UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10K


x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010oro
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from          to





DC BRANDS INTERNATIONAL, INC.





Colorado(State or Other Jurisdiction of Incorporation or Organization)2833(Primary Standard Industrial Classification Code Number)20-1892264(I.R.S. Employer Identification No.)9500 W. 49th Avenue, Suite D-106

Wheat Ridge, CO 80033(Address and telephone number of principal executive offices)9500 W. 49th Avenue, Suite D-106

Wheat Ridge, CO 80033(Address of principal place of business or intended principal place of business)





(303) 591-2029


Phone Number




Securities registered pursuant to Section 12(b) of the Exchange Act:  None




Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  o




Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o     No  x





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 past 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  o      No  x





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 Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files ) Yes  o No  o











Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   Yes o




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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer
 ̈
Accelerated filer
 ̈Non-accelerated filer
 ̈
Smaller reporting company
x(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).




Yes  o No  x




The number of shares of the issuer’s common stock issued and outstanding as of  March 24, 2011 was 344,413,849 shares.




State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second  fiscal quarter. $1,184,750 based upon $0.05 per share which was the last price at which the common equity purchased by non-affiliates was last sold.


Documents Incorporated By Reference:  None
















DC BRANDS INTERNATIONAL, INC.




FORM 10-K




For the Year Ended December 31, 2010









PagePART I.Item 1.
Business
1Item 1A.
Risk Factors
10Item 2.
Properties
18Item 3.
Legal Proceedings
19Item 4.
(Removed and Reserved)
19PART II.Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
19Item 6.
Selected Financial Data
21Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21Item 8.
Financial Statements and Supplementary DataItem 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
28Item 9A.
Controls and Procedures
28Item 9B.
Other Information
29PART III.Item 10.
Directors, Executive Officers of the Registrant and Corporate Governance
30Item 11.
Executive Compensation
33Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
34Item 13.
Certain Relationships and Related Transactions and Director Independence
35Item 14.
Principal Accounting Fees and Services
35PART IV.Item 15.
Exhibits and Financial Statement Schedules
37







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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS




This Annual Report on Form 10-K contains forward-looking statements including, in particular, statements about future events, future financial performance including earnings estimates, plans, strategies, expectations, prospects, competitive environment, regulation and availability of raw materials. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words“may,”“will,”“expect,”“anticipate,”“believe,”“estimate,”“plan,”“intend”or the negative of these terms or similar expressions in this Annual Report on Form 10-K. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections, as well as a variety of other risks and uncertainties and other factors, and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements.





Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update the forward-looking statements, and the estimates and assumptions associated with them after the date of this Annual Report on Form 10-K, except to the extent required by applicable securities laws. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed in Item 1A, "Risk Factors" under“Risks Related to Our Business”and elsewhere in this Annual Report on Form 10-K. These risk factors may not be exhaustive as we operate in a continually changing business environment with new risks emerging from time to time that we are unable to predict or that we currently do not expect to have a material adverse effect on our business. You should carefully read this report in its entirety as it contains important information about our business and the risks we face.




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Item 1.  Business





Company Overview





We specialize in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body.    Our current focus is on the sale of our products under our H.A.R.D Nutrition label.  To date, a substantial portion of our revenue has been derived from the sale of our products under this label. We currently have two distinct types of product that are sold under our H.A.R.D. Nutrition logo; our Functional Water System and nutritional supplements.  The Functional Water System and nutritional supplements can each be further categorized into four sub product lines; each line tailored to different health and daily needs: our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. Our H.A.R.D. Nutrition Functional Water System provides consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage. All of the products sold under our H.A.R.D. Nutrition Functional Water System are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle.  The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top compartment.  We also sell other products included in our H.A.R.D. Nutrition label such as herbal supplements which are made from a mixture of herbs and have been formulated to help maintain good health  by providing the supplements that we believe are needed by our  body but cannot be readily obtained from foods.





To date, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through a variety of distributors  and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain. We also sell products directly from our corporate headquarters and through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to expand our marketing efforts in the United States beyond the local Colorado area.





We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our anticipated acquisition of DC Brands, LLC.  Our principal offices are located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033.  Our telephone number is 303-279-3800.  Information about our products can be obtained from our website www.hardnutrition.com.








BUSINESS





We, together with our wholly owned subsidiary, DC Nutrition, Inc., specialize in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body.    Our current focus is on the sale of our products under our H.A.R.D Nutrition label.  To date, a substantial portion of our revenue has been derived from the sale of our products under this label. We currently have two distinct types of product that are sold under our H.A.R.D. Nutrition logo; our Functional Water Systems and nutritional supplements.  The Functional Water Systems and nutritional supplements can each be further categorized into four sub product lines; each line tailored to different health and daily needs: our performance, strength and training line, our wellness and beauty line, our weight loss and diet line and our energy line. Our H.A.R.D. Nutrition Functional Water Systems provide consumers with the convenience of the unique combination of nutraceutical supplements with a functional beverage.  All of the products sold under our H.A.R.D. Nutrition Functional Water Systems are sold in a bottle which combines in one container water, which is lightly flavored, with vitamins stored in our patented, licensed flip top compartment on the top of the bottle.  The water provides the hydration and catalyst needed for absorption of the specially formulated nutraceutical capsules contained in the bottle’s flip top cap compartment.  During the year ended December 31, 2010, we derived $538,888 representing 89% of our revenue from sales of our Functional Water Systems.  During the year ended December 31, 2009, we derived $548,382, representing 87% of our revenue from sales of our Functional Water Systems.





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The other products sold under our H.A.R.D. Nutrition label are traditional supplements “not in the cap on top of the Water Systems” which are made from a mixture of herbs and have been formulated to help maintain good health by providing the supplements that we believe are needed by our body but cannot be directly obtained from foods.  Our sale of nutritional supplements has not generated as much revenue as the sale of our Functional Water Systems. During the year  ended December 31, 2010, we derived $66,604 representing 11% of our revenue from sales of our H.A.R.D. Nutritional Supplement products.  During the year ended December 31, 2009, we derived $81,143, representing 13% of our revenue, from sales of our nutritional supplements.





To date, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through  a variety of distributors and directly to retail stores and health and fitness establishments, including the Max Muscle retail health and fitness chain as well as a few health and fitness and gym locations.  We also sell products directly from our corporate headquarters and through our website. Subject to being able to secure sufficient capital on commercially acceptable terms and attractive commercial prospects, we intend to expand our marketing efforts in the United States beyond the local Colorado area.





We were incorporated in 1998 in Colorado under the name Telamerge Holding Corp. In 2004, we changed our name to DC Brands International, Inc. in connection with our anticipated acquisition of DC Brands, LLC.





We have only recently commenced operations of products that are sports and fitness based nutraceutical supplements under the H.A.R.D. Nutrition label.  In fact, our first functional water sales were made in August of 2009.  Prior to 2006, our main focus was on the manufacture and sale of energy drinks.





Our principal offices are located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033.  Our telephone number is 303-279-3800.  Information about our products can be obtained from our website www.hardnutrition.com.





History





We were incorporated under the laws of the State of Colorado on April 29, 1998 as (“Telamerge”).  Telamerge was originally formed for the purpose of, and engaged in the business of providing telemarketing services.  Telamerge did not have meaningful business activity prior to its acquisition of DC Brands, LLC, a Florida limited liability company in 2004.





In 2002, DC Brands, LLC began the development and distribution of energy drinks under the labels “Dickens Energy Cider” and “Turn Left Energy Drink”.   In August 2004, in connection with our new business plan and the anticipated acquisition of DC Brands, LLC, Telamerge changed its name to DC Brands International, Inc. DC Brands, LLC became our wholly owned subsidiary which is now inactive.  In November 2004, DC Brands International, Inc. acquired all of the outstanding membership interest of DC Brands, LLC in exchange for the assumption of certain debt of DC Brands, LLC. On December 3, 2004, we effectuated a 120:1 forward split of our issued and outstanding shares of common stock. In 2006, we acquired the assets of Health Advantage Research and Development, Inc., a sports and fitness- based nutraceutical and supplement company.





In 2007, we changed the focus of our business away from carbonated energy drinks that contained sugar and caffeine to developing, marketing, distributing and selling health related products that are natural based and contain vitamins.  In July 2007, we acquired the assets of Hard Nutrition, Inc. and commenced production and marketing of our health drink/supplement combination under our current HARD Nutrition label.  In September 2007, we effectuated a 10:1 reverse split of our issued and outstanding shares of common stock. Since we have outsourced our manufacturing and have no prior or future commitment for any specified quantity of products, we did not incur any manufacturing costs when we terminated production of the carbonated energy drinks; however as a result of such termination in 2008 we wrote off $2,924,000 of intellectual property related to formulas and other intangibles used in the carbonated energy drink business.  Also in 2008 we wrote off an additional  $8,541,669 of intellectual property related to the formulas and other intellectual property used in the carbonated energy drinks business and we incurred in excess of $200,000 in capital expenditures related to production and manufacturing expenses incurred in connection with our new line of business. In 2009, we commenced sales of our Functional Water Systems.





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Existing Products





We currently sell two distinct types of products under our H.A.R.D. Nutrition label including our   Functional Water Systems and our Nutritional Supplements. Each product line is further divided into similar categories based upon its targeted results, namely our performance, strength and training products,   wellness products,   energy products and weight loss and diet products.  Each product was developed to attain its desired result based upon our research of third party documented studies as to which vitamins and herbs are likely to produce our desired results.  After establishing what we believe the general consensus is regarding a particular nutraceutical’s typical effects, we then create mixtures of products to help achieve the desired result.  We don’t use any “secret” ingredients or seek to include any particularly unusual vitamins and herbs in our products but rather seek to rely on established expectations regarding the intended effects of such nutraceuticals, recognizing that such intended effects have not been confirmed in any respect by the U.S. Food and Drug Administration or any other governmental agency, and as such may, in fact, not be effective.  We do not engage in formal testing of the achievement of desired results of our products but do receive feedback from existing customers which is recorded and referred to when modifying or creating new products.  We believe what makes us unique is not necessarily the vitamin and herb combinations chosen by our herbalist in our products themselves, but rather our ability to deliver those chosen nutraceuticals in our patented flip-topcap together with each product in our Functional Water System rather than relying on delivering the vitamins and herbs in only liquid form as part of the actual drink, as our competitors do.





Our Functional Water Systems




Our Functional Water Systems are a unique combination of a functional beverage and a nutraceutical.  Due to our unique bottle design we are able to provide consumers with a combination of a beverage and a nutraceutical supplement all in one convenient bottle. We currently manufacture nine unique water systems, each of which is designed to provide a specific functional benefit for the body and can be further categorized into one of our four subcategories based upon the functional benefit desired (performance, strength and training- fitness- wellness and beauty- weight loss and diet and energy).  Each system includes supplements, vitamins and minerals that are enclosed in our proprietary licensed cap which is attached to our bottle filled with a lightly flavored water specially formulated to act as a catalyst for the enclosed supplements. When the supplements and flavored water are combined they provide the body with the nutrients needed to achieve the desired result.  Wrapped around each bottle is a rubber bracelet with our message “Your life won’t change until you change your life” which we believe creates a unique brand loyalty and identification tool.  It is hard for us to imagine someone wearing our bracelet going back to drinking flavored water pretending to have vitamins.  The Functional Water Systems have a shelf life of one year, which is the shelf life in the industry for most of the products stored in PET bottles that contain vitamin additives.  We conduct periodic tests of the color, flavor and desired results of our products in house.  Each product contains a label with a date stamp that specifies the shelf life.  Under our agreement with Acosta, Inc., Acosta, Inc. as part of its service is  responsible for maintaining stocked shelves of our products and checking expiration dates of products.





Our nine different systems are The Daily Basics, The Fat Fighter, The Get Over It-Feel Better Now, Whacked Energy, Wide Awake, Win, Fix It, Cleanse +, and Rebuild and Recover.  The Daily Basics is a wellness product that includes vitamins and supplements.  The Fat Fighter falls under the diet and weight loss category. The Get Over It-Feel Better Now is a wellness product that is a blend of vitamins, herbs and minerals. The Get Over It-Feel Better Now water system is currently being sold in certain hotels in Las Vegas on a trial basis and is being stocked in the guest rooms  in the hotels and is being marketed to combat hangovers.   Whacked Energy and Wide Awake are part of our energy line.  Win is geared towards athletes for use when conducting fitness training.. Fix It! is a combination of herbs and supplements. Cleanse+ is a 12 day total body cleansing system intended to be taken once every 90 days and Rebuild and Recover is a very potent combination of products targeted towards the serious athlete. All of our products contain ingredients that are intended to provide health related benefits. For example, many of the products in our energy line include Ginko biloba, which has been shown in several studies to help improve focus and help concentration and improve blood flow to the brain. (See Gessner B, Voelp A, and Klasser M in Arzneimittelforschung. 1985;35(9):1459-65.(1985);Adams LL, Gatchel RJ, Gentry C. Complementary and alternative medicine: applications and implications for cognitive functioning in elderly populations. Altern Ther HealthMed. 2001;7(2):52-61;Kleijnen, J and P. Knipschild. 1992. Ginkgo biloba for cerebral insufficiency. Br. J. Clin. Pharmac. 34:352358.)





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We commenced sales of our H.A.R.D. Nutrition Functional Water Systems in August 2009 at King Soopers.  During the year  ended December 31, 2010, we derived $538,888 representing 89% of our revenue from sales of our Functional Water Systems.  During the year ended December 31, 2009, we derived $548,382, representing 87% of our revenue from sales of our Functional Water Systems.




The H.A.R.D. Nutrition Functional Water Systems are primarily sold in retail establishments.  Approximately 86% of our total revenue for the year ended 2010 derived from sales of our H.A.R.D. Nutrition Functional Water beverages has been derived from sales to King Soopers supermarkets, which is a division of Kroger Foods through two distributors. Inasmuch as we have only recently begun selling our H.A.R.D. Nutrition Functional Water Systems products we do not believe that we have enough data to determine whether any one product sales will consistently surpass those of the other products.


Our Nutritional Supplements




Our H.A.R.D. Nutrition Supplements are sold primarily though our wholly owned subsidiary DC Nutrition, Inc. and are aimed at athletes and improving performance. We currently have approximately 300 products in this product line which we divide into the four categories previously discussed:  performance and strength supplements, wellness products, energy supplements and the weight loss and diet products.





Our second largest product line in terms of sales revenue is our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2010, we derived $66,604 representing 11% of our revenue from sales of our H.A.R.D. Nutritional Supplement products. During the year ended December 31, 2009, we derived $81,143, representing 13% of our total revenue from sales of our H.A.R.D. Nutritional Supplement products.  The H.A.R.D. Nutritional Supplement products are primarily sold to retailers or by orders placed at our corporate headquarters, website and certain smaller retail establishments such as gyms and fitness centers.





During the last two years we did not spend any funds on research and development activities.





Marketing





To date, our marketing focus has been in the Colorado area.  We have used various forms of advertising as part of our marketing campaign.  Our marketing strategy has included associations with well know public figures in the Colorado area in an effort to capitalize on their notoriety.





In October 2009, we entered into an Endorsement Agreement with Chris Andersen, a professional basketball player with the National Basketball Association’s Denver Nuggets.  The agreement provides that for a one year period, which was extended by Mr. Anderson in October 2010 for an additional year, we have on a limited basis the right to use Mr. Andersen’s name, nickname, initials, photograph and likeness in connection with the advertisement, promotion and sale of our beverages under the trade name H.A.R.D. Nutrition.  As compensation for such services we have issued Mr. Andersen shares of our common stock. We have engaged in an aggressive radio marketing campaign in the Colorado area.  In July, the Company was appointed the official sponsor of the KOA / Broncos Radio throughout the 2009 football season. The radio station has approximately 153,000 listeners at any given time.  Dave Logan, a former NFL player and one of the radio station’s announcers has also been promoting our products on the air. The company promotional agreement with Mr. Logan continues into 2011.  The company chose not to sponsor the Broncos in 2010.





We have attended various trade shows.  The H.A.R.D. Nutrition Functional Water System was introduced to the public in September 2008 at a Mr. Olympic Body Building Show in Las Vegas and at the National Convenience Stores Show in Chicago a few weeks later.





We began to market our products on television beginning May 2010.  TV appearances include appearance on the local television show “Colorado & Company” as well as a profile on the “Hay Stacks Colorado” segment during the Rachel Rae Show in May 2009.  The Company produced a 60 second commercial that talks about all of our products as well as 30 commercials discussing individual products.




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In addition, to the radio and media campaign, the Company offers free seminars at its headquarters geared toward gyms and fitness centers where free product samples are distributed and educational information about the products and nutrition are disseminated.





