stock
offered by
Selling
Shareholders 4,427,000 $0.80 $3,541,600 $412
---------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
2
PROSPECTUS
DNA BRANDS, INC.
4,427,000 Shares of Common Stock
This Prospectus relates to the resale by the selling stockholders (the "Selling
Stockholders") of 4,427,000 shares of our common stock (the "Common Stock" or
the "Securities"). The Selling Stockholders may sell their shares of our Common
Stock from time to time at the then prevailing market price or privately
negotiated prices. See "SELLING STOCKHOLDERS" and "PLAN OF DISTRIBUTION."
We will pay the expenses of registering these shares. We will not receive any
proceeds from the sale of shares of Common Stock in this Offering. All of the
net proceeds from the sale of our Common Stock will go to the Selling
Stockholders.
Our Common Stock is currently listed for trading on the OTC Bulletin Board under
the symbol "DNAX". On August 1, 2011, the closing price for our Common Stock was
$0.93.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD INVEST
IN OUR COMMON STOCK ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
The information in this Prospectus is not complete and may be changed. This
Prospectus is included in the registration statement that was filed by DNA
Brands, Inc. with the Securities and Exchange Commission. The Selling
Stockholders may not sell these Shares until the registration statement becomes
effective. This Prospectus is not an offer to sell these Shares and is not
soliciting an offer to buy these Shares in any State where the offer or sale is
not permitted.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ____________, 2011
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TABLE OF CONTENTS
Page
No.
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Prospectus Summary
Special Note About Forward-Looking Statements
Risk Factors
Market Price of and Dividends on the Company's Common Equity and Related
Stockholder Matters
Selling Stockholders
Plan of Distribution Management's
Discussion and Analysis of Financial Condition and Results of Operations
Description of Business
Management Executive Compensation
Security Ownership of Certain Beneficial Owners & Management
Certain Relationships and Related Transactions
Description of Securities
Shares Eligible for Future Sale
Legal Matters
Experts
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Additional Information
Financial Statements
4
PROSPECTUS SUMMARY
This summary provides an overview of certain information contained elsewhere in
this Prospectus and does not contain all of the information that you should
consider or that may be important to you. Before making an investment decision,
you should read the entire Prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to the financial statements.
In this Prospectus, the terms "DNA," "the "Company," "we," "us" and "our" refer
to DNA Brands, Inc., unless otherwise specified herein.
OVERVIEW
DNA Brands, Inc. (hereinafter referred to as "us," "our," "we," the "Company" or
"DNA") was incorporated in the State of Colorado on May 23, 2007 under the name
"Famous Products, Inc." Prior to July 6, 2010 we were a holding company
operating as a promotion and advertising company. Our current business commenced
in May 2006 in the State of Florida under the name "Grass Roots Beverage
Company, Inc." ("Grass Roots"). Initial operations of Grass Roots included
development of our energy drinks, sampling and other marketing efforts and
initial distribution in the State of Florida.
Effective July 6, 2010, we executed agreements to acquire all of the assets,
liabilities and contract rights of DNA Beverage Corporation of Boca Raton,
Florida ("DNA Beverage"), including 100% of the common stock of DNA Beverage's
wholly owned subsidiary Grass Roots Beverage Company, Inc. ("Grass Roots") in
exchange for the issuance of 31,250,000 shares of our common stock. We were
classified as a "shell" company prior to the aforesaid transaction. As part of
the terms of these transactions:
o we amended our Articles of Incorporation to change our name to "DNA
Brands, Inc." and our authorized capital to 100,000,000 shares of
Common Stock and 10,000,000 shares of Preferred stock. A relevant
Information Statement regarding this action was not filed or
disseminated to our shareholders of record on the date this action
occurred. As a result, it is possible that we, along with our
former and current officers and directors may have potential
liability for non-compliance under the laws of the State of Colorado
as well as federal securities laws. We believe that any such
potential liability would not be considered material;
o our former President agreed to voluntarily redeem 19,274,400 common
shares back to us;
o our former Board of Directors approved a "spin-off" of our wholly owned
subsidiary company, Fancy Face Promotions, Inc., a Colorado
corporation. The terms of this "spin-off" provide for a dividend to be
issued to our shareholders of one share of common stock for every share
that our shareholders owned as of June 30, 2010, the record date of the
dividend.
o our former officers and directors resigned their positions with us and
were replaced by the former management team of DNA Beverage. Mr. Darren
Marks, became a director and our President and CEO, and Mr. Melvin
Leiner, became a director and our Executive Vice President, Secretary
and COO/CFO. See "MANAGEMENT."
The share issuance represented approximately 94.6% of our outstanding shares at
the time of issuance.
We incurred net losses of ($7,468,422) and ($3,918,721), respectively, during
the years ending December 31, 2010 and 2009. For the three month period ended
March 31, 2011, we incurred a net loss of $1,066,677, or $0.03 per basic and
fully diluted share, as compared to a net loss of $2,420,623, or $0.13 per basic
and fully diluted share during the corresponding period of the prior year. Based
upon our current business plan, our ability to begin to generate profits from
operations is dependent upon our obtaining additional financing and there can be
no assurances that we will ever establish profitable operations. See "RISK
FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
Our principal offices are located at 506 NW 77th Street, Boca Raton, Florida,
33487, telephone (954) 970-3826. Our website is www.dnabrandsusa.com.
5
ABOUT THE OFFERING
Common Stock to be Offered by Between February and May 2011, we sold
Selling Shareholders 4,427,000 shares of our Series A preferred
stock to a group of private investors at a
price of $0.25 per shares. Each Series A
preferred share, at the option of the holder,
could at any time be converted into one share
of our common stock. As of July 25, 2011 all
Series A preferred shares had been converted
into shares of our common stock. By means of
this prospectus, a number of our shareholders
are offering to sell up to 4,427,000 shares of
our common stock which they received upon the
conversion of the Series A preferred shares.
Shares outstanding 40,451,030
Use of Proceeds We will not receive any proceeds
from the sale of the Common Stock by the
Selling Shareholders.
Risk Factors See the discussion under the caption
"RISK FACTORS" and other information in this
Prospectus for a discussion of factors you
should carefully consider before deciding to
invest in our Common Stock.
-------------------------
SELECTED FINANCIAL DATA
The following summary of our financial information at December 31, 2010 and
2009, and for the years ended December 31, 2010 and 2009, has been derived from,
and should be read in conjunction with, our audited financial statements
included elsewhere in this Prospectus. The summary of our financial information
as at March 31, 2011 and for the three month periods ended March 31, 2011 and
2010 has been derived from, and should be read in conjunction with, our
unaudited interim financial statements also included elsewhere in this
Prospectus.
Statement of Operations:
Three Months Ended Year Ended
March 31, December 31,
2011 2010 2010 2009
Revenues $ 265,817 $ 310,305 $ 1,168,461 $ 667,276
Total operating expenses $ 1,142,715 $ 2,412,578 $ 7,651,728 $ 3,627,903
(Loss) from operations $(1,057,612) $(2,363,703) $(7,352,341) $(3,428,747)
Other (expense) $ (9,065) $ (56,920) $ (116,081) $ (489,974)
Provision for income tax $ -
Net (loss) $(1,066,677) $(2,420,623) $(7,468,422) $(3,918,721)
Net (loss) per share -
basic and fully diluted $ (0.03) $ (0.13) $ (0.28) $ (0.26)
============ ============ ============ ============
Weighted average common
shares outstanding 35,031,697 19,072,805 26,729,555 15,366,097
============ ============ ============ ============
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Balance Sheet:
March 31, December 31, December 31,
2011 2010 2009
----------- ------------ ------------
Cash $ 90,579 $ 74,604 $ 11,392
Current assets $ 718,003 $ 438,824 $ 298,860
Total assets $ 763,120 $ 493,105 $ 340,888
Current liabilities $ 2,933,879 $ 2,951,266 $ 2,766,431
Total liabilities $ 3,405,635 $ 2,954,443 $ 3,381,113
Total stockholders' equity $(2,642,515) $(2,461,338) $(3,040,225)
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made some statements in this Prospectus, including some under "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," "DESCRIPTION OF BUSINESS" and elsewhere, which
constitute forward-looking statements. These statements may discuss our future
expectations or contain projections of our results of operations or financial
condition or expected benefits to us resulting from acquisitions or transactions
and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any results, levels of activity, performance or
achievements expressed or implied by any forward-looking statements. These
factors include, among other things, those listed under "RISK FACTORS" and
elsewhere in this Prospectus. In some cases, forward-looking statements can be
identified by terminology such as "may," "should," "could," "expects,"
"intends," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected in
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements.
RISK FACTORS
An investment in our Common Stock is a risky investment. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors before purchasing shares of our
Common Stock offered hereby. We believe that we have included all material
risks.
RISKS RELATED TO OUR OPERATIONS
Our independent accountants have expressed a "going concern" opinion.
Our financial statements accompanying this Prospectus have been prepared
assuming that we will continue as a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The financial statements do not include any adjustment that might
result from the outcome of this uncertainty. We have a minimal operating history
and minimal revenues or earnings from operations. We have no significant assets
or financial resources. We will, in all likelihood, sustain operating expenses
without corresponding revenues, at least until the third quarter of our fiscal
year ending December 31, 2011, provided that we are successful in obtaining
additional financing. See "DESCRIPTION OF BUSINESS" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources." There are no assurances that we will generate profits from
operations.
We have not generated profits from our operations.
We incurred net losses of ($7,468,422) and ($3,918,721), respectively, during
the years ending December 31, 2010 and 2009. For the three month period ended
March 31, 2011, we incurred a net loss of $1,066,677, or $0.03 per basic and
fully diluted share, as compared to a net loss of $2,420,623, or $0.13 per basic
and fully diluted share during the corresponding period of the prior year. Based
upon our current business plan, our ability to begin to generate profits from
operations is dependent upon our obtaining additional financing and there can be
no assurances that we will ever establish profitable operations. As we pursue
our business plan, we are incurring significant expenses without corresponding
7
revenues. In the event that we remain unable to generate significant revenues to
pay our operating expenses, we will not be able to achieve profitability or
continue operations.
Our ability to continue as a going concern is dependent on raising additional
capital, which we may not be able to do on favorable terms, or at all.
We need to raise additional capital to support our current operations and fund
our sales and marketing programs. We estimate that we will need a minimum of $3
million in additional capital in order to generate profits from operations. We
can provide no assurance that additional funding will be available on a timely
basis, on terms acceptable to us, or at all. If we are unsuccessful raising
additional funding, our business may not continue as a going concern. Even if we
do find additional funding sources, we may be required to issue securities with
greater rights than those currently possessed by holders of our common stock. We
may also be required to take other actions that may lessen the value of our
common stock or dilute our common stockholders, including borrowing money on
terms that are not favorable to us or issuing additional equity securities. If
we experience difficulties raising money in the future, our business and
liquidity will be materially adversely affected.
We do not currently have an external line of credit facility with any financial
institution.
As indicated above, we have estimated that we need approximately $3 million in
additional capital to generate profits from operations. We have attempted to
establish credit facilities with financial institutions but have experienced
little or no success in these attempts due primarily to the current economic
climate, specifically the reluctance of most financial institutions to provide
such lines of credit to relatively new business ventures. We also have limited
assets available to secure such a line of credit. We intend to continue to
attempt to establish an external line of credit in the future, but there can be
no assurances we will be able to do so. The failure to obtain an external line
of credit could have a negative impact on our ability to generate profits.
Our financial results may fluctuate from period to period as a result of several
factors which could adversely affect our stock price.
Our operating results may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside our control. Factors that will
affect our financial results include:
o acceptance of our products and market penetration;
o the amount and timing of capital expenditures and other costs relating
to the implementation of our business plan;
o the introduction of new products by our competitors; and
o general economic conditions and economic conditions specific to our
industry.
As a strategic response to changes in the competitive environment, we may from
time to time make certain pricing, service, or marketing decisions or
acquisitions that could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
We are dependent upon third party suppliers of our raw materials.
We are dependent on outside vendors for our supplies of raw materials. While we
believe that there are numerous sources of supply available, if the third party
suppliers were to cease production or otherwise fail to supply us with quality
raw materials in sufficient quantities on a timely basis and we were unable to
contract on acceptable terms for these services with alternative suppliers, our
ability to produce our products would be materially adversely affected.
We rely on our distributors, retailers and brokers, and this could affect our
ability to efficiently and profitably distribute and market our products,
maintain our existing markets and expand our business into other geographic
markets.
Our ability to establish a market for our brands and products in new geographic
distribution areas, as well as maintain and expand our existing markets, is
dependent on our ability to establish and maintain successful relationships with
reliable distributors, retailers and brokers strategically positioned to serve
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those areas. Most of our distributors, retailers and brokers sell and distribute
competing products, including non-alcoholic and alcoholic beverages, and our
products may represent a small portion of their business. To the extent that our
distributors, retailers and brokers are distracted from selling our products or
do not employ sufficient efforts in managing and selling our products, including
re-stocking the retail shelves with our products, our sales and results of
operations could be adversely affected. Our ability to maintain our distribution
network and attract additional distributors, retailers and brokers will depend
on a number of factors, some of which are outside our control. Some of these
factors include:
o the level of demand for our brands and products in a particular
distribution area;
o our ability to price our products at levels competitive with those of
competing products; and
o our ability to deliver products in the quantity and at the time
ordered by distributors, retailers and brokers.
We may not be able to meet all or any of these factors in any of our current or
prospective geographic areas of distribution. Our inability to achieve any of
these factors in a geographic distribution area will have a material adverse
effect on our relationships with our distributors, retailers and brokers in that
particular geographic area, thus limiting our ability to expand our market,
which will likely adversely affect our revenues and financial results.
We generally do not have long-term agreements with our distributors, and we
incur significant time and expense in attracting and maintaining key
distributors.
Our marketing and sales strategy depends in large part on the availability and
performance of our independent distributors. We have entered into written
agreements with many of our distributors in the U.S., with normal industry terms
of one year and automatically renewable for one year terms thereafter. We
currently do not have, nor do we anticipate in the future that we will be able
to establish, long-term contractual commitments from many of our distributors.
In addition, despite the terms of the written agreements with many of our top
distributors, there are no minimum levels of purchases under many of those
agreements, and most of the agreements may be terminated at any time by us,
generally with a termination fee. We may not be able to maintain our current
distribution relationships or establish and maintain successful relationships
with distributors in new geographic distribution areas. Moreover, there is the
additional possibility that we may have to incur additional expenditures to
attract and maintain key distributors in one or more of our geographic
distribution areas in order to profitably exploit our geographic markets.
If we lose any of our key distributors or regional retail accounts, our
financial condition and results of operations could be adversely affected.
We anticipate that, as consumer awareness of our brand develops and increases,
we will continue to upgrade and expand our distributor network and accounts, we
cannot be assured that we will be able to maintain our key distributor base
which may result in an adverse effect on our revenues and financial results, our
ability to retain our relationships with our distributors and our ability to
expand our market and will place an increased dependence on any one or more of
our independent distributors or regional accounts.
Because our distributors are not required to place minimum orders with us, we
need to manage our inventory levels, and it is difficult to predict the timing
and amount of our sales.
Our independent distributors are not required to place minimum monthly or annual
orders for our products. In order to reduce inventory costs, independent
distributors endeavor to order products from us on a "just in time" basis in
quantities, and at such times, based on the demand for the products in a
particular distribution area. Accordingly, there is no assurance as to the
timing or quantity of purchases by any of our independent distributors or that
any of our distributors will continue to purchase products from us in the same
frequencies and volumes as they may have done in the past. In order to be able
to deliver our products on a timely basis, we need to maintain adequate
inventory levels of the desired products, but we cannot predict the number of
cases sold by any of our distributors. If we fail to meet our shipping
schedules, we could damage our relationships with distributors and/or retailers,
increase our shipping costs or cause sales opportunities to be delayed or lost,
which would unfavorably impact our future sales and adversely affect our
operating results. In addition, if the inventory of our products held by our
distributors and/or retailers is too high, they will not place orders for
additional products, which would also unfavorably impact our future sales and
adversely affect our operating results.
9
Our business plan and future growth is dependent in part on our distribution
arrangements directly with retailers and regional retail accounts. If we are
unable to establish and maintain these arrangements, our results of operations
and financial condition could be adversely affected.
We currently have distribution arrangements with a few regional retail accounts
to distribute our products directly through their venues; however, there are
several risks associated with this distribution strategy. First, we do not have
long-term agreements in place with any of these accounts and thus, the
arrangements are terminable at any time by these retailers or us. Accordingly,
we may not be able to maintain continuing relationships with any of these
national accounts. A decision by any of these retailers, or any other large
retail accounts we may obtain, to decrease the amount purchased from us or to
cease carrying our products could have a material adverse effect on our
reputation, financial condition or results of operations. In addition, we may
not be able to establish additional distribution arrangements with other
national retailers.
We have dedicated, and will continue to dedicate, significant resources to our
sponsorship agreements and may not realize the benefits expected from those
agreements.
Our sponsorship agreements require us to make substantial annual payments in
exchange for certain promotional and branding benefits. There can be no
assurance, however, that the benefit we anticipate from those and similar
agreements will compensate for the annual payment commitments required by the
agreements. These commitments are significant, totaling approximately $550,000
over the remaining terms of the agreements as of December 31, 2010. Given our
limited cash resources, we intend to continue attempting to renegotiate these
sponsorship agreements in order to reduce our payment obligations. Relevant
thereto, in January 2011 we successfully renegotiated the contractual obligation
with Star Racing wherein we agreed to issue 600,000 shares of our Common Stock
to offset a $268,000 cash payment due for the 2011 season. There can be no
assurance that our association with these particular sponsors will have a
positive effect on our image and brand. There is a risk that we will be unable
to recover the costs associated with our sponsorship agreements, which would
have an adverse effect on our results of operations.
We rely on independent contract packers of our products, and this dependence
could make management of our marketing and distribution efforts inefficient or
unprofitable.
We do not own the plants or the majority of the equipment required to
manufacture and package our beverage products, and do not directly manufacture
our products but instead outsource the manufacturing process to third party
bottlers and independent contract packers (co-packers). We do not anticipate
bringing the manufacturing process in-house in the future. We currently use 7 Up
Southeast Snapple as our primary co-packer to prepare, bottle and package our
products. Our contract packers are located in Jacksonville, FL. 7-Up Southeast
Snapple has several co-packing plants located throughout the US that are capable
of bottling product should we so require. As a consequence, we depend on
independent contract packers to produce our beverage products.
We do not have written agreements with our contract packers.
Our ability to attract and maintain effective relationships with our contract
packers and other third parties for the production and delivery of our beverage
products in a particular geographic distribution area is important to the
achievement of successful operations within each distribution area. While we
believe there are other contract packers that can provide the services we need,
there are no assurances that we will be able to identify and reach a mutually
agreeable arrangement with a new contract packer in a specific geographic region
if necessary. This could also affect the economic terms of our agreements with
our packers. There is no written agreement with our contract packers and they
may terminate their arrangements with us at any time, in which case we could
experience disruptions in our ability to deliver products to our customers. We
may not be able to maintain our relationships with current contract packers or
establish satisfactory relationships with new or replacement contract packers,
whether in existing or new geographic distribution areas. The failure to
establish and maintain effective relationships with contract packers for a
distribution area could increase our manufacturing costs and thereby materially
reduce profits realized from the sale of our products in that area. In addition,
poor relations with any of our contract packers could adversely affect the
amount and timing of product delivered to our distributors for resale, which
would in turn adversely affect our revenues and financial condition.
As is customary in the contract packing industry for comparably sized companies,
we are expected to arrange for our contract packing needs sufficiently in
advance of anticipated requirements. To the extent demand for our products
exceeds available inventory and the capacities produced by contract packing
10
arrangements, or orders are not submitted on a timely basis, we will be unable
to fulfill distributor orders on demand. Conversely, we may produce more product
than warranted by the actual demand for it, resulting in higher storage costs
and the potential risk of inventory spoilage. Our failure to accurately predict
and manage our contract packaging requirements may impair relationships with our
independent distributors and key accounts, which, in turn, would likely have a
material adverse effect on our ability to maintain effective relationships with
those distributors and key accounts.
Our business and financial results depend on the continuous supply and
availability of raw materials.
The principal raw materials we use include aluminum cans, labels and cardboard
cartons, flavorings, and proprietary energy blend ingredients which include
vitamins and minerals. The cost of our ingredients is subject to fluctuation. If
our supply of these raw materials is impaired or if prices increase
significantly, our business would be adversely affected.
We may not correctly estimate demand for our products. Our ability to estimate
demand for our products is imprecise, particularly with new products, and may be
less precise during periods of rapid growth, particularly in new markets. If we
materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, cans,
glass, labels, flavors, supplements, and certain sweeteners, or sufficient
packing arrangements, we might not be able to satisfy demand on a short-term
basis. Moreover, industry-wide shortages of certain concentrates, supplements
and sweeteners have been experienced and could, from time to time in the future,
be experienced, which could interfere with and/or delay production of certain of
our products and could have a material adverse effect on our business and
financial results.
Disruption of our supply chain could have an adverse effect on our business,
financial condition and results of operations.
Our ability and that of our suppliers, business partners (including packagers),
contract manufacturers, independent distributors and retailers to make, move and
sell products is critical to our success. Damage or disruption to manufacturing
or distribution capabilities due to weather, natural disaster, fire or
explosion, terrorism, pandemics such as avian flu, strikes or other reasons,
could impair our ability to manufacture or sell our products. Failure to take
adequate steps to mitigate the likelihood or potential impact of such events, or
to effectively manage such events if they occur, could adversely affect our
business, financial condition and results of operations, as well as require
additional resources to restore our supply chain.
If we are unable to maintain brand image and product quality, or if we encounter
other product issues such as product recalls, our business may suffer.
Our success depends on our ability to maintain brand image for our existing
products and effectively build up brand image for new products and brand
extensions. There can be no assurance, however, that additional expenditures and
our advertising and marketing will have the desired impact on our products'
brand image and on consumer preferences. Product quality issues, real or
imagined, or allegations of product contamination, even when false or unfounded,
could tarnish the image of the affected brands and may cause consumers to choose
other products.
In addition, because of changing government regulations or implementation
thereof, allegations of product contamination may require us from time to time
to recall products entirely or from specific markets. Product recalls could
affect our profitability and could negatively affect brand image. Adverse
publicity surrounding obesity concerns, water usage and other concerns could
negatively affect our overall reputation and our products' acceptance by
consumers.
The inability to attract and retain key personnel would directly affect our
efficiency and results of operations.
Our success depends on our ability to attract and retain highly qualified
employees in such areas as production, distribution, sales, marketing and
finance. We compete to hire new employees, and, in some cases, must train them
and develop their skills and competencies. Our operating results could be
adversely affected by increased costs due to increased competition for
employees, higher employee turnover or increased employee benefit costs. We
expect that given our continued exploration of strategic alternatives, we may be
further impacted by turnover among employees. Any unplanned turnover,
particularly involving one of our key personnel, could negatively impact our
operations, financial condition and employee morale.
11
Our inability to protect our trademarks, patents and trade secrets may prevent
us from successfully marketing our products and competing effectively.
Failure to protect our intellectual property could harm our brand and our
reputation, and adversely affect our ability to compete effectively. Further,
enforcing or defending our intellectual property rights, including our
trademarks, patents, copyrights and trade secrets, could result in the
expenditure of significant financial and managerial resources. We regard our
intellectual property, particularly our trademarks, patents and trade secrets to
be of considerable value and importance to our business and our success. We rely
on a combination of trademark, patent, and trade secrecy laws, confidentiality
procedures and contractual provisions to protect our intellectual property
rights. There can be no assurance that the steps taken by us to protect these
proprietary rights will be adequate or that third parties will not infringe or
misappropriate our trademarks, patented processes, trade secrets or similar
proprietary rights. In addition, there can be no assurance that other parties
will not assert infringement claims against us, and we may have to pursue
litigation against other parties to assert our rights. Any such claim or
litigation could be costly. In addition, any event that would jeopardize our
proprietary rights or any claims of infringement by third parties could have a
material adverse effect on our ability to market or sell our brands, profitably
exploit our products or recoup our associated research and development costs.
Litigation or legal proceedings could expose us to significant liabilities
and damage our reputation.
We may become party to litigation claims and legal proceedings. Litigation
involves significant risks, uncertainties and costs, including distraction of
management attention away from our current business operations. We evaluate
litigation claims and legal proceedings to assess the likelihood of unfavorable
outcomes and to estimate, if possible, the amount of potential losses. Based on
these assessments and estimates, we establish reserves and/or disclose the
relevant litigation claims or legal proceedings, as appropriate. These
assessments and estimates are based on the information available to management
at the time and involve a significant amount of management judgment. We caution
you that actual outcomes or losses may differ materially from those envisioned
by our current assessments and estimates. Our policies and procedures require
strict compliance by our employees and agents with all United States and local
laws and regulations applicable to our business operations, including those
prohibiting improper payments to government officials. Nonetheless, there can be
no assurance that our policies and procedures will always ensure full compliance
by our employees and agents with all applicable legal requirements. Improper
conduct by our employees or agents could damage our reputation in the United
States and internationally or lead to litigation or legal proceedings that could
result in civil or criminal penalties, including substantial monetary fines, as
well as disgorgement of profits.
Changes in accounting standards and subjective assumptions, estimates and
judgments by management related to complex accounting matters could
significantly affect our financial results.
Generally accepted accounting principles and related pronouncements,
implementation guidelines and interpretations with regard to a wide variety of
matters that are relevant to our business, such as, but not limited to, revenue
recognition, stock-based compensation, trade promotions, sports sponsorship
agreements and income taxes are highly complex and involve many subjective
assumptions, estimates and judgments by our management. Changes to these rules
or their interpretation or changes in underlying assumptions, estimates or
judgments by our management could significantly change our reported results.
If we are unable to build and sustain proper information technology
infrastructure, our business could suffer.
We depend on information technology as an enabler to improve the effectiveness
of our operations and to interface with our customers, as well as to maintain
financial accuracy and efficiency. If we do not allocate and effectively manage
the resources necessary to build and sustain the proper technology
infrastructure, we could be subject to transaction errors, processing
inefficiencies, the loss of customers, business disruptions, or the loss of or
damage to intellectual property through security breach. Our information systems
could also be penetrated by outside parties intent on extracting information,
corrupting information or disrupting business processes. Such unauthorized
access could disrupt our business and could result in the loss of assets.
