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EX-32.1 - CERTIFICATION - Pulse Beverage Corpexhibit32-1.htm
EX-31.1 - CERTIFICATION - Pulse Beverage Corpexhibit31-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2014

OR

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

Commission File Number: 000-53586

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

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

52,776,037 shares of common stock, par value $0.00001, as of November 14, 2014.


THE PULSE BEVERAGE CORPORATION
FORM 10-Q

INDEX

  PAGE
PART I—FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Condensed Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013 1
   
Condensed Statements of Operations for the three months and nine months ended September 30, 2014 and 2013 (Unaudited) 2
   
Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (Unaudited) 3
   
Notes to Financial Statements 4
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 6
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
   
Item 4. Controls and Procedures 12
   
PART II—OTHER INFORMATION  
   
Item 1. Legal Proceedings 14
   
Item 1A. Risk Factors 14
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
   
Item 3. Defaults Upon Senior Securities 14
   
Item 4. Mine Safety Disclosure 14
   
Item 5. Other Information 14
   
Item 6. Exhibits 14
   
Signature Page 15
   
Certifications  
   
     Exhibit 31.1  
     Exhibit 31.2  
     Exhibit 32.1  


FORWARD-LOOKING STATEMENTS

          This Report on Form 10-Q contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report.  Such statements may be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms, variations of such terms or the negative of such terms.  Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements.  Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources, and accounting matters.  Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation, and other circumstances affecting anticipated revenues and costs, and the risk factors set forth under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.

          YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS

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

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


 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Pulse Beverage Corporation
Condensed Balance Sheets
As of September 30, 2014 (Unaudited) and December 31, 2013

           2014
       $
           2013
      $
 
ASSETS            
             
Current Assets            
             
      Cash   165,778     1,774,994  
      Accounts receivable (Note 3)   800,962     431,399  
      Inventories (Note 4)   1,259,859     1,187,978  
      Other current assets   133,856     195,589  
             
      Total Current Assets   2,360,455     3,589,960  
      Property and equipment, net of accumulated depreciation of $153,192 and $88,740, respectively   323,649     340,052  
      Other assets            
      Loan receivable, net of current portion – related party (Note 5)   178,629     182,738  
      Intangible assets, net of accumulated amortization of $79,483 and $54,228, respectively   1,162,300     1,150,851  
      Total Other Assets   1,340,929     1,333,589  
             
Total Assets   4,025,033     5,263,601  
             
LIABILITIES AND STOCKHOLDERS’ EQUITY            
             
Current Liabilities            
             
      Accounts payable and accrued expenses   687,659     401,418  
             
Total Current Liabilities   687,659     401,418  
             
Stockholders’ Equity            
             
Preferred Stock, 1,000,000 shares authorized, $0.001 par value, none issued         -  
Common Stock, 100,000,000 shares authorized, $0.00001 par value
52,076,037 and 51,654,135 issued and outstanding, respectively (Note 6)
  521     517  
Additional Paid-in Capital   12,935,741     12,668,580  
Deficit   (9,598,888 )   (7,806,914 )
             
Total Stockholders’ Equity   3,337,374     4,862,183  
             
Total Liabilities and Stockholders’ Equity   4,025,033     5,263,601  

(See Notes to Financial Statements)

1


 

The Pulse Beverage Corporation
Condensed Statements of Operations
Three Months and Nine Months Ended September 30, 2014 and 2013
(Unaudited)

    Three Months Ended September 30, 2014
$
    Three Months Ended September 30, 2013
$
    Nine Months Ended September 30, 2014
$
    Nine Months Ended September 30, 2013
$
 
                         
Gross Sales   1,144,846     1,102,026     3,198,935     3,379,815  
Less: Promotional Allowances and Slotting Fees   (107,371 )   (93,314 )   (236,141 )   (251,924 )
Net Sales   1,037,475     1,008,710     2,962,794     3,127,891  
Cost of Sales   721,609     662,944     1,994,117     2,026,118  
                         
Gross Profit   315,866     345,766     968,677     1,101,773  
                         
Expenses                        
      Advertising, samples and displays   28,947     111,703     102,176     242,555  
      Freight-out   118,013     114,898     326,831     345,704  
      General and administration   426,047     394,930     1,264,257     1,183,804  
      Salaries and benefits and broker/agent’s fees   357,562     383,031     1,015,393     1,063,151  
      Stock-based compensation   -     80,792     166     394,845  
                         
Total Operating Expenses   930,569     1,085,354     2,708,823     3,230,059  
                         
Net Operating Loss   (614,703 )   (739,588 )   (1,740,146 )   (2,128,286 )
                         
Other Income (Expense)                        
      Asset impairment   (55,996 )   -     (55,996 )   (7,385 )
      Forgiveness of debt   -     -     -     6,486  
      Interest income, net   1,103     3,214     4,168     13,277  
                         