Funding





To date, we have met substantially all of our financing needs through private sale of shares of our common stock and other equity securities and loans from investors.  We have raised a total of approximately $15,000,000 from our equity and debt financings subsequent to our acquisition of DC Brands, LLC in 2004. In addition, we have recently entered into an accounts receivable factoring agreement with Liquid Capital Exchange, Inc. (“Liquid Capital”) pursuant to which we have agreed to sell, and Liquid Capital has agreed to purchase, certain of the accounts arising from the sale of our products.  Liquid Capital in its sole discretion may advance up to 80% of the face amount of the accounts purchased less an applicable discount fee up to a maximum of $750,000.  In order to secure our payment of all our indebtedness and obligations to Liquid Capital, we granted Liquid Capital a security interest and lien upon our accounts and our other assets. The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement. In January 2011 we entered into a $10 million equity funding facility with Centurion Private Equity, LLC, which is subject to various conditions being met prior to our use of the facility. There can be no guarantee that any funds will be derived from the equity line. If our revenue from sales and payments derived from our factoring arrangement and financing from our equity funding facility is not sufficient to meet our ongoing expenses we will need additional financing.





MANUFACTURING AND QUALITY CONTROL





Our products are manufactured by third parties and we are reliant upon these third parties to maintain proper quality control.   Our manufacturer is required to maintain good manufacturing compliance.  We also do our own random testing of our products to ensure that they meet our specific quality standards.  Inasmuch as we do not manufacture the products, we are not subject to good manufacturing regulations, however we are subject to inspection of our corporate headquarters where the raw materials of our products are kept in inventory.





DISTRIBUTION





To date, our market focus has been in the Colorado area, where we have sold products indirectly to retail stores, including the King Soopers grocery store chain, through  a variety of distributors and directly to retail stores and  health and fitness establishments, including the Max Muscle retail health and fitness chain. Until recently, our distribution efforts have been limited due to our oral agreement with King Soopers not to provide products to other grocery stores. Given sufficient capital and attractive commercial prospects, we intend to expand our distribution effort throughout the United States.  However establishing a successful distribution network nationwide will require the expenditure of substantial amounts of capital.





We have recently entered into an agreement with Acosta, Inc. to provide future retail distribution services, to facilitate our warehouse direct sales.  The agreement provides that Acosta will maintain regular store visits in an effort to maintain shelf requirements.  Acosta is entitled to a commission of 5% of net sales (as defined in the agreement) for product sales to certain specified customers in the defined territory.  The term of the agreement is month to month and either party can terminate the agreement upon 30 days advance notice.   Prior to entering into the agreement with Acosta, Inc. a substantial portion of our revenue derived from product sales was from products distributed by Cold Front Distribution.  Although we anticipate that we will still have a portion of our products distributed by Cold Front Distribution and other distributors, especially those that are not warehouse direct sales, we do not anticipate that a substantial portion of our future revenue will be derived from product sale by such distributors. We do not have a written agreement with Cold Front Distribution and all sales are made based upon a purchase order negotiated at the time of sale.





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SOURCES AND AVAILABILITY OF RAW MATERIALS AND SUPPLIERS





Our raw materials are obtained from a variety of suppliers, some of which are located in foreign countries. We use in excess of 150 ingredients in our nine different Functional Water Systems. No one supplier is responsible for supplying in excess of 10% of our vitamins and herbs and we are not dependent upon any one supplier for the supply of any of our vitamins and herbs. We have identified at least a primary, secondary and tertiary supplier for each ingredient and believe that other suppliers are available if needed. Therefore at this time we are not dependent upon any one supplier for any of our ingredients.   We do not have any written agreements with any of our suppliers and therefore we have no guarantees of minimum supply quantities.  Although there is ample availability of each type of herb used in our products from a variety of suppliers, there is a limited number of suppliers that can provide the premium herbs of the quality that we use in our products at a reasonable price.  Several factors that can affect the availability of quality herbs or their prices include inclement weather in the countries where the herbs are grown, embargos imposed by our government or natural catastrophes.





We currently rely on one manufacturer, Ball Corporation, for the supply of the bottles that are used in our products.  However, we believe that alternative suppliers are readily available. We have an existing relationship with three different co-packers/bottlers to manufacture our products. We have also reviewed and approved two other co-packers/bottlers that we intend to use as our sales volume increases.  We supply the ingredients to the co-packers and they manufacture our products in accordance with our specifications in the bottles we obtain from Ball Corporation and supply to the co-packer and then our label is affixed  to the bottles.  The labels are purchased from an independent third party.  We place orders for our bottles and finished goods based upon our estimates of our future sales volume and reserve line time with our co-packers  a few weeks in advance of our anticipated order fulfillment date.  We do not have any written agreement with the supplier of our bottles, the co-packer or the manufacturer of our patented cap and enter into purchase orders that are at negotiated prices at the time each order is placed.  Typically the payment terms for the co-packers on these orders is net thirty days.  The payment terms for our bottles and the manufacture of our caps is typically cash on delivery. We own the tool used in the manufacturing process of our caps.  Although there are several other manufacturers of bottles that we could use as well as co-packers, due to the unique nature of our cap, we would incur substantial start up costs for the transfer of the equipment needed to produce our caps if we were to use an alternative cap manufacturer.  Due to the unique shape of our patented bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers.  Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps.  In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.





COMPETITION





The industries in which we operate are highly competitive. Not only do we compete with other manufacturers of functional beverages, but we also compete with manufacturers of nutraceutical supplements and dietary supplements.





Our competition in the beverage industry includes products owned by multinational corporations with significant financial resources, including products such as Vitamin Water and Gatorade which are owned by Coca-Cola and Pepsi.  Our energy drinks also compete with products such as Monster, Red Bull and Rockstar.  These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do.  They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future.  Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever.





We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Joint Juice, Slimfast and Nutrisystem.  The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. These markets include manufacturers, distributors and physicians. Numerous manufacturers and distributors compete with us for customers throughout the United States in the packaged nutritional supplement industry selling products to retailers such as mass merchandisers, drug store chains, independent pharmacies and health food stores.  Many of the competitors are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us.   In addition, we will compete with several large pharmaceutical companies for therapeutic and symptomatic relief of disease symptoms.  Many of these drug companies are substantially larger and more experienced than us, have longer operating histories, and have materially greater financial and other resources than us.  These drug companies also have substantially greater political influence and regulatory support for the use of their products in the treatment of diseases and wellness.





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The market is highly sensitive to the introduction of new products.  As a result, in order to remain competitive, we believe we will continually need to successfully introduce new products.





We are also subject to competition in the attraction and retention of employees.  Many of our competitors have greater financial resources and can offer employees compensation packages that are difficult for us to compete with.





TRADEMARKS AND PATENT





We regard our patent, trademarks, copyrights, domain names, trade dress, trade secrets, proprietary technologies, and similar intellectual property as important to our success, and we rely on patent, trademark and copyright law, trade-secret protection, and confidentiality and/or license agreements with our employees, customers, partners, suppliers and others to protect our proprietary rights.





Richard Pearce, our President & Chief Executive Officer, and Jeremy J. Alcamo, our Executive VP., have received a design patent in the United States (US D 576,877S) for the flip-top cap compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap.  The Patent was issued on September 16, 2008 and has a term of 14 years, terminating on September 15, 2022.  In addition, the Company owns several copyrights and trademarks that are used in connection with its H.A.R.D. Nutrition product line.  See “Certain Relationships and Related Transactions.”





The steps we take to protect our proprietary rights in our intellectual property and brand name may not be adequate to prevent the misappropriation of our intellectual property and brand name in the United States or abroad.  Existing patent and trademark laws afford only limited practical protection for our intellectual property and product lines.    However, because of the rapid pace of the natural product industry's development, we believe that the legal protection for our product is less significant to our success than the knowledge, technical expertise and marketing skills of our personnel, the frequency of product expansion and pace of market penetration.





INDUSTRY OVERVIEW





According to  a  recent study conducted by AlixPartners LLP, a global advisory firm, which is discussed in the April 13, 2010  BeverageWorld publication,   the beverage industry is expected to see  stagnant carbonated soft drink consumption next year.  Major industry players have responded to this by enlarging their range of beverages, expanding into sports and energy drinks, ready-to-drink tea and bottled water.  These segments are growing at faster rates than the carbonated soft drink segment.   The growth of energy drinks reflects consumers’ demand for functional beverages a specific function from their beverages in addition to provide hydration and taste such as our H.A.R.D. Nutrition Functional Water Systems. However, as reported in the August 2009 BeverageWorld publication, the carbonated soft drink segment is still the largest segment of the soft drink production industry, with 45% of packaged beverages down from between 65% and 70%.  Growth segments for the industry have included energy drinks, sports drinks and bottled water.  We believe the growth of these segments is driven by increased health consciousness, desire for convenience and fashion trends.  According to statistics in an August 2009 publication of Beverage World supplied by the senior vice president of Beverage Marketing, a New York industry consultancy, sales of energy drinks in 2008 grew 9% to 7.8 billion as compared to 1.3 billion five years prior.  Such beverages have been outperforming traditional larger categories like carbonated soft drinks and growth is expected in bottled water, sports and energy drink segments given increasing health and wellness awareness of the public. It is expected that future growth will arise from continued innovation of non-carbonated drink, coupled with heavy marketing. IBISWORLD forecasts that over the period to 2014, revenue generated by the US Soft Drink Production Industry will rise to 46.4 billion dollars, an annual increase of 1.2%.




7





The nutritional supplements industry is highly fragmented and intensely competitive. It includes companies that manufacture and distribute products which are generally intended to enhance the body's performance as well as to enhance well being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals and compounds derived therefrom. Opportunities in the nutritional supplements industry were enhanced by the enactment of the Dietary Supplement Health and Education Act of 1994 ("DSHEA").  Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients.  However, they are subject to many regulations regarding labeling and advertising of such products. See “Regulation” below.





REGULATION





In the United States, we are subject to compliance with laws, governmental regulations, administrative determinations, court decisions and similar constraints.  Although our products are not deemed to be drugs, they are deemed to be dietary supplements and therefore are subject to all regulations regarding products and dietary supplements ingested by consumers.  Such laws, regulations and other constraints exist at the federal, state and local levels in the United States and at all levels of government in foreign jurisdictions.  These regulations include constraints pertaining to: (i) the manufacturing, processing, formulating, packaging, labeling, distributing and selling; (ii) advertising of products and product claims; (iii) transfer pricing; and (iv) method of use.


In the United States, the formulation, manufacturing, packaging, storing, labeling, advertising, distribution and sale of our Products are subject to regulation by various governmental agencies, which include, among others (i) the Food and Drug Administration (“FDA”), (ii) the Federal Trade Commission (“FTC”), and (iii) the Consumer Product Safety Commission. The most active regulation has been administered by the Food and Drug Administration, which regulates the formulation, manufacture and labeling of products pursuant to the Federal Food, Drug and Cosmetic Act (‘FDCA”) and regulations promulgated thereunder. Most importantly, the FDA has guidelines under the Dietary Supplement Health and Education Act (DSHEA) to enable the manufacturing, advertising, marketing, and sale of dietary supplements.  In addition, the FTC has overlapping jurisdiction with the FDA to regulate the interstate labeling, promotion, advertising and sale of dietary supplements, over the counter drugs, and foods.





Compliance with applicable FDA and any state or local statutes is crucial. Although we believe that we are in compliance with applicable statutes, should the FDA amend its guidelines or impose more stringent interpretations of current laws or regulations, we may not be able to comply with these new guidelines. As a marketer of a product that is ingested by consumers, we are always subject to the risk that one or more of our products that currently are not subject to regulatory action may become subject to regulatory action. Such regulations could require the reformulation of certain products to meet new standards, market withdrawal or discontinuation of certain products not able to be reformulated, imposition of additional record keeping requirements, expanded documentation regarding the properties of certain products, expanded or different labeling and/or additional scientific substantiation. Failure to comply with applicable requirements could result in sanctions being imposed on us, or the manufacturers of any of our products, including but not limited to fines, injunctions, product recalls, seizures and criminal prosecution.





The FDCA generally regulates ingredients added to foods and requires that such ingredients making up a food product are themselves safe for their intended uses. In this regard, generally when a company adds an ingredient to a food, the FDCA requires that the ingredient either be determined by the Company to be generally regarded as safe (“GRAS”) by qualified experts or go through FDA’s review and approval process as a food additive.





The FDCA has been amended with respect to dietary supplements by the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). The DSHEA provides a statutory framework governing the safety, composition and labeling of dietary supplements. It regulates the types of statements that can be made concerning the effect of a dietary supplement. The DSHEA generally defines the term “dietary supplement” to include products that contain a “dietary ingredient” which may include vitamins, minerals, herbs or other botanicals, amino acids, and metabolites. Our products contain herbs and supplements currently consumed as part of a healthy and regular diet of human beings and therefore are considered dietary supplements. Under the DSHEA, a dietary supplement manufacturer is responsible for ensuring that a dietary supplement is safe before it is marketed. Generally, under DSHEA, dietary ingredients that were on the market before October 15, 1994 may be sold without FDA pre-approval and without notifying the FDA.  The ingredients in our products were on the market before October 15, 1994 and therefore  may be sold without FDA pre-approval.





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With respect to labeling, DSHEA permits “statements of nutritional support” for dietary supplements without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well being (but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease). This, therefore, severely limits the direct advertising of the healthcare benefits of our products.  A company making a statement of nutritional support must possess substantiating evidence for the statement, and disclose on the label that the FDA has not reviewed that statement and that the product is not intended to diagnose, treat, cure or prevent a disease.





We intend to label our products with statements of nutritional support and believe that we have adequate substantiating evidence to support such statements However, the FDA may determine that a given statement of nutritional support that we or our licensees decide to make is a drug claim rather than an acceptable nutritional support statement. Such a determination would require deletion or substantiating proof of the drug claim.





In addition, DSHEA allows the dissemination of “third party literature”, publications such as reprints of scientific articles linking particular dietary, ingredients with health benefits.  Third party literature may be used in connection with the sale of dietary supplements to consumers.  Such a publication may be so used if, among other things, it is not false or misleading, no particular brand of dietary supplement is promoted and a balanced view of available scientific information on the subject matter is presented. There can be no assurance, however, that all pieces of third party literature that may be disseminated in connection with our products will be determined by the FDA to satisfy each of these requirements, and any such failure could subject the product involved to regulation as a new drug or as a “misbranded” product, causing us to incur substantial fines and penalties.





Our products and product related activities may also be subject to regulation by other regulatory agencies, including but not limited to the Federal Trade Commission (“FTC”), the Consumer Products Safety Commission, the United States Department of Agriculture, the United States Postal Service, the United States Environmental Protection Agency and the Occupational Safety and Health Administration. Advertising of dietary supplement products is subject to regulation by the FTC under the Federal Trade Commission Act (“FTCA”). The FTCA prohibits unfair methods of competition and unfair or deceptive trade acts or practices in or affecting commerce. Furthermore, the FTCA provides that the dissemination or the causing to be disseminated of any false advertising pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Pursuant to this FTC requirement, we are required to have adequate substantiation of all material advertising claims made for our products. Failure to adequately substantiate claims may be considered either deceptive or unfair practices.





The FTC has recently issued a guidance document to assist supplement marketers of dietary supplement products in understanding and complying with the substantiation requirement.





The FTC is authorized to use a variety of processes and remedies for enforcement, both administratively and judicially including compulsory process, cease and desist orders, and injunctions. FTC enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, divestiture of assets, rescission of contracts and such other relief as may be deemed necessary. State and local authorities can also regulate advertising and labeling for dietary supplements and conventional foods.





Our activities are also regulated by various agencies of the states and localities in which our products are sold, including, the Colorado Department of Public Health and Environment which in March 2010 performed an inspection of our warehouse facility, which entailed an inspection of our plant and grounds, sanitary operations (general maintenance and pest control) and our equipment and utensils and did not result in any corrective action to our product or ingredients.





We believe that current and reasonably foreseeable governmental regulation will have minimal impact on our business.





9




Employees





As of December 31, 2010, we had 17 full time employees.




ITEM 1A.  RISK FACTORS




RISK FACTORS





Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. You should carefully consider the risks described below, the other information in this Annual Report, the documents incorporated by reference herein and the risk factors discussed in our other filings with the Securities and Exchange Commission when evaluating our company and our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known by us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed. In such case, the trading price of our common stock could decline and investors could lose all or a part of the money paid to buy our common stock.








RISKS RELATED TO OUR BUSINESS





We have a limited operating history in our current line of business.