We have no manufacturing facilities and are largely dependent upon third parties
to manufacture our products.
We have no manufacturing facilities and have entered into manufacturing
arrangements with third parties to manufacture our products. Accordingly, our
ability to market our products is partially dependent on our relationships with
12
our third party contract manufacturers and their ability to manufacture our
products on a timely basis in accordance with our specifications. While we
believe that there are numerous other third party manufacturers capable of
manufacturing our products, should we not be able to continue to obtain contract
manufacturing on commercially reasonable terms with our current suppliers, we
may experience difficulty obtaining inventory rapidly when needed. Any of such
events may materially, adversely affect our business, prospects, financial
condition, and results of operations.
Our success depends, to an extent, upon the continued services of Darren Marks,
our President and Chief Executive Officer and Mel Leiner, our Chief Financial
Officer and Chief Operating Officer.
We rely on the services of Darren Marks and Mel Leiner, our founders, for
strategic and operational management and the relationships they have built. The
loss of either of Messrs. Marks or Leiner could also result in the loss of our
favorable relationships with one or more of our customers. We have not entered
into an employment agreement with either Mr. Marks or Leiner but expect to do so
in the near future. In addition, we do not maintain "key person" life insurance
covering any of our management and we do not expect to obtain the same in the
future due primarily to the cost of premiums for such insurance and our limited
financial resources. This could also preclude our ability to attract and retain
qualified persons to agree to become directors of our Company.
The industry in which we operate is highly competitive.
Numerous well-known companies, which have substantially greater capital,
research and development capabilities and experience than we have, are presently
engaged in the energy drink and meat product market. By virtue of having or
introducing competitive products on the market before us, these entities may
gain a competitive advantage. If we are unable to successfully compete in our
chosen markets, our business, prospects, financial condition, and results of
operations would be materially adversely affected.
Provisions of our Articles of Incorporation and Bylaws may delay or prevent a
take-over that may not be in the best interests of our stockholders.
Provisions of our Articles of Incorporation and Bylaws may be deemed to have
anti-takeover effects, which include when and by whom special meetings of our
stockholders may be called, and may delay, defer or prevent a takeover attempt.
In addition, our Articles of Incorporation authorizes the issuance of up to
10,000,000 shares of Preferred Stock with such rights and preferences determined
from time to time by our Board of Directors. As of the date of this Prospectus,
none of our Preferred Stock is currently issued or outstanding. Our Board of
Directors may, without stockholder approval, issue additional Preferred Stock
with dividends, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of our Common
Stock.
Our failure to maintain and develop our brand names could adversely affect
our revenues.
We believe that maintaining and developing our brand name, including the
trademark "DNA(R)" are critical to our success. The importance of our name
recognition may increase as our products gain market acceptance and as we enter
additional markets. If our brand building strategy is unsuccessful, we may be
unable to increase our future revenues or expand our products and services. Such
events would have a material adverse effect on our business, prospects,
financial condition and results of operations.
Any inability by us to respond to changes in consumer demands in a timely manner
could materially adversely affect our business, prospects, financial condition,
and results of operations.
Our success depends on our ability to identify, originate and define product
trends in our markets, as well as to anticipate, gauge and react to changing
consumer demands in a timely manner. Our products must appeal to a broad range
of consumers whose preferences cannot be predicted with certainty and are
subject to periodic change. We may not be able to meet changing consumer demands
in the future. If we misjudge the market for our products, we may be faced with
significant excess inventories for some products and missed opportunities for
other products. Either of such events could have a material adverse effect on
our business, prospects, financial condition, and results of operations.
13
RISKS RELATED TO OUR COMMON STOCK
There is a limited trading market for our Common Stock and there can be no
assurance that a larger market will develop in the future.
In the absence of a public trading market, an investor may be unable to
liquidate his investment in our Company.
We do not have significant financial reporting experience, which may lead to
delays in filing required reports with the Securities and Exchange Commission
and suspension of quotation of our securities on the OTCBB which will make it
more difficult for you to sell your securities.
The OTCBB, an inter-dealer quotation system, and other national stock exchanges
each limits quotations to securities of issuers that are current in their
reports filed with the Securities and Exchange Commission. Because we do not
have significant financial reporting experience, we may experience delays in
filing required reports with the Securities and Exchange Commission (the "SEC").
Because issuers whose securities are qualified for quotation on the OTCBB or any
other national exchange are required to file these reports with the SEC in a
timely manner, the failure to do so may result in a suspension of trading or
delisting.
There are no automated systems for negotiating trades on the OTCBB and it is
possible for the price of a stock to go up or down significantly during a lapse
of time between placing a market order and its execution, which may affect your
trades in our securities.
Because there are no automated systems for negotiating trades on the OTCBB, they
are conducted via telephone. In times of heavy market volume, the limitations of
this process may result in a significant increase in the time it takes to
execute investor orders. Therefore, when investors place market orders, an order
to buy or sell a specific number of shares at the current market price, it is
possible for the price of a stock to go up or down significantly during the
lapse of time between placing a market order and its execution.
Our stock will be considered a "penny stock" so long as it trades below $5.00
per share. This can adversely affect its liquidity.
Our Common Stock is considered a "penny stock" and will continue to be
considered a penny stock so long as it trades below $5.00 per share and as such,
trading in our Common Stock will be subject to the requirements of Rule 15g-9
under the Securities Exchange Act of 1934. Under this rule, broker/dealers who
recommend low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements. The
broker/dealer must make an individualized written suitability determination for
the purchaser and receive the purchaser's written consent prior to the
transaction.
SEC regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. In addition, broker-dealers must disclose commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities they offer. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from
recommending transactions in our securities, which could severely limit the
liquidity of our securities and consequently adversely affect the market price
for our securities. In addition, few broker or dealers are likely to undertake
these compliance activities. Other risks associated with trading in penny stocks
could also be price fluctuations and the lack of a liquid market.
We do not anticipate payment of dividends, and investors will be wholly
dependent upon the market for the Common Stock to realize economic benefit from
their investment.
As holders of our Common Stock, you will only be entitled to receive those
dividends that are declared by our Board of Directors out of retained earnings.
We do not expect to have retained earnings available for declaration of
dividends in the foreseeable future. There is no assurance that such retained
earnings will ever materialize to permit payment of dividends to you. Our Board
of Directors will determine future dividend policy based upon our results of
operations, financial condition, capital requirements, reserve needs and other
circumstances.
14
Any adverse effect on the market price of our Common Stock could make it
difficult for us to raise additional capital through sales of equity
securities at a time and at a price that we deem appropriate.
Sales of substantial amounts of our Common Stock, or in anticipation that such
sales could occur, may materially and adversely affect prevailing market prices
for our Common Stock.
The market price of our Common Stock may fluctuate significantly in the
future.
We expect that the market price of our Common Stock may fluctuate in response to
one or more of the following factors, many of which are beyond our control:
o competitive pricing pressures;
o our ability to market our services on a cost-effective and timely
basis;
o our inability to obtain working capital financing, if needed;
o changing conditions in the market;
o changes in market valuations of similar companies;
o stock market price and volume fluctuations generally;
o regulatory developments;
o fluctuations in our quarterly or annual operating results;
o additions or departures of key personnel; and
o future sales of our Common Stock or other securities.
The price at which you purchase shares of our Common Stock may not be indicative
of the price that will prevail in the trading market. You may be unable to sell
your shares of Common Stock at or above your purchase price, which may result in
substantial losses to you and which may include the complete loss of your
investment. In the past, securities class action litigation has often been
brought against a company following periods of stock price volatility. We may be
the target of similar litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and our resources
away from our business. Any of the risks described above could adversely affect
our sales and profitability and also the price of our Common Stock.
RISKS RELATING TO THIS OFFERING
The market price of our Common Stock is subject to volatility.
There can be no assurance that an active trading market for the securities
offered herein will develop after this Offering, or, if developed, be sustained.
Purchasers of our Common Stock may have difficulty selling their securities
should they desire to do so and holders may lose their entire investment.
FINRA sales practice requirements may limit a stockholder's ability to buy and
sell our stock.
The Financial Industry Regulatory Authority ("FINRA") has adopted rules that
require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer's financial status, tax status, investment
objectives and other information. Under interpretations of these rules, the
FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our Common Stock, which may have the effect of reducing the level
of trading activity in our Common Stock. As a result, fewer broker-dealers may
be willing to make a market in our Common Stock, reducing a stockholder's
ability to resell shares of our Common Stock.
15
State securities laws may limit secondary trading, which may restrict the states
in which you can sell the shares offered by this Prospectus.
If you purchase shares of our Common Stock sold in this Offering, you may not be
able to resell the shares in any state unless and until the shares of our Common
Stock are qualified for secondary trading under the applicable securities laws
of such state or there is confirmation that an exemption, such as listing in
certain recognized securities manuals, is available for secondary trading in
such state. There can be no assurance that we will be successful in registering
or qualifying our Common Stock for secondary trading, or identifying an
available exemption for secondary trading in our Common Stock in every state. If
we fail to register or qualify, or to obtain or verify an exemption for the
secondary trading of, our Common Stock in any particular state, our Common Stock
could not be offered or sold to, or purchased by, a resident of that state. In
the event that a significant number of states refuse to permit secondary trading
in our Common Stock, the market for our Common Stock will be limited which could
drive down the market price of our Common Stock and reduce the liquidity of the
shares of our Common Stock and a stockholder's ability to resell shares of our
Common Stock at all or at current market prices, which could increase a
stockholder's risk of losing some or all of his investment.
WE CANNOT PREDICT WHETHER WE WILL SUCCESSFULLY EFFECTUATE OUR CURRENT BUSINESS
PLAN. EACH PROSPECTIVE PURCHASER IS ENCOURAGED TO CAREFULLY ANALYZE THE RISKS
AND MERITS OF AN INVESTMENT IN OUR COMMON STOCK AND SHOULD TAKE INTO
CONSIDERATION WHEN MAKING SUCH ANALYSIS, AMONG OTHERS, THE RISK FACTORS
DISCUSSED ABOVE.
MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Trading of our Common Stock commenced on the OTCBB in July 2008 under the
trading symbol "FPRD". In November 2010 our trading symbol became "DNAX".
The table below sets forth the reported high and low bid prices for the periods
indicated. The bid prices shown reflect quotations between dealers, without
adjustment for markups, markdowns or commissions, and may not represent actual
transactions in our Common Stock.
Quarter Ended High Low
-------------------------------------------- ---------------- --------------
March 31, 2009 $0.55 $0.2
June 30, 2009 $0.55 $0.25
September 30, 2009 $0.55 $0.25
December 31, 2009 $0.55 $0.25
March 31, 2010 $0.39 $0.00
June 30, 2010 $1.25 $0.00
September 30, 2010 $1.35 $0.35
December 31, 2010 $1.50 $0.10
March 31, 2011 $1.10 $0.45
June 30, 2011 $1.20 $0.80
As of August 1, 2011, the closing bid price of our Common Stock was $0.93.
Trading volume in our Common Stock has been limited. As a result, the trading
price of our Common Stock is subject to significant fluctuations.
HOLDERS
As of the date of this prospectus we had 326 holders of record for our Common
Shares. The number of record shareholders does not include those persons who
hold their shares in "street name."
16
DIVIDEND POLICY
We have not paid any dividends since our incorporation and do not anticipate the
payment of dividends in the foreseeable future. At present, our policy is to
retain earnings, if any, to develop and market our products. The payment of
dividends in the future will depend upon, among other factors, our earnings,
capital requirements, and operating financial conditions.
SELLING STOCKHOLDERS
Between February and May 2011, we sold 4,427,000 shares of our Series A
preferred stock to a group of private investors at a price of $0.25 per shares.
Each Series A preferred share, at the option of the holder, could at any time be
converted into one share of our common stock. As of July 25, 2011 all Series A
preferred shares had been converted into shares of our common stock.
The persons listed in the following table, referred to as the "selling
shareholders", plan to offer the shares they received upon the conversion of the
Series A preferred shares, shown opposite their respective names, by means of
this prospectus.
Shares To Ownership
Name of Shares Be Sold In After
Selling Shareholder Owned This Offering Offering
------------------ ----- ------------- --------
Alice C. Tate, Roth IRA 40,000 40,000
Allen Roger 50,000 50,000
Benedum, David 36,000 36,000
Clark, Lee B. 36,000 36,000
Cohen, Walter Dr. 36,000 36,000
Cohen, Walter Dr. 100,000 100,000
Cohen, Walter Dr. 40,000 40,000
Cooper, Barry L. 100,000 100,000
Devlin, James B 36,000 36,000
Devlin, James B 100,000 100,000
Fernandez, Jack 200,000 200,000
Gately, Steve 200,000 200,000
Gibson, Joseph 54,000 54,000
Gibson, Joseph* 36,000 36,000
Goodman, Kerry 400,000 400,000
Grim, Harry 36,000 36,000
J. Michael Millis Trust 100,000 100,000
Kaye Foundation, Carole
and Barry 100,000 100,000
Kaye, Barry 400,000 400,000
Konzen, John 100,000 100,000
Kotyk, Thomas C. 36,000 36,000
Lyman, James W. 36,000 36,000
Mauss, Bruce V. 100,000 100,000
Mauss, Bruce V. 100,000 100,000
McKeon, Belinda and
Gary 18,000 18,000
Morse, Charles H 100,000 100,000
Nelson, Curtis J. 200,000 200,000
Nelson, Curtis J. 36,000 36,000
Norcutt Dean D. 20,000 20,000
Potter, William 36,000 36,000
Ricks, John E. 500,000 500,000
Rutherford, Thomas Dr. 200,000 200,000
Saccoccio, August and
Maria 40,000 40,000
17
Sasson, Isaaac 20,000 20,000
Sepe, Adam 24,000 24,000
Sheth Nikhil, Dr. 80,000 80,000
Shpritz, Louis, MD 336,000 336,000
Squitieri, Victor R 60,000 60,000
Squitieri, Victor R 40,000 40,000
Unique Health Care 200,000 200,000
White, Jeffrey 18,000 18,000
Wood, Richard A. 27,000 27,000
------ ------
4,427,000 4,427,000
========= =========
The controlling person of the non-individual selling shareholders are:
Name of Shareholder Controlling Person
------------------- ------------------
Alice C. Tate, Roth IRA Alice C. Tate
Kay Foundation Carole and Barry Kay
Unique Health Care _________________
None of the Selling Stockholders have had a material relationship with us or any
of our affiliates other than as a stockholder at any time within the past three
years. See the table and footnotes to the table located in "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT" below.
To our knowledge, none of the Selling Shareholder are affiliated with a
securities broker.
PLAN OF DISTRIBUTION
The shares of common stock owned by the Selling Stockholders and any of his/her
pledges, assignees, and successors-in-interest may, from time to time, be
offered and sold from time to time on any stock exchange, market, or trading
facility on which the shares are traded or in private transactions. The Selling
Stockholders may offer shares in transactions at fixed or negotiated prices.
Sales may be at fixed or negotiated prices. A selling security holder may use
any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the effective date of the
registration statement of which this Prospectus is a part;
o broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
o a combination of any such methods of sale; or
o any other method permitted pursuant to applicable law.
18
In competing sales, brokers or dealers engaged by the selling shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from selling shareholders in amounts to be
negotiated. As to any particular broker-dealer, this compensation might be in
excess of customary commissions. Neither we nor the selling stockholders can
presently estimate the amount of such compensation. Notwithstanding the above,
no FINRA member will charge commissions that exceed 8% of the total proceeds
from the sale. The Selling Stockholders and any broker/dealers who act in
connection with the sale of their securities may be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Acts of
1933, and any commissions received by them and any profit on any resale of the
securities as principal will be deemed to be underwriting discounts and
commissions under the Securities Act. The Selling Stockholder, who is an
"underwriter" within the meaning of Section 2(11) of the Securities Act, is
subject to the Prospectus delivery requirements of the Securities Act. Each
Selling Stockholder has informed the Company that it does not have any agreement
or understanding, directly or indirectly, with any person to distribute the
Common Stock.
If any Selling Stockholder enters into an agreement to sell his or her
securities to a broker-dealer as principal, and the broker-dealer is acting as
an underwriter, we will file a post-effective amendment to the registration
statement, of which this prospectus is a part, identifying the broker-dealer,
providing required information concerning the plan of distribution, and
otherwise revising the disclosures in this prospectus as needed. We will also
file the agreement between the selling shareholder and the broker-dealer as an
exhibit to the post-effective amendment to the registration statement.
The Selling Shareholders may also sell their shares pursuant to Rule 144 of the
Securities and Exchange Commission.
We are bearing all costs relating to the registration of the Common Stock, which
are estimated at $33,482. The Selling Stockholders, however, will pay any
commissions or other fees payable to brokers or dealers in connection with the
exercise and purchase of the Common Stock and any sale of the Common Stock. We
have agreed to indemnify the Selling Stockholders against certain losses,
claims, damages, and liabilities, including liabilities under the 33 Act.
We agreed to keep this Prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
by reason of Rule 144 under the Securities Act or any other rule of similar
effect, or (ii) all of the shares have been sold pursuant to this Prospectus or
Rule 144 under the Securities Act or any other rule of similar effect. The
resale shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied with.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Some of the information in this Prospectus contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there may
be events in the future that we are not able to accurately predict or over which
we have no control. Our actual results and the timing of certain events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth under "RISK FACTORS" and
"DESCRIPTION OF BUSINESS" and elsewhere in this Prospectus. See "RISK FACTORS."
19
COMPANY OVERVIEW AND HISTORY
DNA Brands, Inc. (hereinafter referred to as "us," "our," "we," the "Company" or
"DNA") was incorporated in the State of Colorado on May 23, 2007 under the name
"Famous Products, Inc." Prior to July 6, 2010 we were a holding company
operating as a promotion and advertising company. Our current business commenced
in May 2006 in the State of Florida under the name "Grass Roots Beverage
Company, Inc." ("Grass Roots"). Initial operations of Grass Roots included
development of our energy drinks, sampling and other marketing efforts and
initial distribution in the State of Florida.
Effective July 6, 2010, we executed agreements to acquire all of the remaining
assets, liabilities and contract rights of DNA Beverage Corporation of Boca
Raton, Florida ("DNA Beverage"), and 100% of the common stock of DNA Beverage's
wholly owned subsidiary Grass Roots Beverage Company, Inc. ("Grass Roots") in
exchange for the issuance of 31,250,000 shares of our common stock. As part of
the terms of these transactions, our former President agreed to voluntarily
redeem 19,274,400 common shares back to us. The share issuance represented
approximately 94.6% of our outstanding shares at the time of issuance. Each DNA
Beverage shareholder on the Record Date received 0.729277764 shares of our
Common Stock for every one share of DNA Beverage they owned on the Record Date.
Additionally, our officers and directors resigned their positions with us and
were replaced by the former management team of DNA Beverage. Mr. Darren Marks
became a director and our President and CEO, and Mr. Melvin Leiner became a
director and our Executive Vice President, Secretary and COO/CFO.As a result of
this transaction we changed our name to "DNA Brands, Inc." Our principal offices
are located at 506 NW 77th Street, Boca Raton, Florida, 33487, telephone (954)
970-3826. Our website is www.dnabrandsusa.com.
In addition, to the transaction described above, our former Board of Directors
approved a "spin-off" of our wholly owned subsidiary company, Fancy Face
Promotions, Inc., a Colorado corporation. The terms of this "spin-off" provide
for a dividend to be issued to our shareholders of one share of common stock for
every share that our shareholders owned as of June 30, 2010, the record date of
the dividend.
Following is our results of operations for our fiscal years ended December 31,
2010 and 2009 and for the three month periods ended March 31, 2011 and 2010. All
DNA Beverage share amounts for the periods presented in this Prospectus
including weighted average shares outstanding and shares outstanding have been
adjusted to reflect the conversion ratio of 0.729277764. Share amounts for the
audited periods of December 31, 2010 and 2009, respectively, have not been
converted using this conversion ratio.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the years ended December 31, 2010 and
2009
Revenue
-------
Revenue for the year ended December 31, 2010 was $1,168,461 compared to $667,276
for the year ended December 31, 2009. This increase of 75.1% for year ended
December 31, 2010 compared to the year ended December 31, 2009 is primarily
attributable to our growing number of retail distribution channels in 2010,
compared to 2009 combined with increased marketing efforts. While no assurances
can be provided, we expect that our ongoing sales and marketing efforts,
combined with brand recognition and awards we have received for the quality of
our products will generate significant incremental revenue increases in the
future. However our ability to continue to expand our revenue is dependent upon
our success in raising additional capital and there can be assurance we will be
successful or obtain funding to support our marketing efforts. See "Liquidity
and Capital Resources" below.
Gross Margin
------------
We calculate gross margin by subtracting cost of goods sold from revenue. Gross
margin percentage is calculated by dividing the gross margin by revenue. Our
gross margin for the year ended December 31, 2010 was $299,387 compared to
$199,156 in the same period in 2009. Our gross margin percentage in 2010
decreased to 25.6% compared to 29.8% in 2009. Since we are in our growth phase
and a small number of sales and transactions can impact our gross margin
percentage, we do not believe that the gross margin percentages for the year
20
ended December 31, 2010 is indicative of future results. Until we reach higher
and more consistent sales level, we believe that our future gross margin levels
will vary from quarter to quarter and year to year.
Compensation and Benefits
-------------------------
Compensation and benefits for the year ended December 31, 2010 were $3,510,129
compared to $2,272,551 for the same period in 2009. Due to our limited
liquidity, in 2009 we began to incentivize key employees with a small base
salary and significant stock grants. Our two executive officers have deferred
all cash salary since 2008. The increase in 2010 compensation levels compared to
2009 is primarily attributable to an increase in stock grants of approximately
$665,000 over 2009 levels and the hiring of additional personnel in the area of
sales and marketing to help support our growth.
General and Administrative
--------------------------
General and administrative expense ("G&A") for the year ended December 31, 2010
was $999,015 compared to $733,516 for the year ended December 31, 2009. G&A is
primarily comprised of office and warehouse rent, utilities, corporate
insurance, travel and entertainment, and other expenses. The increase in G&A for
the year ended December 31, 2010 compared to the same periods in 2009 is
attributable to increases in rent, travel, insurance and vehicle expenses. We
believe that we can significantly increase sales levels with minimal increases
in G&A. However, there can be no assurances that we will be successful in
increasing sales levels or minimizing G&A expenses in the future.
Professional and outside services
---------------------------------
Professional and outside services for the year ended December 31, 2010 was
$2,209,840 compared to $333,520 for the year ended December 31, 2009.
Professional and outside services are comprised primarily of legal, public
relations, accounting and other fees. The significant increase in 2010
professional and outside services is attributable to increases in legal fees of
approximately $1,400,000, increases in accounting fees of approximately $165,000
and increase in investor relations fees of approximately $249,000. These
expenses were incurred as a result of the reverse merger that occurred on July
6th as described throughout this Prospectus. Approximately $1,400,000 of the
increased expenses in 2010 is attributable to non-cash stock awards.
Selling and marketing expenses
------------------------------
Selling and marketing expenses for the year ended December 31, 2010 was
$906,367, compared to $266,569 for the year ended December 31, 2009. The
material increase in selling and marketing expenses during the year ended
December 31, 2010 compared to 2009 is attributable to marketing, promotion and
selling efforts. During 2010, we increased the number of our distribution chains
allowing us to utilize a greater number of promotional opportunities to expand
our sales territories. Additionally, we upgraded our sponsorship agreements to
include higher profile athletes in an effort to establish a larger national
presence. We believe that these increased efforts have yielded a number of new
accounts with significant potential for new sources of revenue. There can be no
assurances that ongoing and additional marketing efforts will generate new
sources of revenue in excess of these marketing expenses
Interest expense
----------------
Interest expense for the year ended December 31, 2010 was $116,081 compared to
$489,974 for the year ended December 31, 2009. The primary reason for the
significant drop in interest expense for the year ended December 31, 2010
compared to the same periods in 2009 is attributable to the conversion of
convertible debt to common stock (See Note 10 to the Notes to Financial
Statements) in May and June of 2010. As a result we no longer recorded interest
expense associated with the amortization of loan discount. Due to the thinly
traded nature of our Common Stock and selling restrictions placed upon insiders
and executive management, we believe that the amount of shares issued to retire
this debt was reasonable.
Net loss
--------
We incurred a net loss of $7,468,422 during the year ended December 31, 2010,
or, $0.28 per share compared to a net loss of $3,918,721 for the year ended
December 31, 2009, or, $0.26 per share. Since inception we have generated
21
material operating losses. A significant portion of these losses as described in
this Prospectus are non-cash in nature, however, the losses remain substantial
excluding those items. We believe that based upon our growing distribution
channels, recognition of the quality of our products and marketing plan than we
can become profitable from operations by the beginning of 2012. However there
can be no assurances that we will be successful or that we will have sufficient
liquidity to execute our plans.
Comparison of Results of Operations for the three month periods ended March
31, 2011 and 2010
Revenue
-------
Revenue for the three month period ended March 31, 2011 was $265,817, compared
to $310,305 during the corresponding period of the prior year. Our revenue for
the three months ended March 31, 2011 decreased 14.3% compared to the same
period in the prior year. This decrease is primarily attributable to a changing
customer base during our growth phase where we are continually testing our
products through a variety of channels. For the first quarter of 2011, there
were a number of new customers who we weren't selling to during the first
quarter of 2010. However, the revenue from these new customers in 2011 did not
offset the loss of revenue from customers from the same period in 2010 who
tested the product and did not re-order, or, who we chose not to continue doing
business with in 2011. We believe this a normal process for the introduction of
a new product and can provide no assurances that we will not have sales
fluctuation from quarter to quarter while we continue to introduce our product
into various retail markets and distribution channels.
While no assurance can be provided, we expect that our ongoing sales and
marketing efforts, combined with our increasing brand recognition and the awards
we have received for the quality of our products will generate significant
incremental revenue for us in the future. However, our ability to achieve
increased revenue is dependent upon our success in raising additional capital.
No assurances can be provided that we will successfully raise the funding
necessary to support our marketing efforts. See "Liquidity and Capital
Resources."