Total Other Income (Expense)   (54,893 )   3,214     (51,828 )   12,378  
                         
Net Loss   (669,596 )   (736,374 )   (1,791,974 )   (2,115,908 )
                         
Net Loss Per Share – Basic and Diluted   (0.01 )   (0.01 )   (0.04 )   (0.04 )
                         
Weighted Average Shares Outstanding – Basic and Diluted   51,975,000     51,492,000     51,811,000     49,308,000  

(See Notes to Financial Statements)

2


 

The Pulse Beverage Corporation
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2014 and 2013
(Unaudited)

      2014
$
    2013
$
 
Operating Activities            
      Net loss   (1,791,974 )   (2,115,908 )
      Less non-cash items:            
          Amortization and depreciation   89,708     65,701  
          Asset impairment   55,996     7,385  
          Shares and options issued for services   221,166     666,628  
      Changes in operating assets and liabilities:            
      (Increase) in accounts receivable   (369,563 )   (601,359 )
      Decrease in prepaid expenses   6,473     57,346  
      (Increase) in inventories   (124,506 )   (487,866 )
      Increase in accounts payable and accrued expenses   286,241     222,537  
             
Net Cash Used in Operating Activities   (1,626,459 )   (2,300,228 )
             
Investing Activities            
     Repayment of note receivable - related party   3,949     3,794  
     Acquisition of property and equipment   -     (36,240 )
     Acquisition of intangible assets   (36,706 )   (55,722 )
             
Net Cash Used in Investing Activities   (32,757 )   (88,168 )
             
Financing Activities            
     Proceeds from the sale of common stock, net of costs   50,000     4,058,600  
             
Net Cash Provided by Financing Activities   50,000     4,058,600  
             
(Decrease) Increase in Cash   (1,609,216 )   1,670,204  
             
Cash - Beginning of Period   1,774,994     744,906  
             
Cash - End of Period   165,778     2,415,110  
             
Non-cash Financing and Investing Activities:            
             
     Shares and options issued for services, debt and prepaid expenses   217,166     461,483  
             
Supplemental Disclosures:            
             
     Interest paid   2,151     433  
     Income tax paid   -     -  
             

(See Notes to Financial Statements)

3


 

The Pulse Beverage Corporation
Notes to Financial Statements

1. Nature of Operations

  The Pulse Beverage Corporation manufactures and distributes Natural Cabana™ Lemonades, Limeades and Coconut Waters; and PULSE® Heart & Body Health functional beverages.

  The condensed interim financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

  These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these interim financial statements be read in conjunction with the financial statements of the Company for the period ended December 31, 2013 and notes thereto included in the Company's Form 10-K. The Company follows the same accounting policies in the preparation of interim reports.

  Results of operations for the interim periods are not indicative of annual results.

2. Summary of Significant Accounting Policies

  Use of Estimates

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

  Intangible Assets

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

  Revenue Recognition

  Revenue is recognized in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as revised by SAB No. 104. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectability is reasonably assured. Ownership and title of our products pass to customers upon delivery of the products to customers. Certain of our distributors may also perform a separate function as a co-packer on our behalf. In such cases, ownership of and title to our products that are co-packed on our behalf by those co-packers who are also distributors, passes to such distributors when we are notified by them that they have taken transfer or possession of the relevant portion of our finished goods. Net sales have been determined after deduction of discounts, slotting fees and other promotional allowances in accordance with ASC 605-50.

  Recent Pronouncements

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

4


 
3. Accounts Receivable

  Accounts receivable consist of the following:

      September 30, 2014
$
    December 31, 2013
$
 
               
  Trade accounts receivable   786,679     396,014  
  Less: Allowance for doubtful accounts   (13,680 )   (13,680 )
  Trade accounts receivable - net   772,999     382,334  
  Employee advances   1,150     4,366  
  Volume rebate receivable   -     7,000  
  Due from a co-packer   26,813     37,699  
      800,962     431,399  

4. Inventories

  Inventories consist of the following:

      September 30, 2014
$
    December 31, 2013
$
 
               
  Finished Goods   571,841     398,848  
  Deposits on Finished Goods   67,706     54,434  
  Work in Process   15,122     -  
  Raw Materials   605,190     734,696  
      1,259,859     1,187,978  

5. Loan Receivable – Related Party

  Pursuant to a Letter Agreement dated December 24, 2010 between us and Catalyst Development Inc., (“Catalyst”) a company owned by our Chief of Product Development, we loaned $200,000 to Catalyst. The loan bears interest at a rate of 4% per annum, is amortized over 25 years and matures on May 16, 2016 with a balloon payment due in the amount of $174,000. Catalyst repays this loan on a monthly basis at $1,055 principal and interest. As of September 30, 2014, the remaining principal balance due is $184,081 of which $5,452 is current and included in Other Current Assets, the balance of $178,629 is long-term.