Because we have a limited operating history in our current line of business, there can be no assurance that we will be able to implement any aspect of our business plan or establish a successful business.  We are subject to all of the business risks and uncertainties associated with any new business enterprise, including product acceptance, establishing an effective distribution channel and having sufficient funds.  In 2004, we changed our focus to the manufacture of energy drinks.  In 2006, we began selling health related products under our H.A.R.D. nutrition label, which to date has only been sold in a small targeted territory.





We may not be profitable.





We expect to incur operating losses for the foreseeable future.   Our marketing program, which we consider to be crucial to our future success, has required significant expenditures. These expenditures will result in a loss until adequate revenues are derived from sales.   For the years ended December 31, 2010 and 2009, we had revenue of $605,493 and $629,525, respectively and sustained a net loss of $10,018,421 and $5,365,216  respectively.  Our ability to become profitable depends on our ability to have successful operations and generate and sustain sales, while maintaining reasonable expense levels, all of which are uncertain in light of our limited operating history in our current line of business.





We may not be able to continue as a going concern.





The opinion of our independent registered accounting firm for our fiscal years ended December 31, 2010 and December 31, 2009 is qualified subject to substantial doubt as to our ability to continue as a going concern.   See “Report of Independent Registered Public Accounting Firm” and the notes to our Financial Statements. During the year ended December 31, 2010 we incurred $5,174,524 of operating expenses, had a net loss of ($10,018,421) and at December 31, 2010 had an accumulated deficit of $80,029,678 and stockholders’ deficit of $7,820,259.  During the year ended December 31, 2009 we incurred $4,152,128 of operating expenses, had a net loss of ($5,365,216) and at December 31, 2009 had an accumulated deficit of $70,011,257 and stockholders’ deficit of $6,901,650.





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Our products have been sold in a limited territory, which may not be indicative of the acceptance of our products in a broader territory.





To date, our products have been sold in a limited territory.  We currently focus our sales and marketing efforts in the Colorado area.  In fact, substantially all of our revenue for the year ended December 31, 2010 and the year ended December 31, 2009 was derived from sales in the Colorado area.  Our marketing efforts have also been limited to this territory and have included advertising on KOA, the Broncos radio station, and retention of Chris Anderson of the Denver Nuggets as one of our spokespeople.  If our current market becomes saturated, our sales will be adversely impacted.  Our success will be dependent upon our ability to expand our sales territory and our ability to apply our sales and marketing plans used in our current territory to a broader territory.  Our inability to expand our territory will have an adverse impact on our anticipated revenue.





The loss of King Soopers as a customer would have a material adverse effect on our business.





We sell a substantial portion of our H.A.R.D. Nutritional Functional Water Systems indirectly to King Soopers, a grocery chain in Colorado which is a division of Krogers. The loss of King Soopers as a customer would have a material adverse effect on our business. We do not have any written agreement with King Soopers and they are not required  to purchase any specified quantity of products from us.  In August 2009 we entered into an oral agreement with King Soopers pursuant to which we agreed not to sell our Functional Water Systems to any other grocery stores or allow any distributors to sell our products to any grocery stores until the end of the first quarter of 2010 so long as they continued to sell our Functional Water Systems.  The agreement was subsequently extended until August 1, 2010, when it expired.  Although the agreement did not guarantee any purchase quantities or marketing or display terms, our indirect sales to King Soopers represented a significant quantity of our product sales. Since August 1, 2010, we and our distributors are no longer prohibited from selling our Functional Water Systems to other grocery stores, however, our indirect sales to King Soopers continue to remain stable and continue to represent a significant portion of our Functional Water Systems sales. Although we consider our relationship with King Soopers to be good, they could at any time decide not to purchase our beverages.





We are dependent upon the public image of our advertisers, the KOA radio station and   Chris Andersen, our representative.





If there is any negative publicity about the companies that advertise our products, the affiliated sports teams or  the athletes or celebrities that we hire as spokespeople, the negative publicity could have an adverse impact on our sales. A large part of our marketing plan has revolved around increasing our public image in the Colorado territory by having associations with sports teams and athletes.  We are currently a sponsor on the KAO radio station that is the Broncos radio station and advertises our products and we have entered into an agreement with Chris Andersen, a player with the Denver Nuggets, to use his name in connection with the promotion of our products.





We face substantial uncertainties in establishing our business.





Establishing a successful business will require us to attain certain goals to which no assurance can be given that we will be successful in our efforts.  We believe that in order to establish a successful business we must, among other things, hire personnel to run our day to day operations, develop a larger distribution network and establish a customer base and brand name. In order to implement any of these we will be required to expend a substantial amount of money.  If we are unable to raise the necessary money, we will be unable to accomplish these goals and if we are unable to accomplish one or more of these goals, our business may fail.




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We may experience difficulty in effectively managing our planned expansion.




Further growth and expansion of our business would place additional demands upon our current management and other resources and would require additional production capacity, working capital, information systems, management, operational and other financial resources. In order to expand our business, we will need to increase our sales volume and expand our sales territory.   Such expansion will require significant additional expenditures for manufacturing, raw materials inventory and marketing and we will not be able to effectuate any such expansion without additional capital.  Critical to such expansion will be establishment of a nationwide distribution network and there can be no assurance that we will be able to establish a successful nationwide distribution network.  Our further growth will also depend on various factors, including, among others, our ability to attract and retain new employees, the development of new products, competition and federal and state regulation of the functional beverage and nutritional supplements industry. Not all of the foregoing factors are within our control. No assurance can be given that our business will grow in the future and that we will be able to effectively manage such growth. If we are unable to manage growth effectively, our business, results of operations and financial condition would be materially adversely affected.





We may need additional capital and may not be able to obtain it.





We may need to raise additional funds in order to support further expansion, meet competitive pressures, or respond to unanticipated requirements.  In addition, we have several notes payable that are past due or due upon demand. Although no request for repayment of these notes has been made yet, there can be no assurance that the note holders will continue to forbear on collecting amounts due under the notes. We cannot assure you that additional financing will be available if needed on terms favorable to us. We currently do not have any commitments for additional funding other than a factoring arrangement with Liquid Capital Exchange, Inc. for the factoring of our accounts receivable and an Equity Line with Centurion Private Equity, LLC, which is dependent upon stock sales volume and our stock price.





If our cap manufacturer were to cease production of our caps, we would incur substantial start up and other costs if we were to engage an alternative manufacturer.





If for any reason our current cap manufacturer were to cease production of our caps, the engagement of an alternative manufacturer would cause us to incur substantial additional costs. Due to the unique shape of our bottle caps, the manufacture of our caps requires use of special equipment that is costly and not part of the standard equipment used by most manufacturers.  Therefore, any alternative manufacturer would require us to purchase, at our expense, any additional special equipment required for production of the caps. In addition, our manufacturer is located outside of the United States and an alternative supplier located in another country may have higher labor costs that would be passed onto us and could force us to increase our product prices or reduce our gross margin on our products.





If our suppliers were to fail to meet our needs, our costs for our raw materials and bottles may increase substantially due to many factors beyond our control.





If our current suppliers were to be unwilling or unable to meet our needs, we could suffer shortages or incur substantial costs.  Changing suppliers could require long lead times.  The principal raw materials we use in our business are PET bottles and caps, and herbs, vitamins,  juice, electricity, fuel and water. The cost of the raw materials can fluctuate substantially.   Although each type of herb used in our products is readily available from multiple sources,  the premium  herbs used in our products are of a quality that is not available from many sources.  The cost and availability of the premium herbs is based upon availability and can be impacted by severe weather conditions that cause crop failures, natural disasters, embargos from the countries from which they are derived and diseases such as salmonella.    In addition, our suppliers could be impacted by financial difficulties, strikes, transportation interruption, government regulation, political instability and terrorism. PET prices increased significantly in recent periods. We are also significantly impacted by increases in fuel costs for our distribution and transportation.  Any increases in raw materials or manufacturing costs will exert pressure on our costs and we may not be able to pass along any such increases to our customers or consumers, which could negatively affect our business and financial performance.





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If our relationship with our merchandiser were to be terminated, we could experience difficulties in maintaining our product shelving needs and be forced to incur additional expenses in order to maintain our shelving needs.





If our relationship with our merchandiser Acosta, Inc. were to be terminated, we would be forced to find an alternative merchandiser or to hire additional sales personnel to do the job being done by Acosta, Inc. Although we believe that alternative merchandisers are available, there can be no guarantee that such alternative merchandisers will be available when needed or if available, that the compensation to be paid for such engagement would be as favorable as that paid to Acosta, Inc. We are dependent upon, Acosta, Inc., for the continuous shelving of our products. Selling by direct warehouse requires continuous monitoring of our product needs. Our agreement with Acosta, Inc. can be terminated by Acosta, Inc. upon 30 days notice.





Our performance is dependent upon certain key employees, the loss of which would have a material adverse effect on our business





Our performance significantly depends upon the continued contributions of our Chief Executive Officer and President, Richard Pearce, our Executive VP, Jeremy Alcamo, and other  key employees, including  Robert Nikkel, our Chief Herbalist, each individually and as a group, and our ability to retain and motivate them. Our officers and key personnel have many years of experience with us and in our industry and it may be difficult to replace them. If we lose key personnel or are unable to recruit qualified personnel, our operations and ability to manage our business may be adversely affected.  We do not yet have “key person” life insurance for any of our executive officers or key employees.





Our current management controls the right to vote our common stock and they may be able to control our company indefinitely.





Richard Pearce, our President & Chief Executive Officer, has the right to control the vote of 51.25% of our outstanding common stock through his ownership of our Series A Preferred Stock.    As a result, Mr. Pearce may be able to effectively control our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, for an indefinite period of time.  This concentration of voting control might have the effect of delaying or preventing a change in control and might adversely affect the market value of our common stock in the future and the voting rights of our other stockholders.





Any additional issuance of our common stock will cause dilution only to a limited number of our shareholders.





Future issuances of shares of our common stock will cause dilution to all shareholders other than the voting rights of Richard Pearce, the holder of our Series A Preferred Stock. Our Series A Preferred Stock has the right to vote 51.25% of the outstanding common stock at any time upon vote of the majority holder.  Therefore, the holder of the voting power of the Series A Preferred Stock will never have their voting power diluted by future stock issuances.





We operate in highly competitive markets.




The industries in which we operate are highly competitive. Not only do we compete with other manufacturers of functional beverages, but we also compete with manufacturers of nutraceutical supplements and dietary supplements. We compete with multinational corporations with significant financial resources, including products such as Vitamin Water owned by Coca-Cola and Gatorade owned by PepsiCo. We also compete with nutraceutical supplements such as Boost, Detox, Zenergize and dietary supplements such as Slimfast and Nutrisystem. These competitors can use their resources and scale to rapidly respond to competitive pressures and changes in consumer preferences by introducing new products, reducing prices or increasing promotional activities. We also compete against a variety of smaller, regional and private label manufacturers. Many of our competitors have longer operating histories and have materially greater financial and other resources than we do. They therefore have the advantage of having established reputations, brand names, track records, back office and managerial support systems and other advantages that we will be unable to duplicate in the near future. Moreover, many competitors, by virtue of their longevity and capital resources, have established lines of distribution to which we do not have access, and are not reasonably likely to duplicate in the near term, if ever. Smaller companies may be more innovative, better able to bring new products to market and better able to quickly exploit and serve niche markets. Our inability to compete effectively could result in a decline in our sales. As a result, we may have to reduce our prices or increase our spending on marketing, advertising and product innovation. Any of these could negatively affect our business and financial performance.


13





We may not effectively respond to changing consumer preferences, trends, health concerns and other factors.





Consumers’ preferences can change due to a variety of factors, including aging of the population, social trends, negative publicity, economic downturn or other factors.  If we do not effectively anticipate these trends and changing consumer preferences, then quickly develop new products in response, our sales could suffer.  Developing and launching new products can be risky and expensive. We may not be successful in responding to changing markets and consumer preferences, and some of our competitors may be better able to respond to these changes, either of which could negatively affect our business and financial performance.





Substantial disruption to production at our bottling or flavor plants or other manufacturing facilities could occur.





A disruption in production at any of our functional water manufacturing facilities, could have a material adverse effect on our business. In addition, a disruption could occur at any of our other facilities or those of our suppliers, bottlers or distributors. The disruption could occur for many reasons, including fire, natural disasters, weather, manufacturing problems, disease, strikes, transportation interruption, government regulation or terrorism. Alternative facilities with sufficient capacity or capabilities may not be available, may cost substantially more or may take a significant time to start production, each of which could negatively affect our business and financial performance.





Our products may not meet health and safety standards or could become contaminated.





We have adopted various quality, environmental, health and safety standards. We do not have control over all of the third parties involved in the manufacturing of our products and their compliance with government health and safety standards.  Even if our products meet these standards they could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our bottlers, distributors or suppliers. This could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.





Weather and climate changes could adversely affect our business.





In general, sales of functional beverages usually increase when the weather is warm.  However, certain of our products, such as our H.A.R.D. Nutrition Functional Water System named “Get Over It Feel Better Now” which is geared at the treatment of colds and flu will normally have higher sales during cold weather months.  Inasmuch as the mix of our products may vary from quarter to quarter, we cannot guarantee that diversity of our products will reduce the risk or that the seasonal aspects of our products will not adversely affect our business. Unseasonable or unusual weather or long-term climate changes may negatively impact the price or availability of raw materials, energy and fuel, and demand for our products. Unusually cool weather during the summer months may result in reduced demand for our products and have a negative effect on our business and financial performance.





We depend on a small number of large retailers for a significant portion of our sales.





Food and beverage retailers in the United States have been consolidating. Consolidation has resulted in large, sophisticated retailers with increased buying power. They are in a better position to resist our price increases and demand lower prices. They also have leverage to require us to provide larger, more tailored promotional and product delivery programs. If we, and our bottlers and distributors, do not successfully provide appropriate marketing, product, packaging, pricing and service to these retailers, our product availability, sales and margins could suffer. Certain retailers make up a significant percentage of our products’ retail volume, including volume sold by our bottlers and distributors. The loss of sales of any of our products in a major retailer could have a material adverse effect on our business and financial performance.





We depend on third-party suppliers, distributors and manufacturers.  Any disruption or extended delay in product supply from any of our third-party suppliers or loss of distributors could have a significant adverse impact on our operations.





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There are numerous companies that produce, or supply the ingredients and products used in our business.  We do not manufacture the bottles or their flip-top cap compartments directly and depend entirely on third party manufacturers and suppliers.  We do not have guaranteed supply or pricing arrangements with our suppliers or bottling manufacturer, but submit purchase orders and pay for ingredients and materials as needed. As a result, we risk increased cost of materials and difficulty in procuring products.





We also rely upon the efforts of third party distributors. Our success will in part depend upon our ability to recruit, retain and motivate distributors and the distributor’s ability to recruit, retain and motivate sales employees and to make sales of our products. In our efforts to attract and retain distributors, we will compete with other companies that are more established.  Our operating results will be harmed if our products do not generate sufficient interest to attract and retain distributors.





Our ability to enter new markets and sustain satisfactory levels of sales in each market will be dependent in part upon the ability of our suppliers, manufacturers and distributors to properly perform their functions and to comply with local regulations or market environments, for introduction into such markets. While outsourcing may reduce the cost of operations, it also reduces direct control by us over the services rendered.  Although we attempt to select reputable suppliers, manufacturers and distributors and will conduct quality control tests, it is possible that one or more of these providers could fail to perform as we expect. In addition, the expanded role of third party providers has required and will continue to require us to implement and adopt new procedures and processes for retaining and managing these providers.





The failure of any manufacturer to supply products as required by us could have a material adverse effect on our business, results of operations and financial condition. If we do not timely and effectively develop and implement our outsourcing strategy or if third party providers do not perform as anticipated, we may experience operational difficulties, increased costs, or even manufacturing delays, which could materially and adversely affect our business, financial condition and results of operations.





Although a number of alternative manufacturers exist that we believe could replace our main suppliers with alternative sources at comparable prices and terms, any disruption or extended delay in raw material products supply from any of our third party suppliers could have a significant adverse impact on our operations.  In addition, the time needed to replace any main supplier could adversely affect our operations by delaying shipments and potentially losing customers to our competition.





We may not comply with applicable government laws and regulations, and they could change.