Gross margin
------------
We calculate gross margin by subtracting cost of goods sold from revenue. Gross
margin percentage is calculated by dividing the gross margin by revenue. Our
gross margin for the three month period ended March 31, 2011 was $85,103, as
compared to $48,875 during the corresponding period of the prior year. Our gross
margin percentage increased to 32.0% from 15.8% when compared to the prior year
period. The increase in gross margin percentage is due to the varying price
structures that we have tested during 2010 and 2011 in various markets. Since we
are in our growth phase a small number of sales and transactions can impact our
gross margin percentage either up or down. We do not believe that the gross
margin percentages for the three month periods in 2011 and 2010 are necessarily
indicative of future results when applied to larger sales volumes.
Compensation and benefits
Compensation and benefits for the three month period ended March 31, 2011 was
$480,335, as compared to $1,707,551 during the corresponding period of the prior
year. The decrease in compensation and benefits of $1,227,216, or 71.9%, from
the prior year period is primarily attributable to the issuance of common stock
to employees as compensation in 2010. Due to our limited liquidity, we have
incentivized key employees earning a small base salary with significant stock
grants.
Stock grants to employees vest immediately and are recorded at their fair market
value on the date that our Board of Directors approves such grants. On January
11, 2010, we granted five key employees an aggregate of 1,932,586 shares of our
common stock. We valued these shares at their quoted market values upon
authorization and recorded an expense of $1,245,500 during the three month
period ended March 31, 2010.
Our two executive officers have deferred cash payment of their salaries since
2008. For both the three month periods ended March 31, 2011 and 2010, we
recorded $62,500 in compensation expense related to these deferrals. At March
31, 2011, the aggregate value of these salary deferrals totaled $812,500 and was
included in our accrued liabilities.
22
General and administrative
--------------------------
General and administrative expenses ("G&A") for the three month period ended
March 31, 2011 were $231,557, as compared to $221,624 during the corresponding
period of the prior year. G&A remained relatively similar to the levels incurred
in the prior year period, increasing by only $9,933 or 4.5%. G&A is primarily
comprised of the rent associated with our facilities, cost of utilities,
insurance premiums, travel and entertainment, and other miscellaneous expenses.
Professional and outside services
---------------------------------
Professional and outside services for the three month period ended March 31,
2011 was $205,468, as compared to $271,413 during the corresponding period of
the prior year. Professional and outside services are comprised primarily of
accounting fees, legal fees, investor and public relations expenses and other
miscellaneous services. The decrease in professional and outside services of
$65,945, or 24.3%, is primarily attributable to the reduction in investor
relation fees to $33,500 in the current period from $93,113 in the prior year.
Selling and marketing expenses
------------------------------
Selling and marketing expenses for the three month period ended March 31, 2011
were $219,455, as compared to $206,113 during the corresponding period of the
prior year. The nominal increase in selling and marketing expenses of $13,342,
or 6.5%, is primarily attributable to our continued marketing and promotional
efforts. We continue to increase the number of our distribution chains; allowing
us to utilize a greater number of vehicles to expand our sales territories.
Additionally, we continue to upgrade our sponsorship agreements to include
higher profile athletes in an effort to establish a larger national presence.
There can be no assurances that these expenditures will enable us to increase
revenue.
Interest expense
----------------
Interest expense for the three month period ended March 31, 2011 was $9,065, as
compared to $56,920 during the corresponding period of the prior year. The
decrease in interest expense of $47,855, or 84.1%, is primarily attributable to
the amortization of loan discounts related to convertible, subordinated
debentures during the prior year period. During the three month period ended
March 31, 2010, we recorded $42,447 in non-cash interest expense relative to
these loan discounts, resulting from beneficial conversion features.
In February 2011 we issued 125,000 shares of our common stock in connection with
the issuance of a $500,000 convertible, subordinated debenture. These restricted
shares were valued at their fair market value and recorded as a discount to the
stated value of the debenture. The discount is being amortized using the
effective interest rate method over the term of the debenture. During the three
months ended March 31, 2011, we recorded $1,170 in non-cash interest expense
relative to this loan discount (See Note 10).
Net loss
--------
For the three month period ended March 31, 2011, we incurred a net loss of
$1,066,677, or $0.03 per basic and fully diluted share, as compared to a net
loss of $2,420,623, or $0.13 per basic and fully diluted share during the
corresponding period of the prior year. Since our inception, we have generated
material operating losses. A significant portion of our losses are non-cash in
nature; however, our losses remain substantial even after excluding those items.
The weighted average number of basic and fully diluted shares outstanding for
the three month period ended March 31, 2011 was 35,031,697, as compared to
19,072,805 shares for the corresponding period of the prior year. There were no
dilutive equivalents included in our calculation of fully diluted shares during
either period since their inclusion would be anti-dilutive due to our net loss
per share.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2011, we had $90,579 in cash and cash equivalents.
23
During the three month period ended March 31, 2011, we recorded a net loss of
$1,066,677 and had negative cash flows of $778,082 from our operating
activities. At March 31, 2011, we had a working capital deficit of $2,215,876
and a stockholders' deficit of $2,642,515. We have relied, in large part, upon
debt and equity financing to fund our operations. These matters collectively
raise a substantial doubt about our ability to continue as a going concern.
Net cash used in operations was $778,802 for the three month period ended March
31, 2011, as compared to $729,998 during the corresponding period of the prior
year. The increase in net cash used of $48,804, or 6.7%, over the prior year
period is primarily due to an increase in prepaid expenses of $216,561 in 2011
compared to a decrease of $96,033 in 2010. We recorded a net loss of $1,066,677
during the three month period ended March 31, 2011, as compared to $2,420,623 in
the corresponding period of the prior year. After excluding non-cash expenses of
$1,245,500 in 2010 resulting from the issuance of common stock to key employees
as a form of compensation, we realized a net cash benefit of $108,446 from
operating activities over the prior year period. Further, we realized a cash
benefit from the growth in our accrued expenses; increasing by $207,556 as
compared to $80,088 during the prior year period. The period over period net
change in our principal working capital assets (accounts receivable, inventory
and accounts payable) was immaterial.
Net cash provided by investing activities was $3,398 for the three month period
ended March 31, 2011, as compared to net cash used of $26,106 during the
corresponding period of the prior year. The positive change in net cash from
investing activities of $29,504, or 113.0%, over the prior year period is
primarily due to the purchase of capital assets aggregating $26,106 in 2009.
Additionally, we recovered $3,148 of the advances it made to a related party,
Royal Strategies and Solutions, Inc., during the three month period ended March
31, 2011.
Net cash provided by financing activities was $790,659 for the three month
period ended March 31, 2011, as compared to $961,543 during the corresponding
period of the prior year. The decrease in net cash provided by financing
activities of $170,884, or 17.8%, from the prior year period is primarily due to
the repayment of loans to officers. During the three month period ended March
31, 2010, we made net loan repayments of $268,369 to its officers, as compared
to net repayments of $70,054 in the corresponding period of the prior year. We
received proceeds from the issuance new capital, as described below, aggregating
$1,063,750 during the three months ended March 31, 2011, as compared to
$1,122,477 in the prior year period.
In the first quarter of 2011 a number of our employees agreed to defer a portion
of their cash compensation to assist us in improving our liquidity position. In
return, we agreed to file an S-8 registration statement with the SEC to register
900,000 shares of common stock to reimburse the employees with free-trading
shares of our common stock that could be immediately sold and cash proceeds
realized subject to the trading volume of our stock; and, additionally to
provide a means for paying consultants and service providers. This S-8
registration statement became effective on April 14, 2011. As of March 31, 2011
there was $47,500 in accrued payroll related to this arrangement.
In July 2010, we undertook a private offering of our common stock whereby we
offered up to 3,000,000 shares at an offering price of $0.50 per share to
"accredited investors" as that term is defined under the Securities Act of 1933,
as amended. During the three month period ended March 31, 2011, we sold 50,000
shares and received proceeds of $25,000. As of the date of this report, we have
sold an aggregate of 2,060,000 shares and have received proceeds of $1,030,000
therefrom. This offering was closed to investors in the first quarter of 2011.
In February 2011, we undertook a private offering of our preferred stock whereby
we offered up to 4,000,000 shares at an offering price of $0.25 per share to
accredited investors. During the three months ended March 31, 2011, we sold
2,155,000 shares and received proceeds of $538,750. As of the date of this
report, we have sold an aggregate of 4,000,000 shares and have received proceeds
of $1,000,000 therefrom.
In February 2011, we issued a secured, convertible debenture to an existing
shareholder in the principal amount of $500,000, which becomes due three years
from the date of issuance. The debenture bears interest at 12% per annum and is
payable quarterly beginning in May 2011. In addition to interest, as inducement
for the maker to loan funds to us, the maker received 125,000 restricted shares
of our common stock contemporaneously with the execution of the debenture.
Further, we agreed to pay to the maker an annual transaction fee of $30,000 in
equal installments on a quarterly basis beginning in May 2011. The balance due
under the debenture is collateralized by all of our assets, including but not
limited to inventory, receivables, vehicles and warehouse equipment. Lastly, we
agreed to issue 750,000 shares of its common stock (the "Escrowed Shares"), in
favor of the maker, to be held in escrow by a mutually agreeable party. In the
event of failure to pay all or any portion of the principal and interest due
under the debenture, including any and all rights to cure, the Escrowed Shares
shall be released to the maker. The Escrowed Shares are not entitled to voting
24
rights, or to receive any dividends if and when declared unless and until the
Escrowed Shares are released.
We are working on generating new sales from additional retail outlets,
distribution centers or through sponsorship agreements; and allocating
sufficient resources to continue with advertising and marketing efforts. Based
upon our current operating activity, we believe will require a minimum of
approximately $6.0 million in new funding to execute our business plan during
the next year. There can be no assurances that if we can secure these funds we
will be able to generate a sufficient level of revenue to sustain our ongoing
cash flow requirements.
We intend to continue to raise funds through private placements of our common
stock, debt offerings and through short-term borrowing. While we have engaged in
discussions with various investment banking firms, venture capitalists and
private investors to provide us these funds, as of the date of this report we
have not reached any definitive agreement with any party that has agreed to
provide us with the capital necessary to continue to expand our operations to
the point where we are generating profits from our operations. Our inability to
obtain sufficient funds from external sources when needed will have a material
adverse effect on our plan of operation, results of operations and financial
condition.
TRENDS
Our emphasis over the next 12 months will continue to be to build our brand and
increase revenues. We have been actively involved in discussions with potential
investors to provide us with additional equity funding. While we believe our
efforts in this regard will result in our obtaining this funding, as of the date
of this Prospectus we have no definitive agreement with any third party to
provide us with this funding. However, as stated in the paragraph above, we have
executed a letter agreement with Equinox Securities, Inc. where we have retained
Equinox as our placement agent to raise up to $6 million in equity capital, at a
share price to be agreed, on a "best efforts" basis. There are no assurances
that Equinox will successfully raise any equity capital on our behalf.
Assuming receipt of funding we intend to continue to increase our expansion
efforts, including expanding operations into New York and Texas. Clem
Distributing of New York, one of the largest snack distributors in NY, and
Chappell Hill Sausage of Texas have agreed to represent us and our products.
Texas has over 14,000 convenience store outlets. DNA meat snacks will be made
available to the over 10,000 outlets serviced by Clem Distributing. DNA Meat
snacks will be available throughout the major metropolitan region of New York
City and its five boroughs.
Creating more brand awareness and trials will be addressed through a significant
public relations and advertising program. Public relations, targeted cable TV
advertising, increased "cans in hand" sampling, events and billboards will round
out the program. We will also continue to develop and expand those areas where
our products are currently being distributed. The public relations and
advertising program will encompass these locations as well.
INFLATION
Although our operations are influenced by general economic conditions, we do not
believe that inflation had a material effect on our results of operations during
the three month period ended March 31, 2011.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into 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 and would be considered
material to investors.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting estimates - The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect the
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates based on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
25
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The
following represents a summary of our critical accounting policies, defined as
those policies that we believe are the most important to the portrayal of our
financial condition and results of operations and that require management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain.
Leases - We follow the guidance in SFAS No. 13 "Accounting for Leases," as
amended, which requires us to evaluate the lease agreements we enter into to
determine whether they represent operating or capital leases at the inception of
the lease.
Stock-based compensation - Effective January 1, 2006, we adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standard
(SFAS) No. 123R, "Share Based Payment." SFAS 123R requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. That cost is
recognized on a straight-line basis over the employee service period (usually
the vesting period). That cost is measured based on the fair value of the equity
or liability instruments issued using the Black-Scholes option pricing model.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures - Our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
Prospectus.
These controls are designed to ensure that information required to be disclosed
in the reports we file or submit pursuant to the Securities Exchange Act of 1934
is recorded, processed, summarized and reports within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that such
information is accumulated and communicated to our management, including our CEO
and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
Based on this evaluation, our CEO and CFO concluded that our disclosure controls
and procedures were effective as of March 31, 2011, at the reasonable assurance
level. We believe that our consolidated financial statements presented in this
Prospectus fairly present, in all material respects, our financial position,
results of operations, and cash flows for all periods presented herein.
Inherent Limitations - Our management, including our Chief Executive Officer and
Chief Financial Officer, do not expect that our disclosure controls and
procedures will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdown can occur because of simple error or mistake. In
particular, many of our current processes rely upon manual reviews and processes
to ensure that neither human error nor system weakness has resulted in erroneous
reporting of financial data.
Changes in Internal Control over Financial Reporting - There were no changes in
our internal control over financial reporting during the three month period
ended March 31, 2011, which were identified in conjunction with management's
evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
26
DESCRIPTION OF BUSINESS
INTRODUCTION AND HISTORY
DNA Brands, Inc. (hereinafter referred to as "us," "our," "we," the "Company" or
"DNA") was incorporated in the State of Colorado on May 23, 2007 under the name
"Famous Products, Inc." Prior to the transaction described in "PROSPECTUS
SUMMARY - Overview" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Overview and History" above, we were a
holding company operating as a promotion and advertising company. Our current
business commenced in May 2006 in the State of Florida under the name "Grass
Roots Beverage Company, Inc." ("Grass Roots"). Initial operations of Grass Roots
included development of our energy drinks, sampling and other marketing efforts
and initial distribution in the State of Florida. In August 2007, Grass Roots
engaged in a share exchange with Imagine Holding Corporation ("Imagine") wherein
all of the issued and outstanding stock of Grass Roots was acquired by Imagine
making Grass Roots a wholly owned subsidiary. As part of this transaction,
Imagine's name was changed to "DNA Beverage Corporation." Grass Roots developed
into a distribution company and the balance of our current operations was
conducted through DNA Beverage Corporation.
As a result of the transactions described "PROSPECTUS SUMMARY - Overview" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Company Overview and History," we have changed our name to DNA
Brands, Inc., as well as our current business plan. Our principal offices are
located at 506 NW 77th Street, Boca Raton, Florida, 33487, telephone (954)
970-3826. Our website is www.dnabrandsusa.com.
We currently produce, market and sell a proprietary line of three carbonated
blends of DNA Energy Drinks(R), as well as a line of meat snacks made up of two
beef jerky flavors and three flavors of beef sticks. We began selling our energy
drink initially in the State of Florida in 2007. As of the date of this
Prospectus we are currently distributing our products throughout 31 of 42
Florida counties as well as the Southeastern US, including Georgia, Louisiana
and Mississippi. We also distribute in California, Maryland, Ohio, Pennsylvania
and Michigan and are in the process of expanding our distribution into the
Carolinas. In addition we will soon be fully represented in Illinois, Indiana,
New York and parts of New Jersey. In New York we will be distributing DNA Shred
Stix(R) through Clems Distributing, one of New York's largest snack distributors
with over 10,000 points of distribution. We are also in discussions for Clems to
distribute DNA Energy Drink(R). It is our intention to have nationwide
distribution by 2012 provided we are able to obtain the financing necessary to
accomplish this objective.
We strive to maintain creditability with our core demographic, increase our
consumer base by adapting to trends and changes, keep the brand in front of
consumers through TV, magazines, events and viral campaigns and at the same time
giving the consumer superior products at a lower price with quality service. We
have demonstrated our ability to adapt to market trends by pioneering the DNA
Beef Jerky and Shred Stix line, giving us numerous cross marketing
opportunities.
Our founders are Mr. Darren Marks, our current President and CEO, and Mr. Melvin
Leiner, our current Executive Vice President, Secretary and COO/CFO, who
together founded DNA to leverage their experience and create a prominent brand
in the energy drink segment of the beverage industry.
We are a Florida based company focused on building our DNA brand. In an industry
where only 5% of new companies survive, we feel our continued success will be
based upon a methodical approach to build our brand. We started out with the
idea that energy drinks could be functional and delicious tasting at the same
time and made the conscious decision not to follow the industry leaders taste
profile and created energy drinks to set us apart from the competition. In
January 2010 we were awarded a 1st Place "Platinum Award," as the best tasting
energy drink at the prestigious World Beverage Competition(TM) held in Geneva,
Switzerland. More than 30 counties and over 10,000 entries were submitted in all
beverage categories.
Knowing full well that brands are not built overnight, especially in the highly
competitive energy drink category, our first two years were devoted to brand
development, creating awareness through sampling programs (over 20,000 cases
sampled) and creating credibility among our core demographic by concentrating
marketing efforts on action sports locations and events (surf, motocross, skate,
etc.) which we continue today throughout Florida.
27
As we learned through trial and error, there was a severe lack of meaningful
brand-building distribution options available to new non-alcoholic brands in
Florida forcing us to create our own Direct Store Distribution (DSD) entity,
Grass Roots Beverage Company, Inc. ("Grass Roots"). Grass Roots directly covered
31 of 42 counties in Florida before Anheuser-Busch agreed to become our
distributor for Florida. Grass Roots continues to service accounts in these
counties and/or assists Anheuser Busch in the selling or distribution of our
branded products and will do so until the products are fully assimilated into
Anheuser Busch's network. Once we were comfortable that the brand had some
legitimacy we aggressively went after the independent convenience and chain
stores. Our products are currently sold in over 3,000 Florida stores, most of
which came on board over the 7 months prior to the date of this Prospectus.
Having our own DSD has given us insight into what is required from both a
manufacturer's and distributor's standpoint to successfully build a brand.
On February 23, 2010, the committee for Anheuser Busch's ("AB") 26 Florida
distributors recommended that DNA Energy Drink become the replacement for
Monster Energy Drink that terminated their relationship with AB. Combined the 26
AB-Budweiser houses sold 1.4 million cases of Monster with gross revenues
approximating $40 million. As a bonus the committee also gave its approval for
distribution of our entire meat snack line. Quality Distributors of Deltona,
Florida became the first AB distributor to receive product. Since February 2010
we have entered into eleven (11) separate agreements with AB distributors and
expect to continue to enter into new distribution agreements over the next 6
months. However, as of the date of this Prospectus AB is not servicing
approximately 60% of the State of Florida and as a result, we still maintain
Grass Roots to fill in the territories not yet serviced by AB and to act as
service representatives for the AB network.
On March 1 2011, we entered into a distribution agreement with Sand Dollar
Distributors, LLC for the distribution of our entire line of products. This
agreement calls for Sand Dollar to service the Miami/Dade, Monroe (Key West
through Miami), and Palm Beach counties where we have no AB coverage. Sand
Dollars was Red Bull's exclusive South Florida distributor until recently and
largely credited with its success in South Florida. Distribution efforts are
expected to begin in April 2011.
We are the "title" sponsor of a factory Yamaha AMA super cross team the "DNA
Shred Stix Star/Yamaha Racing Team." AMA Motocross/Supercross is only second to
NASCAR in motor sport attendance according to the AMA Supercross Association.
The DNA team is one of only four teams that contended for the world "Lites"
title and had four podium appearances with a title win in Seattle in 2010 and
have had extensive coverage on CBS and Speed channels already in 2011.
We try to maintain creditability with the core demographic and increase our
consumer base by adapting to trends and changes, keeping the brand in front of
consumers through TV, magazines, events and viral campaigns and at the same time
giving the consumer superior products at a lower price with quality service. We
believe we have demonstrated our ability to adapt to market trends and when we
were certain that our energy drink had gained credibility among our core
demographic we pioneered the release of the DNA Beef Jerky and Shred Stix line
in July 2009 and January 2010, respectively. We believe this gives us numerous
cross marketing opportunities.
PRODUCTS
We produce, market and sell an initial proprietary line of three carbonated
blends of DNA Energy Drink(R) ("DNA(R)") as well as a line of meat snacks made
up of two beef jerky flavors and three flavors of beef sticks. These drinks are
sold in 16 ounce cans styled with the name DNA(R) prominently placed and a logo
that includes the DNA Skull and Helix. The beef jerky is packaged in a 3.0 oz
sealable pouch and the beef stick is 1.0 oz stick form. We believe the name DNA,
our edgy color schemes, logo and other graphics stand out on store shelves and
coolers. The DNA name resonates highly with our target market which includes a
younger core of a more active demographic involved in today's rapidly expanding
and trend setting action sports community. Our initial product flavors include:
DNA Energy Drink(R)
o Citrus -Tastes like a true blend of real oranges with specific
citrus nuances
o Lemon Lime -Velvety and smooth lemon lime mix
o Citrus Sugar free (No carbs) - The taste of a very high end
orange soda but with a jolt of energy
o Cranberry Raspberry Sugar Free (CranRazzberry) (No carbs) - a mix of
Cranberry and Raspberry with the correct energy boost.
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DNA Beef Jerky(TM)
o Original - True beef flavor
o Teriyaki - Tastes like authentic Asian seasoning
DNA Shred Stix(R)
o Original - Real beef flavor
o Pizza - Authentic Pepperoni Pizza taste
o Jalapeno - Hot and Spicy
o Taco -Authentic Taco Flavor
Energy Drinks
We have formulated DNA(R) to the highest flavor profile standard and believe it
is superior in taste to any of the other energy drink brands in the industry. We
incorporate the best and highest quality ingredient mix in our proprietary
blends which have been formulated to maximize energy and awareness levels that
result in improved performance on demand.
Our energy drink makes an immediate and lasting difference in elevating energy
levels of consumers. This category is the only one that creates an immediate
expectation of an effect on consumer bodily functions. There are many energy
drinks that have compromised functionality for cost savings. We believe they
have learned all too late that if an energy drink does not deliver on its
promise for an immediate and lasting increase in energy levels, it is no more
than an expensive soda. Energy drink consumers will go to another reliable
brand. We believe one of the several principal reasons new energy drinks
entrants commercially fail soon after introduction is because they use inferior
ingredients and as a result do not provide the expected results.
DNA(R) is formulated to ensure that DNA(R) drinkers will, upon first drink,
experience a taste that is delicious beyond the typical expected
institutionalized medicinal taste that has been the main negative reaction
associated with the vast number of brands of energy drinks including the major
brands. We have not sacrificed taste for functionality and performance which we
believe gives us a major competitive advantage over other energy drinks and has
awarded us with high accolades from distributors and industry insiders, as well
as from numerous action sports publications. These early taste accolades for
DNA(R) have converted numerous energy drink consumers to us in those geographic
areas of our distribution. We believe on taste alone, given our high
functionality profile, we are able to quickly convert consumers from other
brands. In fact, our tag line, "Tastes Like No Other," was given to us by a
first time consumer in our initial sampling program. Our taste and functionality
profiles have begun to create a positive response in our target market, with
distributors and with convenience store chains that dominate energy drink
distribution. DNA(R) has also captured industry attention at the highest levels.
DNA was awarded the 1st Prize "Platinum Award" in the "Best Tasting Energy
Drink" category by the World Beverage Competition for 2010 which was held in
Geneva, Switzerland. More than 30 countries participated and more than 10,000
entrants in all beverage categories were submitted for judging. One winner from
each category was selected in double blind tasting tests.
We are experimenting with line extensions on these blends and also on completely
new items that are in the research and development process. We will not
introduce them until significant distribution and wide name recognition is
obtained for our core line offerings.
DNA Meat Snacks
In July 2009 we released ours beef jerky line, followed in January 2010 with our
Shred Stix meat stick, all of which are produced in the United States with 100%
American muscle beef unlike most all of our competition. DNA meat snacks are
made under the strictest controls and supervision to insure the highest quality.
Quality, taste and consistency remains very much in the forefront of production
philosophy as it is for our energy drinks. As is with our energy drink, DNA
Shred Stix is the only brand that does not contain MSG. Extensive market testing
and research has gone into the brand prior to production.
Because we use 100% American beef and the finished goods are packaged only once
within hours of production, we are able to bake our flavors into the meat. This
process eliminates the greasy look, feel and taste that are prevalent in much of
our competitors' products. In addition to 100% American beef, our production
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process uses imported dry spices, ground and blended to provide great, well
rounded flavors that stay true with extended shelf life resulting in more flavor
control and more consistency from batch to batch. Some competitive jerky is made
51% in the USA and 49% in South America then blended before final packaging.
This allows them to avoid the "Product of Argentina" declaration on the package.
Some competitors' products may not be packaged for several weeks after
production, the result of which is they virtually paint the flavor just prior to
packaging to be able to retain the taste.
DNA Meat Snacks are being marketed to a similar demographic that consumes energy
drinks. Distributors are gravitating to the brand with great enthusiasm on a
local, regional and national level and see the brand extension as a natural
progression to servicing the needs of our demographic base.
RECENT DEVELOPMENTS
While no assurances can be provided, our management believes that we are on the
verge of explosive growth. In support of this contention below are several
recent events that have occurred to foster this belief:
>> As discussed above, on February 23, 2010, the committee for Anheuser
Busch's ("AB") 26 Florida distributors recommended that DNA Energy
Drink become the replacement for Monster Energy Drink that terminated
their relationship with AB. Combined, the 26 AB-Budweiser houses sold
1.4 million cases of Monster with gross revenues approximating $40
million. As a bonus the committee also gave its approval for
distribution of our entire meat snack line. Quality Distributors of
Deltona, Florida became the first AB distributor to receive product.
Since February 2010 we have entered into eleven (11) separate
agreements with AB distributors and expect to continue to enter into
new distribution agreements over the next 6 months.
>> Since June 2009, we have reached verbal and written agreements with
quality retailers such as CVS, Walgreens, Race Track, Circle-K and
7-Eleven to offer our products. Based upon early successes with
Walgreens, in February 2011 we entered into a full statewide
distribution program with Walgreens covering 823 locations throughout
Florida. Each Walgreens location will carry the full line of our meat
snacks and energy drink.
>> Over the past few years we have entered into various co-Branding
marketing agreements with CVS and Walgreens and major league sport
franchises, including the New Orleans Hornets, Cleveland Cavaliers and
Orlando Magic of the NBA, the Florida Marlins and Cincinnati Reds of
MLB, and the Arizona Cardinals, Houston Texans and Indianapolis Colts
of the NFL. These agreements are entered into for a 9-12 month term
and usually coincide with our entry into a new geographic section of
the US. We believe that these agreements are fueling expansion. These
programs are expected to continue in the foreseeable future.