6. Common Stock

  During the three months ended September 30, 2014 we issued a total of 250,000 common shares, having an average fair value of $108,000, pursuant to agreements for services rendered. We also received $50,000 pursuant to a subscription; terms and issuance to be determined.

7. Warrants

  As at September 30, 2014 we had 20,234,247 common share purchase warrants outstanding having an average exercise price of $0.62 per common share and having an average expiration date of 1.57 years.

8. Subsequent Events

  We evaluated all subsequent events through the date these financial statements were issued and determined that there are no subsequent events to record and the following subsequent events to disclose:

5


 
  a) we issued 700,000 common shares valued at $212,000 pursuant to service agreements;

  b) we received a further $50,000 pursuant to a subscription;

  c) we incorporated a wholly-owned Mexico subsidiary, Natural Cabana S.A. de CV, on October 13, 2014.

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

The discussion that follows is derived from our unaudited interim Condensed Balance Sheet as of September 30, 2014 and our audited Balance Sheet as at December 31, 2013, our unaudited interim Condensed Statements of Operations for the three months and nine months ended September 30, 2014 and 2013, and our unaudited interim Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013.

Overview

We began production of Natural Cabana® Lemonade in 2011.  Since then, and with this initial product, we developed a nationwide distribution system through more than 150 distributors in 50 US States, Canada, Mexico, Panama, Bermuda and Ireland. We have secured listings with regional and national grocery and convenience chain stores such as Walmart, Albertsons, Kmart, Food City, Gelsons, Sprouts, Safeway, Whole Foods, HEB, Save Mart, Walgreens, Kroger, Price Chopper, 7-Eleven, Winco Foods, HyVee, Fred Myers, RaceTrac Petroleum and others. Our lemonades and limeades are now being sold in more than 20,000 stores and our coconut waters are sold in more than 5,000 stores. Additionally, during the last few months we have received approved listings at nationally recognized chain stores to carry our brands in more than 2,500 stores. 

On June 30, 2014 we began delivering lemonade to Smashburger®, the rapidly expanding “better burger” restaurant, which will now be one of Pulse’s top food service accounts offering Natural Cabana® Lemonade at all 265 locations nationwide. Deliveries to Smashburger are being made through SYSCO and The Sygma Network which represent a new channel of distribution into the multi-billion dollar food service industry.

We have been participating in a Colorado regional Walmart program called “Buy Local, Buy Colorado Proud”. All 7 flavors of Natural Cabana® Lemonades and Limeades were being prominently featured in a ten case floor stacker at over 50 Colorado Walmart locations from September 29, 2014 to October 26, 2014. The four-week event was supported by radio commercials and three two-hour tasting events, which included on-site radio. Due to the success of this program these stores are continuing to carry our products and we are authorized to sell into individual Walmart stores with manager approval in other regions of the United States. To date we have been approved in more than 250 Walmart stores.

We have now been in operation with our first product, Natural Cabana™ Lemonade, for less than three years and have expanded this brand into Limeade and Raspberry Limeade, which started selling in early 2014, and into Natural Cabana™ Coconut Water and Pineapple Coconut Water, which started selling in March, 2014.

Our PULSE® Heart & Body Health functional beverages, originally developed by Baxter Healthcare, will be marketed in a new, non-gender-specific formulation in November. We believe the new formulation will have significantly wider consumer appeal. We have completed the first production run in October, 2014.

We currently develop, produce, market, sell and distribute our brands through our strategic regional and international distribution system, which includes more than 80% Class “A” distributors, such as United Natural Foods, Inc. and distributors for Anheuser Busch, Miller Coors, Pepsi, Coca-Cola, RC/7-Up, Cadbury Schweppes and SYSCO and The Sygma Network.

In the United States, the first quarter of 2014 was one of the coldest, harshest winters in many decades, expectedly impacting sales of lemonade and retailers across the country as delivery trucks throughout the Northeast and Midwest were literally frozen in their tracks. Despite the environmental challenges endured by the overall industry, we remained focused on our planned strategies and spent the second and third quarters catching up on sales and expanding our growth in Natural Cabana® Coconut Water domestically and set the groundwork to expand into Mexico. Based on the success of our Natural Cabana® Coconut Water roll-out in the U.S. and the lack of premium, reasonably priced coconut water available in Mexico, we have incorporated  a wholly-owned subsidiary in Mexico, Natural Cabana S.A. de CV. Our Mexico operations are being headed by Carlos Villarreal and his team, collectively, Borrega Consulting Inc. (“Borrega”).