We are subject to a variety of federal, state and local laws and regulations in the United States. These laws and regulations apply to many aspects of our business including the manufacture, safety, labeling, transportation, advertising and sale of our products. See “Business — Regulatory Matters” for more information regarding many of these laws and regulations. Violations of these laws or regulations could damage our reputation and/or result in regulatory actions with substantial penalties. In addition, any significant change in such laws or regulations or their interpretation, or the introduction of higher standards or more stringent laws or regulations could result in increased compliance costs or capital expenditures. For example, changes in recycling and bottle deposit laws or special taxes on functional beverages or ingredients could increase our costs. Certain of the herbs used in our products are obtained from foreign countries and importing them into the United States is subject to various regulations.  Regulatory focus on the health, safety and marketing of food products is increasing. Certain state warning and labeling laws, could become applicable to our products. Some local and regional governments and school boards have enacted, or have proposed to enact, regulations restricting the sale of certain types of soft drinks in schools. Any violations or changes of regulations could have a material adverse effect on our profitability, or disrupt the production or distribution of our products, and negatively affect our business and financial performance.





Our financial results may be negatively impacted by the recent global financial events.





The recent global financial events have resulted in the consolidation, failure or near failure of a number of institutions in the banking, insurance and investment banking industries and have substantially reduced the ability of companies to obtain financing. These events have also caused a substantial reduction in the stock market. These events could have a number of different effects on our business, including:







15




●
reduction in consumer spending, which would result in a reduction in our sales volume;●
a negative impact on the ability of our customers to timely pay their obligations to us or our vendors to timely supply materials, thus reducing our cash flow;●
an increase in counterparty risk;●
restricted access to capital markets that may limit our ability to take advantage of business opportunities, such as acquisitions.





Other events or conditions may arise directly or indirectly from the global financial events that could negatively impact our business.





Our business is sensitive to public perception.  If any product proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding their safety or effectiveness, then our image in the marketplace would be negatively impacted.





Our results of operations may be significantly affected by the public’s perception of our Company and similar companies. Our products have not been approved by the FDA and have not been endorsed by any organization searching for cures for the diseases that we believe such products treat or prevent.  Although the naturally occurring chemically unaltered products are not required to be approved by the FDA, many consumers only purchase FDA approved products.   In addition, our business could be adversely affected if any of our products or similar products distributed by other companies proves to be harmful to consumers or if scientific studies provide unfavorable findings regarding the safety or effectiveness of our products or any similar products.  Our products contain vitamins, minerals, extracts from herbs and other ingredients that we regard as safe when taken as directed by us.  While quality control testing is conducted on the ingredients in such products, we are highly dependent upon consumers' perception of the overall integrity of the dietary supplements business.  The safety and quality of products made by competitors in our industry may not adhere to the same quality standards that ours do, and may result in a negative consumer perception of the entire industry.  If our products suffer from negative consumer perception, it is likely our sales will slow and we will have difficultly generating revenues.





If the products we sell do not have the healthful effects intended, our business may suffer.





In general, our products sold consist of food, nutritional supplements which are classified in the United States as “dietary supplements” which do not currently require approval from the FDA or other regulatory agencies prior to sale.  Although many of the ingredients in such products are vitamins, minerals, herbs and other substances for which there is a long history of human consumption, they contain innovative ingredients or combinations of ingredients.  Although we believe all of such products and the combinations of ingredients in them are safe when taken as directed by the Company, there is little long-term experience with human or other animal consumption of certain of these ingredients or combinations thereof in concentrated form.  The products could have certain side effects if not taken as directed or if taken by a consumer that has certain medical conditions. Furthermore, there can be no assurance that any of the products, even when used as directed, will have the effects intended or will not have harmful side effects.





We are at risk for product liability claims and require adequate insurance to protect us against such claims.  If we are unable to secure the necessary insurance coverage at affordable cost to protect our business against any claims, then our exposure to liability will greatly increase and our ability to market and sell our products will be more difficult since certain customers rely on this insurance in order to distribute our products.





We are at risk that consumers and users of our products will bring lawsuits alleging product liability.  We are not aware of any claims pending against us, or our products that would adversely affect our business.  While we will continue to attempt to take what we consider to be appropriate precautions, these precautions may not protect us from significant product liability exposure in the future.  We currently pay an annual premium of $8,848 for product liability insurance with the following coverage limitations: $1,000,000 for bodily injury and property damage; $100,000 for damage to premises; and $1,000,000 per person for personal injury and advertising injury with an aggregate limit of $2,000,000. Any liability in excess of our $2,000,000 coverage limit will not be covered by our insurance and will have to be paid by us. There can be no assurance that we will be able to retain this coverage or that this coverage will be cost-justified or sufficient to satisfy any future claims.   If we are sued, we may not have sufficient resources to defend against the suit or to pay damages.  A material lawsuit could negatively impact our business.





16




The success of our business will depend upon our ability to create brand awareness.





The market for functional beverages and nutraceuticals is already highly competitive, with many well-known brands leading the industry.  Our ability to compete effectively and generate revenue will be based upon our ability to create awareness of our products distinct from those of our competitors. It is imperative that we are able to convey to consumers the fact that our products are not just functional beverages but are also nutraceuticals.  However, advertising and packaging and labeling of such products will be limited by various regulations. Our success will be dependent upon our ability to convey to consumers that our products are superior to those of our competitors.





We must continue to develop and introduce new products to succeed.





The functional beverage and nutritional supplement industry is subject to rapid change. New products are constantly introduced to the market.  Our ability to remain competitive depends on our ability to enhance existing products, continue to develop and manufacture new products in a timely and cost effective manner, to accurately predict market transitions, and to effectively market our products.  Our future financial results will depend to a great extent on the successful introduction of several new products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products.





The success of new product introductions depends on various factors, including the following:





●
proper new product selection;●
successful sales and marketing efforts;●
timely delivery of new products;●
availability of raw materials;●
pricing of raw materials;●
regulatory allowance of the products; and●
customer acceptance of new products.





We face challenges in developing new products, primarily with funding development costs and diversion of management time.  On a regular basis, we evaluate opportunities to develop new products through product line extensions and product modifications.  However, there is no assurance that we will successfully develop product line extensions or integrate newly developed products into our business.  In addition, newly developed products may not contribute favorably to our operations and financial condition.  Our failure to develop, or have developed on our behalf, and introduce new products on a timely basis would adversely affect our future operating results.





Our success is dependent upon our ability to protect and promote our proprietary rights.





If we are unable to protect our intellectual property rights, our ability to compete effectively would be harmed and we may never become profitable. We cannot be certain that the steps we have taken to protect our rights will be sufficient or that others will not infringe or misappropriate our rights. Although we have entered into confidentiality agreements with our employees and consultants, there can be no assurance given that all such agreements can be enforced in a timely manner or that any such employees or consultants will not violate their respective agreements with us.  There also can be no assurance given that the scope of our protection is broad enough to protect all of our interests or that it cannot be circumvented, that it will not violate the proprietary rights of others, or that we will not be prevented from using our products and trademarks if challenged.   In fact, even if broad enough, others may still infringe upon our rights, which will be costly to protect. We and third parties, including competitors, could come into conflict over intellectual property rights. Litigation could disrupt our business, divert management attention and cost a substantial amount to protect our rights or defend ourselves against claims.





17




The intellectual property that we possess is important to the manufacture and marketing of our products. This intellectual property includes ingredient formulas, trademarks, copyrights, patent, business processes and other trade secrets.  We also have an exclusive license for the design patent for our flip-top cap compartment that is contained in each bottle and holds the nutraceutical capsules.  The flip-top cap design is unique and allows our products to be effective by separating the drink from the nutraceutical, ensuring that the drink only acts as a catalyst when combined. See “Business — Intellectual Property and Trademarks” for more information.    To date, we do not know of any other company that can combine a functional beverage and nutraceutical in a manner that allows for easy consumer use as is available with our products.





We have not paid, and do not intend to pay, cash dividends in the foreseeable future.





Payment of cash dividends is dependent upon our revenues and earnings, if any, capital requirements and our general financial conditions, as well as requirements for surplus under state law.  At present, we are unable to pay any cash dividends to any shareholder and we do not intend to do so in the immediate future.  We intend to reinvest any future earnings in developing and expanding our business.





A limited trading market currently exists for our securities and we cannot assure you that an active market will ever develop, or if developed, will be sustained.





There is currently a limited trading market for our securities on the pink sheets and the over-the-counter-market. We cannot assure you when and if an active-trading market in our shares will be established, or whether any such market will be sustained or sufficiently liquid to enable holders of shares of our common stock to liquidate their investment in our company. If an active public market should develop in the future, the sale of unregistered and restricted securities by current shareholders may have a substantial impact on any such market.





We may issue shares of preferred stock with greater rights than our common stock.





Our articles of incorporation authorize our board of directors to issue up to twenty five million shares of preferred stock in one or more series and determine the price for those shares without seeking any further approval from our stockholders, one hundred thousand of which have been designated as Series A Preferred Stock. Further, under Colorado law, the board of directors may at its discretion, and without stockholder approval, create other series of preferred stock and set the other terms of the preferred stock. Any preferred stock such as our Series A Preferred Stock with respect to voting rights, that is issued may rank ahead of our common stock, in terms of dividends, liquidation rights and voting rights that could adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Such provisions could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. Any delay or prevention of, or significant payments required to be made upon, a change of control transaction or changes in our board of directors or management could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a substantial premium over the then current market price for their shares.





There may be future dilution of our common stock and current shareholders will experience immediate dilution.





If we sell additional equity or convertible debt securities, those sales could result in additional dilution to our shareholders.








ITEM 2.  PROPERTY





Our principal office is located at 9500 W. 49th Avenue, Suite D-106, Wheat Ridge, Colorado 80033. This space consists of approximately 15,000 square feet.  The lease provides that it terminates on April 30, 2013 and our base rent expense is approximately $15,000 per month, which includes a base rent and excludes certain payments for operating expenses. We believe these facilities are adequate to serve our present needs.





18




ITEM 3.  LEGAL PROCEEDINGS





We are not a party to any material legal proceedings.





We may occasionally become subject to legal proceedings and claims that arise in the ordinary course of our business. It is impossible for us to predict with any certainty the outcome of pending disputes, and we cannot predict whether any liability arising from pending claims and litigation will be material in relation to our consolidated financial position or results of operations.





ITEM 4.  REMOVED AND RESERVED








ITEM 5.  MARKET PRICE OF COMMON STOCK AND OTHER STOCKHOLDER MATTERS





Until January 13, 2011 our stock was traded solely on the pink sheets under the symbol DCBR.  On January 13, 2011 our 15C211 form was approved by FINRA and our stock began trading on the OTC.BB exchange under the symbol DCBR





Per Share Common Stock Bid Prices by Quarter and Average Daily Trading Volume for each Quarter


For the Fiscal Year Ended on December 31, 2010





Average Daily Trading Volume


High


LowQuarter Ended December 31, 2010


57,917


$
.09


$
.03Quarter Ended September 30, 2010


55,945


$
.10


$
.06Quarter Ended June 30, 2010


77,986


$
.14


$
.08Quarter Ended March 31, 2010


80,625


$
.17


$
.11











Per Share Common Stock Bid Prices by Quarter and Average Daily Trading Volume for each Quarter


For the Fiscal Year Ended on December 31, 2009





Average Daily Trading Volume


High


LowQuarter Ended December 31, 2009


84,756


$
.25


$
.08Quarter Ended September 30, 2009


103,606


$
.23


$
.06Quarter Ended June 30, 2009


165,965


$
.12


$
.05Quarter Ended March 31, 2009


235,085


$
.14


$
.03





Holders





As of December 31, 2010, there were approximately 304 holders of record of our common stock.  As of December 31, 2010 we had 302,167,779 shares of common stock outstanding.





Dividends





We have not paid any dividends on our common stock to date and do not anticipate that we will be paying dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the Board of Directors may think are relevant. We do not anticipate having any earnings from which to pay dividends in the foreseeable future and currently intend to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.





19




Purchase of Equity Securities by the Small Business Issuer and Affiliated Purchasers





We did not repurchase any shares of our common stock during the year ending December 31, 2009 or 2010.




Issuances of Common Stock
 
 The Company issued 58,670,000 shares of common stock throughout 2009 in exchange for $2,983,510 in cash at prices ranging from $0.032 to $0.10 per share.  Also included with the sales of common stock were 58,760,000 warrants described in detail below.  The Company recorded a warrant liability of $1,794,870, and the remaining proceeds of $1,188,640 was recorded as common stock and additional paid in capital.
 
 The Company issued 8,670,000 shares of common stock from May to December 2009 related to services provided by vendors.  The shares were valued at prices ranging from $0.08 to $0.21 per share and were collectively valued at $1,008,376.
 
 The Company issued 16,300,000 shares of common stock during 2009 in order to pay off or pay down notes payable and accrued interest.  The common stock was valued at $0.04 to $0.20 per share for 10,300,000 issued in October and December.  The shares were collectively valued at $2,279,000.
 
 Additional Issuances of Stock
 
 Included in the 8,670,000 shares of common stock issued from May to December 2009 related to services provided by vendors, the Company issued 2,750,000 shares of stock to three professional athletes and one agent in exchange for promotion of the company’s products.  The shares were valued from $.08 to $.18 per share for a total compensation expense of $425,000.  The terms of these agreements range from 12 to 24 months.  The earned portion of $49,156 is included in the $1,008,376 noted above.  The remaining unearned portion of $375,844 of these contracts is recorded as a reduction to Stockholders Equity.  In the year ended December 31, 2010 the company issued an additional 1,750,000 shares to a professional athlete and his agent.  The shares were valued at $.08 per share for a total compensation expense of $140,000.  The terms of these agreements are 12 months.  The earned portion of $357,068 was booked to marketing expense in 2010.  The remaining unearned portion of $158,766 of these contracts is recorded as a reduction to Stockholders Equity.


The Company issued common stock during the twelve months ended December 31, 2010, as set forth below.  The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.





The Company issued 9,130,000 shares of common stock during the twelve months ended December 31, 2010, in exchange for $576,500 in cash at prices ranging from $0.05 to $0.10 per share.





The Company issued 25,000,000 shares of common stock during the twelve months ended December 31, 2010, upon the exercise of options in exchange for $25,000 in cash at a price of $0.01per share.





The Company issued 12,420,891 shares of common stock during the twelve months ended December 31, 2010, related to services provided by vendors.  The shares were valued at prices ranging from $0.06 to $0.13 per share. The shares were collectively valued at $1,156,440.





The Company issued 34,231,749 shares of common stock during the twelve months ended December 31, 2010, in order to pay off or pay down notes payable and accrued interest.  The common stock was valued at $0.06 to $0.13 per share.  The shares were collectively valued at $3,415,905.





The Company issued 16,065,419 shares of common stock during the twelve months ended December 31, 2010, related to the issuance of debt.  The shares were valued from $0.08 to $0.12 per share and collectively valued at 1,373,900. The debt was issued to 13 shareholders.




The Company issued to one investor a warrant exercisable for 25,000,000 shares of common stock at an exercise price of $.01 per share for a period of five years.




These issuances of shares qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuances did not involve a public offering. The issuances were not a public offering as defined in Section 4(2) because the offer and sale was made to an insubstantial number of persons and because of the manner of the offering. These issuances were  done with no general solicitation or advertising by the Company. Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for these issuances.




20





ITEM 6.  SELECTED FINANCIAL DATA




Not Applicable




ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in this prospectus. This discussion includes forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.





Financial Operations Overview





We have only recently commenced operations and have only recently began sales of our H.A.R.D. Nutrition Functional Water System.   From our inception to December 31, 2010, we had incurred an accumulated deficit of $80,029,678.  Our accumulated deficit through December 31, 2010 is primarily attributable to our issuance of stock compensation.





Since inception, we have primarily financed our operations from the sale of common stock and debt. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements for the next few months. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital and if we do not have adequate working capital we may need to raise additional funds, whether through a stock offering or otherwise.





We have recently entered into an accounts receivable factoring agreement with Liquid Capital  pursuant to which we have agreed to sell and Liquid Capital has agreed to purchase certain of the accounts arising from the sale of our products.  Liquid Capital in its sole discretion may advance up to 80% of the face amount of the accounts purchased less an applicable discount fee up to a maximum of $750,000.  In order to secure our payment of all our indebtedness and obligations to Liquid Capital, we granted Liquid Capital a security interest and lien upon our accounts and our other assets.   The agreement with Liquid Capital has a term of one year and may be terminated by either party upon 30 days prior written notice and immediately by Liquid Capital upon an event of default as defined in the agreement.  There can be no assurance that the funds derived from this arrangement will be sufficient to meet our needs.  Subsequent to year-end we entered into a $10 million equity funding facility with Centurion Private Equity, LLC.  This facility gives us the right to sell shares of our common stock to Centurion at a price determined by the current market.  These sales are limited by our trading volume and price limitations determined by the Company and there can be no assurance that we will be able to use such facility.