>> We have been approved by both military buying organizations, AAFES and
DeCA, for the purchase of DNA branded meat snack products. Initial
orders have been received and deliveries have been made to both
agencies. Orders are generally placed by individual distribution
centers and have been between $1,000 and $50,000. While no assurances
can be provided, we expect that this will be a recurring order.
>> In the second quarter of 2010 we began to distribute product in both
the Midwest and Mid-Atlantic regions.
>> Grass Roots, our wholly owned subsidiary, is currently servicing 600
convenience stores and independent grocers in the Detroit, Michigan
area and is in negotiations with Garden Foods, Inc., one of the
largest non-alcoholic distributor in the Midwest, to become our master
distributor covering several counties surrounding Detroit. Product was
initially launched on March 29, 2009 and we have subsequently received
3 additional full container truck load (approximately $200,000) orders
since that time.
>> On March 1, 2011, we signed a distribution agreement with Sand Dollar
Distributors, LLC for the distribution of our entire line of products.
Sand Dollar will service Miami Dade, Monroe and Palm Beach counties of
Florida from Key West to Fort Pierce with the exception of Broward
County which is serviced by AB's Double Eagle. This Agreement is
significant for two reasons, including (i) Sand Dollar was the former
"exclusive" distributor of Red Bull covering all of South Florida for
approximately 10 years and was largely credited with its success in
South Florida; and (ii) the appointment of Sand Dollar fills two key
areas in the Southeastern US where we have experienced difficulty in
obtaining AB approval, including Miami, which is a corporate AB
location that sells AB products exclusively and Palm Beach, which we
have not yet secured.
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SALES AND MARKETING
DNA Energy Drink(R) and DNA Beef Snacks(TM) provide immediate and sustained
energy and/or satisfies the hunger needs of all groups of people in need of an
energy lift to meet the challenges of the day and these groups may include
parents, office workers, truck drivers, postal carriers, laborers, students,
night watchmen and scores of others in every walk of life. We have specifically
targeted our marketing attention to the "trend setters" in two sectors: (1)
today's rapidly growing action sports community, our initial and most critical
target market and more recently (2) the music industry, that may or may not be
action sports orientated. In either case the audience is trendy and edgy and we
believe our perfect customer.
Our choice to target the action sports community reflects our management's
personal and professional experiences coupled with the fact that this
demographic group represents those most likely to seek alternative beverages and
meat snacks and the immediate gratification that energy drinks provide. More
importantly, they set the tone and influence others to try our products.
These action sports include:
o Surfing
o Wake Boarding
o Skim Boarding
o Skate Boarding
o BMX
o Motocross/Supercross
o Free Style Motocross
We are also the "title" sponsor of a factory Yamaha AMA super cross team. AMA is
only second to NASCAR in motor sport attendance. The DNA team is one of only
four teams that contended for a world "Lites" title and was on the winner's
podium four times this season with a DNA rider taking first place in Seattle. We
have had extensive coverage on CBS and Speed channels. We believe that this
sponsorship program provides significant exposure of our products to our target
demographic that we could not currently afford if we elected to purchase
equivalent advertising.
Our target demographic is 18 to 39 years of age and predominantly male although
with the growing popularity, female participants and fans are beginning to enter
the field in larger numbers. This group tends to be on the cutting edge of style
and have a profound influence on cultural trends and fashion. They are
individualistic and tend to avoid corporate culture in favor of personal
individual expression. They are extreme, risk takers, can spot the next "next"
in the culture and are quick to try it. They quickly adopt it and spread the
word if they like it and are as quick to toss it aside if it compromises their
integrity and individuality. This group will provide the greatest initial
benefit to the energy drink market and to DNA(R) and, therefore, they are the
group on which we are focusing the greatest attention. The 18-39 year old
profile represents approximately 90 million people who can likely be potential
energy drinkers and meat snack consumers.
We believe that an aggressive "grass roots" marketing approach directed at the
core demographic through support of their activities and events leads to product
acceptance and credibility, the two ingredients we believe are necessary for
success. Additional more conventional marketing and advertising programs
directed at radio/television campaigns will reinforce our message. We believe
that top down advertising strategies are costly and will not work against the
highly capitalized brands on a dollar-for-dollar basis and will lead to failure.
A prime example of this in the energy drink category is Xyience Energy which
declared bankruptcy after spending all its capital in one quarter on high priced
advertising in support of their drink Xenergy.
Our objective is to build and maintain credibility with our target market and
create a loyalty to our brand among consumers beginning at a younger age. We see
action sports as a community, tied together by like mindedness, similarity of
lifestyle, a commitment to their sport and its stars and more importantly their
constant presence either as participants or as fans within the action sports
lifestyle. This community is present at and a part of local or national events,
on street corners, parks or whether following the sport through websites
dedicated to each of the action sports, national magazines that cover all the
sporting events including Dirt Rider, RacerX, Transworld Skate, Mundo Rad,
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Surfer Magazine, Surfing Magazine and Eastern Surf Magazine, or national
television and cable networks like CBS, Fuel TV, ESPN, EXPN, and the Speed
Channel which televise all events. We strive to be seen in this community at all
times through our individual athletes, our teams who wear our logos proudly and
drive their rigs with our banners and logos, with their photographs drinking
DNA(R) and with our sampling vans placing "Cans In Hands." All of these are
inexpensive ways that have created a "buzz" for DNA(R) that has the appearance
and effect of spending that major brands spend.
Our strategy is to be prominently featured in each of these venues on an ongoing
basis through our sponsored athletes without the high costs of advertising and
event sponsorships. We want to receive de facto and real endorsements from the
stars of the sports which will further confirm the DNA(R) brand within our
target market given the grass roots ground work we are laying with our sampling
and other awareness programs. The DNA(R) brand is beginning to appear in all of
these forums as well as magazines such as the June 2008 issue of Racer X where
we are mentioned as one of the driving forces behind AMA Motocross. For
fractions of the dollars, we believe we are now perceived to be a prominent
factor in the market we are pursuing and are on the same playing field as Red
Bull, Monster, Rock Star and No Fear. We are seeing the positive effects on our
sales and distribution efforts both with retailers and consumers.
To maintain the pulse of the action sports community we believe we need to
secure recognized athletes and teams for specific periods before they are "the"
bona fide star. Because of our intimate experience in this field, we have been
able to recognize the upcoming stars at an early stage in their careers. These
athletes and teams, who are not far behind those of the major athletes and
teams, cost the major brands significantly more but give them no more than we
receive in brand exposure.
Motocross/Supercross
We are the "title" sponsor of a factory Yamaha AMA super cross team the "DNA
Shred Stix Star/Yamaha Racing Team." According to the AMA Supercross
Association, AMA Motocross/Supercross is only second to NASCAR in motor sport
attendance and popularity as it tours North America with 17 events. The DNA team
is one of only four teams that contended for the world "Lites" title and had
four podium appearances with a title win in Seattle in 2010 and have had
extensive coverage on CBS and Speed channels already during the past couple of
years. In 2011 our riders have already been on the podium several times
culminating with a first place win on March 12, 2011 in Indianapolis, Indiana
before in excess of 50,000 spectators.
Our title sponsorship agreement with Star Yamaha runs year to year and required
a sponsorship fee of $250,000 in 2010. Relevant thereto, in January 2011 we
successfully renegotiated our contractual obligation with Star wherein we agreed
to issue 600,000 shares of our Common Stock to offset a $268,000 cash payment
due for the 2011 season. We believe that after comparing the benefits gained
from this agreement in terms of advertising and media generated with similar
industry agreements that our competition has which cost millions of dollars that
our ground-up grass roots strategy demonstrates its powerful effectiveness.
Surf, Wakeboard, Skateboard
Our Surf, Wake and Skateboard teams comprise a combination of recognized
up-and-coming amateur athletes and seasoned professionals. Our Surf team is made
up of Tommy O'Brien, Billabong Pro Team Rider and Jr. Pro Champion; Cody and
Evan Thompson, Billabong Professional Surfers and Jr. Pro Surfers; Jeremy
Johnson, Professional Surfer; Mark Dawson, Professional Surfer and Jr. Pro
Surfer; and Luke Marks, a 12 year old star on the horizon.
Our typical sponsorship contracts are for one to three years, and according to
the athletes' ranking and exposure, we provide compensation that range from
event entrance fees to annual sponsorship. Generally, annual fees are a few
thousand dollars and sometimes include a nominal amount of stock options. In
return, our name and logo is placed on their boards, shirts, other apparel and
gear. Our logo then appears in magazines around the world to the extent of the
media coverage they earn. We are always on the look-out for the rising stars and
because of our history with these sports, we believe we are better suited to
identify the best value propositions for our capital.
We currently employ 13 persons in direct sales and sampling. We train our people
to distinguish the benefits of DNA(R) from other brands in the market. Our staff
stresses visibility and sampling for a period of 30-90 days before we commence
distribution activities in a geographic market. We have outfitted DNA(R)
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vehicles, apparel, and signage and take them to locations where action sports
take place including outdoor and indoor playgrounds where people are playing and
begin to systematically sample DNA(R) with our "Cans In Hands" and "Shred Stix"
program.
Our sampling techniques are programmed to create interest, trial and demand. We
engage consumers about their experiences regarding taste and functionality. We
acquire lists of distributors' store accounts and begin a very organized
sampling program both outside and within stores which are designed to create
requests for our products before it is available. We attend all action sports
events and provide sampling at such events alongside our vehicles and, in some
cases, with an 18 wheel rig which is replete with our DNA(R) graphics and logos,
and are motored nationwide by our Motor Cross Racing teams. Further, we have
placed over 200 branded 5 foot tall DNA(R) coolers in the action shops where
enthusiasts congregate which are becoming introductory revenue platforms for us.
The objective of our "Cans In Hands" and Shred Stix sample programs are not only
to build awareness, introduce newcomers to the category and to our brand but
also to compete with the established brands on taste and functionality. We want
the consumer to experience and believe that DNA(R) tastes better and is as
effective, if not more effective than all the other brands. This program has
created our core grass roots loyal followers who are now our first line of brand
evangelists as they move to the action sports shops and see our branded DNA(R)
coolers. We then extend our expansion to the next geographic target. Together
with our action sports individual athlete and team endorsements, our brand
evangelists in hand and our developing interactive web component, our marketing
program is also geared to create a viral effect both within and outside our
target demographic and spread the word about DNA(R).
When our sales team calls on beverage distributors and convenience store
retailers, whether chain or independently owned, we are already known to them.
Because of the grass roots pull we have created for DNA(R), they have been eager
to accept meetings with us as we represent a legitimate revenue opportunity for
them. Today, we are receiving calls from a wide range of outlets as a result of
our grass roots efforts. This effort has built good will with distributors and
retailers who frequently express their appreciation to us for developing
awareness, expectation and demand ahead of the date the product is on the shelf.
Viral Component
This component of our marketing program, in play from the inception of our
marketing strategy, beginning with sampling, building our brand awareness
through our association with action sports and our public relations strategy, is
the essence of our communications platform. It is what we do to communicate our
message on a perpetual basis to accelerate trial of DNA(R) in our target market
and within the natural extensions into other demographics. The objective of our
viral program is to accelerate potential in a competitive segment of the
beverage market. We want to make DNA(R) an acronym for energy drinks in every
market we enter and use our target market as our brand evangelists to spread the
word that DNA(R) tastes good and is cool to drink. Therefore, as we develop our
message we will explore ideas to use DNA within our message as a substitute for
drinking energy drinks.
As we have expanded our awareness through sampling, events driven participation
and endorsements, we have received and benefited from significant public
relations that has had a greater positive effect on our awareness program than
advertising. We will continue our strategy to use our action sports teams and
athletes on the back of our grass roots marketing strategy to expand this
recognition platform.
We plan to accelerate the expansion of our community with our web site which
will also be a destination point we will use to aggregate the action sports
community as a one stop resource to learn about all that is going on in action
sports. We are creating the "DNA Report" as an aggregator of all the current
action sports stories and events, and drive our target market to the site in all
our messaging. Our site will be the place to go to learn about what is going on
in action sports.
We have successfully developed DNA Facebook, Twitter, My Space, Hooked It,
Sponsor House and a fully interactive website. Our web site includes videos of
our teams' performances, daily updates, events and relevant brand news and also
includes music components and music tours.
33
Distribution
In Florida, prior to Anheuser Busch agreeing to take over distribution of our
energy drink and meat snack lines, our wholly owned distribution subsidiary,
Grass Roots Beverage Company, Inc. ("Grass Roots") covered 31 out of the 42
counties in the state and all of the heavily populated areas. As of the date of
this Prospectus 13 out of the 23 Anheuser Busch distributors in Florida are
distributing DNA products, 4 more have given approval and will be added shortly
with most of the others expected to be aboard over the next 3 months.
On March 1, 2011, we entered into a distribution agreement with Sand Dollar
Distributors, LLC for the distribution of our entire line of products. The
agreement calls for Sand Dollar to service the Miami/Dade, Monroe (Key West
through Miami) and Palm Beach counties where we have no AB coverage. Sand Dollar
was Red Bull's exclusive South Florida distributor until recently and largely
credited with its success in South Florida. Distribution efforts are expected to
begin in April 2011.
Grass Roots will continue to service those areas not presently covered by
Anheuser-Busch until distribution agreements with the additional branches of the
Anheuser Busch dealers are executed and the brand is fully assimilated in the
Anheuser Busch network. Currently Grass Roots has ten company branded delivery
vehicles and three branded sampling vehicles. Ralph Sabella, our Vice President
of Operations, manages the eight sales people and four sampling teams of two
people each. As Anheuser Busch's involvement increases Grass Roots will begin to
scale back its delivery function, reduce its delivery personnel and concentrate
on providing back up sales and marketing support in the region.
In addition to implementing our events support programs and on street and
in-store sampling programs, Grass Roots also calls on action sports shops,
individual or small convenience stores in Florida from one targeted territory to
the next. Our staff has established weekly sales calls and actual sales they
must make. They are trained on how to ask for the order including offering our
initial trial offer of three cases and an additional one for free. Most
convenience stores agree to take our offer. Our staff provides all of the
customer support and repeat orders which they have been trained to promote.
Our goals in Florida for the next 12 months are to secure additional
distribution among the chain convenience, pharmacy and grocery locations such as
Chevron (1,000 locations), 7 Eleven (1,000 locations), CVS Pharmacies, (700
locations) and Gate Petroleum (150 locations), among others. Authorizations have
already been received by CVS, Circle K and 7 Eleven. We are actively pursuing
the remaining accounts and will leverage Circle K as a means to acquire other
similar distribution. Additionally, Grass Roots continues to service
independents and chain stores in areas that are not yet covered by Anheuser
Busch and newly appointed Sand Dollar distributors.
Based upon early successes with Walgreens, in February 2011 we entered into a
full statewide distribution program with Walgreens covering 823 locations
throughout Florida. Each Walgreens location will carry the full line of our meat
snacks and energy drinks.
The state of Louisiana is also the responsibility of Grass Roots. Grass Roots
made the decision to expand operations into Louisiana when Race Trac, Circle K
and CVS expressed interest in carrying the DNA brands. Race Trac, Circle K and
CVS will act as a base to secure additional chains and independent convenience
store business. To facilitate product placement and awareness we entered into a
marketing agreement with CVS and the New Orleans Hornets of the NBA in which the
products will be featured at CVS on their end-cap program and promoted through
the New Orleans Hornets.
In February 2010 we launched operations into the Georgia market with Savannah
Distributing pursuant to a verbal agreement. Currently Savannah is servicing
Race Trac stores turned over to them by Grass Roots and are seeking additional
distribution among the more than 1,200 Independent/Chain C Store Accounts they
service. We are also currently in discussions with a large Anheuser Busch
distributor in that region.
We are currently in negotiations with a large Miller Wholesaler in Wisconsin
that distributes to over half of that state. If a mutually acceptable agreement
can be reached, May 15, 2011 is the anticipated kick off date.
Our exclusive broker, Royal Strategies and Solutions, has enlisted the services
of several prominent brokerage companies to assist in acquiring new chain and
wholesale business on the west coast of the United States utilizing several
distribution methods. In addition, we are utilizing the sales and marketing
network of Monogram Food Solutions, our manufacturing, sales and marketing
partner in the production of DNA Beef Jerky(TM) and DNA Shred Stix(TM).
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Advertising
Our budget as it relates to traditional media advertising is relatively small
and at this time will not support traditional advertising on television or radio
that would support our growth as we cannot afford to compete by matching our
competitor's budget for this type of exposure. However, we do recognize its
importance and are close to being able to address these markets in what we
believe is an economical and inventive way. We also believe that traditional
advertising is contrary to the nature of our target market and will use it only
as support for successful grass roots programs. Therefore, we are looking at the
Internet as our source for advertising. We are looking at compiling all of the
action sport web sites and creating a linked presence in each of them. We are
developing search engine optimization and key Google and Yahoo ad words to
ensure that DNA(R) is one of the first places to go when energy drinks and meat
snacks are Googled. This process is being handled by our own in-house IT
specialist who is responsible for keeping the website current and Facebook,
Twitter, MySpace, Hookit and Sponsorship fresh, but does not perform any other
IT functions for us. We believe that the DNA(R) 18-wheel rig traveling
throughout the United States has provided us with major visibility. We intend to
expand these programs as a strategy of high effective low cost advertising.
We believe that how we communicate our message must be integrated and
coordinated among all of the above initiatives to deliver the message and create
the necessary reach. A top down approach as employed by the elite brands is
capital intensive and we believe will not allow us to exploit the window of
weakness in elite brands' marketing strategy to enter the market. We believe
that we must communicate with our target market from the ground-up.
We are confident our products can compete on taste and functionality which we
hope will allow us to convert a portion of our competitor's market share.
However, their vast marketing dollars and existing national presence make it
unrealistic to compete successfully with them on an initial national level for
their customer base. To succeed, it is our intention to build and maintain
prominent positions in each successive phased geographic location we enter. This
means our products must have prominent shelf space in the vast majority of
stores that the elite brands occupy in each state we enter. Therefore, we
understand we must be competitive on quality; we must expand awareness to
accelerate trial, and must provide an appealing value proposition to our
customers.
We have a master broker agreement with Royal Strategies & Solutions, Inc.
("Royal"), a company owned by our management. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," below. Under the terms of the agreement Royal seeks to
place our products on the shelves of major chain, drug and grocery stores in
specifically targeted areas selected by us. They receive constant support from
us in making sales calls or working to create in store promotion programs to
accelerate sales. Royal specializes in the launch of new products and oversees a
national network of brokers, distributors, manufactures and retailers selling a
wide array of products to retailers across the nation. Royal's most recent
launch success is DRSI's "ReStore Energy Formula" that is gaining national
distribution through retailers such as Rite-Aid and Kroger. Prior to ReStore,
Royal launched Zestra Laboratories (touted as the female Viagra(R)), gaining
nearly 35,000 shelves nationwide in less than 24 months including nearly every
major drug, pharmacy, and supermarket, including Wal-Mart. We are currently in
final negotiations with a group representing significant distribution in the
Caribbean. The business will consist of volume sales to these regions at a
discounted price. However due to the lack of required support normally given the
brand, we do not feel the net profit per case will be adversely affected.
We will not extend our presence beyond our human resources, production
capability, and capital means to support each market to the levels we promise to
our distributors and retailers. If and when we secure a prominent position in a
target territory using our grass roots marketing strategy, we will leverage our
relationships and achievements to move to the next area and repeat our programs
there.
MANUFACTURING AND PRODUCTION
Our energy drink products are based on a proprietary formulation we have created
with our contract development group under a non-disclosure agreement. Our energy
drinks are currently manufactured at Seven-Up Snapple Southeast ("SUS") f/k/a/
Southeast Atlantic Beverage in Jacksonville, Florida under a confidentiality
agreement. SUS is a full service contract manufacturer and also manufactures
beverages for Welch's Sunkist, Hawaiian Punch and many others. This facility
35
owns all of the manufacturing equipment and was identified by us as having an
excellent record for contract manufacturing and the capacity to meet all of our
initial growth expectations in southeastern United States. SUS has manufacturing
plants located throughout the United States, which is expected to provide us a
significant benefit as our operations expand throughout the United States. As we
expand geographically, we believe we can use any of SUS's manufacturing plants
located throughout the country to expand capacity and save costs on
transportation. We believe this facility can manufacture enough cases to meet
all of our immediate needs in the Southeast. Production turnaround time is 14-30
days. Our terms of payment are C.O.D. We do not believe there are any problems
that may obstruct the procurement of raw materials. Raw materials are ordered
2-4 weeks in advance. Payment terms for ingredients are 30 days after receipt.
Our 16 oz. cans are manufactured by Rexam Can Company at their North Carolina
facility. Rexam, formerly American Can Company, is one of the largest producers
of cans in the world. Estimated turn-around time varies from season to season
and runs between 14 to 30 days. The manufacturer has the capacity to produce
over 50 billion cans per annum. Upon completion, the cans are shipped by truck
to the contract manufacturer where they are filled. We do not believe there are
any problems in procuring the raw materials to manufacture the cans.
We purchase our raw materials for our energy drink from several producers,
including Energy Blend from Anmar International, Bridgeport, CT. Our flavors
come from Seethness Greenleaf in Illinois, and Guarana is sourced from Gateway
in New Jersey. Prices are fixed for a period of one year and all bought against
purchase orders. The raw materials portion of our beverage represents
approximately 33% of the cost of goods sold of our product. We receive delivery
of shipment at contract manufacturers (cans & producer) within 14 days of our
order for which we pay C.O.D. All other terms are based net 30 days.
We purchase the raw materials for our cans from Rexam and those costs represent
33% percent of our cost of goods sold. Our terms are based net 30 days.
Manufacturing costs represent 33% of our cost of goods sold. Based on our
average order, our cost is approximately $10 per case of 24 cans depending on
flavor. Cases come in pallets of 80 and are shrink wrapped and include shipping
to warehouse.
Our meat snack products are also produced with proprietary formulation that has
been created by us and produced by our manufacturing "partner," Monogram Food
Solutions, under a Manufacturing, Sales and Marketing Agreement (the
"Agreement"). The product is produced at either the Martinsville, Virginia or
Chandler, Minnesota facility. The terms of the Agreement call for Monogram to
finance the production, produce, distribute and sell the product and for us to
market, distribute, sell and promote the DNA Branded meat products. The
highlight of this line is the "Shred Stix," a 1 ounce meat stick that is
produced in 3 flavors. Profits on the sale of our meat snacks are shared equally
by Monogram and us. Monogram has advised that it is the largest producer of 100
% US meat snacks in the US and the third largest overall. Monogram is
maintaining an adequate inventory to insure delivery promises can be met and
will require a 4-6 week period to handle special orders.
INDUSTRY OVERVIEW
Energy Drink
We have entered into the United States' $23 billion (AC Nielsen 2008) New Age
Beverage category that according to Global Industry Analysts, Inc., the Sports
and Energy Drink sector we occupy is collectively expected to reach US$39.2
billion by 2011. New Age Beverage category is made up of a line of functional
beverages that address specific health and performance needs. These beverages
range from Gatorade, introduced in the 1960's initially to replace electrolytes
for athletes, to drinks filled with vitamins and nutrients to improve energy,
awareness and hydration, among numerous other functions. According to
BEVNET.com, Inc, a leading trade source in the industry, New Age Beverages are
rapidly gaining in popularity over carbonated sodas and juices as people are
becoming more health conscience and seeking an edge to improve their performance
either athletically or to handle their daily challenges with more vigor. New
categories are constantly finding ways into the New Age beverage sector.
Industry experts appear to be in agreement that the energy drink market is one
of the fastest growing segments of the functional drink market. Energy drinks
were introduced initially in the United States by Red Bull in 1997 after its
major success in Europe. By 2001, the energy drink market had developed to
almost $400 million in retail sales. By 2005, it had grown to approximately $4
billion. This trend is continuing. Energy drinks as a category are no longer
36
considered a fad. It has been on a steep growth curve since its introduction
over 10 years ago. New brands are constantly being introduced to meet the
growing demand.
In 1998 Red Bull, the largest selling energy drink in the world, introduced its
Red Bull Energy Drink in the United States to a younger demographic, 18-39, of
people who are highly active and in need of energy. Despite injecting
significant funds into its initial marketing campaign, there were many obstacles
to overcome including a high price barrier of $2 and more for an 8 ounce can and
a medicinal taste. Red Bull developed a highly disciplined training program for
their employees and introduced Red Bull in several key major trend setting
markets. They sampled heavily, made it available initially in the major and most
popular night clubs and events. With discipline, Red Bull demonstrated that with
its high quality ingredients, it provided consumers with the energy lift they
wanted. They were able to define the category and set price point acceptance
among a highly motivated and developing consumer base. Beyond its initial target
they expanded their marketing to include all those people in need of energy in
their daily routine.
Approximately 85% (NAACS Jan. 2010) of all purchases of energy drinks at retail
are sold through the 146,294 individual and chain convenience store outlets and
gas stations with attached convenience stores in single serve cold cans.
Moreover, the top brands are finding their way onto supermarket shelves and also
into branded coolers. Other sales outlets included among the 739,441 total
combined retail/on-premise locations are restaurants, bars, actions sport shops,
grocers, pharmacies, parks, beaches and generally everywhere drinks are sold.
Our principal focus has been and will continue to be on convenience stores. Once
we have made inroads into convenience stores in a particular territory, we will
work with Royal's broker network and with relevant distributors to move into
supermarket, mass market and pharmacy stores as outlets for DNA(R).
Top Convenience Store States (National Association of Convenience Stores
"NACS" January 2010)
State Stores
----- ------
Texas 14,226
California 10,312
Florida 9,223
New York 7,552
Georgia 6.363
North Carolina 6,146
Ohio 5,182
Michigan 4,814
Illinois 4,496
Virginia 4,461
The typical consumers of energy drinks are 18-39 year olds, active in or fans of
action sports (Bev Net, Nacs, Convenience Store News, Supermarket news). Energy
drink users consume drinks before, during and after activities and at any other
time when an additional source of energy is wanted. Although there is brand
loyalty, energy drink purchasing continues to be in good portion an impulse
purchase in single cans. With the introduction of the category into large retail
outlets, energy drinks are now being sold in multi-can cartons, which serve to
lessen some of the impulse buying and augers well for the category as it
competes with other beverage categories including carbonated soda and coffees.