Borrega is a San Diego based international business development consulting and brokerage firm with expertise in Latin American business development for over 16 years. Mr. Villarreal was responsible for the Mexico introduction and distribution of Monster Energy Drink® in 2004 and led the expansion across all of Mexico up until June, 2010. Mr Villarreal has worked with leading brands such as Dr. Pepper, Snapple, Miller, Patron Tequila, Titos Vodka among others, in their entry/distribution strategies. He has also served as a Director for Anheuser-Busch and for Grupo Modelo (Corona) in the U.S. and Mexico. We are offering our Natural Cabana® Coconut Water in both Natural and Pineapple in 520ml containers for convenience stores and both flavors in smaller 320ml containers for large grocery chains.

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In September, 2014 we secured a distribution agreement with Unique Foods (Canada) Inc. (“Unique Foods”) to distribute Natural Cabana® Coconut Water throughout Canada. Unique Foods is headquartered in Montreal, Canada with an established presence in Atlantic and Western Canada, Ontario and Quebec through coordinators and multiple independent regional distributors. Unique Foods is a leading importer of premium beverage brands such as: Stewart’s Old Fashioned Sodas, Cascade Ice™, Hype Energy™, AQUAhydrate™ and ACTIVATE® Vitamin Drinks. Unique Foods will be offering Pulse’s Natural Cabana® Coconut Water in both Natural and Pineapple flavors in 520ml rolled steel cans. In September Unique Foods showcased Natural Cabana® Coconut Water at two trade shows, CHFA Natural Foods Show in Toronto on September 13th and 14th and Grocery Innovations Show in Toronto on September 28th and 29th. From these tradeshows many major grocery, health and nutrition retailers have already taken on the product and/or approved a listing for 2015.

In October Unique Foods added Corwin Distribution Limited (“Corwin”) to provide sales and distribution across Canada. Corwin is an established Eastern Canada supplier of quality natural and organic products to more than 1,000 retailer and vendor accounts. Through this distribution agreement, Corwin will supply Natural Cabana™ Coconut Water to its natural and health food retailers including Nutrition House, S&H Health Foods, Healthy Planet, Kardish Foods and Pusateri’s Foods to name a few. Nutrition House, one of Canada's leading natural health product franchises, operates 65 retail stores, located in high-profile shopping centers across Canada and in the USA. S&H Health Foods, one of Canada’s leading retailers of nutritional and natural products, operates 28 retail stores in local area shopping malls located throughout the Greater Toronto Area and in other Southern Ontario cities.

In October we received, through Unique Foods’ efforts, a commitment from Sobeys to list Natural Cabana™ Coconut Water in its warehouses where it will be available to all Foodland franchisees as well as more than 300 independent grocery stores. The Canadian franchised Foodland stores are locally owned and operated supermarkets that focus on a no-frills customer convenience, offering a wide selection of conventional supermarket products. Foodland stores are franchised through Sobeys, the second largest food retailer in Canada. Currently there are more than 150 Foodland locations in the province of Ontario and more than 60 in Atlantic Canada.

In November we secured placement of Natural Cabana® Coconut Water into Whole Foods® Market stores in Canada.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2014 (“Q3-2014”) AND 2013 ("Q3-2013")

    Q3-2014
$
    Q3-2013
$
    Increase
(Decrease)

$
 
                   
Gross Sales   1,144,846     1,102,025     42,821  
Less: Promotional Allowances and Slotting Fees   (107,371 )   (93,314 )   14,056  
Net Sales   1,037,475     1,008,710     28,765  
Cost of Sales   721,609     662,944     58,665  
                   
Gross Profit   315,866     345,766     (29,900 )
                   
Expenses                  
      Advertising, samples and displays   28,947     111,703     (82,756 )
      Freight-out   118,013     114,898     3,115  
      General and administration   426,047     394,930     31,117  
      Salaries and benefits and broker/agent’s fees   357,562     383,031     (25,469 )
      Stock-based compensation   -     80,792     (80,792 )
                   
Total Operating Expenses   930,569     1,085,354     (154,785 )
                   
Net Operating Loss   (614,703 )   (739,588 )   (124,885 )
                   
Total Other Income (Expense)   (54,893 )   3,214     58,107  
                   
Net Loss   (669,596 )   (736,374 )   (66,778 )

Net Sales

During Q3-2014, gross revenues, on sales of more than 100,000 cases of Natural Cabana® Lemonade, Limeade and Coconut Water (Q3-2013 – 92,500), before slotting fees and other promotional allowances, increased by $102,173 to $1,144,846 (Q3-2013 - $1,042,673). This is an increase of 10% over Q3-2013. During Q3-2014 we did not sell Pulse® as we were switching to the newly developed, non-gender specific, Pulse® Heart & Body Health. During Q3-2013 we had gross sales of $59,352 of Pulse®.