Results of Operations





Year ended December 31, 2010 Compared to year ended December 31, 2009





Revenue- During the year ended December 31, 2010 we generated revenue of $605,493, a substantial portion of which is attributable to the sale of our H.A.R.D, Nutrition Functional Water System which commenced in August 2009.  This represented an approximate  4% decrease from the prior year.  This decrease was principally due to the large initial orders in 2009 needed to fill the shelves as we began our relationship with King Soopers.  During the same period of 2009, we had revenue of $629,525.  Our gross margin increased from $121,846 for the year ended December 31, 2009 to $133,915 for the year ended December 31, 2010.  The increase in gross margin was attributable to production efficiencies in our Functional Water Systems in 2010 vs. 2009.    Sales of our H.A.R.D, Nutrition Functional Water System and H.A.R.D. Nutrition supplement accounted for 89% and 11% respectively of our revenue for the year ended December 31, 2010.   At least 80% of our sales of our H.A.R.D. Nutrition Functional Water System were attributed to indirect sales to King Soopers.





21




Expenses- Our total operating expenses for the year ended December 31, 2010 was $5,176,309 as compared to $4,152,128 for the year ended December 31, 2009.





General and administrative expenses were $3,860,941 and $2,802,466 for the years ended December 31, 2010 and December 31, 2009, respectively and included salaries, travel expenses, legal, accounting and other professional fees and occupancy related expenses.  The majority of this increase was due to the increased professional, legal and audit fees related to our preparation and filing of a registration statement on Form S-1 and a Form 15-C-211 filing.  Included in general and administrative expenses was stock based compensation expenses for services provided to vendors and employees of $1,156,440 and $597,338 for the year ended December 31, 2010 and 2009, respectively. The remaining general and administrative expenses $2,704,501 and $2,205,128 for the years ended December 31, 2010 and 2009, respectively included $1,243,910 and $1,069,964 for salaries, $203,519 and $90,853 for travel expenses, $952,748 and $655,149 for legal accounting and other professional expenses and $215,627 and $207,633 for occupancy related expenses.





Sales and marketing which consisted of advertising and other promotional expenses were relatively stable when comparing 2010 and 2009. Sales and marketing expenses were $1,229,476 and $1,264,455 for the years ended December 31, 2010 and December 31, 2009, respectively and included stock based compensation for services provided by vendors and employees of $357,068 and $35,204 for the years ended December 31, 2010 and 2009, respectively. The remaining sales and marketing expenses, $872,408 and $1,229,251 for the years ended December 31, 2010 and 2009, respectively included $586,828 and $980,000, respectively for advertising.


Interest expense increased by greater than 100% from 2009 to 2010 because of increased short term borrowings. Interest expense related to warrant liability increased from $0 in 2009 to $1,855,400 due to fluctuations in the warrant liability and the exercising of a warrant issued in 2010 related to a debt restructuring. The loss on retirement of debt increased 180% from 2009 to 2010 due to a management push to convert more of the debt into equity.





Net loss for the year ended December 31, 2010 increased by approximately 87% to $10,018,412 as compared to $5,365,216 for the period ended December 31, 2009 and was primarily attributable to an increase in legal, accounting  and other professional fees, and increase in interest expense as well as a larger loss on retirement of debt.





Liquidity and Capital Resources





Revenues


At December 31, 2010 we had cash and cash equivalents of $23,234 as compared to $81,362 at December 31, 2009.  Our working capital deficit at December 31, 2010 was $3,75,277 and at December 31, 2009 was $5,159,883.





For the twelve months ended December 31, 2010 our cash used in operating activities was $2,814,373.  Our primary sources and uses of cash from operating activities for the period were losses from operations, excluding common stock issued for services, loss on retirement of debt and depreciation and amortization of $4,217,983 offset by deferral of $628,956 in salaries and royalties payable to our officers and increase in warrant liability of $1,884,600.





Net cash used in investing activities for the twelve months ended December 31, 2010 was $28,703, all of which was attributable to the purchase of equipment.





Net cash provided by financing activities for the twelve months ended December 31, 2010 was $2,784,947 which included $826,500 from the issuance of common stock $2,209,406 from the issuance of notes.





At December 31, 2009 we had cash and cash equivalents of $81,362 as compared to $12,232 for the year ended December 31, 2008.  Our working capital deficit at December 31, 2009 was $5,159,883.  For the year ended December 31, 2009 our cash used in operating activities was $3,609,475.  Our primary sources and uses of cash from operating activities for the period was losses from operations, loss on retirement of debt, common stock issuances, adjusted for noncash items of income and expense which included:





22




An increase in accounts receivable due to increased sales and increase in inventory related to increased sales





An increase in accounts payable related to increased purchases of inventory in anticipation of increased sales





A decrease in accrued interest expense due to retirement of debt





Net cash used in investing activities for the twelve months ended December 31, 2009 was $8,608, all of which was attributable to the purchase of equipment.





Net cash provided by financing activities was $3,687,213 which included $2,983,510 from the issuance of common stock and warrants, in our private placement and $760,205 from the issuance of notes which was offset by $56,502 used to make payments on outstanding notes.




Current and Future Financing Needs





We have incurred an accumulated deficit of $80,029,678 through December 31, 2010. We have incurred negative cash flow from operations since we started our business. At December 31, 2010, we had short term and long term debt of $5,625,474.   We have no commitment for additional funding other than the factoring arrangement and the $10 million equity financing agreement that we have entered into. In addition, we have lease commitments of $203,949, $206,832 and $69,260 for 2011, 2012 and 2013.  We also have minimum salary commitments for compensation to our Chief executive Officer and Executive Vice President in accordance with the terms of their employment agreements that range from $750,000 to $1,007,031. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our advertising and marketing campaign,  and fees in connection with regulatory compliance and corporate governance. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. If our anticipated sales for the next few months do not meet our expectations, our existing resources will not be sufficient to meet our cash flow requirements for the next few months. Furthermore, if our expenses exceed our anticipations, we will need additional funds to implement our business plan. We will not be able to fully establish our business if we do not have adequate working capital and if we do not have adequate working capital we may need to raise additional funds, whether through a stock offering or otherwise.





We also have note payable commitments with respect to various notes payable issued to unaffiliated third parties who are accredited investors. A summary of notes payable as of December 31, 2010 is as follows: At December 31, 2010 we had 30 notes outstanding, twelve of the notes or 31% of the aggregate principal balance were either past due or due on demand.    Two notes in the aggregate principal amount of $256,688 are non interest bearing and are due on demand.  To date, no demand for payment has been made.  Three notes in the aggregate principal amount of $566,261 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made.  Notes in the aggregate principal amount of $462,873 bearing interest at a rate of 15% are owed to 7 investors in our private placements and payment was due between July and August 2010, $362,873 due on or before July 31, 2010, $100,000 due on or before August 31, 2010.  Notes in the aggregate principal amount of $ $926,142 owed to four investors with a maturity date of July 1, 2013. These notes bear interest at a range from 6% to 16% per annum. Three of these notes with a total principal amount of $592,933 are callable by holder anytime after January 1, 2012. A total of 6,332,089 of new shares of common stock were issued to these four debt holders in connection with the debt restructuring. The $5 million revolving note with a principal outstanding balance as of December 31, 2010 of $1,893,708 was restructured on June 2010 such that it now bears interest at a rate of 10.25% per annum and matures on January 1, 2015.  A warrant for the purchase of 25,000,000 shares of our common stock at an exercise price of $.01 was issued to this debt holder.   The fair market value of this warrant, $1,750,000 was booked as additional paid in capital and as interest expense warrant liability. We also converted $1,650,840 of related party payables owed to Richard Pearce and Jeremy Alcamo into notes bearing interest at a rate of 10% that are callable with 366 days notice which classifies them as long term debt.  Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of  a debt or equity financing or any combination thereof and our receipt of  gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo  Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.




23





Two notes in the aggregate principal amount of $15,251 bear interest at a rate of 11% and the principal amount outstanding is payable by June 30, 2011.





A summary of notes payable as of December 31, 2010 is as follows:





Current


Long Term


Total1 Note payable, originated in 2004, due in 2006,

6% interest rate, secured by assets of


541,995


$
-


$
541,995DC Brands, LLC, a wholly owned subsidiary1 Note payable originated in 2005, due on demand,

non interest bearing, unsecured


242,188



-



242,1881 Note payable originated in 2005, due on demand,

non interest bearing, unsecured


14,500



-



14,5001 Note payable originated in 2007, due in 2007,

36% interest, unsecured


10,000



-



10,0001 Notes payable originated in 2007, due in 2008,

24% interest, unsecured


14,266



-



14,2667 Notes payable, originated in 2008,

due at various dates from July to August 2010,

15% interest, unsecured


462,873



-



462,8731 Note payable, originated in 2010, due


-



1,893,708



1,893,708January 1, 2015, 10.25% interest, unsecured3 Notes payable, originated in 2010, due


-



592,933



592,933July 1, 2013, callable after January 1, 20126% interest, unsecured1 Note payable, originated in 2010, due


-



333,209



333,209July 1, 2013, 16% interest, unsecured9 Notes payable, originated in 2010, due

due at various dates from July to September 2013,


-



773,333



773,33316% interest, unsecured2 Notes payable, originated in 2007, due in

monthly installments, maturing 2011 to 2012, interest

from 1.9% to 11%, secured by motor vehicles


15,252



-



15,2521,301,074



3,593,183



4,894,258Unamortized discount


-



(919,624
)


(919,624
)1,301,074



2,673,559



3,974,633Related party notes2 Notes payable, originated in 2010, callable


-



1,650,841



1,650,841with 366 day notice, 10% interest, unsecured


24





A summary of notes payable as of December 31, 2009 is as follows:





At December 31, 2009 we had 25 notes outstanding.  One note in the principal amount of $1,892,932 bears interest at a rate of 10% per annum and is due in January 2011. Two notes in the aggregate principal amount of $256,688 are non interest bearing and are due on demand.  To date no demand for payment has been made.  Five notes in the aggregate principal amount of $753,866 bearing interest at a range from 6% to 36% are past due and to date no demand for payment has been made.  There are no default penalties of fees that may be sanctioned against the Company for not paying the notes upon maturity.  The Company intends to attempt to restructure these notes into long term debt or equity. Notes in the aggregate principal amount of $947,989 bearing interest at a rate of 15% are owed to 13 investors in our private placements and payment is due between July and November 2010, $551,808 due on or before July 31, 2010, $196,181 due on or before August 31, 2010, $100,000 due on or before October 31, 2010, and $100,000 due on or before November 30, 2010.  To date no demand for payment has been made with respect to these notes.





Four notes in the aggregate principal amount of $55,155 bear interest at a rate of 11% and $39,712 of the principal amount outstanding is payable by December 31, 2010 and $15,443 is payable after December 31, 2010.





Current


Long Term


Total2 Notes payable, originated in 2004, due in 2006,

$
649,900


$
-


$
649,9006% interest rate, secured by assets ofDC Brands, LLC, a wholly owned subsidiary1 Note payable originated in 2005, due on demand,


242,188



-



242,188non interest bearing, unsecured1 Note payable originated in 2005, due on demand,


14,500



-



14,500non interest bearing, unsecured2 Notes payable originated in 2007, due in 2007,


86,123



-



86,12336% interest, unsecured1 Note payable originated in 2007, due in 2008,


17,843



-



17,84324% interest, unsecured1 Note payable, originated in 2007, due


-



1,892,932



1,892,932January 1, 2011, 10% interest, unsecured13 Notes payable, originated in 2008,


947,989



-



947,989due at various dates from July to November2010, 15% interest, unsecured4 Notes payable, originated in 2005 and  2007,


39,712



15,443



55,155due in monthly installments of $2,681, maturing 2010 to 2012,interest at 11%, secured by motor vehicles1,998,255



1,908,375



3,906,630Unamortized discount


(108,609
)


-



(108,609
)$
1,889,646


$
1,908,375


$
3,798,021





Our continued operations in the long term will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Such additional funds may not become available on acceptable terms and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term.  We will continue to fund operations from cash on hand and through the similar sources of capital previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs.





25




We have based our estimate on assumptions that may prove to be wrong.  As previously stated, we may need to obtain additional funds in the next couple of months or in greater amounts than we currently anticipate. Potential sources of financing include strategic relationships, public or private sales of our shares or debt and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements.  We do not have any committed sources of financing at this time, other than the 10 million equity financing agreement that we signed in January 2011, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all.  If we raise funds by selling additional shares of common stock or other securities convertible into common stock, the ownership interest of our existing stockholders will be diluted.  If we are not able to obtain financing when needed, we may be unable to carry out our business plan.  As a result, we may have to significantly limit our operations and our business, financial condition and results of operations would be materially harmed.





Subsequent to the year ended, we raised an aggregate of $250,000 from one investor through the issuance of notes.   The notes bear interest at a rate of 16% per annum and mature in 36 months.





Critical Accounting Policies and Estimates





The preparation of financial statements requires management to utilize estimates and make judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. The estimates are evaluated by management on an ongoing basis, and the results of these evaluations form a basis for making decisions about the carrying value of assets and liabilities that are not readily apparent from other sources. Although actual results may differ from these estimates under different assumptions or conditions, management believes that the estimates used in the preparation of our financial statements are reasonable. Management regularly reviews these estimates and judgments for impairment, valuation and other changes in estimate.  Our critical account estimates are set forth below and have not changed during 2009 or 2010. There were no changes to any estimates or judgments that had a material impact on the financial presentation.





The critical accounting policies affecting our financial reporting are summarized in Note 1 to the consolidated financial statements included in this prospectus. Policies involving the most significant judgments and estimates are summarized below.





Accounts Receivable




Our accounts receivable are unsecured, and we are at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. We sell products generally on net 30 day terms. We do not normally charge financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when we have exhausted all reasonable means of collection. We did not have an allowance for doubtful accounts at December 31, 2010 or December 31, 2009 as we deemed our accounts receivable all to be collectible.





Our method of determining the allowance for doubtful accounts and estimates used therein are subject to the risk of change if, in the future, our sales volume and type of customers would change.





As of December 31, 2008, there were no past due receivables.  As of December 31, 2009, $41,715 of receivables were past due. During the first six months of 2010, credit memos were issued for $19,959, and $21,756 was collected. As of December 31, 2010, there were no past due receivables.








26








Fair Value of Financial Instruments





Effective May 1, 2008, we adopted guidance issued by the Financial Accounting Standards Board ("FASB") on "Fair Value Measurements" for assets and liabilities measured at fair value on a recurring basis. This guidance establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. The adoption of this guidance did not have an impact on our financial position or operating results, but did expand certain disclosures.





The FASB defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, the FASB requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.





These inputs are prioritized below:





Level 1:
Observable inputs such as quoted market prices in active markets for identical assets or liabilities.Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by market dataLevel 3:
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity's own assumptions.





We did not have any Level 2 or Level 3 assets or liabilities as of June 30, 2010.





Cash and cash equivalents include money market securities and commercial paper and marketable securities representing certificates of deposits maturing in less than one year that are considered to be highly liquid and easily tradable.  These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within the fair value hierarchy.





In addition, the FASB issued, "The Fair Value Option for Financial Assets and Financial Liabilities," effective for May 1, 2008. This guidance expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. We did not elect the fair value option for any of our qualifying financial instruments, other than those subject to a recent acquisition.





Warrant Liability





The warrant liability is calculated using a Barrier Option Model with MonteCarlo Simulation from Global Derivatives.com.  The current stock price, the stock volatility for the prior three months and the risk free rate (treasury bills) equal to the remaining term of the warrants are the inputs used in this valuation model.  This model specifically addresses the fact that no additional shares of stock will need to be issued if our stock price hits the target (barrier) of $.50 or $.15.  The stock volatility for any quarter is capped at 90% as volatilities greater than this produce an unreasonably low estimation of liability.  This amount is adjusted quarterly based upon the changes in valuation provided by the model. There were no warrants outstanding as of December 31, 2008 and the valuation model produced a $1,463,000 and a $1,448,400 warrant liability as of December 31, 2009 and 2010 respectively.





Equity-Based Compensation





The computation of the expense associated with stock-based compensation requires the use of a valuation model.  The FASB issued accounting guidance requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation.  We currently use a Black-Scholes option pricing model to calculate the fair value of our stock options.  We primarily use historical data to determine the assumptions to be used in the Black-Scholes model and have no reason to believe that future data is likely to differ materially from historical data. However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.  This accounting guidance requires the recognition of the fair value of stock compensation in net income.  Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.





27




Recently Issued Accounting Standards





In June 2009, the FASB issued ASC 105 Accounting Standards CodificationTMand the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards CodificationTM (the “Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”). All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws, however, will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include references to the new Codification. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.