According to the Mintel Oxygen Report's Global Market Navigator, August 2010,
American's consume 3.05 liters of energy drinks per capita each year, which
translates into approximately two cans per day for energy drinkers. On the heels
of Red Bull's success, numerous other brands were developed.
Numerous major beverage companies have no presence in this category but do have
large distribution and marketing capacity to leverage. We believe that that the
typical energy drink consumer does not connect to the corporate culture that
these large beverage companies carry with them. Therefore, it is viewed as a
more logical approach that a larger company would acquire an up and coming brand
in order to acquire a strong foothold and presence in this side of the industry.
To date, the larger beverage companies have not purchased energy drink companies
but have made significant contributions to their distribution. Vitamin Water, in
the functional beverage category, is a huge success story with Coca Cola
purchasing the company for 12 times revenue at a sale price in excess of $4
billion in 2007. Hansen Natural Beverages was a regional successful carbonated
soda company. It was only when Monster Energy was developed and launched that
37
its sales exceeded $1 billion per annum. The other top brands are controlled by
Coke and Pepsi. We believe that there is room for other energy drink companies
to build a successful brand not by competing dollar for dollar with the elite
brands, but by seeking a place of prominence in store shelves and with consumers
in our target market alongside these elite brands based on the quality of our
taste and functional profile, and by establishing intimate ground roots
recognition and adoption within DNA's target demographic at low and controlled
costs.
Meat Snacks
According to the USDA, processed beef represents approximately 13% of total beef
consumption Of the 30 billion pounds of beef annually consumed in the US, 90% of
all households consume beef according to the USDA (LDP-M-135-02 Factors
Affecting US Beef Consumption) but only 23% beef jerky. The challenge is
bridging the gap between household consumption and meat snack consumption.
We believe it is important that we understand market variations and our
competition before we can fully address and implement intelligent product
alternatives and marketing programs. There are gender considerations to
consider. According to the USDA (LDP-M-135-02 Factors Affecting US Beef
Consumption) males consume an average of more than 38 lbs. of beef annually than
women. Per-capita beef consumption was highest for males 20-30 and females
12-19. There are also generation considerations. The USDA Economic Research
institute expects beef consumption to decrease as the population ages. Finally
there are race/ethnicity considerations. Beef consumption (most to least) is in
the following order: Black/Hispanic/White/Other. However, Hispanics are expected
to exceed consumption by Blacks due to population increases. The challenge is to
target and identify new consumer segments as the existing target audience
continues to age and shrink and bring them products that are innovative as well
as nutritionally satisfying.
Existing characteristics of the energy drink and meat snack markets include:
o The categories are real and growing.
o Price point adoption. Red Bull has set the high price point and the
market has adopted it. At these levels, there has been no resistance.
o Brand loyalty exists at younger age levels. Brand loyalty can be
somewhat offset by the high degree of impulse buying principally in
single cans from convenience stores.
o Impulse buying habits are also being changed, albeit slowly, by
quantity purchases from supermarkets primarily by the older elements
of our target market and those outside our target market.
EMPLOYEES
Currently we have seventeen (17) full time employees of which two are executive
management. Eleven (11) are employed in direct sales and sampling who are
predominantly on the road and four (4) are in administrative support and
fulfillment. Additionally, we use contract labor and consultants on an "as
needed" basis primarily in the areas of administration, accounting, investor
relations, and on a limited basis in sales and marketing.
We require all our employees and consultants to sign a confidentiality and
non-disclosure agreement. Our success relies on our ability to hire additional
employees, particularly on the local sales side. We believe there are numerous
quality people to choose from throughout our area of targeted expansion.
As we grow we anticipate in the near future we will require a national marketing
director, an in-house IT director and regional sales directors for each region
and a Chief Financial Officer/controller.
None of our employees are members of any union. We believe that our relationship
with our employees is excellent.
38
COMPETITION
Competition - Energy Drinks
We are competing with publicly and privately held companies, each of whom having
greater resources, both financial and otherwise, than the resources presently
available to us. The energy drink market is dominated by five brands including:
o Red Bull: With estimated worldwide sales in excess of $5 billion, Red
Bull is the largest participant in the energy drink sector. Red Bull
is owned by Dietrich Mateschitz, who introduced it to the European
market in 1987. Red Bull's distributed more than one billion cans in
2001 without owning a single plant, truck or retail outlet. The taste
profile of Red Bull is along medicinal lines with its ingredients
being of standard fare. Due to the lack of competition, Red Bull was
able to build a strong a brand and a loyal client base. Red Bull
caters to the action sports community, on-premise liquor sales, and a
"yuppie" contingency. Red Bull is sold through Red Bull exclusive
regional distributors in more than 50 countries worldwide.
o Monster Energy: Monster Energy is owned by Hansen's Natural Beverage
and in 2007 it achieved $1 billion in revenue for the first time.
Monster has risen to become the second largest energy drink producer
behind Red Bull building a predominately strong core following through
the sponsorship of major action sports events and teams. In 2007 the
company opted to forsake its established distribution relationships in
favor of Anheuser-Busch to take advantage of AB's on premise liquor
business which has left a major void in the conventional beverage
distributors' portfolios.
o Rock Star: Rock Star Energy is the third largest producer in the
energy drink category with approximately 528 million cans sold in
2007. Rock Star is a California/Nevada based operation with strong
ties to the entertainment world. Rock Star also has shut off its
distributors in favor of a national distribution relationship with
Coca-Cola.
o Full Throttle: Full Throttle is in fourth position behind Red Bull,
Monster and Rock Star. Full Throttle is owned by Coca-Cola but does
not compete nearly as well as the top three, we believe because the
corporate image behind Coke and Pepsi is viewed as contrary to the
images of "cool and credible" that permeates among a younger target
market.
o AMP: AMP is a new Pepsi product and rounds off the top of the line in
the category. We believe it sells on par with Full Throttle and has
image issues for similar reasons we raised for Full Throttle.
These five brands represented more than 90% of the total dollar sales in the
energy drink category in 2010 as reported by Symphony. The data does not include
mass market retailers.
The elite brands today also trade on functionality. However, it is principally
the recognition they are able to build with extremely high marketing dollars
that maintain their status in the category. Several brands are expanding their
SKU's into new energy drink categories including children energy drinks, coffee
energy drinks and high concentration long lasting energy drinks as category line
extensions.
We believe there are several avenues on which we compete including on our high
taste and functional profiles. At $1.89-$1.99 per can, we are priced at retail
at up to 50 cents less than the existing top brands (even more so with Red Bull
as they sell an 8 ounce can at over $2.49 per can) giving us an advantageous
value proposition which is important on three levels: On the distributor level
in which the distributor pays less per case for our product and can sell it for
more of a profit than other top brands; on the retail level in which retailers
are finding they can sell our product over our MSRP but under the retail price
suggested by the elite brands to obtain higher margins per ring, and; on a
consumer level with those having tried and liked DNA(R) or heard about it, who
are more likely to impulsively reach for it when they see a price of up to 50
cents lower.
Competition - Meat Snacks
In the meat snack segment of our business, the following are our principal
competitors:
39
o Jack Link's - The leaders in the beef jerky segment of the meat snack
category is Jack Links holding 11 of the top 25 spots and a 44% market
share according to a 2009 SCANTRACK convenience survey. Jack Link's
(Matador) continues to grow as a result of the Frito Lay Partnership.
We believe that it is doubtful that retailers will want to allocate
more than 50% of the snack category revenue to one supplier. Oberto
follows in the category with a 7% declining share and rounded out by
Penrose and Pemmican.
o Slim Jim - Holds the outright lead in meat stick (1.0 oz.) sales with
nearly two-thirds market and is a clear number two in overall meat
snacks with 25% market share.
The top four brands drive nearly 80% of sales revenue in the category according
to Scantrack Conv (52 weeks ending 06/13/09) and AC Nielsen (12 weeks ending
06/13/09).
PROPERTY
Our principal place of business is located at 506 NW 77th Street, Boca Raton,
Florida 33487. This location consists of 5,000 square feet of office and
conference room space and also houses our primary warehouse which consists of
approximately 12,000 square feet. Our lease expires in June 2014 and we pay rent
of $10,400 per month. We do not anticipate that we will need to expand the
office facility for the next 12 months.
We also maintain two satellite warehouses in Orlando and Tampa to facilitate
distribution at a monthly cost of $300 and $250, respectively. These leases are
month to month. As we expand our distribution geographically, we anticipate that
we will require additional warehousing closer to the manufacturing facility and
to the distribution which will create a cost savings on shipping for us as well
as allow us to service our accounts on a timely basis. Moreover, those
warehouses can support the local and regional sales and sampling staff we take
on as we expand our business.
Additionally, we own/lease a fleet of 13 DNA(R) branded vans which are used for
selling, delivery and sampling to outlets. We purchase or lease these vans new
and used as and when we believe the local market can support them. We also spend
an average of $2,000 per vehicle to create the DNA(R) branded graphics that are
distinct to our Company.
Our IT, primarily our web site, is hosted remotely with redundancy capability.
We own and/or lease over 200 branded coolers that are placed primarily at
actions sports shops across the state. We will require more as we expand. We
believe these coolers pay for themselves in 18 months.
GOVERNMENT REGULATIONS
While we do not manufacture our products, the production and marketing of our
licensed and proprietary products are subject to the rules and regulations of
various federal, state and local health agencies, including in particular the
U.S. Food and Drug Administration (FDA). The FDA also regulates labeling of our
products. From time to time, we may receive notifications of various technical
labeling or ingredient reviews with respect to our licensed products. We believe
that we have a compliance program in place to ensure compliance with production,
marketing and labeling regulations.
Packagers of our beverage products presently offer non-refillable, recyclable
containers in the U.S. and various other markets. Some of these packagers also
offer refillable containers, which are also recyclable. Legal requirements have
been enacted in jurisdictions in the U.S. requiring that deposits or certain
eco-taxes or fees be charged for the sale, marketing and use of certain
non-refillable beverage containers. The precise requirements imposed by these
measures vary. Other beverage container related deposit, recycling, eco-tax
and/or product stewardship proposals have been introduced in various
jurisdictions in the U.S. We anticipate that similar legislation or regulations
may be proposed in the future at local, state and federal levels in the U.S.
40
LEGAL PROCEEDINGS
As of the date of this Prospectus we are involved in the following legal
matters:
DNA Brands, Inc. v. Edwards Investments, Inc., Alchemy Financial Services, Inc.
and Craig Edelman a/k/a Craig Edwards, Fifteenth Judicial Circuit Court, Palm
Beach County, Florida, Case No. 50 2010 CA 029413. This is an action filed on
December 7, 2010, for a declaratory judgment (to determine whether notes from
DNA Brands, Inc. to Edwards Investments, Inc. for $50,000 and to Alchemy
Financial Services, Inc. for $200,000 are enforceable due to lack of
consideration) and for fraudulent and negligent inducement as to Edwards
Investments, Inc. and Craig Edelman a/k/a Craig Edwards. Edwards Investments,
Inc. and Alchemy Financial Services, Inc. served a Motion to Quash and/or Abate
(contesting jurisdiction over them in Florida) on January 21, 2011. Mr. Edelman
has not yet been served.
Edwards Investments, Inc. v. DNA Brands, Inc., District Court, Arapahoe County,
Colorado, Case No. 10CV2693. This is an action filed on December 17, 2010, for
breach of a promissory note in the principal amount of $50,000. We filed an
Answer and asserted Affirmative Defenses on January 24, 2011, asserting defenses
based upon lack of consideration for the note.
Alchemy Financial Services, Inc. v. DNA Brands, Inc., District Court, Arapahoe
County, Colorado, Case No. 10CV2694. This is an action filed on December 17,
2010, for breach of a promissory note in the principal amount of $200,000. DNA
Brands, Inc. served an Answer and Affirmative Defenses on January 24, 2011,
asserting defenses based upon lack of consideration for the note.
Discovery is in the initial stages on the above matters. While we are optimistic
that we will be successful in the above matters, due to the uncertainties of
litigation it is not possible to provide an evaluation of the likelihood of an
unfavorable outcome or an estimate of the amount or range of potential loss at
this time.
We are not involved in any other material legal proceedings, nor are we aware of
any other legal proceedings threatened or in which any director or officer or
any of their affiliates is a party adverse to our Company or has a material
interest adverse to us.
MANAGEMENT
The following table sets forth information regarding our executive officers and
directors:
Name Age Position
-------------------------- -------- -----------------------------------
Darren M. Marks 43 Chief Executive Officer,
President,
Treasurer and Director
Melvin Leiner 71 Chief Financial Officer, Chief
Operating
Officer, Secretary, Treasurer and
Director
The above listed officers and directors will serve until the next annual meeting
of the shareholders or until their death, resignation, retirement, removal, or
disqualification, or until their successors have been duly elected and
qualified. Vacancies in the existing Board of Directors are filled by majority
vote of the remaining Directors. Officers serve at the will of the Board of
Directors.
RESUMES
Darren M. Marks has been the President, Chief Executive Officer and a Director
of DNA since August 2007. Prior, from May 2004 through July 2007, he was the
President, CEO and a director of Grass Roots Beverage Company, Inc., Boca Raton,
FL. From 2001 through April 2006, Mr. Marks served in an executive capacity for
Royal Strategies and Solutions, Inc., a brokerage services company servicing
primarily ethnic food companies seeking to expand distribution and is currently
its Vice President and a director. He has been instrumental in the development,
production and marketing of DNA's initial product offering and has been
responsible for developing all DNA's relationships in the action sports
community. From 1991 to 1997, Mr. Marks served as founder and Vice President of
Sims Communications, Inc., a publicly-traded NASDAQ telecommunications company,
and was responsible for the creation, design and funding of a national
telecommunication program for clients such as Alamo Rent-a-Car and the American
Automobile Association. He devotes substantially all of his time to our affairs.
41
Melvin Leiner has been Executive Vice President, Chief Financial Officer, Chief
Operating Officer, Secretary, Treasurer and a Director of DNA since August 2007.
Prior, from May 2004 through July 2007, he held similar positions with Grass
Roots Beverage Company, Inc., Boca Raton, FL. From 2001 through April 2006, Mr.
Leiner served in an executive capacity for Royal Strategies and Solutions, Inc.,
a brokerage services company servicing primarily ethnic food companies seeking
to expand distribution and is currently its President and a director. Mr. Leiner
has over 35 years of entrepreneurial and management experience in developing,
initiating, and operating companies in a broad range of industries including the
beverage industry. He has served in an executive capacity and consultant for
numerous privately held and public companies in the beverage and
telecommunications industries. Mr. Leiner was also the founder, Chairman and CEO
of Sims Communications, Inc., a NASDAQ-traded telecommunications company and
former financial consultant with several firms specializing in new ventures. He
devotes substantially all of his time to our affairs.
We have elected Messrs. Leiner and Marks as directors as a result of their
extensive experience in our industry, as discussed above. Additionally, each of
our directors has had prior experience as officers and directors of public
companies prior to assuming their positions with us. We believe that we are
currently unable to attract additional experienced individuals to serve as
directors because we have not obtained director and officer liability insurance.
We expect to obtain the same once we have obtained the funding necessary to
fully effectuate our business plan, as discussed above in both the Management's
Discussion and Business sections of this Prospectus. Until we obtain such
insurance our ability to attract other experienced business people who agree to
serve as officers and/or directors is expected to be limited due to the
potential liabilities that accrue to public companies.
BOARD COMMITTEES
As of the date of this Prospectus we do not have any committees of our Board of
Directors. We expect to appoint outside Directors to serve on our Board in the
near future, but as of the date of this Prospectus we have not identified such
prospective Directors. Once appointed, we expect to form an Audit Committee, a
Compensation Committee, a Corporate Governance Committee and a Nominating
Committee.
FAMILY RELATIONSHIPS
There are no family relationships between any of our Directors or executive
officers.
CONFLICTS OF INTEREST
Members of our management are also officers and directors of Royal Strategies
and Solutions, Inc., a brokerage company that we utilize on a limited basis See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," below. Consequently, there are
potential inherent conflicts of interest in their acting as officers and
directors that may arise as a result of this relationship. Because of our
increased relationship with unaffiliated brokerage companies, the amount of
activity devoted by our management to Royal's affairs is limited and we do not
believe that it has any impact on their ability to perform their
responsibilities to our Company. Insofar as our officers and directors are
engaged in other business activities, management anticipates it will devote a
substantial majority of their business time to our affairs.
EXECUTIVE COMPENSATION
REMUNERATION
Following is a table containing the aggregate compensation paid to our
Chief Executive Officer and all other officers who received aggregate
compensation exceeding $100,000 during our fiscal years ended December 31, 2010,
2009 and 2008, along with our two highest paid employees:
42
SUMMARY COMPENSATION TABLE
Non-qualified
Name and Stock Option Non-Equity Deferred All Other Total
Principal Salary Bonus Awards Awards Incentive Plan Compensation Compensation Compensation
Position Year ($)(1) ($) ($)(2) ($) Compensation Earnings ($)(3) ($)
-------------------------------------------------------------------------------------------------------------------
Darren Marks,
CEO/President 2010 $125,000 $ 0 $ 0 $ 0 $ 0 $ 0 $18,308 $143,308
2009 $125,000 $ 0 $116,000 $ 0 $ 0 $ 0 $17,239 $258,239
2008 $125,000 $ 0 $ 0 $ 0 $ 0 $ 0 $16,914 $141,914
Melvin Leiner,
CFO/Treasurer/ 2010 $125,000 $ 0 $ 0 $ 0 $ 0 $ 0 $10,316 $135,316
Secretary 2009 $125,000 $ 0 $116,000 $ 0 $ 0 $ 0 $ 9,691 $250,691
2008 $125,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 9,511 $134,511
Ralph D. Sabella 2010 $ 55,384 $ 0 $ 0 $ 0 $ 0 $ 0 $20,960 $ 76,344
2009 $ 45,000 $ 0 $116,000 $ 0 $ 0 $ 0 $29,960 $181,960
2008 $ 79,615 $ 0 $ 0 $ 0 $ 0 $ 0 $18,864 $ 98,479
Ismael A. Llera 2010 $ 46,063 $ 0 $ 0 $ 0 $ 0 $ 0 $23,256 $ 69,319
2009 $ 57,692 $ 0 $116,000 $ 0 $ 0 $ 0 $13,960 $187,652
2008 $ 66,346 $ 0 $ 0 $ 0 $ 0 $ 0 $12,558 $ 78,904
(1) The salaries for Mr. Marks and Mr. Leiner have been accrued since 2008 and
remain unpaid as of the date of this Report.
(2) Represents the issuance of 200,000 shares of Common Stock which had a market
price of $0.58 on the date of the Board of Director resolution.
(3) Represents insurance premiums paid by us.
(4) In September 2009, Mr. Marks and Mr. Leiner converted interest free loans
they had extended to us in exchange for Common Stock. The amount of debt
retired for Mr. Marks and Mr. Leiner was $237,240 and $223,818,
respectively. Based upon the trading price of our stock on the date of the
Board of Directors resolution, Mr. Marks and Mr. Leiner received share value
of $98,486 and $111,909, respectively, in excess of the face value of the
loans retired. Due to the thinly traded nature of our Common Stock and due
to the restriction placed upon insiders, our Board of Directors believe that
the value of these shares was significantly lower than their trading price
on the date of the Board of Directors resolution. The amounts shown if the
aggregate grant date fair value computed in accordance with FASB ASC Topic
718.
Salaries are established by our Board of Directors. We currently do not have a
Compensation Committee. Our two executive officers also currently constitute our
Board of Directors and as such, determine their own respective salaries.
However, we believe that the salaries of our executive officers are commensurate
with salaries paid to executive officers of other companies in our industry that
are at a similar stage of growth. None of our employees are employed pursuant to
an employment agreement.
Our current executive officers receive annual salaries of $125,000 per person.
Our directors are not compensated for the performance of their duties as
directors, other than reimbursement of out of pocket expenses incurred in the
performance of their duties.
Stock Option and Bonus Plans. We have adopted stock option and stock bonus
plans. A summary description of these plans follows. In some cases these Plans
are collectively referred to as the "Plans".
o Incentive Stock Option Plan. Our Incentive Stock Option Plan
authorizes the issuance of shares of our common stock to persons that
exercise options granted pursuant to the Plan. Only our employees may
be granted options pursuant to the Incentive Stock Option Plan. The
option exercise price is determined by our directors but cannot be
less than the market price of our common stock on the date the option
is granted.
43
o Non-Qualified Stock Option Plan. Our Non-Qualified Stock Option Plan
authorizes the issuance of shares of our common stock to persons that
exercise options granted pursuant to the Plan. Our employees,
directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plan, provided however that bona fide
services must be rendered by such consultants or advisors and such
services must not be in connection a capital-raising transaction or
promoting the price of our common stock.
o Stock Bonus Plan. Our Stock Bonus Plan allows for the issuance of
shares of common stock to our employees, directors, officers,
consultants and advisors. However bona fide services must be rendered
by the consultants or advisors and such services must not be in
connection with in a capital-raising transaction or promoting the
price of our common stock.
As of the date of this Prospectus we have not issued any shares of our Common
Stock or any option to purchase shares of our Common Stock under the aforesaid
plans.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information regarding beneficial ownership
of our Common Stock as of the date of this Prospectus by (i) each person who is
known by us to own beneficially more than 5% of our Common Stock, (ii) each of
our officers and Directors, and (iii) all Directors and executive officers as a
group.
Name and Address Amount and Nature Percent
Of Beneficial Owner Of Beneficial Ownership Of Class
----------------------------- ------------------------ ------------
Darren Marks
506 NW 77th Street
Boca Raton, Florida, 33487 3,555,359(1) 8.8%
Melvin Leiner
506 NW 77th Street
Boca Raton, Florida, 33487 3,445,808(2) 8.5%
All Officers and Directors
As a Group (2 persons) 7,001,167(1) (2) 17.3%
--------------------
(1) Includes 3,547,995 shares held under the name Family Tys, LLC.
(2) Includes 3,437496 shares held under the name 4 Life LLC.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since our inception our executive officers have loaned us significant amounts of
operating capital on an interest free basis and without formal repayment terms.
As of December 31, 2010 these loans totaled $1,077,100.
In October 2009, we agreed to issue 652,900 shares of our common stock in
exchange for the officer's retiring $461,059 of loans payable. In May 2010, we
issued 5,961,217 shares of our common stock in exchange for the officer's
retiring $1,634,828 of loans payable. The aforesaid share figures reflect the
conversion from DNA Beverage shares to DNA Brands shares.
We maintain a brokerage agreement with Royal Strategies and Solutions, Inc.
("RSS"), a related party. Under the terms of the agreement, RSS promotes our
products in return for a commission on successful sales or sales agreements. We
also share a common base of majority stockholders with RSS. Additionally, our
principal executive officers also serve as corporate officers to RSS.
RSS leases office space and a warehouse which is partially subleased to us. We
utilize this space for the warehousing and distribution of our products. In
addition, RSS is financially responsible for other operating costs and personnel
that are utilized by or dedicated to us. We, in turn, provide cash financing to
RSS; either via allocated charge backs or non-interest bearing loans. Loans
44
receivable from the related party RSS at December 31, 2010 was $26,943 and
non-interest bearing. For the years ended December 31, 2010 and December 31,
2009, we recorded $336,750 and $210,742 in expenses, respectively, from activity
associated with RSS. These expenses were comprised primarily of brokerage fees,
commissions and administrative services.
In the event we discontinued using RSS as a provider of these brokerage
services, it would not have a material impact on our financial condition or
operations. The maximum exposure to loss that exists as a result of our
involvement with RSS cannot be quantified as such exposure would include
responsibility for the remainder of the leased office space and warehouse,
unknown personnel costs and undeterminable promotional costs that have been the
responsibility of RSS.
There have been no other related party transactions, or any other transactions
or relationships required to be disclosed pursuant to Item 404 of Regulation
S-K.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 110,000,000 shares, of which 10,000,000
shares are preferred shares, par value $0.001 per share, and 100,000,000 are
common shares, par value $0.001 per share. There are 36,024,030 common shares
issued and outstanding as of the date of this Prospectus. There are no preferred
shares issued or outstanding.
Common Stock. All shares of common stock have equal voting rights and, when
validly issued and outstanding, are entitled to one vote per share in all
matters to be voted upon by shareholders. The shares of common stock have no
preemptive, subscription, conversion or redemption rights and may be issued only
as fully-paid and non-assessable shares. Cumulative voting in the election of
directors is not permitted, which means that the holders of a majority of the
issued and outstanding shares of common stock represented at any meeting at
which a quorum is present will be able to elect the entire Board of Directors if
they so choose and, in such event, the holders of the remaining shares of common
stock will not be able to elect any directors. In the event of our liquidation,
each shareholder is entitled to receive a proportionate share of our assets
available for distribution to shareholders after the payment of liabilities and
after distribution in full of preferential amounts, if any. All shares of our
common stock issued and outstanding are fully-paid and non-assessable. Holders
of the common stock are entitled to share pro rata in dividends and
distributions with respect to the common stock, as may be declared by the Board
of Directors out of funds legally available therefore.
Preferred Shares. Shares of preferred stock may be issued from time to time in
one or more series as may be determined by our Board of Directors. The voting
powers and preferences, the relative rights of each such series and the
qualifications, limitations and restrictions thereof shall be established by the
Board of Directors, except that no holder of preferred stock shall have
preemptive rights. As of the date of this prospectus, we did not have any
outstanding shares of preferred stock.
TRANSFER AGENT AND REGISTRAR
Corporate Stock Transfer Corp., Denver, Colorado, acts as the transfer agent for
our Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Market sales of shares of our Common Stock after this Offering and from time to
time, and the availability of shares for future sale, may reduce the market
price of our Common Stock. Sales of substantial amounts of our Common Stock, or
the perception that these sales could occur, could adversely affect prevailing
market prices for our Common Stock and could impair our future ability to obtain
capital, especially through an offering of equity securities. As of the date of
this Prospectus, all of the 4,427,000 shares to be sold by the selling
shareholders, as well as 3,573,980 shares registered in a prior offering, were
freely tradable without restrictions or further registration under the
Securities Act, unless the shares are purchased by our affiliates, as that term
is defined in Rule 144 under the Securities Act. The remainder of our
outstanding shares will be eligible for sale pursuant to the exemption from
registration provided by Rule 144 discussed below.