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Net sales during Q3-2014 increased by $28,765 to $1,037,475 (Q3-2013 - $1,008,710) after slotting fees and other promotional allowances of $107,371 or 9.4% of sales (Q3-2013 - $93,314 or 8.5% of sales). Slotting fees and other promotional allowances increased during Q3-2014, as a percentage of sales, due to the economic decision to pay slotting fees to large retailers such as: Albertsons, Sprouts, Walgreens, Quicktrip and Racetrac Petroleum, which slotting fees amounted to $26,058 during Q3-2014 as compared to $10,573 for Smith Foods only.

Cost of Sales

Cost of sales for Q3-2014 increased by $58,665 to $721,609 (Q3-2013 – $662,944) due to a small increase in sales volume and increased cost of raw materials, mainly because of US anti-dumping petitions against Mexican sugar suppliers. As a percentage of net revenue, cost of sales for Q3-2014 was 69.6% (Q3-2013 – 65.7%). Cost of sales includes raw materials, co-packing services and lab testing. There is increasing price pressure from suppliers of our raw materials. We continue to buy in volume where economically feasible.

Gross Profit

Gross profit for Q3-2014 decreased by $29,900 to $315,866 (Q3-2013 - $345,766) due to higher proportion increase in raw materials to the increase in sales during Q3-2014. Gross profit for Q3-2014 was 30.4% (Q3-2013 – 34.3%). The decrease was due to higher raw material costs as mentioned above.

Expenses

Advertising, samples and displays

During Q3-2014, advertising, samples, in-store demos and in-store display expenses decreased by $82,756 to $28,947 (Q3-2013 - $111,703). As a percentage of net sales, this expense was 2.8%, compared with 11.1% in Q3-2013. This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. We expect this expense to increase in proportion to increases in sales, mainly due to the introduction of Natural Cabana™ Coconut Water and the re-formatted PULSE® Heart & Body Health functional beverages, and due to an overall increase in distribution reach both in the United States and internationally. We expect this expense, as a percentage of sales, to be on average 5% of net revenue. During Q3-2014 we made the decision to reduce in-store sampling and we did not require display racks, ice barrels, sell sheets, shelf strips and door decals at the same rate as Q3-2013.

Freight-out

During Q3-2014, freight-out increased by $3,115 to $118,013 (Q3-2013 - $114,898) due to the increase in case sales. On a per case basis, freight-out increased by $0.08 per case to $1.18 (Q3-2013 - $1.10). This per case increase of $0.08 was due to higher gasoline prices and average proximity of co-packer to distributor. We expect freight-out, on a per case basis, to decrease due to the lower shipping cost of Natural Cabana™ Coconut Water and the lower shipping cost of our PULSE® Heart & Body Health functional beverages.

General and administrative

General and administration expenses for Q3-2014 and Q3-2013 consist of the following:

            Q3-2014
       $
           Q3-2013
       $
    Increase (Decrease)
       $
 
Advisory, board and consulting fees   12,000     8,200     3,800  
Amortization and depreciation   30,435     24,275     6,160  
Legal, professional and regulatory fees   44,938     39,865     5,073  
Office, rent and telephone   80,771     130,268     (49,497 )
Shareholder, broker and investor relations   163,173     92,439     70,734  
Trade shows   5,199     4,690     509  
Travel and meals   89,531     95,193     (5,662 )
                   
    426,047     394,930     31,117  

During Q3-2014, general and administrative expenses increased by $31,117 to $426,047 (Q3-2013 - $394,930). Amortization and depreciation increased by $6,160 due to the increased amortization of our property and equipment. Legal, professional and regulatory fees increased by $5,073 to $44,938 (Q3-2013-39,865) due to a one-time legal expense associated with terminating a distributor contract. Office, rent and telephone decreased by $49,497 to $80,771 (Q3-2013 - $130,268). The decrease is due to a one-time expense and timing issue during Q3-2013. Office, rent and telephone should remain constant at $20,000 per month. During Q3-2014 shareholder, broker and investor relations expense increased by $70,734 to $163,173. Travel and meals decreased by $5,662 to $89,531 (Q3-2013 - $95,193).

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Salaries and benefits and broker/agent’s fees

During Q3-2014, salaries and benefits and broker/agent’s fees decreased by $25,469 to $357,562 (Q3-2013 - $383,031). We expect to increase this cost during the remainder of the year as we hire additional regional and district managers and additional staff for the introduction of the re-formatted PULSE® Heart & Body Health functional beverages and the continued growth of Natural Cabana™ Coconut Water domestically and into Canada and Mexico.