In January 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements(“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding disclosure of the different classes of assets and liabilities, valuation techniques and inputs used, activity in Level 3 fair value measurements, and the transfers between levels. ASU No. 2010-06 is effective for the annual reporting period beginning after December 15, 2009. The Company is providing the required disclosures beginning with the this Annual Report on Form 10-K for the year ending December 31, 2010. The Company does not anticipate that the adoption of the Update will have a material impact to the Company’s financial position, results of operations or cash flows.





In February 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements(“ASU No. 2010-09”). The new standard addresses, among other things that an entity that is an SEC filer is no longer required to disclose the date through which subsequent events have been evaluated.  ASU No. 2010-10 is effective upon the issuance of the final Update. The Company has adopted this Update beginning with the Company’s S-1 filing.The adoption of this Update has not had a material impact to the Company’s financial position, results of operations or cash flows.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 The financial statements and supplementary data required by this Item 8 are set forth later in this report.





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE





None





ITEM 9A.CONTROLS AND PROCEDURES


Disclosure Controls and Procedures




The Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports filed under the Exchange Act, such as this Form 10-K, is collected, recorded, processed, summarized and reported within the time periods specified in the rules of the Securities and Exchange Commission.  The Company’s disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.  As required under Exchange Act Rule 13a-15, the Company’s management, including the Chief Executive Officer and Principal Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report.  Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO, as appropriate, to allow timely decisions regarding required disclosure.





28




Management’s Report on Internal Control Over Financial Reporting





The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15.  The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.  Management conducted an assessment of the Company’s internal control over financial reporting based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework.  Based on the assessment, management concluded that, as of December 31, 2010, the Company’s internal control over financial reporting is effective based on those criteria.





The Company’s management, including its Chief Executive Officer and Principal Financial Officer, does not expect that the Company’s disclosure controls and procedures and its internal control processes 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.  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 error or fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that the breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also 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.  Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.  However, these inherent limitations are known features of the financial reporting process.  Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.





Changes in Internal Control





There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our fiscal quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.







ITEM 9B.  OTHER INFORMATION




None.







29




ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.




DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS





Executive Officers





The following table sets forth the name of our executive officers and directors and the position held by each:





Name

Age

PositionRichard Pearce

49

President, Chief Executive Officer, and Chairman of the Board of DirectorsBob Armstrong

49

Chief Financial OfficerJeremy Alcamo

36

Executive VP and Director serving on the BoardWade Brantley

52

Director of Investor Relations and Director serving on the BoardRobert Nikkel

60

Chief HerbalistPeter Papilion

55

Director serving on the Board





The background of our executive officers is as follows:





Richard Pearce, President, Chief Executive Officer and Chairman of the Board of Directors





Mr. Pearce has been our CEO since 2002.  Prior to becoming CEO, Mr. Pearce was the founder of several business ventures including Bay Area Cash Registers in Tampa, Florida, Cash Graf, a COMDEX “Best In Show” software package that included accounting, database, appointment scheduling and word processing programs, a clothing line called Refuze 2 Luz, which was sold in hundreds of stores across the United States and ClearPath Inc. d/b/a ThermaProducts, Inc., the world’s first and only portable snow melting equipment.





Mr. Pearce has been associated with us for over 8 years and brings to the board extensive knowledge about our business operations.  He also brings to the Board significant executive leadership and operational experience.  Mr. Pearce’s prior business experience with other manufacturers of products, along with his tenure at our company, we believe gives him broad and extensive understanding of our operations and the proper role and function of the Board.





Bob Armstrong, Chief Financial Officer





Mr. Armstrong has been our Chief Financial Officer since May 3, 2010.    Mr. Armstrong joined the Company from Three Palms, LLC where he spent eleven years as CFO.  His responsibilities included all activities related to client administration, accounting and reporting for over 40 hedge funds.  Prior to Three Palms, Mr. Armstrong spent ten years as an independent financial consultant advising small and rapidly growing companies in all aspects of financial management.  His clients included companies in the telecommunications and food service industries.  Mr. Armstrong also spent four years as Assistant Treasurer for Nu-West Industries, Inc., a publicly traded chemical fertilizer manufacturer.  Mr. Armstrong began his career as an auditor with Deloitte & Touche in Denver.  Mr. Armstrong received a B.S. in Business Administration from The Ohio State University in 1984.





Jeremy Alcamo, Executive VP. and Director





Mr. Alcamo officially joined the team in October of 2006. As Executive VP, he oversees operations. In this capacity, Mr. Alcamo assists in coordinating the manufacturing and shipping of the drinks in addition to the ordering and purchasing of point-of-sale materials. Prior to working at DC Brands, Mr. Alcamo worked for Colorado-based companies Avanti Petroleum; a franchisee of Total Petroleum convenience stores; and Palo Alto; a franchisee of Taco Bells, Pizza Huts and Kentucky Fried Chickens. He also worked with Richard Pearce previously at ThermaProducts, where he was responsible for the company’s accounting and product development. Mr. Alcamo is a graduate of Regis University and has a Bachelor’s degree in professional accounting and Business Administration.





30




Mr. Alcamo brings a strong business background to our company, having worked with various companies in the Colorado area.   He brings significant financial and operational management, as well as financial reporting expertise to the Board.





Wade Brantley, Director of Investor Relations and Director





Mr. Brantley joined the Company in January, 2010. For the five years prior to joining the Company, Mr. Brantley was an Associate Vice President in Investments with Wells Fargo Financial Advisors.  Mr. Brantley has over twenty five years of combined experience in the government and capital markets arenas.  Mr. Brantley is the director of Investor Relations and responsible for shareholder communications and stock related issues, as well as monitoring the compliance and regulatory requirements applicable to DC Brands as a publicly traded entity.





Mr. Brantley received his Masters Degree from Drake University’s College of Business and Public Administration. He completed the Executive Certification for Investment Management Analyst through the Wharton School of Business and the Investment Management Consultants Association. His experiences include structuring debt and equity financing for public and private projects, and small business development. He has served as an elected official on the board of a special district, as well as an appointed executive director to a general improvement taxing district.  Mr. Brantley has been appointed to several community based committees for development and planning of public facilities.





Mr. Brantley brings a strong business background to our company, having worked in the financial service industry for over twenty five years.  His experiences have resulted in a broad understanding of the operational, financial and strategic issues facing public and private companies.





Robert Nikkel, Chief Herbalist





Mr. Nikkel has been with DC Brands, LLC, the company that we acquired in 2004, for the last ten years.   He has been involved in the manufacture of pharmaceutical and herbal medicine since 1987.  Mr. Nikkel concentrates his work on the use of Eastern medicine, specifically the concept of wellness based upon total lifestyle, for athletes in sports to perfect performance lifestyle and the supplements to support them.  He has written over 300 formulas that are assets of the Company that include formulas to treat illness as well as formulas to increase athletic performance.





Peter Papilion , Director





Peter Papilion has been a director since November, 2005.  From 1998 until the present he has been a director of Global Sourcing with G&G Outfitters, Inc., a global company engaged in the sale of promotional items worldwide.  His responsibilities include sourcing production facilities worldwide for branded merchandise and OEM products.





Mr. Papillion brings significant knowledge and experience to the Board.  He has significant experience in marketing and promotional activities. His extensive management experience is an important aspect of his service on this Board.





DIRECTORS





Directors are elected at each annual meeting of shareholders and hold office until the next annual meeting of shareholders following their election.  To date, none of our directors have received any compensation from us, whether in the form of cash or securities, for their service as directors. Peter Papillion is our only independent director serving on our Board of Directors.





31




Directors’ Term of Office




Directors will hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board of directors.




Directors’ Term of Office





Directors will hold office until the next annual meeting of shareholders and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board of directors.





Audit Committee





Our board of directors currently serves as our audit committee. The audit committee is responsible for recommending independent auditors and reviewing management actions in matters relating to audit functions. The committee reviews, with independent auditors, the scope and results of its audit engagement, the system of internal controls and procedures and reviews the effectiveness of procedures intended to prevent violations of laws.





The audit committee, consistent with the Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with management and the auditors prior to filing of officers’ certifications with the SEC to receive information concerning, among other things, significant deficiencies in the design or operation of internal controls.





Our board members other than Peter Papillion are not “independent” in accordance with rule 4200(a)(14) of the Nasdaq Marketplace Rules. Our board of directors does not have an “audit committee financial expert,” within the meaning of that phrase under applicable regulations of the Securities and Exchange Commission, serving on the audit committee. The board of directors believes that each member is financially literate and experienced in business matters and is capable of (1) understanding generally accepted accounting principles (“GAAP”) and financial statements, (2) assessing the general application of GAAP principles in connection with our accounting for estimates, accruals and reserves, (3) analyzing and evaluating our financial statements, (4) understanding our internal controls and procedures for financial reporting, and (5) understanding audit committee functions, all of which are attributes of an audit committee financial expert. However, the board of directors believes that no audit committee member has obtained these attributes through the experience specified in the SEC's definition of “audit committee financial expert.” Further, as is the case with many small companies, it would be difficult for us to attract and retain board members who qualify as “audit committee financial experts,” and competition for such individuals is significant. The board of directors believes that its current audit committee is able to fulfill its role under SEC regulations despite not having a designated “audit committee financial expert.”





Section 16(a) Beneficial Ownership Reporting Compliance




Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers, directors and persons who beneficially own more than 10 percent of a registered class of the Company’s equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of the Company’s common stock.  Such officers, directors and persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms that they file with the SEC.




Based solely on a review of the copies of such forms that were received by the Company, or written representations from certain reporting persons that no Form 5s were required for those persons, the Company is not aware of any failures to file reports or report transactions in a timely manner during the Company’s fiscal year ended December 31, 2010.




32




Code of Ethics




The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer and controller.  Such code of ethics is posted on the Company’s internet website, which is located at www.hardnutrition.com.




ITEM 11.  EXECUTIVE COMPENSATION





During the year ended December 31, 2010 and 2009 we did not issue any options or shares of restricted stock to any named officers or directors in connection with their employment or service to the Company and there are no outstanding equity awards as of December 31, 2010.





Executive Compensation





The following table sets forth all compensation awarded, earned or paid for services rendered to our executive officers that exceeded $100,000 during each of the fiscal years ended December 31, 2010 and 2009.





Summary Compensation Table


Name and

PrincipalPosition

(a)

Year

(b)


Salary

($)(c)


Bonus

($)(d)


Option

Awards

($)(f)

Stock

Awards

($)(g)

All Other

Compensation

($)(h)


Total

($)(i)(1)(2)









(3)Richard Pearce,


2010



625,000



-



-




4,867



629,867President & CEO


2009



525,000



-



-




12,677



537,677Jeremy Alcamo


2010



125,000



-



-




-



125,000Executive Vice President


2009



125,000



-



-




-



125,000


(1) Salary shown in the table represents salary earned by Mr. Pearce.  Mr. Pearce deferred salary of $596,538 and $491,561 in 2010 and 2009, respectively.


(2) Salary shown in the table represents salary earned by Mr. Alcamo.  Mr. Alcamo deferred salary of $71,134 and $21,686 in 2010 and 2009, respectively.


(3) Consists of expenses to provide Mr. Pearce an automobile.





Employment Agreements





On October 1, 2004, we entered into a ten year Employment Agreement with Richard Pearce which expires in October 2014. The Employment Agreement appoints Mr. Pearce as our President and Chief Executive Officer and requires that Mr. Pearce devote his full time to the business of the Company in exchange for compensation increasing from a base salary of $250,000 for the first year to $1,000,000 the tenth year of the term of the Employment Agreement. The agreement also provides that so long as Mr. Pearce is serving as our President and Chief Executive Officer that he is to also serve as one of our directors. Mr. Pearce is entitled to a life insurance policy at our expense, of which we are a 50% beneficiary and a person designated by him is the other 50% beneficiary. To date, such policy has not been purchased. Upon execution of the agreement, Mr. Pearce was issued 100,000 shares of our Series A Preferred Stock which entitled Mr. Pearce to such number of votes as shall equal 56.25% of the voting power of our outstanding stock; however subsequent to the issuance Mr. Pearce exchanged 5% of his voting power for 40,000,000 shares of common stock. Mr. Pearce now holds 91,111 shares of Series A Preferred Stock that have the right to vote 51.25% of the outstanding voting shares. The agreement is subject to termination without cause upon the vote of three quarters of the shareholders and board and with cause upon the determination of an arbitrator and only after Mr. Pearce has been notified at least three times of his breach. In the event of a termination with or without cause, Mr. Pearce is entitled at his option to be paid in full the current value of all monies and other forms of compensation owed, at that time, under the employment agreement throughout its then remaining term or to the same on a periodic basis (consistent with whatever periodic payments are owed as of that time). Cause is defined as willful and malicious misappropriation of customer assets for personal gain to Mr. Pearce, willful and flagrant disregard of reasonable written instructions of the board of directors involving those consistent with Mr. Pearce’s position and title as determined by an independent professional arbitrator and only after not less than 3 written notices from the Chairman of the Board to follow the policies and procedures of the board of directors. We may also suffer treble damages if we attempt to remove Mr. Pearce from office by threat of actual litigation which does not meet the criteria for cause.





33




On May 1, 2010, we entered into a three year employment agreement with Jeremy Alcamo.  The Employment Agreement appoints Mr. Alcamo as our Executive Vice President and requires that Mr. Alcamo devote the time he deems necessary to the performance of the business of the Company in exchange for an annual salary of $125,000 subject to increases each year which shall be at least 5% per year.  The Company has the right to terminate the Employment Agreement upon Mr. Alcamo’s death or disability or for cause as defined in the agreement. Mr. Alcamo has the right to terminate the Employment Agreement for good reason as defined in the agreement which includes a material breach by the Company and  a change of control.   In the event of a termination by Mr. Alcamo for good reason, or by the Company without cause, Mr. Alcamo is entitled to receive his monthly salary for an additional six months in addition to any accrued bonus, vacation pay and expense reimbursement.





We currently maintain no other agreements for employment with any of our other executive officers or employees.




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





We determine beneficial ownership based on the rules of the Securities and Exchange Commission. In general, beneficial ownership includes shares over which a person has sole or shared voting or investment power and shares which the person has the right to acquire within 60 days. Unless otherwise indicated, the persons listed below have sole voting and investment power over the shares beneficially owned. As of March 24, 2011 we had 344,413,849 shares of common stock outstanding.


Name and Address of Beneficial Owner

Shares Beneficially Owned (1)


Percentage of ClassRichard Pearce(2)


399,845,546



55.63
%Bob Armstrong


0



*Jeremy Alcamo


724,997



*Peter Papilion


45,000



*Wade Brantley


845,000



*Robert Nikkel


250,000



*All executive officers and directors as a group (seven persons)


401,710,543



55.89
%


____________________


* less than 1%


(1)  Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options, warrants and convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding, including for purposes of computing the percentage ownership of the person holding such option, warrant or convertible security, but not for purposes of computing the percentage of any other holder.





(2)  Includes 12,263,267 shares that Mr. Pearce has the right to purchase in accordance with the terms of his Employment Agreement. Excludes 91,111 shares of Series A Preferred Stock that Mr. Pearce owns that allows him the right to vote 51.25% of the outstanding voting stock or 309,488,033 votes.





34





ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





The Company had related party payables of $637,392 and $1,659,277 at December 31, 2010 and 2009, respectively consisting primarily of deferred salaries payable and royalties payable to its officers.  Of the $637,392 of related party payables, $559,434 was owed to Mr. Pearce ($552,409 for deferred salary payable and $6,825 for royalties owed in accordance with the bottle cap license agreement) and $77,959 was owed to Mr. Alcamo ($71,134 for deferred salary payable and $6,825 for royalties owed in accordance with the bottle cap license agreement).  Richard Pearce and Jeremy Alcamo collectively deferred $623,743 and $513,247 in salaries and $13,649 and $13,376 in royalties in 2010 and 2009, respectively.  Richard Pearce, our Chief Executive Officer, and Jeremy J Alcamo, our Executive Vice President, have received a design patent in the United States (US D 576,877S) for the flip-top compartment which we currently use on our H.A.R.D. Nutrition bottles, which they have licensed to us on an exclusive basis for a fee based upon the number of products sold that contain the cap.  The royalty agreement with Richard Pearce and Jeremy Alcamo is for a term of five years and is renewable by the Company for five additional one year terms and provides that they are entitled to receive 5 cents per cap or 2 1/2 cents each for each bottle cap sold.  The bottle cap is a specialized cap that contains the vitamin supplements in the Company’s functional water system. The agreement may be immediately terminated upon the occurrence of: (i) a default in payments due thereunder if the default has continued for ten days after notice of the default was given; (ii) upon a party’s insolvency, assignment for the benefit of creditors of filing of a bankruptcy petition; or (ii) a party’s refusal or failure to perform an obligation under the agreement if such default is not cured within ten days of notice thereof.   The related party payables are non-interest bearing and due on demand.