45
RULE 144
Rule 144, adopted by the Securities and Exchange Commission pursuant to the
Securities Act of 1933, generally provides an exemption for the resale or
privately offered securities provided the conditions of the rule are met, which
include, among other limitations, that the securities be held for a minimum of
six months. Consequently, our Shareholders may not be able to avail themselves
of Rule 144 or otherwise be readily able to liquidate their investments in the
event of an emergency or for any other reason, and the shares may not be
accepted as collateral for a loan. If such non-affiliate has owned the shares
for at least six months, he or she may sell the shares without complying with
any of the restrictions of Rule 144. However, the SEC has recently adopted an
amendment to Rule 144 that provides that a shareholder of a "shell company"
cannot utilize Rule 144 until such a shell company files disclosure that
contains "Form 10 information" with the SEC which includes disclosure that such
company is no longer considered a "shell" company. Prior to the transactions
described above wherein we acquired all of the assets of DNA Beverage, we were
considered a "shell" company. We filed a report with the relevant disclosure on
January 11, 2011. As a result, a shareholder who acquired their shares from us
following the acquisition of the assets of DNA Beverage and whose shares have
not been registered shall not be entitled to rely upon Rule 144 until one year
from the date we filed the relevant Form 10 information, or January 11, 2012.
EXPERTS
The consolidated financial statements of DNA Brands, Inc. as of and for the
years ended December 31, 2010 and 2009 included herein, have been audited by
Mallah Furman, independent registered public accountants, as indicated in their
report with respect thereto, and are in reliance upon the authority of said firm
as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act" or "Securities Act") may be permitted to directors, officers or
persons controlling our Company pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1, including exhibits, with the
SEC with respect to the shares being offered in this Offering. This Prospectus
is part of the registration statement, but it does not contain all of the
information included in the registration statement or exhibits. For further
information with respect to us and our Common Stock, we refer you to the
registration statement and to the exhibits and schedules to the registration
statement. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to herein are not necessarily complete,
and in each instance, we refer you to the copy of the contract or other document
filed as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. You may inspect a copy of the
registration statement without charge at the SEC's principal office in
Washington, D.C., and copies of all or any part of the registration statement
may be obtained from the Public Reference Section of the SEC, 100 F. St. NE,
Washington, D.C. 20549, upon payment of fees prescribed by the SEC. The SEC
maintains a world wide website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the website is http://www.sec.gov. The SEC's toll
free investor information service can be reached at 1-800-SEC-0330.
46
FINANCIAL STATEMENTS
The audited financial statements for the fiscal years ending December 31, 2010
and 2009 are set forth on Pages F-1 through F-21 and the unaudited financial
statements for the quarter ended March 31, 2011 are set forth on Pages F-22
through F-36.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS, OR OF ANY SALE
OF OUR COMMON STOCK.
47
F-6
DNA Beverage Corporation and Subsidiary
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of DNA Brands, Inc.
We have audited the accompanying consolidated balance sheets of DNA Brands, Inc.
and Subsidiary as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for each of the
years in the two year period ended December 31, 2010. DNA Brands, Inc.'s
management is responsible for these financial statements. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DNA Brands, Inc. and
Subsidiary as of December 31, 2010 and 2009, and the results of its operations
and its cash flows for each of the years in the two year period ended December
31, 2010 in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company's dependence on outside financing, lack of
sufficient working capital, and recurring losses raises substantial doubt about
its ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Mallah Furman
Fort Lauderdale, FL
March 31, 2011
F-2
DNA BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
2010 2009
-------------- -------------
Restated
ASSETS
Current assets
Cash and cash equivalents $ 74,604 $ 11,392
Accounts receivable, net 139,819 17,424
Inventory 150,978 132,158
Loans receivable from related party 26,493 -
Prepaid expenses and other current assets 46,930 137,886
-------------- -------------
Total current assets 438,824 298,860
Property and equipment, net 54,281 42,028
-------------- -------------
Total assets $ 493,105 $ 340,888
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 472,649 $ 325,853
Accrued liabilities 1,390,533 623,748
Bank loans payable, current portion 10,984 24,552
Loans payable to officers 1,077,100 1,792,278
-------------- -------------
Total current liabilities 2,951,266 2,766,431
Bank loans payable, net of current portion 3,177 14,920
Convertible, subordinated debentures, net of
discounts - 439,283
Loans payable to related party - 160,479
-------------- -------------
Total liabilities 2,954,443 3,381,113
Commitments and contingencies - -
Stockholders' deficit
Preferred stock, $0.001 par value,
10,000,000 authorized, zero and zero
issued and outstanding, respectively - -
Common stock, $0.001 par value,
100,000,000 authorized, 35,828,980
and 19,847,671 issued and outstanding,
respectively 35,829 19,848
Additional paid-in capital 14,461,846 6,430,518
Accumulated deficit (16,959,013) (9,490,591)
-------------- -------------
Total stockholders' deficit (2,461,338) (3,040,225)
-------------- -------------
Total liabilities and stockholders'
deficit $ 493,105 $ 340,888
============== =============
The accompanying notes are an integral part of these financial
statements.
F-3
DNA BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
2010 2009
------------- -------------
Restated
Sales $ 1,168,461 $ 667,276
Cost of goods sold 869,074 468,120
------------- -------------
Gross margin 299,387 199,156
Operating expenses
Compensation and benefits 3,510,129 2,272,551
Depreciation expense 26,377 21,747
General and administrative expenses 999,015 733,516
Professional and outside services 2,209,840 333,520
Selling and marketing expenses 906,367 266,569
------------- -------------
Total operating expenses 7,651,728 3,627,903
------------- -------------
Loss from operations (7,352,341) (3,428,747)
Other expense
Interest expense (116,081) (489,974)
------------- -------------
Total other expense (116,081) (489,974)
------------- -------------
Loss before income taxes (7,468,422) (3,918,721)
Income taxes - -
------------- -------------
Net loss $ (7,468,422) $ (3,918,721)
============= =============
Loss per share:
Basic and diluted $ (0.28) $ (0.26)
============= =============
Weighted average number of common shares
outstanding:
Basic and diluted 26,729,555 15,366,097
============= =============
The accompanying notes are an integral part of these financial
statements.
F-4
DNA BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 (RESTATED)
Preferred Common Stock
Stock Additional
--------------- -------------------- Paid-In Accumulated
Share Amount Issued Amount Capital Deficit Total
------ ------- ---------- -------- ---------- ----------- ---------
Balance, December 31, 2008 - $ - 14,427,284 $14,427 $3,630,212 $(5,571,870) $(1,927,231)
Issuance of common stock in connection with
private offerings - - 3,927,317 3,928 862,191 - 866,119
Issuance of common stock warrants in
connection with private offering of common
stock - - - - 414,171 - 414,171
Issuance of common stock in exchange for
consulting, professional and other
services - - 7,293 7 6,793 - 6,800
Issuance of common stock as compensation to key
members of management - - 729,278 729 579,271 - 580,000
Issuance of common stock in exchange for
conversion of debt with officers - - 652,900 653 460,406 - 461,059
Issuance of common stock in exchange for
extension of maturity of convertible,
subordinated debenture - - 7,293 7 4,493 - 4,500
Issuance of common stock in connection with
common stock warrant exercises - - 96,306 97 56,051 - 56,148
Recognition of beneficial conversion features
embedded within convertible, subordinated
debentures - - - - 350,426 - 350,426
Issuance of common stock warrants in connection
with offering of convertible, subordinated
debentures - - - - 66,504 - 66,504
Net loss - - - - - (3,918,721) (3,918,721)
Balance, December 31, 2009 - - 19,847,671 19,848 6,430,518 (9,490,591) (3,040,225)
Issuance of common stock in connection with
private offerings - - 4,611,781 4,612 1,749,988 - 1,754,600
Issuance of common stock warrants in connection
with private offering of common stock - - - - 346,150 - 346,150
Issuance of common stock in exchange for
consulting, professional and other services - - 1,413,866 1,414 1,524,468 - 1,525,882
Issuance of common stock as compensation to key
members of management - - 1,932,586 1,932 1,243,568 - 1,245,500
Issuance of common stock in exchange for
conversion of debt with officers - - 5,961,218 5,961 1,628,867 - 1,634,828
Issuance of common stock in exchange for
conversion of convertible, subordinated
debentures - - 910,658 911 565,850 - 566,761
Issuance of common stock in connection with
common stock warrant exercises - - 1,151,200 1,151 831,869 - 833,020
Common stock options granted to employees - - - - 140,568 - 140,568
Net loss - - - - - (7,468,422) (7,468,422)
Balance, December 31, 2010 - $ - 35,828,980 $35,829 $14,461,846 $(16,959,013) $(2,461,338)
===== ======= ========== ======== =========== =========== ===========
The accompanying notes are an integral part of these financial
statements.
F-5
DNA BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
2010 2009
----------- -----------
Restated
Cash flows from operating activities:
Net loss $(7,468,422) $(3,918,721)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation expense 26,377 21,747
Loss on disposal of fixed assets 2,502 -
Non-cash interest expense related
to convertible, subordinated
debentures 89,717 328,245
Provision for doubtful accounts 36,969 6,523
Common stock issued in exchange
for services 1,525,882 6,800
Common stock issued in exchange
for financing costs - extension
of debt maturity - 4,500
Common stock issued in exchange for
financing costs - interest expense - 51,486
Common stock issued as employee
compensation 1,245,500 580,000
Common stock warrants issued with
convertible, subordinated debentures - 66,504
Share based compensation expense
related to employee stock option grants 140,568 -
Changes in operating assets and liabilities:
Accounts receivable (159,364) (14,932)
Inventory (18,820) (57,404)
Prepaid expenses and other current assets 90,955 (119,311)
Accounts payable 146,796 (85,035)
Accrued liabilities 804,546 359,006
----------- -----------
Net cash used in operating activities (3,536,794) (2,770,592)
Cash flows from investing activities:
Purchase of property and equipment (41,131) -
Loan receivable from related party (26,493) -
----------- -----------
Net cash used in investing activities (67,624) -
Cash flows from financing activities:
Net proceeds from officer loans 919,650 1,046,272
Net proceeds from convertible,
subordinated debentures - 450,000
Net payment on loans payable to related party (160,479) (6,950)
Repayments on bank loans payable (25,311) (23,418)
Net proceeds from the issuance of common stock 2,100,750 1,228,804
Net proceeds from the exercise of common
stock warrants 833,020 56,148
----------- -----------
Net cash provided by financing activities 3,667,630 2,750,856
----------- -----------
Net change in cash and cash equivalents 63,212 (19,736)
Cash and cash equivalents at beginning of period 11,392 31,128
----------- -----------
Cash and cash equivalents at end of period $ 74,604 $ 11,392
=========== ===========
Supplemental disclosures:
Interest paid $ 17,520 $ 16,953
=========== ===========
Income taxes paid $ - $ -
=========== ===========
Supplemental disclosures of non-cash investing
and financing activities:
Common stock issued in connection with
conversion of loans payable to officers $ 1,634,828 $ 461,058
=========== ===========
Common stock issued in connection with
conversion of convertible, subordinated
debentures and accrued interest $ 566,761 $ -
=========== ===========
The accompanying notes are an integral part of these financial
statements.
F-6
DNA Brands, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
DNA Brands, Inc. (hereinafter referred to as the "Company" or "DNA") was
incorporated in the State of Colorado on May 23, 2007 under the name "Famous
Products, Inc." Prior to July 6, 2010 the Company was a holding company
operating as a promotion and advertising company.
Effective July 6, 2010, the Company executed agreements to acquire all of the
remaining assets, liabilities and contract rights of DNA Beverage Corporation of
Boca Raton, Florida ("DNA Beverage"), and 100% of the common stock of DNA
Beverage's wholly owned subsidiary Grass Roots Beverage Company, Inc. ("Grass
Roots") in exchange for the issuance of 31,250,000 shares of the Company's
common stock.
As a result of this transaction the Company changed its name to DNA Brands, Inc.
On November 9, 2010, the Company changed its fiscal year end from October 31 to
December 31.
The Company's current business commenced in May 2006 in the State of Florida
under the name Grass Roots Beverage Company, Inc. Initial operations of Grass
Roots included the development of energy drinks, sampling and other marketing
efforts and initial distribution of its energy drinks in the State of Florida.
The Company began selling its energy drink in the State of Florida in 2007.
The Company produces, markets and sells a proprietary line of three carbonated
blends of DNA Energy Drinks(R), as well as a line of meat snacks made up of two
beef jerky flavors and three flavors of beef sticks, and other related products.
Reverse Capitalization
Effective July 6, 2010, the Company executed agreements to acquire all of the
remaining assets, liabilities and contract rights of DNA Beverage, and 100% of
the common stock of its subsidiary Grass Roots, in exchange for the issuance of
31,250,000 shares of the Company's common stock. . . This share issuance
represented approximately 94.6% of the Company's outstanding stock.
The historical financial statements of the Company are those of DNA Beverage and
of the consolidated entity. All DNA Beverage share amounts presented in this
Report, including weighted average shares outstanding and shares outstanding,
have been adjusted to reflect the conversion ratio of .729277794.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary Grass Roots. All significant intercompany balances
and transactions have been eliminated in consolidation.
F-7
DNA Brands, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition
The Company derives revenues from the sale of carbonated energy drinks, meat
snacks and other related products. Revenue is recognized when all of the
following elements are satisfied: (i) there are no uncertainties regarding
customer acceptance; (ii) there is persuasive evidence that an agreement exists;
(iii) delivery has occurred; (iv) legal title to the products has transferred to
the customer; (v) the sales price is fixed or determinable; and (vi)
collectability is reasonably assured.
Shipping and Handling Costs
Shipping and handling costs related to the movement of finished goods from
manufacturing locations to sales distribution centers are included in cost of
goods sold on the Company's consolidated statements of operations. Shipping and
handling costs incurred to move finished goods from the Company's sales
distribution centers to its customer locations are also included in cost of
goods sold on its consolidated statements of operations. The Company's customers
do not pay separately for shipping and handling costs.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents,
accounts receivable, advances to related party, accounts payable, accrued
expenses, and loans payable. The carrying values of the financial instruments
approximate their fair value due to the short-term nature of these instruments.
The fair values of the loans payable have interest rates that approximate market
rates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. Cash and cash
equivalents are stated at cost and consist of bank deposits. The carrying amount
of cash and cash equivalents approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company bills its customers after its products are shipped. The Company
bases its allowance for doubtful accounts on estimates of the creditworthiness
of customers, analysis of delinquent accounts, payment histories of its
customers and judgment with respect to the current economic conditions. The
Company generally does not require collateral. The Company believes the
allowances are sufficient to cover uncollectible accounts. The Company reviews
its accounts receivable aging on a regular basis for past due accounts, and
writes off any uncollectible amounts against the allowance.
F-8
DNA Brands, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Inventory
Inventory is stated at the lower of cost or market. Cost is principally
determined by using the average cost method that approximates the First-In,
First-Out (FIFO) method of accounting for inventory. Inventory consists of raw
materials as well as finished goods held for sale. The Company's management
monitors the inventory for excess and obsolete items and makes necessary
valuation adjustments when required.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Replacements, maintenance and repairs which do not improve or extend the lives
of the respective assets are charged to expense as incurred. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets as follows:
Equipment 5 Years
Furniture and fixtures 5 Years
Vehicles 5 Years
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the book value of the assets may not be recoverable. In
accordance with Accounting Standards Codification ("ASC") 360-10-35-15
Impairment or Disposal of Long-Lived Assets recoverability is measured by
comparing the book value of the asset to the future net undiscounted cash flows
expected to be generated by the asset.
No events or changes in circumstances have been identified which would impact
the recoverability of the Company's long-lived assets reported at December 31,
2010 and 2009.
Derivative Instruments
The Company does not enter into derivative contracts for purposes of risk
management or speculation. However, from time to time, the Company enters into
contracts, namely convertible notes payable, that are not considered derivative
financial instruments in their entirety, but that include embedded derivative
features.
In accordance with Financial Accounting Standards Board ("FASB") ASC Topic
815-15, Embedded Derivatives, and guidance provided by the SEC Staff, the
Company accounts for these embedded features as a derivative liability or equity
at fair value.
The recognition of the fair value of the derivative instrument at the date of
issuance is applied first to the debt proceeds. The excess fair value, if any,
over the proceeds from a debt instrument, is recognized immediately in the
statement of operations as interest expense. The value of derivatives associated
with a debt instrument is recognized at inception as a discount to the debt
instrument and amortized to interest expense over the life of the debt
instrument. A determination is made upon settlement, exchange, or modification
of the debt instruments to determine if a gain or loss on the extinguishment has
been incurred based on the terms of the settlement, exchange, or modification
and on the value allocated to the debt instrument at such date.
F-9
DNA Brands, Inc.
Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company applies, codified ASC 718 Compensation - Stock Compensation, to
stock-based compensation awards. ASC 718 requires the measurement and
recognition of non-cash compensation expense for all share-based payment awards
made to employees and directors. The Company records common stock issued for
services or for liability extinguishments at the closing market price for the
date in which obligation for payment of services is incurred.
Stock compensation arrangements with non-employee service providers are
accounted for in accordance with ASC 505-50 Equity-Based Payments to
Non-Employees, using a fair value approach. The compensation costs of these
arrangements are subject to re-measurement over the vesting terms as earned.
Stock Purchase Warrants
The Company has issued warrants to purchase shares of its common stock. Warrants
have been accounted for as equity in accordance with ASC 480, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, Distinguishing Liabilities from Equity.
Income Taxes
Income taxes are accounted for under the asset and liability method as
stipulated by Accounting Standards Codification ("ASC") 740. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. 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 be recovered or settled. Under ASC 740,
the effect on deferred tax assets and liabilities or a change in tax rate is
recognized in income in the period that includes the enactment date. Deferred
tax assets are reduced to estimated amounts to be realized by the use of a
valuation allowance. A valuation allowance is applied when in management's view
it is more likely than not (50%) that such deferred tax will not be utilized
The Company follows the provisions of the Financial Accounting Standards Board
("FASB") Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109" ("FIN 48"). FASB Statement
No. 109 has been codified in ASC Topic 740. ASC Topic 740 contains a two-step
approach to recognizing and measuring uncertain tax positions accounted for in
accordance with ASC Topic 740. This first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it
is more likely than not that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is more than 50%
likely of being realized upon ultimate settlement. The Company considers many
factors when evaluating and estimating its tax positions and tax benefits, which
may require periodic adjustments and which may not accurately anticipate actual
outcomes. ASC Topic 740 did not result in any adjustment to the Company's
provision for income taxes.
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share using the weighted average
number of shares of common stock outstanding during the period.
F-10
DNA Brands, Inc.
Notes to Consolidated Financial Statements
2. Restatement
In November, 2010 the Company determined that the share conversion ratio, as
well as the calculation of non-controlling shares outstanding for the purposes
of determining weighted average shares outstanding pursuant to the July 6th
reverse merger described in Note 1 above had been calculated incorrectly due to
the following errors:
o The number of DNA Beverage shares outstanding and shares to be issued
as of the date of the reverse merger on July 6, 2010 was inaccurate
o The number of shares reserved for the conversion of preferred
stock to common stock was calculated incorrectly
o As a result of the errors described above, DNA Brands non-controlling
shares outstanding as of July 6, 2010 were excluded from the
calculation of weighted average shares outstanding.
Accordingly, the Company has restated its financial statements for the year
ended December 31, 2009 to correct the number of common shares reported as
issued and outstanding by changing the conversion ratio from .7787576 to
..729277794. The effect of the restatement on the previously issued consolidated
financial statements for the year ended December 31, 2009 is presented in the
following table:
As
Originally Effect of
Reported Restatement Restated
---------- ----------- --------
Consolidated Balance Sheets
Common shares issued and outstanding
December 31, 2009 20,137,994 290,323 9,847,671
Common stock balance December 31, 2009 $ 20,138 $ (290) $ 19,848
Additional paid-in capital
December 31, 2009 $ 6,430,228 $ 290 $6,430,518
3. Recently Issued Accounting Pronouncements
In May 2009 and as updated February 2010, the FASB issued FASB ASC 855,
"Subsequent Events". This Statement addresses accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. FASB ASC 855 requires disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date, the date issued. The Company adopted this Statement in 2009. As a
result the date through which the Company has evaluated subsequent events and
the basis for that date have been disclosed in Note 18.
In April 2009, the FASB issued an update to FASB ASC 820, "Fair Value
Measurements and Disclosures", related to providing guidance on when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. The update clarifies the
methodology to be used to determine fair value when there is no active market or
where the price inputs being used represent distressed sales. The update also
reaffirms the objective of fair value measurement, as stated in FASB ASC 820,
which is to reflect how much an asset would be sold in and orderly transaction,
and the need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become inactive.
The Company adopted this Statement in 2009 without significant financial impact.
F-11
DNA Brands, Inc.
Notes to Consolidated Financial Statements
3. Recently Issued Accounting Pronouncements (continued)
In June 2009, ASC 810.10, Amendments to FASB Interpretation No. 46(R), was
issued. The objective of ASC 810.10 is to amend certain requirements of ASC 860
(revised December 2003), Consolidation of Variable Interest Entities, or ASC 860
to improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. ASC 810 carries forward the scope of ASC 860, with the
addition of entities previously considered qualifying special-purpose entities,
as the concept of these entities was eliminated in ASC 860, Accounting for
Transfers of Financial Assets. ASC 810.10 nullifies FASB Staff Position ASC 860,
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets
and Interests in Variable Interest Entities. The principal objectives of these
new disclosures are to provide financial statement users with an understanding
of:
a. The significant judgments and assumptions made by an enterprise
in determining whether it must consolidate a variable interest
entity and/or disclose information about its involvement in a
variable interest entity;
b. The nature of restrictions on a consolidated variable interest
entity's assets and on the settlement of its liabilities reported
by an enterprise in its statement of financial position,
including the carrying amounts of such assets and liabilities;
c. The nature of, and changes in, the risks associated with an
enterprise's involvement with the variable interest entity; and
d. How an enterprise's involvement with the variable interest entity
affects the enterprise's financial position, financial
performance and cash flows.
ASC 810 is effective as of the beginning of each reporting entity's first annual
reporting period that begins after November 15, 2009. Earlier application is
prohibited. The provisions of ASC 810 need not be applied to immaterial items.
The adoption of ASC 810 did not have an impact on the consolidated financial
statements.
4. Going Concern
As reflected in the accompanying financial statements, the Company has recorded
net losses of $7,468,422 and $3,918,721 for the years ended December 31, 2010
and 2009, respectively. Net cash used in operations from the same periods were
$3,536,794 and, $2,770,592, respectively. At December 31, 2010 the Company had a
working capital deficit of $2,512,442 and a stockholders' deficit of $2,461,338.
These matters raise a substantial doubt about the Company's ability to continue
as a going concern.
The ability of the Company to continue as a going concern is dependent on
management's plans, which includes implementation of its business plan and
continuing to raise funds through debt or equity raises. The Company will likely
continue to rely upon related-party debt or equity financing in order to ensure
the continuing existence of the business. Additionally the Company is working on
generating new sales from additional retail outlets, distribution centers or
through sponsorship agreements; and allocating sufficient resources to continue
with advertising and marketing efforts.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. These financial statements do not
include any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-12
DNA Brands, Inc.
Notes to Consolidated Financial Statements
5. Inventory
The following table sets forth the composition of the Company's inventory at
December 31, 2010 and 2009:
2010 2009
--------- ---------
Raw materials $ 25,672 $ 3,712
Finished goods - beverages and meat snacks 125,306 128,446
--------- ---------
Total inventory $150,978 $132,158
========= =========
6. Accounts Receivable and Customer Credit Concentration
The following table sets forth the composition of the Company's accounts
receivable at December 31, 2010 and 2009:
2010 2009
--------- ---------
Accounts Receivable $144,032 $ 21,161
Less: Allowance for doubtful accounts (4,213) (3,737)
--------- ---------
Accounts Receivable, net $139,819 $ 17,424
========= =========
Bad debt expense for the years ended December 31, 2010 and 2009 was $36,969 and
$6,523, respectively.
During 2009, one customer accounted for approximately 15.6% of the Company's
sales. In 2010, two different customers, accounted for approximately 14.7% and
11.5% of sales, respectively, neither of which accounted for more than 10% of
the Company's sales in 2009.
7. Prepaid Expenses
The following table sets forth the composition of the Company's prepaid expenses
at December 31, 2010 and 2009:
2010 2009
--------- ---------
Short-term security deposit $ 10,000 $ 10,000
Employee and other advances 33,930 26,386
Sponsorship agreement - 100,000
Miscellaneous, other 3,000 1,500
--------- ---------
Total prepaid assets $ 46,930 $137,886
========= =========
F-13
DNA Brands, Inc.
Notes to Consolidated Financial Statements
8. Property and Equipment, Net
The following table sets forth the composition of the Company's property and
equipment at December 31, 2010 and 2009:
2010 2009
--------- ---------
Equipment $ 18,690 $ 48,925
Furniture and fixtures 9,156 9,156
Vehicles 91,785 50,654
Accumulated depreciation (65,350) (66,707)
--------- ---------
Total property and equipment, net $ 54,281 $ 42,028
========= =========
Depreciation expense for the years ended December 31, 2010 and 2009 was $26,377
and $21,747, respectively.
9. Accrued Expenses
The following table sets forth the composition of the Company's accrued expenses
as of December 31, 2010 and 2009:
2010 2009
--------- ---------
Salaries and bonuses (a) $750,000 $540,000
Interest expense on convertible, subordinated debentures - 22,565
Professional services 290,060 -
Vendor agreement 71,103 -
Payroll taxes and penalties 279,370 61,183
--------- ---------
Total accrued expenses $1,390,533 $623,748
========== =========
(a) Due to the shortage of liquidity, the Company's two principal executive
officers have deferred their salaries since 2008.
As of December 31, 2010 and 2009, accrued payroll taxes and penalties
represented the unpaid portion of employer and employee payroll taxes totaling
approximately $231,066 and $56,683. The Company has estimated potential
penalties associated with these unpaid amounts to be $48,304 and $4,500 as of
December 31, 2010 and 2009.
10. Bank Loans Payable
Bank loan payable were comprised primarily of bank financing for vehicles and
beverage coolers for the Company's products. The range of interest rates on
these loans was 9% to 26%. The following table sets forth the current and long
term portions of bank loans as of December 31, 2010 and 2009:
2010 2009
--------- ---------
Bank loans $ 14,161 $ 39,472
Less: Current portion of bank loans (10,984) (14,920)
--------- ---------
Total long term-bank loans $ 3,177 $ 24,522
========= =========
F-14
DNA Brands, Inc.