Stock-based compensation

During Q3-2014, we had no further stock-based compensation cost from our stock options granted in 2012. We have no further unrecognized stock-based compensation cost to record. During Q3-2013 we had a reversal of stock-based compensation due mainly to the discontinuance of our equity incentive plan where we reversed out, during Q3-2013, $405,000 of accrued charges to the end of March 31, 2013 resulting in a negative $167,877 in stock-based compensation

Other Income (Expense)

During Q3-2014, we incurred an asset impairment charge of $55,996 for old inventory written-off. During Q3-2014 we received $1,850 (Q3-2013 - $3,647) of interest income from interest earned on our cash balances and long-term note receivable less interest expense of $746 (Q3-2013 - $433).

Net Loss

Net loss for Q3-2014 decreased by $66,778 to $669,596, or $0.01 per share, compared with a net loss for Q3-2013 of $736,374. Our net losses to date, for the most part, continues to be the result of a concentrated effort to establish and increase brand awareness; and establish and improve upon our extensive nationwide and international distribution systems. Our net losses are also due to the development of our brands including: Natural Cabana® Lemonade and Limeade and Coconut Waters and to secure distribution and chain store listings.

NINE MONTHS ENDED SEPTEMBER 30, 2014 (“2014”) AND 2013 (“2013”)

         2014
        $
         2013
         $
    Increase
(Decrease)

         $
 
                   
Gross Sales   3,198,935     3,379,815     (180,880 )
Less: Promotional Allowances and Slotting Fees   (236,141 )   (251,924 )   (15,783 )
Net Sales   2,962,794     3,127,891     (165,097 )
Cost of Sales   1,994,117     2,026,118     (32,001 )
                   
Gross Profit   968,677     1,101,773     (133,096 )
                   
Expenses                  
      Advertising, samples and displays   102,176     242,555     (140,379 )
      Freight-out   326,831     345,704     (18,873 )
      General and administration   1,264,257     1,183,804     80,453  
      Salaries and benefits and broker/agent’s fees   1,015,393     1,063,151     (47,758 )
      Stock-based compensation   166     394,845     (394,679 )
                   
Total Operating Expenses   2,708,823     3,230,059     (521,236 )
                   
Net Operating Loss   (1,740,146 )   (2,128,286 )   (388,140 )
                   
Total Other Income (Expense)   (51,828 )   12,378     64,206  
                   
Net Loss   (1,791,974 )   (2,115,908 )   (323,934 )

Net Sales

During 2014, gross revenues, on sales of 280,150 cases of Natural Cabana® Lemonade, Limeade and Coconut Water (2013 – 295,342), before slotting fees and other promotional allowances, decreased by $106,693 to $3,197,536 (2013 - $3,304,229).  Net sales during 2014 decreased by $165,097 to $2,962,794 (2013 - $3,127,891) after slotting fees and other promotional allowances of $236,141 or 7.4% of sales (2013 - $251,924 or 7.0% of sales). The reason 2014 results are lower than 2013 is due to Q1-2014 being one of the coldest, harshest winters in many decades, expectedly impacting sales of lemonade and retailers across the country. The last two quarters we have been catching up on sales.

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Cost of Sales

Cost of sales for 2014 decreased by $32,001 to $1,994,117 (2013 – $2,026,118) due to a decrease in sales volume and increased cost of raw materials, mainly because of US anti-dumping petitions against Mexican sugar suppliers. As a percentage of net revenue, cost of sales for 2014 was 67.4% (2013 – 64.8%). Cost of sales includes raw materials, co-packing services and lab testing. There is increasing price pressure from suppliers of our raw materials. We continue to buy in volume where economically feasible.

Gross Profit

Gross profit for 2014 decreased by $133,096 to $968,677 (2013 - $1,101,773) due to a higher proportion increase in raw materials to the increase in sales during 2014. Gross profit for 2014 was 32.7% (2013 – 35.2%).

Expenses

Advertising, samples and displays

During 2014, advertising, samples, in-store demos and in-store display expenses decreased by $140,379 to $102,176 (2013 - $242,555). As a percentage of net sales, this expense was 3.4%, compared with 7.8% in 2013. This expense includes in-store sampling, samples shipped to distributors, display racks, ice barrels, sell sheets, shelf strips and door decals. We expect this expense to increase in proportion to increases in sales, mainly due to the introduction of Natural Cabana™ Coconut Water and the re-introduced PULSE® brand of Heart Healthy functional beverages, and due to an overall increase in distribution reach both in the United States and internationally. We expect this expense, as a percentage of sales, to be on average 5% of net revenue. During 2014 we made the decision to reduce in-store sampling and we did not require display racks, ice barrels, sell sheets, shelf strips and door decals at the same rate as 2013.

Freight-out

During 2014, freight-out decreased by $18,873 to $326,831 (2013 - $345,704) due to the decrease in case sales and because very few shipments were made to a large area of the United States because of bad weather during the early part of 2014. On a per case basis, freight-out increased by $0.04 per case to $1.17 (2013 - $1.13). This per case increase was due to higher freight costs and poor weather issues. We expect freight-out on a per case basis to decrease due to the lower shipping cost of Natural Cabana™ Coconut Water and the lower shipping cost of our PULSE® brand of Heart Healthy functional beverages.