In June 2010 the company converted $1,659,277 of related party payables owed to Richard Pearce and Jeremy Alcamo into notes bearing interest at a rate of 10% that are callable with 366 days notice which classifies them as long term debt.  Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of  a debt or equity financing or any combination thereof and our receipt of  gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo then, and upon the happening of any such event, Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.





ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Aggregate fees including expenses billed to us for the years ended December 31, 2010 and 2009, for processional services performed by Turner, Stone and Company were as follows:




2010


2009Audit Fees and Expenses

$
123,875


$
40,714Audit-Related FeesTax Fees


24,000All Other Fees


-



-Total

$
147,975


$
40,714







35





ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES


(a) Financial Statements





The financial statements listed in the Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K. All financial statement schedules have been included in the Consolidated Financial Statements or Notes thereto.





(b) Exhibits




Exhibit

Number

Description3.1
Articles of Incorporation filed on April 29, 1998 (1)3.2
By-laws (1)3.3
Articles of Amendment filed on August 23, 2004 (1)3.4
Articles of Amendment filed on December 3, 2004 (1)3.5
Articles of Amendment filed on January 31, 2006 (1)3.6
Certificate of Designations for Series A Preferred Stock filed on May 21, 2007 (1)3.7
Articles of Amendment filed on August 31, 2007 (1)3.8
Certificate of Correction to Certificate of Designations filed on May 6, 2010 (1)3.9
Articles of Amendment filed on July 9, 2010 (3)4.1
Form of Warrant  for purchase of up to 4,000,000 shares of common stock (1)4.2
Form of Warrant for purchase of up to 2,000,000 shares of common stock (1)4.3
Form of Warrant for purchase of up to 25,000,000 shares of common stock4.4
Form of Promissory Note10.1
License Agreement, dated as of January 1, 2008, between the Company and Richard Pearce and Jeremy Alcamo (1)10.2
Employment Agreement, dated October 10, 2004, between the Company and Richard Pearce (1)10.3
Exchange Agreement, dated as of June 8, 2007, between the Company and Richard Pearce (1)10.4
Exchange Agreement, dated as of March 24, 2008, between the Company and Richard Pearce (1)10.5
Employment Agreement, dated as of May 1, 2010, between the Company and Jeremy Alcamo (1)10.6
Endorsement Agreement, dated October 21, 2009, between the Company and Chris Andersen (2)10.7
Sales Representative Contract, dated as of March 15, 2010, between the Company and Acosta, Inc. (2)10.8
Purchase and Sale Agreement, dated as of June 4, 2010, between the Company and Liquid Capital Exchange, Inc. (2)10.9
Investment Agreement, dated as of Janaury 31, 2011, between the Company and Centurion Private Equity, LLC (4)10.10
Registration Rights Agreement, dated as of January 31, 2011, between the Company and Centurion Private Equity, LLC (4)14
Code of Conduct (5)21.1
List of Subsidiaries (1)31.1
Certification pursuant to Rule 13a-14(a)/15d-14(a) (5) Certification pursuant to Rule 13a-14(a)/15d-14(a) (5)31.2
Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002(5)32.2
Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002(5)




36

















DC BRANDS INTERNATIONAL, INC.





Consolidated Financial Statements


And


Report of Independent Registered Public Accounting Firm


December 31, 2010 and 2009











Board of Directors and Stockholders


DC Brands International, Inc. and subsidiaries


Denver, Colorado





We have audited the accompanying consolidated balance sheets of DC Brands International, Inc. and subsidiaries, (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes 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 consolidated financial position of DC Brands International, Inc. and subsidiaries at December 31, 2010 and 2009, and the results of their consolidated operations and cash flows for the years then ended 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 1 to the consolidated financial statements, the Company has incurred significant losses, negative cash flows from operations and had negative working capital at December 31, 2010 and 2009, all of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.





/s/ Turner, Stone & Company, L.L.P.





Certified Public Accountants


Dallas, Texas


March 24, 2011








F-1














DC BRANDS INTERNATIONAL, INC.








Consolidated Financial Statements





As of December 31, 2010 and 2009













F-2





DC Brands International, Inc.





Consolidated Balance Sheets





As of December 31


December 31,2010


2009AssetsCurrent assetsCash and cash equivalents


23,234


$
81,362Accounts receivable


72,857



185,106Inventory


305,307



364,991Prepaid expenses


-



7,423Total current assets


401,398



638,882Property and equipment, net


109,418



166,608Total assets


510,816


$
805,490LiabilitiesCurrent liabilitiesAccounts payable


388,447


$
573,208Accrued interest payable


330,723



206,332Accrued liabilities


637



7,302Related party payable


637,392



1,659,277Warrant liability


1,448,400



1,463,000Short-term notes payable and current portion of long-term debt (Net of Unamortized Discount of $0 in 2010 and $108,609 in 2009)


1,301,074



1,889,646Total current liabilities


4,106,673



5,798,765Long-term debt  to related party


1,650,841



-Long-term debt (Net of Unamortized Discount of $919,624 in 2010 and $0 in 2009)


2,673,559



1,908,375Total liabilities


8,431,073



7,707,140Commitments and contingencies (Note 4)Stockholders' deficitPreferred Stock, $0.001 par value; 25,000,000 shares authorizedSeries A Preferred Stock, 100,000 shares authorized, shares issuedand outstanding - 91,111 shares in 2010 and 2009


91



91Common Stock, $0.001 par value; 500,000,000shares authorized, shares issued and outstanding- 302,167,779 in 2010 and 201,569,720 in 2009


302,168



201,570Additional paid in capital


71,965,937



63,283,790Issuances in exchange for promotional consideration


(158,776
)


(375,844
)Accumulated deficit


(80,029,677
)


(70,011,257
)Total stockholders' deficit


(7,920,257
)


(6,901,650
)Total liabilities and stockholders' deficit


510,816


$
805,490


The accompanying notes are an integral part of these financial statements.





F-3


DC Brands International, Inc.





Consolidated Statements of Operations




For the Twelve Months Ended December 31




2010


2009Net Revenues, net


605,493


$
629,525Cost of goods sold


471,578



507,679Gross margin


133,915



121,846Operating ExpensesGeneral and administrative (includes share based compensation of $1,156,440 in 2010 and $597,338 in 2009)


3,860,742



2,802,466Sales and marketing (includes share based compensation of $357,068  in 2010 and $35,204 in 2009)


1,227,890



1,264,455Depreciation


85,892



85,207Total operating expenses


5,174,524



4,152,128Loss from operations


(5,040,608
)


(4,030,282
)Other ExpenseInterest expense


1,206,715



651,627Interest expense - warrant liability


1,855,400



-Loss on retirement of debt


1,915,697



683,307Total other expense


4,977,812



1,334,934Net Loss


(10,018,420
)

$
(5,365,216
)Weighted average number of common shares outstanding


251,868,750



151,240,782Basic and diluted net loss per common share


(0
)

$
(0.04
)
 
 The accompanying notes are an integral part of these financial statements.
 
 F-4
  DC Brands International, Inc.
 
 Consolidated Statements of Cash Flows
 
 For the Twelve Months Ended December 31
  2010


2009Cash used in operating activitiesNet loss


(10,018,420
)

$
(5,365,216
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization


85,892



85,207Common stock issued for services


1,653,508



632,532Loss (gain) on retirement of debt


1,915,697



683,307Amortization of debt discount


562,884



196,556Write-down of inventory






14,316Impairment of intangible assets


-Changes in operating assets and liabilities:Accounts receivable


112,250



(183,853
)Inventory


59,684



(292,010
)Prepaid expenses


7,423



(2,500
)Accounts payable


(184,761
)


149,802Accrued interest payable


124,392



147,389Accrued liabilities


(6,665
)


469Related party payable


628,956



324,526Warrant liability


1,855,400



-Net cash used in operating activities


(3,203,760
)


(3,609,475
)Cash used in investing activitiesPurchase of property and equipment


(28,703
)


(8,608
)Net cash used in investing activities


(28,703
)


(8,608
)Cash provided by financing activitiesProceeds from issuance of common stock


576,500



2,983,510Interest accruals paid with stock


272,967Proceeds from notes payable


2,531,500



760,205Stock Issued to Settle Warrant LiabilityPayment on notes payable


(206,632
)


(56,502
)Net cash provided by financing activities


3,174,335



3,687,213Net increase  (decrease) in cash and cash equivalents


(58,128
)


69,130Cash and cash equivalentsBeginning of period


81,362



12,232End of period


23,234


$
81,362Supplemental Disclosure of NoncashInvesting and Financing ActivitiesAccrued interest refinanced into new note payable


200,357Notes payable refinanced


2,341,338Debt forgiven for warrant exercise


250,000Notes payable paid throught the issuance of stock


1,270,750



2,279,000Common stock issued for retirement of debt and accrued int


3,415,905


$
-Related party advance converted to notes payable


1,650,841


$
-Warrants issued as incentive to debt holder


1,750,000


$
-Common stock as discount in connection with debt offering


1,373,900Supplemental DisclosureInterest paid


117,689


$
287,828Income taxes paid


-


$
-Interest received


-


$
-
 
  The accompanying notes are an integral part of these financial statements.
 
 F-5
  DC Brands International, Inc.
 
 Consolidated Statement of Stockholders’ Equity
 
 For the Twelve Months Ended December 31
  Series A Preferred Stock


Common Stock


Additional

Paid in


Additional


Accumulated


Total Stockholders'Shares


Amount


Shares


Amount


Capital


Issuances


Deficit


DeficitBalance, December 31, 2008


91,111


$
91



117,929,720


$
117,930


$
58,559,544


$
-


$
(64,646,041
)

$
(5,968,476
)Common stock issued in exchange for cash


-



-



58,670,000



58,670



1,461,840







-



1,520,510Common stock issued in exchange for services


-



-



8,670,000



8,670



999,706



(375,844
)


-



632,532Common stock issued in exchange for






























-retirement of debt


-



-



16,300,000



16,300



2,262,700







-



2,279,000Net loss


-



-



-



-



-







(5,365,216
)


(5,365,216
)Balance, December 31, 2009


91,111



91



201,569,720



201,570



63,283,790



(375,844
)


(70,011,257
)


(6,901,650
)Common stock issued in exchange for cash










9,130,000



9,130



567,370











576,500Common stock issued in exchange for services










14,170,891



14,171



1,282,269



217,068







1,513,508Common stock issued in exchange for retirement of debt










34,231,749



34,232



3,381,673











3,415,905Warrants issued as incentive to debt holder










25,000,000



25,000



1,975,000











2,000,000Common Stock issued on exercise of warrant










2,000,000



2,000



118,000











120,000Common stock issued in conjunction with debt offering










16,065,419



16,065



1,357,835











1,373,900Net loss


























(10,018,421
)


(10,018,421
)Balance, Dec 31, 2010


91,111


$
91



302,167,779


$
302,168


$
71,965,937


$
(158,776
)

$
(80,029,678
)

$
(7,920,258
)
 
 The accompanying notes are an integral part of these financial statements.




F-6


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009





1.
Business and Significant Accounting Policies





The Company





DC Brands International, Inc. (“DC Brands” or the “Company”) was incorporated under the laws of Colorado in 1998 as Telemerge Holding Corp. and changed its name to DC Brands International, Inc. in 2004.  DC Brands specializes in the manufacture, marketing and distribution of health related products that utilize natural botanicals, vitamins, minerals and supplements and are aimed at maximizing the full potential of the body.    The Company’s current focus is on the sale of products under its H.A.R.D. Nutrition label.  The Company currently has two distinct types of products sold under its H.A.R.D. Nutrition logo; Functional Water Systems and nutritional supplements.  The Company’s products are sold to consumers, primarily through retail outlet distribution.  The Company’s products were distributed principally in the state of Colorado during 2010 and 2009.





Financial Condition




The Company has incurred significant losses and negative cash flows since its inception.   In addition, the Company had negative working capital (current assets less current liabilities) at December 31, 2010.  The Company’s ability to continue as a going concern is contingent upon its ability to secure additional financing.  Although the Company has negotiated in excess of $10 million in Debt/Equity financing subsequent to December 31, 2010, and believes that its prospects for securing additional financing are good, there can be no assurance given that it will be successful in its efforts to raise capital.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of these uncertainties.





Principles of Consolidation





These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries DC Nutrition, Inc. and DC Brands, LLC (inactive).  All material intercompany transactions and balances have been eliminated.





Cash and Cash Equivalents





DC Brands considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of money market investments. DC Brands maintains balances from time to time in excess of the federally insured limits.





Accounts Receivable





The Company’s accounts receivable are unsecured, and the Company is at risk to the extent such amounts become uncollectible. Management continually monitors accounts receivable balances and provides for an allowance for doubtful accounts at the time collection becomes questionable based on payment history or age of the receivable. The Company sells products generally on net 30 day terms. The Company does not normally charge financing fees on late payments. Accounts receivable are charged to the allowance for bad debts when the Company has exhausted all reasonable means of collection.  The Company did not have an allowance for doubtful accounts at December 31, 2010 or December 31, 2009 as it deemed its accounts receivable all to be collectible.





Inventory





Inventory consists of Functional Water Systems and nutritional supplements.  Inventory is classified as finished goods when assembled into product ready for sale.  Unassembled components are classified as raw materials.  Components partially assembled or in the process of assembly are classified as work in process.  Inventory is stated at lower of cost or market on a first-in first-out method.  Management establishes a reserve for damaged and discontinued inventory when the estimated market value is determined to be lower than cost.





F-7


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


Property and Equipment





Property and equipment is recorded at the original cost to the Company and is depreciated or amortized over estimated useful lives of three to five years, and leasehold improvements are amortized over the remaining life of the lease, using the straight-line method, commencing when the asset is placed in service.  Depreciation expense totaled $85,892 and $85,207, for the twelve months ended December 31, 2010 and 2009, respectively.





Warrant Liability





The warrant liability is calculated using a Barrier Option Model with MonteCarlo Simulation from Global Derivatives.com.  The current stock price, the stock volatility for the prior three months and the risk free rate (treasury bills) equal to the remaining term of the warrants are the inputs used in this valuation model.  This model specifically addresses the fact that no additional shares of stock will need to be issued if our stock price hits the target (barrier) of $.50 or $.15.  The stock volatility for any quarter is capped at 90% as volatilities greater than this produce an unreasonably low estimation of liability.  This amount is adjusted quarterly based upon the changes in valuation provided by the model.





Income Taxes





The Company uses the liability method for accounting for income taxes.  Under this method, the Company recognizes deferred assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years.  The Company establishes a valuation allowance for all deferred tax assets for which there is uncertainty regarding realization.





Net Loss Per Common Share





GAAP provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share include no dilution and are computed by dividing income available to common stockholders by the weighted-average number of shares outstanding during the period. Diluted earnings per share reflect the potential of securities that could share in the earnings of the Company, similar to fully diluted earnings per share. Basic and diluted loss per share was the same as of December 31, 2010 and December 31, 2009.  Common stock equivalents of 12,263,267 shares outstanding at both December 31, 2010 and December 31, 2009 from stock issuable on demand as described in Footnote 7 – Stockholders’ Equity – Stock Rights were not included in the calculation of earnings per share because they would have been anti-dilutive.





Revenue Recognition





Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured.  The Company accepts returns only if the item is damaged.   Items returned will be recorded when the items are returned.  Historically, we have not had any products returned.  However, we believe that the lack of returns, is in part due to our secret shopper program pursuant to which our Chief Executive Officer has used his own funds to purchase damaged products and products which are not damaged but have earlier generation labels. Although difficult to predict, we believe that returns without this program could be as high as one half of one percent of annual sales.  These repurchased products are then donated to charity or used in promotional campaigns and are not resold.





F-8


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


Share-Based Compensation





Share-based compensation is measured at the grant date, based on the closing value of the  Company’s common stock at the date of grant and is recognized over the requisite service period.




Advertising Expense




Advertising expense is expensed as incurred. Advertising expense totaled $586,828  and $980,000 for the twelve months ended December 31, 2010 and 2009, respectively.