Notes to Consolidated Financial Statements
11. Convertible, subordinated debentures, net of discount
The following table summarizes the Company's convertible, subordinated
debentures as of December 31, 2010 and 2009:
2010 2009
--------- ---------
Convertible notes-face value $529,000 $529,000
Loan discount (89,717) (419,09)
Add: amortization of loan discount 89,717 329,373
Less: conversion of notes to common stock (529,00) -
--------- ---------
Net convertible notes $ - $439,283
========= =========
As of December 31, 2010 and 2009, the Company had outstanding convertible notes
to various non-related parties in the aggregate amount of $-0- and $439,283,
respectively. These notes were issued at varying interest rates from 8% to 12%
with varying conversion rates and formulas that enabled the noteholder to
convert these notes to common stock. Due to its limited liquidity, the Company
was unable to pay off any of the convertible notes on the original due date, and
as a result negotiated extensions on the loans by either lowering the conversion
price, or granting warrants to purchase the Company's common stock.
In May and June of 2010, holders of previously issued convertible subordinated
debentures agreed to convert $529,000 plus $37,671 in accrued interest, in
return for the issuance of 910,657 shares of common stock. The approximate value
per share was $0.62.
The calculated value of the conversion feature that resulted in the discount in
the table above was estimated using the Black-Scholes option pricing model with
the following weighted average assumptions for the years ended December 31, 2010
and 2009.
2010 2009
--------- ---------
Expected dividend yield (1) 0.00% 0.00%
Risk-free interest rate (2) 1.55% 3.45%
Expected volatility (3) 147.70% 141.20%
Expected life (in years) (4) .03-1.0 1.00
--------------
(1) The Company has no history or expectation of paying cash dividends on its
common stock.
(2) The risk-free interest rate is based on the U.S. Treasury yield for a term
consistent with the expected life of the awards in effect at the time of
grant.
(3) The volatility of the Company stock is based on three similar publicly
traded companies. The Company used the average volatility rate of the
three companies.
(4) The expected life represents the due date of the note.
F-15
DNA Brands, Inc.
Notes to Consolidated Financial Statements
12. Loans payable to officers
The following table summarizes the Company's loans payable to officers as of
December 31, 2010 and 2009:
2010 2009
---------- ---------
Loans payable to officers $1,077,100 $1,792,278
---------- ----------
$1,077,100 $1,792,278
========== ==========
Since the inception of the Company, its principal executive officers have loaned
the Company significant amounts of operating capital on an interest free basis
and without formal repayment terms.
In October 2009, the Company agreed to issue 652,900 shares of the Company's
common stock in exchange for the officer's retiring $461,058 of loans payable.
In May 2010, the Company agreed to issue 5,961,217 shares of the Company's
common stock in exchange for the officer's retiring $1,634,828 of loans payable.
13. Related Party Transactions and Balances
The Company through its wholly-owned subsidiary Grass Roots maintains a
brokerage agreement with Royal Strategies and Solutions, Inc. ("RSS"), a related
party. Under the terms of the agreement, RSS promotes the Company's products in
return for a commission on successful sales or sales agreements. The Company
also shares a common base of majority stockholders with RSS. Additionally, the
Company's principal executive officers also serve as corporate officers to RSS.
RSS leases office space and a warehouse which is partially subleased to the
Company. The Company utilizes this space for the warehousing and distribution of
its products. In addition, RSS is financially responsible for other operating
costs and personnel that are utilized by or dedicated to the Company. The
Company, in turn, provides cash financing to RSS; either via allocated expenses
or non-interest bearing loans.
Under the guidelines of ASC 810.10, Amendments to FASB Interpretation No. 46(R),
"if a reporting entity is not the primary beneficiary but has a variable
interest in the variable interest entity, the reporting entity is required to
disclose related information in its financial statements." Based upon tests
performed, the Company has determined that it has a variable interest in RSS but
is not the primary beneficiary; and, therefore has not consolidated the
financial statements of RSS with the Company.
Advances from the related party RSS at December 31, 2009 was $160,479 and
non-interest bearing.
Advances to the related party RSS at December 31, 2010 was $26,493. For the
years ended December 31, 2010 and 2009, the Company recorded $210,722 and
$336,750 in expenses, respectively, from activity associated with RSS. These
expenses were comprised primarily of brokerage fees, commissions and
administrative services.
In the event the Company discontinued using RSS as a provider of these brokerage
services, it would not have a material impact on the Company's financial
condition or operations.
F-16
DNA Brands, Inc.
Notes to Consolidated Financial Statements
13. Related Party Transactions and Balances (continued)
The maximum exposure to loss that exists as a result of the Company's
involvement with RSS cannot be quantified as such exposure would include
responsibility for the remainder of the leased office space and warehouse,
unknown personnel costs and undeterminable promotional costs that have been the
responsibility of RSS.
14. Equity
At December 31, 2010 the Company was authorized to issue 100,000,000 shares, of
$0.001 par value Common Stock, and 10,000,000 shares of $0.001 Preferred Stock.
The holders of common stock are entitled to receive dividends whenever funds are
legally available and when declared by the Board of Directors. Each share of
common stock is entitled to one vote.
As of December 31, 2010 and 2009 there were 35,828,980 and 19,847,671 shares
outstanding, respectively. The approximate number of shares issued and their
respective approximate values for the activity for the changes in common stock
between December 31, 2010 and 2009 are as follows:
Since 2007, the Company has issued and sold common stock and common stock
warrants in order to fund a significant portion of its operations. Additionally,
the Company has issued common shares to compensate its employees and to retire
debt. Furthermore, the Company has issued a limited number of stock options to
two employees. The value of the common stock options and warrants has been
determined using the following Black Scholes methodology:
2010 2009
--------- ---------
Expected dividend yield (1) 0.00% 0.00%
Risk-free interest rate (2) 1.55% 3.45%
Expected volatility (3) 147.70% 141.20%
Expected life (in years) 5.00 5.00
--------------
(1) The Company has no history or expectation of paying cash dividends on its
common stock.
(2) The risk-free interest rate is based on the U.S. Treasury yield for a term
consistent with the expected life of the awards in effect at the time of
grant.
(3) The volatility of the Company stock is based on three similar publicly
traded companies.
Warrants
--------
The following table reflects all outstanding and exercisable warrants for the
periods ended December 31, 2010 and 2009. All stock warrants are immediately
vested upon issuance and are exercisable for a period five years from the date
of issuance.
F-17
DNA Brands, Inc.
Notes to Consolidated Financial Statements
Warrants (continued)
Weighted Remaining
Number of Average Contractual
Warrants Exercise Life
Outstanding Price (Years)
----------- -------- ----------
Balance, December 31, 2008 2,166,191 $ 1.52 4.55
Warrants issued 1,279,859 $ 1.74 4.62
Warrants exercised (97,035) $ 0.50 -
----------- -------- ----------
Balance, December 31, 2009 3,349,015 $ 1.60 3.89
Warrants issued 1,061,105 $ 1.75 4.41
Warrants exercised (1,157,441) $ 0.50 -
----------- -------- ----------
Balance, December 31, 2010 3,252,679 $ 1.62 3.04(1)
=========== ======== ==========
--------------
(1) The remaining contractual life of the warrants outstanding as of December
31, 2010 ranges from 2.08 to 4.00 years.
Stock options
The Company has not adopted a formal stock option plan. As of December 31, 2010,
the Company had committed to issue stock options to two of its employees.
Average
Remaining
Number Weighted Contractual
of Exercise Life
Options Price (Years)
--------- -------- ----------
Outstanding on December 31, 2009 - -
Granted 226,076 1.49 4.00
Exercised -
Forfeited and expired -
--------- -------- ----------
Outstanding and exercisable on December 31, 2010 226,076 1.49 4.00
========= ======== ==========
Intrinsic value is measured using the fair market value price of the Company's
common stock less the applicable exercise price. The aggregate intrinsic value
of stock options outstanding and exercisable as of December 31, 2010, was $-0-.
The aggregate intrinsic value in the preceding table represents the total
pre-tax intrinsic value based on the closing price of the Company's common stock
of $0.72 on December 31, 2010, which would have been received by the option
holders had all option holders exercised their options as of that date.
As of December 31, 2010, there was $-0- in unrecognized compensation related to
stock options outstanding. All outstanding stock options are vested. Since the
inception of the Company, no stock options have been exercised
F-18
DNA Brands, Inc.
Notes to Consolidated Financial Statements
15. Earnings Per Share
In accordance with ASC 260, which replaced SFAS No. 128, Earnings per Share
("SFAS No. 128"), basic net loss per common share is computed by dividing net
loss by the weighted-average number of common shares outstanding. Diluted net
loss per common share is computed similarly to basic net loss per share, except
that the denominator is increased to include all potential dilutive common
shares, including outstanding options and warrants. Potentially dilutive common
shares have been excluded from the diluted loss per common share computation for
each of the two years ended December 31, 2010 and 2009 because such securities
have an anti-dilutive effect on loss per share due to the Company's net loss.
The following table sets forth as of December 31, 2010 and 2009 the number of
potential shares of common stock issuable that have been excluded from diluted
earnings per share because their effect was anti-dilutive:
2010 2009
---------- ---------
Stock options 226,076 -
Outstanding unexercised warrants 3,252,679 3,349,015
---------- ---------
Total 3,552,679 3,349,015
========== =========
16. Income Taxes
The actual income tax expense for 2010 and 2009 differs from the statutory tax
expense for the year (computed by applying the U.S. federal corporate tax rate
of 34.4% to income before provision for income taxes) as follows:
Effective Effective
2010 Tax Rate 2009 Tax Rate
------------ -------- ----------- --------
Federal taxes at statutory rate $(2,569,137) 34.40% $(1,348,040) 34.40%
State income taxes, net of
federal tax benefit (269,461) 3.61% (141,387) 3.61%
Temporary differences 1,201,794 (16.09) 318,051 (8.12)%
Change in valuation allowance 1,636,804 (21.92) 1,171,376 (29.89)%
------------ -------- ----------- --------
Total $ - 0.00% $ - 0.00%
============ ======== =========== ========
The following table represents the tax effects of significant items that give
rise to deferred taxes as of December 31, 2010 and 2009:
2010 2009
----------- ---------
Deferred tax asset:
Net operating loss carryforward $924,481 $ 46,770
Temporary differences 427,392 -
----------- ---------
1,351,873 46,770
Less: Valuation allowance (1,351,873) (46,770)
----------- ---------
Net deferred tax asset $ - $ -
=========== =========
F-19
DNA Brands, Inc.
Notes to Consolidated Financial Statements
16. Income Taxes (continued)
As of December 31, 2010, the Company has available approximately $2,432,333 of
operating loss carryforwards before applying the provision of IRC Section 382,
which may be used in the future filings of the Company's tax returns to offset
future taxable income for United States income tax purposes. Net operating
losses expire beginning in the year 2022. As of December 31, 2010 and 2009, the
Company has determined that due to the uncertainty regarding profitability in
the near future, a 100% valuation allowance is needed with regards to the
deferred tax assets. Changes in the estimated tax benefit that will be realized
from the tax loss carryforwards and other temporary differences will be
recognized in the financial statement in the years in which those changes occur.
Under the provisions of the Internal Revenue Code Section 382, an ownership
change is deemed to have occurred if the percentage of the stock owned by one or
more 5% shareholders has increased, in the aggregate, by more than 50 percentage
points over the lowest percentage of stock owned by said shareholders at any
time during a three year testing period. Once an ownership change is deemed to
have occurred under Section 382, a limitation on the annual utilization of net
operating loss (NOL) carryforwards is imposed and therefore, a portion of the
tax loss carryforwards would be subject to the limitation under Section 382.
The acquisition of Grass Roots Beverage Company, Inc. on July 6, 2010 (see Note
1) and various other equity transactions resulted in an ownership change
pursuant to Section 382. The utilization of the $123,052 net operating loss as
of December 31, 2009 is limited under IRC Section 382.
The tax years 2007 through 2010 remain open to examination by federal
authorities and state jurisdictions where the Company operates.
17. Commitments
As of December 31, 2010, the Company is committed to future minimum payments
under non-cancelable operating leases for vehicles and sponsorship agreements as
follows:
2011 $ 70,867
2012 43,367
2013 33,016
2014 710
2015 and thereafter -
---------
Total $147,960
F-20
DNA Brands, Inc.
Notes to Consolidated Financial Statements
Leases
The Company subleases office and warehouse space on a month to month basis in
Boca Raton, Florida from RSS at the rate of approximately $12,261 per month.
Additionally, the Company has commitments with a truck leasing company for
$43,367 in 2011, and $77,093 in total through 2014.
Sponsorship and Other Agreements
As part of its marketing efforts, the Company enters into sponsorship agreements
with athletes and celebrity spokespersons to promote its products. These
agreements typically are for one or two year periods. As of December 31, 2010,
the Company was committed to two sponsorship agreements with sport teams that
display the Company's logo for $33,333.
18. Subsequent Events
The Company has evaluated subsequent events between the balance sheet date of
December 31, 2010 and the date the financial statements were issued and
concluded that events and transactions occurring during that period requiring
recognition or disclosure have been made.
In January 2011, the Company successfully renegotiated the contractual
obligation with Star Racing wherein it agreed to issue 600,000 shares of its
Common Stock to offset a $268,000 cash payment due for the 2011 season.
In February 2011, the Company issued a 12% Secured Convertible Debenture to an
existing shareholder in the principal amount of $500,000, which becomes due
three (3) years from the date of issuance. Interest is payable quarterly
beginning in May 2011. In addition to the interest, as additional inducement for
the maker to loan the funds to the Company, the maker received One Hundred
Twenty Five Thousand (125,000) "restricted" shares of common stock
contemporaneously with the execution of the debenture. The Company also agreed
to pay to the maker an annual transaction fee of Thirty Thousand Dollars
($30,000), to be paid quarterly with the first installment of $7,500 beginning
in May 2011. The balance due under the debenture is collateralized by all of the
Company's assets, including but not limited to inventory, receivables, vehicles
and warehouse equipment. The Company also agreed to issue Seven Hundred Fifty
Thousand (750,000) shares of its common stock (the "Escrowed Shares"), in favor
of the maker, to be held in escrow by a mutually agreeable party. In the event
of failure to pay all or any portion of the principal and interest due under the
debenture (including any and all rights to cure), the Escrowed Shares shall be
released to the maker. The Escrowed Shares are not entitled to voting rights, or
to receive any dividends if and when declared unless and until the Escrowed
Shares are released.
Also in February 2011, the Company executed a letter agreement with Equinox
Securities, Inc., Ontario, CA ("Equinox"), a licensed broker-dealer, where it
has retained Equinox as its placement agent to raise up to $6 million in equity
capital, at a share price to be agreed, on a "best efforts" basis. The agreement
requires a payment by the Company to Equinox of $20,000; $10,000 of which was
due upon execution. In addition, if Equinox is successful in raising these funds
they will receive an 8% cash fee, plus a 2% fee payable in shares of the
Company's Common Stock to be issued under the same terms and conditions as paid
by the new investors if they raise equity. If they raise debt, the Company will
owe them a 4% cash fee of the amount raised. The Company will also reimburse
Equinox for all expenses, but it must approve such expenses in writing prior to
the same being incurred. The agreement expires in February 2012.
F-21
DNA Beverage Corporation and Subsidiary
Index to Unaudited Consolidated Financial Statements
Consolidated Balance Sheets for the Fiscal Quarter Ended
March 31, 2011 and the Fiscal Year Ended December 31, 2010 F-23
Unaudited Consolidated Statements of Operations for the Fiscal
Quarters Ended March 31, 2011 and March 31, 2010 F-24
Unaudited Consolidated Statements of Cash Flows for the Fiscal
Quarters Ended March 31, 2011 and March 31, 2010 F-25
Notes to Unaudited Consolidated Financial Statements F-26-F-36
F-22
DNA BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2011 2010
----------- -----------
(Unaudited (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 90,579 $ 74,604
Accounts receivable, net 178,689 139,819
Inventory 161,899 150,978
Advances to related party 23,345 26,493
Prepaid expenses and other current assets 263,491 46,930
----------- -----------
Total current assets 718,003 438,824
Property and equipment, net 45,117 54,281
----------- -----------
Total assets $ 763,120 $ 493,105
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 519,446 $ 472,649
Accrued expenses 1,598,099 1,390,533
Bank loans payable, current portion 7,603 10,984
Loans payable to officers 808,731 1,077,100
----------- -----------
Total current liabilities 2,933,879 2,951,266
Bank loans payable, net of current portion 1,836 3,177
Convertible, subordinated debentures, net of discounts 469,920 -
----------- -----------
Total liabilities 3,405,635 2,954,443
Commitments and contingencies - -
Stockholders' deficit
Preferred stock, $0.001 par value, 10,000,000
authorized, 2,155,000 and zero issued and
outstanding, respectively 2,155 -
Common stock, $0.001 par value, 100,000,000
authorized, 36,693,980 and 35,828,980 issued and
outstanding, respectively 36,694 35,829
Additional paid-in capital 15,344,326 14,461,846
Accumulated deficit (18,025,690)(16,959,013)
----------- -----------
Total stockholders' deficit (2,642,515) (2,461,338)
----------- -----------
Total liabilities and stockholders' deficit $ 763,120 $ 493,105
=========== ===========
The accompanying notes are an integral part of these financial
statements.
F-23
DNA BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
2011 2010
---------- ----------
Sales $ 265,817 $ 310,305
Cost of goods sold 180,714 261,430
---------- ----------
Gross margin 85,103 48,875
Operating expenses
Compensation and benefits 480,335 1,707,551
Depreciation expense 5,900 5,877
General and administrative expenses 231,557 221,624
Professional and outside services 205,468 271,413
Selling and marketing expenses 219,455 206,113
---------- ----------
Total operating expenses 1,142,715 2,412,578
---------- ----------
Loss from operations (1,057,612) (2,363,703)
Other expense
Interest expense (9,065) (56,920)
---------- ----------
Total other expense (9,065) (56,920)
---------- ----------
Loss before income taxes (1,066,677) (2,420,623)
Income taxes - -
---------- ----------
Net loss $(1,066,677)$(2,420,623)
============ ==========
Loss per share:
Basic and diluted $ (0.03) $ (0.13)
========== ==========
Weighted average number of common shares outstanding:
Basic and diluted 35,031,697 19,072,805
=========== ==========
The accompanying notes are an integral part of these financial
statements.
F-24
DNA BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011 AND 2010 (UNAUDITED)
2011 2010
---------- ----------
Cash flows from operating activities:
Net loss $(1,066,677)$(2,420,623)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 5,900 5,877
Loss on disposal of fixed assets 3,014 -
Non-cash interest expense related to
convertible, subordinated debentures 1,170 42,447
Provision for doubtful accounts 4,892 1,274
Common stock issued in exchange for services 290,500 221,313
Common stock issued as employee compensation - 1,245,500
Changes in operating assets and liabilities:
Accounts receivable (43,762) (96,554)
Inventory (10,921) (5,935)
Prepaid expenses and other current assets (216,561) 96,033
Accounts payable 46,797 100,582
Accrued expenses 207,566 80,088
---------- ----------
Net cash used in operating activities (778,082) (729,998)
---------- ----------
Cash flows from investing activities:
Proceeds from the sale of property and equipment 250 -
Purchase of property and equipment - (26,106)
Net repayment of advances to related party 3,148 -
---------- ----------
Net cash provided by (used in) investing
activities 3,398 (26,106)
---------- ----------
Cash flows from financing activities:
Net repayments on loans payable to officers (268,369) (70,054)
Net repayments on loans payable to related party - (83,061)
Net repayments on bank loans payable (4,722) (7,819)
Net proceeds from the issuance of convertible,
subordinated debentures 500,000 -
Net proceeds from the issuance of convertible,
preferred stock 538,750 -
Net proceeds from the issuance of common stock 25,000 659,750
Net proceeds from the exercise of common stock
warrants - 462,727
---------- ----------
Net cash provided by financing activities 790,659 961,543
---------- ----------
Net change in cash and cash equivalents 15,975 205,439
Cash and cash equivalents at beginning of period 74,604 11,392
---------- ----------
Cash and cash equivalents at end of period $ 90,579 $ 216,831
========== ==========
Supplemental disclosures:
Interest paid $ 395 $ 6,091
========== ==========
Income taxes paid $ - $ -
========== ==========
The accompanying notes are an integral part of these financial
statements.
F-25
DNA Brands, Inc.
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies
DNA Brands, Inc. (hereinafter referred to as the "Company" or "DNA") was
incorporated in the State of Colorado on May 23, 2007 under the name Famous
Products, Inc. Prior to July 6, 2010, the Company was a holding company
operating as a promotion and advertising company.
Effective July 6, 2010, the Company executed agreements to acquire all of
the remaining assets, liabilities and contract rights of DNA Beverage
Corporation ("DNA Beverage"), and 100% of the common stock of DNA Beverage's
wholly-owned subsidiary Grass Roots Beverage Company, Inc. ("Grass Roots"), in
exchange for the issuance of 31,250,000 shares of the Company's common stock. As
a result of this transaction, the Company changed its name to DNA Brands, Inc.
On November 9, 2010, the Company changed its fiscal year end from October
31st to December 31st.
The Company's current business commenced in May 2006 in the State of
Florida under the name Grass Roots Beverage Company, Inc. The initial operations
of Grass Roots included the development of energy drinks, sampling and other
marketing efforts and initial distribution of its energy drinks in the State of
Florida. The Company began selling its energy drink in the State of Florida in
2007.
The Company produces, markets and sells a proprietary line of four
carbonated blends of DNA Energy Drinks(R), as well as a line of meat snacks made
up of two beef jerky flavors and four flavors of beef sticks, and other related
products.
Reverse Capitalization
Effective July 6, 2010, the Company executed agreements to acquire all of
the remaining assets, liabilities and contractual rights of DNA Beverage, and
100% of the common stock of its subsidiary Grass Roots, in exchange for the
issuance of 31,250,000 shares of our common stock. Each share of DNA Beverage
held on September 8, 2010 (the Record Date") will receive 0.729277794 shares our
Common Stock. This share issuance represented approximately 94.6% of the
Company's outstanding stock.
The historical financial statements of the Company are those of DNA
Beverage and of the consolidated entity. All DNA Beverage share amounts
presented in this Report, including weighted average shares outstanding and
shares outstanding, have been adjusted to reflect the conversion ratio of
..729277794.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
financial information and the requirements of Form 10-Q and Article 10 of
Regulation S-X of the SEC. Accordingly, they do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America for complete financial statements. Interim
results are not necessarily indicative of results for a full year. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the financial position and the results of operations and cash
flows for the interim periods have been included.
F-26
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary Grass Roots. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue Recognition
The Company derives revenues from the sale of carbonated energy drinks and
meat snacks. Revenue is recognized when all of the following elements are
satisfied: (i) there are no uncertainties regarding customer acceptance; (ii)
there is persuasive evidence that an agreement exists; (iii) delivery has
occurred; (iv) legal title to the products has transferred to the customer; (v)
the sales price is fixed or determinable; and (vi) collectability is reasonably
assured.
Shipping and Handling Costs
Shipping and handling costs related to the movement of finished goods from
manufacturing locations to sales distribution centers are included in cost of
goods sold on the Company's consolidated statements of operations. Shipping and
handling costs incurred to move finished goods from the Company's sales
distribution centers to its customer locations are also included in cost of
goods sold on its consolidated statements of operations. The Company's customers
do not pay separately for shipping and handling costs.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, advances to related party, accounts payable,
accrued expenses, and loans payable. The carrying values of the financial
instruments approximate their fair value due to the short-term nature of these
instruments. The fair values of the loans payable have interest rates that
approximate market rates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents. Cash and
cash equivalents are stated at cost and consist solely of bank deposits. The
carrying amount of cash and cash equivalents approximates fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company bills its customers after its products are shipped. The Company
bases its allowance for doubtful accounts on estimates of the creditworthiness
of customers, analysis of delinquent accounts, payment histories of its
customers and judgment with respect to the current economic conditions. The
Company generally does not require collateral. The Company believes the
allowances are sufficient to cover uncollectible accounts. The Company reviews
its accounts receivable aging on a regular basis for past due accounts, and
writes off any uncollectible amounts against the allowance.
F-27
Inventory
Inventory is stated at the lower of cost or market. Cost is primarily
determined by using the average cost method that approximates the First-In,
First-Out (FIFO) method of accounting for inventory. Inventory consists of raw
materials as well as finished goods held for sale. The Company's management
monitors the inventory for excess and obsolete items and makes necessary
valuation adjustments when required.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Replacements, maintenance and repairs which do not improve or extend the lives
of the respective assets are charged to expense as incurred. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets as follows:
Equipment 5 Years
Furniture and fixtures 5 Years
Vehicles 5 Years
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the book value of the assets may not be recoverable. In
accordance with Accounting Standards Codification ("ASC") 360-10-35-15
Impairment or Disposal of Long-Lived Assets recoverability is measured by
comparing the book value of the asset to the future net undiscounted cash flows
expected to be generated by the asset.
No events or changes in circumstances have been identified which would
impact the recoverability of the Company's long-lived assets reported at
December 31, 2010 or for the three month period ended March 31, 2011.
Derivative Instruments
The Company does not enter into derivative contracts for purposes of risk
management or speculation. However, from time to time, the Company enters into
contracts, namely convertible notes payable, that are not considered derivative
financial instruments in their entirety, but that include embedded derivative
features.
In accordance with Financial Accounting Standards Board ("FASB") ASC Topic
815-15, Embedded Derivatives, and guidance provided by the SEC Staff, the
Company accounts for these embedded features as a derivative liability or equity
at fair value.
The recognition of the fair value of the derivative instrument at the date
of issuance is applied first to the debt proceeds. The excess fair value, if
any, over the proceeds from a debt instrument, is recognized immediately in the
statement of operations as interest expense. The value of derivatives associated
with a debt instrument is recognized at inception as a discount to the debt
instrument and amortized to interest expense over the life of the debt
instrument. A determination is made upon settlement, exchange, or modification
of the debt instruments to determine if a gain or loss on the extinguishment has
been incurred based on the terms of the settlement, exchange, or modification
and on the value allocated to the debt instrument at such date.