General and administrative

General and administration expenses for 2014 and 2013 consist of the following:

            2014
       $
           2013
       $
    Increase (Decrease)
       $
 
Advisory, board and consulting fees   36,000     72,279     (36,279 )
Amortization and depreciation   89,708     65,701     24,007  
Legal, professional and regulatory fees   121,173     133,561     (12,388 )
Office, rent and telephone   236,871     308,618     (71,747 )
Research and development   34,596     -     34,596  
Shareholder, broker and investor relations   435,214     300,412     134,802  
Trade shows   41,723     10,350     31,373  
Travel and meals   268,972     292,883     (23,911 )
                   
    1,264,257     1,183,804     80,453  

During 2014, general and administrative expenses increased by $80,453 to $1,264,257 (2013 - $1,183,804). We reduced our advisory, board and consulting fees by $36,279 due to the reduction of one advisory board member. Amortization and depreciation increased by $24,007 due to the increased amortization of our property and equipment. Legal, professional and regulatory fees decreased by $12,388 to $121,173 (2013- $133,561). Office, rent and telephone decreased by $71,747 to $236,871 (2013 - $308,618). The decrease is due to a one-time expense and timing issue during 2013. Office, rent and telephone should remain constant at $20,000 per month. During 2014 shareholder, broker and investor relations expense increased by $134,802 to $435,214. Trade shows increased by $31,373 to $41,723 (2013 - $10,350) due to attending a number of additional financial and product trade shows during 2014. Travel and meals decreased by $23,911 to $268,972 (2013 - $292,883).

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Salaries and benefits and broker/agent’s fees

During 2014, salaries and benefits and broker/agent’s fees decreased by $47,758 to $1,015,393 (2013 - $1,063,151). We expect this cost will increase during the remainder of the year as we hire additional regional and district managers and additional staff for the introduction of the re-formatted PULSE® Heart & Body Health functional beverages and the continued growth of Natural Cabana™ Coconut Water domestically and into Canada and Mexico.

Stock-based compensation

During 2014, we had recognized $166 of the remaining unrecognized stock-based compensation cost from our stock options granted in 2012. We have no further unrecognized stock-based compensation cost to record. During 2013 we had a reversal of stock-based compensation due mainly to the discontinuance of our equity incentive plan where we reversed out, during 2013, $405,000 of accrued charges.

Other Income (Expense)

During 2014, we incurred an asset impairment charge of $55,996 for old inventory written-off. During 2013 we incurred an asset impairment charge for manufacturing and display equipment that we no longer used. During 2014, we recognized a forgiveness of debt gain of $nil (2013 - $6,486). During 2014 we received $6,319 (2013 - $13,710) of interest income from interest earned on our cash balances and long-term note receivable less interest expense of $2,151 (2013 - $433).

Net Loss

Net loss for 2014 decreased by $323,934 to $1,791,974, or $0.04 per share, compared with a net loss for 2013 of $2,115,908, or $0.04 per share. Our net losses to date, for the most part, continue to be the result of a concentrated effort to establish and increase brand awareness; and establish and improve upon our extensive nationwide and international distribution systems. Our net losses are also due to the development of our brands including: Natural Cabana® Lemonade and Limeade and Coconut Waters and to secure distribution and chain store listings.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the nine months ended September 30, 2014, our cash position decreased by $1,609,216 to $165,778, and our working capital position decreased by $1,515,746 to $1,672,796. We have no long-term debt. As at September 30, 2014, our working capital consisted of: cash of $165,778; customer accounts receivable of $772,999, net of an allowance for bad debts of $13,680; other receivables of $27,963, inventories of $1,259,859 (including finished product of $571,841, deposits towards finished goods to be manufactured of $67,706, work in process of $15,122, and raw materials of $605,190); and other current assets of $133,857. Our accounts payable were $687,659.

The following table sets forth the major sources and uses of cash for the nine months ended September 30, 2014 (“2014”) and 2013 (“2013”):

    2014
$
    2013
$
 
Net cash used in operating activities   (1,626,459 )   (2,300,228 )
Net cash used in investing activities   (32,757 )   (88,168 )
Net cash provided by financing activities   50,000     4,058,600  
Net increase (decrease) in cash   (1,609,216 )   1,670,204  

Cash Used in Operating Activities

During 2014, we used $1,626,459 (2013 - $2,300,228) in operating activities. This was made up of the net loss of $1,796,059 (2013 - $2,115,908), less adjustments for non-cash items such as: shares and options issued for services of $221,166 (2013 - $666,628), asset impairment charge of $55,996 (2013 - $7,385), and amortization and depreciation of $89,708 (2013 - $65,701), all totaling $366,870 (2013 - $739,714). After non-cash items, the net loss was $1,429,189 (2013 - $1,376,194). We used $197,270 (2013 - $809,342) in net increases in operating assets and liabilities. We used $369,563 (2013 - $601,359) due to an increase in accounts receivable, and $124,506 (2013 - $487,866) due to increases in inventory levels. We received $286,241 (2013 - $222,537), due to credit extended by our suppliers resulting in increases in accounts payable. We received $6,473 from an increase in prepaid expenses (2013 – $57,346). 