Stock-Based Compensation
The Company applies, codified ASC 718 Compensation - Stock Compensation, to
stock-based compensation awards. ASC 718 requires the measurement and
recognition of non-cash compensation expense for all share-based payment awards
made to employees and directors. The Company records common stock issued for
services or for liability extinguishments at the closing market price for the
date in which obligation for payment of services is incurred.
F-28
Stock compensation arrangements with non-employee service providers are
accounted for in accordance with ASC 505-50 Equity-Based Payments to
Non-Employees, using a fair value approach. The compensation costs of these
arrangements are subject to re-measurement over the vesting terms as earned.
Stock Purchase Warrants
The Company has issued warrants to purchase shares of its common stock.
Warrants have been accounted for as equity in accordance with ASC 480,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock, Distinguishing Liabilities from Equity.
Income Taxes
Income taxes are accounted for under the asset and liability method as
stipulated by Accounting Standards Codification ("ASC") 740. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. 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 be recovered or settled. Under ASC 740,
the effect on deferred tax assets and liabilities or a change in tax rate is
recognized in income in the period that includes the enactment date. Deferred
tax assets are reduced to estimated amounts to be realized by the use of a
valuation allowance. A valuation allowance is applied when in management's view
it is more likely than not (50%) that such deferred tax will not be utilized.
The Company follows the provisions of the Financial Accounting Standards
Board ("FASB") Interpretation (FIN) No. 48, "Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109" ("FIN 48"). FASB
Statement No. 109 has been codified in ASC Topic 740. ASC Topic 740 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted
for in accordance with ASC Topic 740. This first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement. The Company
considers many factors when evaluating and estimating its tax positions and tax
benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes. ASC Topic 740 did not result in any adjustment to
the Company's provision for income taxes.
Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share using the weighted
average number of shares of common stock outstanding during the period.
2. Recently Issued Accounting Pronouncements
In May 2009 and as updated in February 2010, the FASB issued FASB ASC 855,
"Subsequent Events". This Statement addresses accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or available to be issued. FASB ASC 855 requires disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date, the date issued. The Company adopted this Statement in 2009. As a
result the date through which the Company has evaluated subsequent events and
the basis for that date have been disclosed in Note 15.
F-29
In April 2009, the FASB issued an update to FASB ASC 820, "Fair Value
Measurements and Disclosures", related to providing guidance on when the volume
and level of activity for the asset or liability have significantly decreased
and identifying transactions that are not orderly. The update clarifies the
methodology to be used to determine fair value when there is no active market or
where the price inputs being used represent distressed sales. The update also
reaffirms the objective of fair value measurement, as stated in FASB ASC 820,
which is to reflect how much an asset would be sold in and orderly transaction,
and the need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become inactive.
The Company adopted this Statement in 2009 without significant financial impact.
In June 2009, ASC 810.10, Amendments to FASB Interpretation No. 46(R), was
issued. The objective of ASC 810.10 is to amend certain requirements of ASC 860
(revised December 2003), Consolidation of Variable Interest Entities, or ASC 860
to improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. ASC 810 carries forward the scope of ASC 860, with the
addition of entities previously considered qualifying special-purpose entities,
as the concept of these entities was eliminated in ASC 860, Accounting for
Transfers of Financial Assets. ASC 810.10 nullifies FASB Staff Position ASC 860,
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets
and Interests in Variable Interest Entities. The principal objectives of these
new disclosures are to provide financial statement users with an understanding
of:
a. The significant judgments and assumptions made by an enterprise in
determining whether it must consolidate a variable interest entity and/or
disclose information about its involvement in a variable interest entity;
b. The nature of restrictions on a consolidated variable interest entity's
assets and on the settlement of its liabilities reported by an enterprise
in its statement of financial position, including the carrying amounts of
such assets and liabilities;
c. The nature of, and changes in, the risks associated with an enterprise's
involvement with the variable interest entity; and
d. How an enterprise's involvement with the variable interest entity affects
the enterprise's financial position, financial performance and cash flows.
ASC 810 is effective as of the beginning of each reporting entity's first
annual reporting period that begins after November 15, 2009. Earlier application
is prohibited. The provisions of ASC 810 need not be applied to immaterial
items. The adoption of ASC 810 did not have an impact on the consolidated
financial statements.
3. Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business as they become due.
During the three month period ended March 31, 2011, the Company recorded a
net loss of $1,066,677 and had negative cash flows of $778,082 from its
operating activities. At March 31, 2011, the Company had a working capital
deficit of $2,215,876 and a stockholders' deficit of $2,642,515. The Company has
relied, in large part, upon debt and equity financing to fund its operations.
These matters collectively raise a substantial doubt about the Company's ability
to continue as a going concern.
F-30
The ability of the Company to continue as a going concern is dependent on
management's plans, which includes implementation of its business plan and
continuing to raise funds through debt or equity raises. The Company will likely
continue to rely upon related-party debt or equity financing in order to ensure
the continuing existence of the business. Additionally the Company is working on
generating new sales from additional retail outlets, distribution centers or
through sponsorship agreements; and allocating sufficient resources to continue
with advertising and marketing efforts.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result if the Company is
unable to operate as a going concern.
4. Inventory
The following table sets forth the composition of the Company's inventory
at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Raw materials $ 41,219 $ 25,672
Finished goods 120,680 125,306
--------- ---------
Total inventory $161,899 $150,978
========= =========
5. Accounts Receivable
The following table sets forth the composition of the Company's accounts
receivable at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Accounts receivable $186,712 $144,032
Less: Allowance for doubtful accounts (8,023) (4,213)
--------- ---------
Accounts receivable, net $178,689 $139,819
========= =========
Bad debt expense for the three month periods ended March 31, 2011 and 2010
was $4,892 and $1,274 respectively.
6. Prepaid Expenses and Other Current Assets
The following table sets forth the composition of the Company's prepaid
expenses and other current assets at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Employee and other advances $ 29,991 $ 33,930
Security deposits 10,000 10,000
Sponsorship agreements 201,000 -
Miscellaneous, other 22,500 3,000
--------- ---------
Total prepaid expenses and other current assets $263,491 $ 46,930
========= =========
F-31
7. Property and Equipment, Net
The following table sets forth the composition of the Company's property
and equipment at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Equipment $ 18,690 $ 18,690
Furniture and fixtures 9,156 9,156
Vehicles 82,908 91,785
Accumulated depreciation (65,637) 65,350)
--------- ---------
Total property and equipment, net $ 45,117 $ 54,281
========= =========
Depreciation expense for the three month periods ended March 31, 2011 and
2010 was $5,900 and $5,877 respectively. In March 2011, the Company disposed of
one of its vehicles. As a result of the transaction, the Company received cash
proceeds of $250 and recorded a loss of $3,014.
8. Accrued Expenses
The following table sets forth the composition of the Company's accrued
expenses at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Salaries and bonuses (1) $901,756 $ 750,000
Payroll taxes and penalties (2) 346,636 279,370
Professional services 273,513 290,060
Vendor agreement 71,103 71,103
Miscellaneous, other 5,091 -
---------- ----------
Total accrued expenses $1,598,099 $1,390,533
========== ===========
------------------
(1) Due to the shortage of liquidity, the Company's two principal executive
officers have deferred cash payment of their salaries since 2008. At March
31, 2011 and December 31, 2010, the aggregate balance of these deferrals
totaled $812,500 and $750,000, respectively.
(2) At March 31, 2011 and December 31, 2010, the Company was delinquent in
payment of certain payroll taxes due of $278,558 and $225,102,
respectively, and as a result of its failure to pay has accrued penalties
and interest totaling $68,078 and $54,268, respectively.
9. Bank Loans Payable
Bank loans payable are comprised of third party financing arrangements for
vehicles and equipment coolers utilized for the transport and storage of the
Company's products. The original terms were five years, bearing interest rates
that ranged from 9.3% to 18.6%. The following table sets forth the composition
of the Company's bank loans payable at March 31, 2011 and December 31, 2010:
F-32
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Bank loans payable $ 9,439 $ 14,161
Less: Current portion of bank loans payable (7,603) (10,984)
--------- ---------
Long term portion of bank loans payable $ 1,836 $ 3,177
========= =========
10. Convertible, subordinated debentures, net of discount
A summary of the issuances of all convertible notes during the three month
period ended March 31, 2011 and year ended December 31, 2010 are as follows:
Conversion Rate
of
Face Value to
Issue Date Interest Rate Face Value Original Due Date Common Shares
-------------- -------------- ---------- ----------------- ---------------
02/18/2011 12% 500,000 02/18/2014 1.333
---------
Total $500,000
=========
The following table sets forth the composition of the Company's
convertible, subordinated debentures at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Convertible debentures-face value $500,000 $ -
Loan discount (30,080) -
---------
Net convertible notes $469,920 $ -
========= =========
As of March 31, 2011, the Company had one outstanding convertible debenture
with a non-related party in the amount of $500,000. The debenture carries an
annual transaction fee of $30,000 and bears interest at 12% per annum, both of
which are payable in quarterly installments commencing in May 2011. These costs
are recorded as interest expense in the Company's financial statements.
Additionally, the debenture required the Company to issue 125,000 restricted
shares of its common stock to the holder upon execution. The common shares were
valued at $31,250, their fair market value, and recorded as discount to the
debenture. These costs will be amortized using the effective interest method
over the term of the debenture and recorded as interest expense in the Company's
financial statements.
At December 31, 2010, the Company had no subordinated, convertible
debentures outstanding.
11. Loans payable to officers
The following table sets forth the composition of the Company's loans
payable to officers at March 31, 2011 and December 31, 2010:
March 31, Dec. 31,
2011 2010
---------- ---------
(unaudited)
Loans payable to officers $808,731 $1,077,1 0
--------- ---------
$808,731 $1,077,1 0
========= =========
Since the inception of the Company, its principal executive officers have
loaned the Company significant amounts of operating capital on an interest free
basis and without formal repayment terms.
F-33
12. Related Party Transactions and Balances
The Company, through its wholly-owned subsidiary Grass Roots, maintains a
brokerage agreement with a related party named Royal Strategies and Solutions,
Inc. ("RSS"). Under the terms of the agreement, RSS promotes the Company's
products in return for a commission on successful sales or sales agreements. The
Company and RSS share a common base of majority stockholders. Furthermore, the
Company's principal executive officers also serve as corporate officers to RSS.
RSS leases office space and a warehouse which is partially subleased to the
Company. The Company utilizes this space for the warehousing and distribution of
its products. In addition, RSS is financially responsible for other operating
costs and personnel that are utilized by or dedicated to the Company. The
Company, in turn, provides cash financing to RSS; either via allocated charge
backs or non-interest bearing loans.
Under the guidelines of ASC 810.10, Amendments to FASB Interpretation No.
46(R), "if a reporting entity is not the primary beneficiary but has a variable
interest in the variable interest entity, the reporting entity is required to
disclose related information in its financial statements." Based upon tests
performed, the Company has determined that it has a variable interest in RSS but
is not the primary beneficiary; and, therefore has not consolidated the
financial statements of RSS with the Company.
At March 31, 2011, aggregate non-interest bearing advances made to RSS were
$23,345. For the three month periods ended March 31, 2011 and 2010, the Company
recorded $21,448 and $100,221, respectively, in expenses from activity
associated with RSS. These expenses were comprised primarily of employee
compensation and administrative charge backs.
At December 31, 2010, aggregate non-interest bearing advances made to RSS
were $26,493.
In the event the Company discontinued using RSS as a provider of these
brokerage services, it would not have a material impact on the Company's
financial condition or operations.
13. Equity
The Company's authorized capital stock consists of 100,000,000 shares of
common stock, $0.001 par value per share, and 10,000,000 shares of preferred
stock, $0.001 par value per share. The holders of common stock are entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors. Each share of common stock is entitled to one vote.
At March 31, 2011 and December 31, 2010, common stock issued and
outstanding totaled 36,693,980 and 35,828,980, respectively. As of March 31,
2011 and December 31, 2010, preferred stock issued and outstanding totaled
2,155,000 and zero, respectively.
The approximate number of shares of common stock issued and their
respective values for the activity for the changes in common stock between
December 31, 2010 and March 31, 2011 are as follows:
Shares Value of
Issued Issuances
----------- --------
Common stock issued in exchange for services 690,000 $290,500
Common stock issued in connection with private
offerings to accredited investors 50,000 25,000
Common stock issued in connection with the issuance
of convertible, subordinated debentures 125,000 31,250
----------- --------
Total 865,000 $346,750
=========== ========
F-34
In addition to the table above, the Company issued 2,155,000 shares of its
preferred stock during the three month period ended March 31, 2011 in connection
with a private offering to accredited investors. The Company received $538,750
from the preferred stock offering. Since 2007, the Company has issued and sold
preferred stock, common stock and common stock warrants in order to fund a
significant portion its operations. Additionally, the Company has issued shares
of its common stock to compensate its employees and retire debt.
The value of any common stock options and warrants issued during the three
month periods ended March 31, 2011 and 2010 was determined using the following
Black Scholes methodology:
2011 2010
--------- ---------
Expected dividend yield (1) 0.00% 0.00%
Risk-free interest rate (2) 2.01% 1.55%
Expected volatility (3) 121.98% 135.14%
Expected life (in years) 5.00 5.00
------------------
(1) The Company has no history or expectation of paying cash dividends
on its common stock.
(2) The risk-free interest rate is based on the U.S. Treasury yield for a
term consistent with the expected life of the awards in effect at the
time of grant.
(3) The volatility of the Company stock is based on three similar
publicly traded companies.
Common stock warrants immediately vest upon issuance and are exercisable
for a period five years thereafter. The following table reflects the amount of
common stock warrants outstanding and exercisable for the period ended March 31,
2011.
Number
of Weighted Remaining
Warrants Average Contractual
Outstanding Exercise Price Life (Years)
------------ -------------- ----------
Balance, December 31, 2010 3,252,6 $ 1.62 3.04
Warrants issued - $ - -
Warrants exercise - $ - -
------------ -------------- ----------
Balance, March 31, 2011 3,252,6 $ 1.62 2.79(1)
============ ============== ==========
------------------
(1) The remaining contractual life of the warrants outstanding as of March 31,
2011 ranges from 1.83 to 3.75 years.
The Company has not adopted a formal stock option plan. As of March 31,
2011, the Company had committed to issue stock options to two of its employees.
14. Income Taxes
As of March 31, 2011, the Company has available approximately $3,146,010 of
operating loss carryforwards before applying the provision of IRC Section 382,
which may be used in the future filings of the Company's tax returns to offset
future taxable income for United States income tax purposes. Net operating
losses expire beginning in the year 2022. As of March 31, 2011 and December 31,
2010, the Company has determined that due to the uncertainty regarding
profitability in the near future, a 100% valuation allowance is needed with
regards to the deferred tax assets. Changes in the estimated tax benefit that
will be realized from the tax loss carryforwards and other temporary differences
will be recognized in the financial statement in the years in which those
changes occur.
F-35
Under the provisions of the Internal Revenue Code Section 382, an ownership
change is deemed to have occurred if the percentage of the stock owned by one or
more 5% shareholders has increased, in the aggregate, by more than 50 percentage
points over the lowest percentage of stock owned by said shareholders at any
time during a three year testing period. Once an ownership change is deemed to
have occurred under Section 382, a limitation on the annual utilization of net
operating loss carryforwards is imposed and therefore, a portion of the tax loss
carryforwards would be subject to the limitation under Section 382.
The acquisition of Grass Roots Beverage Company, Inc. on July 6, 2010 (see
Note 1) and various other equity transactions resulted in an ownership change
pursuant to Section 382. The utilization of the $123,052 net operating loss as
of December 31, 2009 is limited under IRC Section 382.
The tax years 2007 through 2010 remain open to examination by federal
authorities and state jurisdictions where the Company operates.
15. Subsequent Events
The Company has evaluated for subsequent events between the balance sheet
date of March 31, 2011 and the date the its financial statements were issued and
concluded that events or transactions occurring during that period requiring
recognition or disclosure have been made.
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DNA Brands, Inc.
4,427,000 Shares of Common Stock
PROSPECTUS
__________________, 2011
===============================================================================
UNTIL ____________, 2011, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant are as follows. All amounts, other
than the SEC registration fee, are estimates.
Amount to be Paid
-------------------
SEC registration fee $ 412
Legal fees and expenses 25,000
Accounting fees and expenses 1,000*
Miscellaneous 3,588*
-------------------
Total $ 30,000*
-------------
*estimate only
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Colorado Statutes and our Articles of Incorporation, our directors and
officers will have no personal liability to us or our shareholders for monetary
damages incurred as the result of the breach or alleged breach by a director or
officer of his "duty of care." This provision does not apply to the directors':
(i) acts or omissions that involve intentional misconduct, fraud or a knowing
and culpable violation of law, or (ii) approval of an unlawful dividend,
distribution, stock repurchase or redemption. This provision would generally
absolve directors of personal liability for negligence in the performance of his
duties, including gross negligence.
The effect of this provision in our Articles of Incorporation is to eliminate
the rights of our Company and our shareholders (through shareholder's derivative
suits on behalf of our Company) to recover monetary damages against a director
for breach of his fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the situations
described in clauses (i) and (ii) above. This provision does not limit nor
eliminate the rights of our Company or any shareholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care. Section 7-109-102 of the Colorado Business Corporation
Act provides corporations the right to indemnify their directors, officers,
employees and agents in accordance with applicable law.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In July 2010 we issued 31,250,000 shares of our Common Stock to DNA Beverage
Corporation in consideration for all of the assets, liabilities, contract rights
of DNA Beverage and all of the outstanding shares of Grass Roots Beverage Corp.
In July 2010 we commenced a private offering of our Common Stock whereby we
offered up to 3,000,000 shares at an offering price of $0.50 per share to
"accredited investors" as that term is defined under the Securities Act of 1933,
as amended. We sold an aggregate of 2,160,000 shares in this offering and
received proceeds of $1,030,000 therefrom.
Also in July 2010 we authorized the issuance of 673,980 shares of our Common
Stock to our legal counsel.
In December 2010 we authorized the issuance of 100,000 shares and 20,000 shares
to two individuals.
In January 2011, we authorized the issuance of 600,000 shares of our Common
Stock in consideration for the waiver of a $268,000 cash payment due Star Racing
LLC for the 2011 season.
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In the first quarter of 2011 a number of our employees agreed to defer a portion
of their cash compensation to assist us in improving our liquidity position. In
return, we agreed to file an S-8 registration statement with the SEC to register
900,000 shares of common stock to reimburse the employees with free-trading
shares of our common stock that could be immediately sold and cash proceeds
realized subject to the trading volume of our stock; and, additionally to
provide a means for paying consultants and service providers. This S-8
registration statement became effective on April 14, 2011. As of March 31, 2011
there was $47,500 in accrued payroll related to this arrangement.
Between February and May 2011, we sold 4,427,000 shares of our Series A
preferred stock to a group of private investors at a price of $0.25 per shares.
Each Series A preferred share, at the option of the holder, could at any time be
converted into one share of our common stock. As of July 25, 2011 all Series A
preferred shares had been converted into shares of our common stock.
In February 2011, we issued a secured, convertible debenture to an existing
shareholder in the principal amount of $500,000, which becomes due three years
from the date of issuance. The debenture bears interest at 12% per annum and is
payable quarterly beginning in May 2011. In addition to interest, as inducement
for the maker to loan funds to us, the maker received 125,000 restricted shares
of our common stock contemporaneously with the execution of the debenture.
Further, we agreed to pay to the maker an annual transaction fee of $30,000 in
equal installments on a quarterly basis beginning in May 2011. The balance due
under the debenture is collateralized by all of our assets, including but not
limited to inventory, receivables, vehicles and warehouse equipment. Lastly, we
agreed to issue 750,000 shares of its common stock (the "Escrowed Shares"), in
favor of the maker, to be held in escrow by a mutually agreeable party. In the
event of failure to pay all or any portion of the principal and interest due
under the debenture, including any and all rights to cure, the Escrowed Shares
shall be released to the maker. The Escrowed Shares are not entitled to voting
rights, or to receive any dividends if and when declared unless and until the
Escrowed Shares are released.
We did not authorize the issuance of any other of our securities during the
prior three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
NO. DESCRIPTION FILED WITH DATE FILED
===============================================================================
3.1 Articles of Incorporation Form SB-2 Registration January 22, 2008
Statement (file
No. 333-148773)
3.2 Bylaws Form SB-2 Registration January 22, 2008
Statement (File No.
333-148773)
3.3 Articles of Amendment to Form 8-K/A Dated July 6, October 18, 2010
Articles of Incorporation 2010
filed July 7, 2010
3.4 Statement of Share and Form S-1 Registration December 15, 2010
Equity Exchange filed July Statement *
8, 2010
5 Opinion of Counsel
10.1 Share Exchange Agreement Form 8-K Dated July 6, 2010 July 12, 2010
Between Famous Products,
Inc. and DNA Beverage
Corporation
10.2 Purchase and Sale Agreement Form 8-K Dated July 6, 2010 July 12, 2010
between Famous Products,
Inc. and DNA Beverage
Corporation
10.3 Form of Distribution Amendment No. 1 to Form S-1 February 24, 2011
Agreement with Anheiser Registration Statement *
Busch Distributors
10.4 Form of Vendor Participation Amendment No. 1 to Form S-1 February 24, 2011
Agreement with Walgreen Co Registration Statement *
and Professional Sports Teams
10.5 Form of Advertising and Amendment No. 1 to Form S-1 February 24, 2011
Promotion Agreement with Registration Statement *
Professional Sports Teams
10.6 Letter Agreement with Circle Amendment No. 1 to Form S-1 February 24, 2011
K Stores, Inc. Registration Statement *
10.7 Business Development Amendment No. 1 to Form S-1 February 24, 2011
Agreement with Racetrac Registration Statement *
Petroleum
10.8 Title Sponsorship Agreement Amendment No. 1 to Form S-1 February 24, 2011
with C&R Motorsports LLC Registration Statement *
II-2
10.9 Sponsorship Agreement with Amendment No. 1 to Form S-1 February 24, 2011
Star Racing LLC Registration Statement *
10.10 Memorandum of Understanding Amendment No. 1 to Form S-1 February 24, 2011
between DNA Brands & Star Registration Statement *
Racing LLC
10.11 Sales, Marketing and Amendment No. 1 to Form S-1 February 24, 2011
Manufacturing Agreement with Registration Statement *
Monogram Meat Snacks LLC
10.12 Brokerage Service Agreement Amendment No. 1 to Form S-1 February 24, 2011
with Reese Group, Inc. Registration Statement *
10.13 AAFES Retail Agreement - Amendment No. 1 to Form S-1 February 24, 2011
Army & Air Force Exchange Registration Statement *
Service
10.14 Broker Agreement with Royal Amendment No. 1 to Form S-1 February 24, 2011
Strategies and Solutions, Registration Statement *
Inc.
10.15 Trust Agreement Amendment No. 1 to Form S-1 February 24, 2011
Registration Statement *
10.16 Letter Agreement with Amendment No. 1 to Form S-1 February 24, 2011
Equinox Securities, Inc. Registration Statement *
10.17 12% Secured Convertible Amendment No. 1 to Form S-1 February 24, 2011
Debenture Registration Statement *
10.18 Letter Agreement with Circle Incorporated by Reference March 31, 2011
K Stores, Inc. to Exhibit 10.6 of Form
10-K For Fiscal Year Ended
December 31, 2010
10.19 Business Development Incorporated by Reference March 31, 2011
Agreement to Exhibit 10.7 of Form
With Racetrac Petroleum, 10-K For Fiscal Year Ended
Inc. December 31, 2010
10.20 Vendor Participation Incorporated by Reference March 31, 2011
Agreement with to Exhibit 10.5 of Form
Walgreen Co. and Orlando 10-K For Fiscal Year Ended
Magic December 31, 2010
10.21 Distributor Agreement with Incorporated by Reference March 31, 2011
City to Exhibit 10.8 of Form
Beverages Limited 10-K For Fiscal Year Ended
Partnership December 31, 2010
10.22 Distributorship Agreement Incorporated by Reference March 31, 2011
with Sand to Exhibit 10.9 of Form
Dollar Distributors LLC 10-K For Fiscal Year Ended
December 31, 2010
10.23 Agreement with Walgreens, Amendment No. 2 to Form S-1 April 14, 2011
Florida Division Registration Statement *
10.24 Advertising and Promotion Form 10-Q for Quarter Ended May 16, 2011
Agreement with Indianapolis March 31, 2011
Colts
16.1 Letter of Ronald R. Form 8-K Dated September September 13,
Chadwick, P.C. 10, 2010 2010
16.2 Letter of Ronald R. Form 8-K/A Dated September September 16,
Chadwick, P.C. 10, 2010 2010
21.1 List of Subsidiaries Form S-1 Registration December 15,
Statement * 2010
23.7 Consent of Accountants
23.8 Consent of Counsel
99.1 Press Release Dated July 12, Form 8-K Dated July 6, 2010 July 12, 2010
2010
99.2 Press Release Dated Form 8-K Dated September September 16,
September 16, 2010 16, 2010 2010
--------------------
* File #333-171177.
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ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20% change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser, if the registrant is
subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as
part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of the securities: The undersigned registrant undertakes
that in a primary offering of securities of the undersigned registrant
pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if
the securities are offered or sold to such purchaser by means of any
of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant
to Rule 424;
II-4
(ii) Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned registrant or used or referred to
by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by
the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amended registration statement to be signed on its behalf by the
undersigned on July 28, 2011.
DNA BRANDS, INC.
By:/s/ Darren M. Marks
--------------------------------
Darren M. Marks, Chief Executive
Officer
By:/s/ Melvin Leiner
--------------------------------
Melvin Leiner, Chief Accounting
Officer and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Darren Marks, Chief Executive Officer, as
his true and lawful attorney-in-fact and agent, with full power of substitution
and re-substitution, for him and in his name, place and stead in any and all
capacities, in connection with this Registration Statement, including to sign in
the name and on behalf of the undersigned, this Registration Statement and any
and all amendments thereto, including post-effective amendments and
registrations filed pursuant to Rule 462 under the U.S. Securities Act of 1933,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorney-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this amended Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
--------- ----- ----
/s/ Darren M. Marks
--------------------------- Director and Chief
Darren M. Marks Executive Officer July 28, 2011
/s/ Melvin Leiner
------------------------ Director, Chief
Melvin Leiner Accounting Officer and July 28, 2011
Chief Financial Officer
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