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Cash Used in Investing Activities

During 2014, we used $32,757 for investing activities. A total of $26,139 was spent on trademarking and $10,566 on Pulse® formula documentation and approvals. We received $3,949 in principal repayments against our long-term loan receivable.    

During 2013 we used $88,168 in investing activities. We spent $36,240 on die cuts, coolers, office equipment and a two delivery vans. We spent $12,892 on formulation costs associated with bringing PULSE® into commercial production. These costs were associated with third party lab testing and consultants to document and review our PULSE® formulas. We also spent $14,805 advancing our trademarks for PULSE® and Natural Cabana® and we spent $28,025 to develop and launch a new website including on-line shopping capabilities.

Cash Provided by Financing Activities

During 2014, we received $50,000 from subscription proceeds. Terms of the subscription are subject to terms of a new private equity offering currently being completed. 

During 2013, we received $4,058,600 from financing activities. We received $4,102,700, net of $156,600 of share issuance costs, and issued 10,256,750 common shares and 10,256,750 common share purchase warrants pursuant to our $0.40 Unit offering. We received $100,000 and issued 125,000 common shares and 125,000 common share purchase warrants pursuant to our $0.80 Unit offering. We received $12,500 and issued 25,000 common shares pursuant to a stock option being exercised by a consultant at $0.50 per share.  

Additional Capital

As a result of our operating losses, we will need additional capital. We have more than 20 million warrants outstanding to purchase up to 20 million common shares at an average exercise price of $0.62 per common share, which could, if exercised, raise us in excess of $12.5 million. We have no assurance, however, that we will ever see this additional money, as the warrant holders must first choose to exercise their warrants.

OFF BALANCE-SHEET ARRANGEMENTS

We have not had, and at September 30, 2014, do not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumption and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. While there are a number of significant accounting policies affecting our financial statements, we believe the critical accounting policies involving the most complex, difficult and subjective estimates and judgments are: revenue recognition, stock-based compensation and use of estimates as discussed in Note 2 to the interim unaudited Condensed financial statements included in Item 1 to this Form 10Q.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Robert Yates, who is both our chief executive officer and our chief financial officer, is responsible for establishing and maintaining our disclosure controls and procedures.  Disclosure controls and procedures are designed to ensure that information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed by us in those reports is accumulated and communicated to the our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.  Our chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2014. Based on that evaluation, it was concluded that our disclosure controls and procedures were effective as of September 30, 2014.

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Changes in internal controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties described in Item 1A of our 2013 Form 10-K.  In our judgment, there were no material changes in the risk factors as previously disclosed in Item 1A of our 2013 Form 10-K.

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

  On July 1, 2014, we issued 150,000 common shares having a fair value of $72,000 pursuant to a service agreement;

  On September 29, 2014, we issued 100,000 common shares having a fair value of $36,000 pursuant to a service agreement.

Subsequent to September 30, 2014, we issued the following securities in unregistered transactions:

  On October 1, 2014, we issued 100,000 common shares having a fair value of $36,000 pursuant to a service agreement.

  On October 22, 2014, we issued 500,000 common shares having a fair value of $150,000 pursuant to a service agreement.

  On October 1, 2014, we issued 100,000 common shares having a fair value of $26,000 pursuant to a service agreement.

We relied upon the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) in connection with issuance of these securities.  The persons who acquired these securities were “sophisticated investors” and were provided full information regarding our business and operations. There was no general solicitation in connection with the offer or sale of these securities. The persons who acquired these securities acquired them for their own accounts. The certificates representing the shares of common stock will bear restricted legends providing that they cannot be sold except pursuant to an effective registration statement or an exemption from registration under the Securities Act. No commission was paid to any person in connection with the issuance of these securities.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

None. 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The following documents are included herein:

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

*Provided herewith

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

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SIGNATURES

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


  THE PULSE BEVERAGE CORPORATION
   
Date: November 14, 2014 BY:  /s/ Robert Yates
    Robert Yates, President, Chief Executive, Financial and  Operating Officer, and Treasurer (Principal Executive Officer, Principal Financial Officer & Principal Accounting Officer)

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