Secret Shopper Program





Our secret shopper program was initially conducted by the Company itself in 2009 using Company funds for repurchases.  Accordingly, we reversed sales for those products that we purchased, reversed the cost of goods sold for those products that we purchased and recorded a marketing expense for the amount of money used to repurchase the products as well as the amount of money used to retool the products.  Commencing 2010, we did not repurchase any products; however our Chief Executive Officer used approximately $30,000 of his own funds to repurchase products.   The only cost incurred by the Company during 2010 in connection with this program was approximately $3,000 for retooling of products that was included in marketing expense, as theses products were later used in our marketing events.




DC Brands International, IncSecret Shopper ProgramPeriod Ended12/31/2010


12/31/2009Sales Reversed

$
0


$
74,584COGS Reversed

$
0


$
47,105Marketing Expense Recorded

$
0


$
53,997Product by CEO

$
30,000


$
0





Credit Risk and Customer Concentrations





Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions.  Financial instruments potentially subjecting the Company to concentrations of credit risk consist principally of accounts receivable.





As of December 31, 2010, one customer represented 63% of the company’s accounts receivable.  Both customers are wholesale distributor who provides product to the Company’s single largest retail grocery outlet, which represented 85% of the Company’s revenue volume during the twelve months ended December, 2010.





Use of Estimates





The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.  Significant estimates included in these financial statements include the estimated useful lives and realizablilty of long lived assets.





F-9


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


Fair Value of Financial Instrument Estimates





GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The fair value hierarchy established by GAAP prioritizes the inputs into valuation techniques used to measure fair value.  Accordingly, the Company uses valuation techniques that maximize the use of observable inputs when determining fair value.  The three levels of the hierarchy are as follows:





Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to us for identical assets or liabilities;





Level 2: Inputs include quoted prices for similar assets and liabilities in active or inactive markets or that are observable for the asset or liability either directly or indirectly; and





Level 3: Unobservable inputs that are supported by little or no market activity.





The Company has no assets or liabilities that were measured using quoted prices for similar assets and liabilities or significant unobservable inputs (Level 2 and Level 3 assets and liabilities) as of June 30, 2010.  The Company’s financial instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued interest payable, accrued liabilities, related party payables, notes payable and warrant liability.   The carrying amounts of all these financial instruments approximate their fair value due to their short maturities with the exception of warrant liability.  The warrant liability is adjusted at each reporting period based upon the Company’s stock price as described more fully in Footnote 7 – Stockholder’s Equity – Warrants.





Recent Accounting Pronouncements





In June 2009, the FASB issued ASC 105 Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification TM (the “Codification”) has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”). All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. Rules and interpretive releases of the SEC issued under the authority of federal securities laws, however, will continue to be the source of authoritative generally accepted accounting principles for SEC registrants. Effective September 30, 2009, all references made to GAAP in our consolidated financial statements will include references to the new Codification. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on our financial position, results of operations or cash flows.




In January 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU No. 2010-06”). The new standard addresses, among other things, guidance regarding disclosure of the different classes of assets and liabilities, valuation techniques and inputs used, activity in Level 3 fair value measurements, and the transfers between levels. ASU No. 2010-06 is effective for the annual reporting period beginning after December 15, 2009. The Company will provide the required disclosures beginning with this Annual Report on Form 10-K for the year ending December 31, 2010. The Company does not anticipate that the adoption of the Update will have  a material impact to the Company’s financial position, results of operations or cash flows.





In February 2010, the FASB issued Accounting Standard Update (“ASU”) No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (“ASU No. 2010-09”).  The new standard addresses, among other things that an entity that is an SEC filer is no longer required to disclose the date through which subsequent events have been evaluated.  ASU No. 2010-10 is effective upon the issuance of the final Update. The Company has adopted this Update beginning with the Company’s S-1 filing for the year ending December 31, 2009. The Company does not anticipate that the adoption of this Update will have a material impact to the Company’s financial position, results of operations or cash flows.




During the period ended December 31, 2010, there were several new accounting pronouncements issued by the FASB the most recent of which was Accounting Standards Update 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.




During the period ended December 31, 2010, there were several new accounting pronouncements issued by the FASB the most recent of which was Accounting Standards Update 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.  Each of these pronouncements, as applicable, has been or will be adopted by the Company.  Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.




F-10


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009





2.
Inventory





Inventory consisted of the following:




December 31,2010


2009Finished goods

$
174,555


$
250,964Work in process


71,358



25,685Raw materials


59,394



197,000305,307



473,649Allowance for obsolescence


-



(108,658
)$
305,307


$
364,991




3.
Property and Equipment





Property and equipment consisted of the following:





December 31,2010


2009Leasehold improvements

$
14,004


$
14,004Office furniture and fixtures


31,521



26,034Vehicles


231,970



231,970Warehouse equipment


103,134



93,030Computer equipment


75,170



62,059455,799



427,097Accumulated depreciation


(346,381
)


(260,489
)$
109,418


$
166,608


4.
Commitments and Contingencies





The Company leases office and warehouse space under a non-cancellable operating lease expiring in April 2013.  Future minimum lease payments under the lease are as follows:


Years EndingDecember 31,2011

$
203,9492012

$
206,8322013

$
69,260
 F-11
 DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


Minimum salary commitments under contracts with the Company’s CEO and Executive Vice-President are as follows:





Years EndingDecember 31,2011

$
856,2502012

$
962,8122013

$
1,007,0312104

$
750,000


5.
Notes Payable





A summary of notes payable as of December 31, 2010 is as follows:





Current


Long Term


Total1 Note payable, originated in 2004, due in 2006,


541,995



-



541,9956% interest rate, secured by assets ofDC Brands, LLC, a wholly owned subsidiary1 Note payable originated in 2005, due on demand,


242,188



-



242,188non interest bearing, unsecured1 Note payable originated in 2005, due on demand,


14,500



-



14,500non interest bearing, unsecured1 Note payable originated in 2007, due in 2007,


10,000



-



10,00036% interest, unsecured1 Notes payable originated in 2007, due in 2008,


14,266



-



14,26624% interest, unsecured7 Notes payable, originated in 2008,


462,873



-



462,873due at various dates from July to August2010, 15% interest, unsecured1 Note payable, originated in 2010, due


-



1,893,708



1,893,708January 1, 2015, 10.25% interest, unsecured3 Notes payable, originated in 2010, due


-



592,933



592,933July 1, 2013, callable after January 1, 20126% interest, unsecured1 Note payable, originated in 2010, due


-



333,209



333,209July 1, 2013, 16% interest, unsecured9 Notes payable, originated in 2010, due


-



773,333



773,333due at various dates from July to September 2013,16% interest, unsecured2 Notes payable, originated in 2007, due in


15,252



-



15,252monthly installments, maturing 2011 to 2012, interestfrom 1.9% to 11%, secured by motor vehicles1,301,074



3,593,183



4,894,257Unamortized discount


-



(919,624
)


(919,624
)$
1,301,074


$
2,673,559


$
3,974,633Related party notes2 Notes payable, originated in 2010, callable

$
-


$
1,650,841


$
1,650,841with 366 day notice, 10% interest, unsecured


F-12


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009





Long Term Debt Maturity by YearDecember 31,2011


-2012


-2013


1,699,4752014


-2015


1,893,708Thereafter


-Total


3,593,183




A summary of notes payable as of December 31, 2009 is as follows:





Current


Long Term


Total2 Notes payable, originated in 2004, due in 2006,

$
649,900


$
-


$
649,9006% interest rate, secured by assets ofDC Brands, LLC, a wholly owned subsidiary1 Note payable originated in 2005, due on demand,


242,188



-



242,188non interest bearing, unsecured1 Note payable originated in 2005, due on demand,


14,500



-



14,500non interest bearing, unsecured2 Notes payable originated in 2007, due in 2007,


86,123



-



86,12336% interest, unsecured1 Notes payable originated in 2007, due in 2007,


17,843



-



17,84324% interest, unsecured1 Note payable, originated in 2007, due


-



1,892,932



1,892,932January 1, 2011, 10% interest, unsecured13 Notes payable, originated in 2008,


947,989



-



947,989due at various dates from July to November2010, 15% interest, unsecured4 Notes payable, originated in 2005 and  2007,


39,712



15,443



55,155due in monthly installments, maturing 2010 to 2012,interest at 11%, secured by motor vehicles1,998,255



1,908,375



3,906,630Unamortized discount


(108,609
)


-



(108,609
)$
1,889,646


$
1,908,375


$
3,798,021





As of December 31, 2010 and 2009, ten notes payable totaling $1,029,135 and five notes payable totaling $753,866, respectively, were past due.  There are no default penalties or fees that may be sanctioned against the Company for not paying the notes upon maturity.  The Company intends to restructure these notes into long-term debt or equity.





The Company retired notes payable and accrued interest payable totaling $1,500,208 and $2,300,757 during the twelve months ended December 31, 2010 and 2009, respectively by issuing 34,231,740 and 16,300,000 shares of common stock during the twelve months ended December 31, 2010 and 2009, respectively.  The Company valued the shares at $3,415,905 and $1,617,450 based upon the closing share price at each retirement date and recorded a loss on retirement of debt of $1,915,697 and $683,307 during the twelve months ended December 31, 2010, and 2009 respectively.





The note payable due January 1, 2015 has a face amount of up to $5,000,000 and functions as a revolving line of credit.  There was $3,106,292 of unused availability on the note at December 31, 2010.





F-13


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009
 
 The notes in the aggregate principal amount of $750,000 owed to four investors with maturity dates between May and June were paid off on June 30 by issuing 4 new notes with aggregate principal amount of $926,142 (the accrued interest was included in the new notes). The new notes have a 36 month maturity. These notes bear interest at a range from 6% to 16% per annum. Three of these notes with a total principal amount of $592,933 are callable by holder anytime after January 1, 2012. A total of 6,332,089 of new shares of common stock were issued to these four debt holders in connection with the new debt issuance. The fair market value of the stock issued ($466,567) was recorded as a discount to these notes payable and will be amortized over the life of the notes. The $5 million revolving note with a principal outstanding balance as of June 30, 2010 of $1,591,338 was restructured such that it now bears interest at a rate of 10.25% per annum and matures on January 1, 2015. A warrant for the purchase of 25,000,000 shares of our common stock at an exercise price of $.01 was issued to this debt holder. The fair market value of this warrant, $1,750,000 was booked as additional paid in capital and as interest expense warrant. We also converted $1,659,277 of related party payables owed to Richard Pearce and Jeremy Alcamo into notes bearing interest at a rate of 10% that are callable with 366 days notice which classifies them as long term debt. Upon the occurrence of: (i) a change in ownership of twenty percent (20%) or more of our outstanding shares of common stock, (ii) our consummation of  a debt or equity financing or any combination thereof and our receipt of  gross proceeds of Five Million Dollars ($5,000,000) or more from such financing, or (iii) our termination of our employment agreement with Richard Pearce or Jeremy Alcamo then, and upon the happening of any such event, Richard Pearce or Jeremy Alcamo at their option shall have the right to immediately seek payment of the entire amount due and payable with interest thereon.





Transactions involving notes payable subsequent to December 31, 2010 are set forth in Note 10. Subsequent Events.





6.
Income Taxes





Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Current year and accumulated deferred tax benefit at the effective combined Federal and state income tax rate of 37.25% is $22,200,000 and a valuation allowance has been set up for the full amount because it is “more likely than not” that the accumulated deferred tax benefit will not be realized in the future.





The following table sets forth the components of estimated net deferred tax assets as of December 31, 2010 and 2009.




2010


2009Deferred tax assetsNOL expense (benefit)

$
26,216,000


$
22,200,000Less: valuation allowance


(26,216,000
)


(22,200,000
)Net deferred tax asset

$
-


$
-


F-14
 DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


A reconciliation of estimated income tax expense at the statutory combined Federal and state income tax rate for the years ended December 31, 2010 and 2009 is as follows:


2010





2009Income tax expense combined rate

$
3,731,000



37.25
%

$
1,820,000



37.25
%ImpairmentTax amortization


285,000



2.9
%


285,000



5.83
%Increase in valuation allowance


(4,016,000
)


(40.15
) %


(2,105,000
)


(43.08
) %Income tax expense

$
-






$
-


The Company has not filed tax returns since its inception.  The Company is in the process of preparing past tax returns and does not believe that it will be exposed to any risk of penalty or forfeiture of NOLs.




7.
Stockholders’ Equity





Issuances of Common Stock




The Company issued 58,670,000 shares of common stock throughout 2009 in exchange for $2,983,510 in cash at prices ranging from $0.032 to $0.10 per share.  Also included with the sales of common stock were 58,760,000 warrants described in detail below.  The Company recorded a warrant liability of $1,794,870, and the remaining proceeds of $1,188,640 was recorded as common stock and additional paid in capital.





The Company issued 8,670,000 shares of common stock from May to December 2009 related to services provided by vendors.  The shares were valued at prices ranging from $0.08 to $0.21 per share and were collectively valued at $1,008,376.





The Company issued 16,300,000 shares of common stock during 2009 in order to pay off or pay down notes payable and accrued interest.  The common stock was valued at $0.04 to $0.20 per share for 10,300,000 issued in October and December.  The shares were collectively valued at $2,279,000.





Additional Issuances of Stock





Included in the 8,670,000 shares of common stock issued from May to December 2009 related to services provided by vendors, the Company issued 2,750,000 shares of stock to three professional athletes and one agent in exchange for promotion of the company’s products.  The shares were valued from $.08 to $.18 per share for a total compensation expense of $425,000.  The terms of these agreements range from 12 to 24 months.  The earned portion of $49,156 is included in the $1,008,376 noted above.  The remaining unearned portion of $375,844 of these contracts is recorded as a reduction to Stockholders Equity.  In the year ended December 31, 2010 the company issued an additional 1,750,000 shares to a professional athlete and his agent.  The shares were valued at $.08 per share for a total compensation expense of $140,000.  The terms of these agreements are 12 months.  The earned portion of $357,068 was recorded as marketing expense in 2010.  The remaining unearned portion of $158,766 of these contracts is recorded as a reduction to Stockholders Equity.





F-15


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


The Company issued common stock during the twelve months ended December 31, 2010, as set forth below.  The common stock was valued at the fair market value at the date the Company became obligated to issue the shares.





The Company issued 9,130,000 shares of common stock during the twelve months ended December 31, 2010, in exchange for $576,500 in cash at prices ranging from $0.05 to $0.10 per share.





The Company issued 25,000,000 shares of common stock during the twelve months ended December 31, 2010, upon the exercise of options in exchange for $25,000 in cash at a price of $0.01per share.





The Company issued 12,420,891 shares of common stock during the twelve months ended December 31, 2010, related to services provided by vendors.  The shares were valued at prices ranging from $0.06 to $0.13 per share. The shares were collectively valued at $1,156,440.





The Company issued 34,231,749 shares of common stock during the twelve months ended December 31, 2010, in order to pay off or pay down notes payable and accrued interest.  The common stock was valued at $0.06 to $0.13 per share.  The shares were collectively valued at $3,415,905.





The Company issued 16,065,419 shares of common stock during the twelve months ended December 31, 2010, related to the issuance of debt.  The shares were valued from $0.08 to $0.12 per share and collectively valued at $1,373,900.





Series A Preferred Stock





The Series A Preferred Stock votes together with the common stock as a single class and the holders of the Series A Preferred Stock are entitled to such number of votes as shall equal 51.25% of the number of votes that may be cast by the outstanding shares of common stock.  The Series A Preferred Stock is not convertible into common stock and does not carry any redemption features.





Warrants





The Company issued 14,630,000 Warrants exercisable for a maximum of 29,260,000 shares of common stock from March to May 2009 in conjunction with the sale of common stock at $0.05 per Unit, each Unit consisting of a share of common stock and a Warrant which expire between March 5, 2012 and May 29, 2012.  In the event that the average trading price exceeds $0.50 per share over any consecutive 20 day period between the 12th and 24th months following the issue date of the Warrants, the Warrants become null and void.  In the event that the average trading price does not exceed $0.50 per share as set forth above, the Warrant may be exercised by the holder. The Warrant is redeemable into the number of shares that would need to be issued to cause the holder to have achieved an average selling price of $0.50 per share had they sold their shares during the 60 days following the 24th month following this issue date of the Warrants. The warrants are exercisable at an exercise price of $0.00 no additional funds need be provided by the holders in order to exercise the warrants and to obtain the underlying shares once the milestone set forth above that allow for exercise is met. As the Measurement Period has not yet passed, the number of shares of common stock for which the Warrants may be redeemed is not yet determinable. For example if the average trading price of our common stock for the 60 days following the 24th month was $.20 the warrant holder is due $.30 of stock value.  Therefore they would be issued an additional 1 1⁄2 shares of common stock ($.30 due / $.20 average value = 1 1⁄2.)  If the average trading price of our common stock for the 60 days following the 24th month was $.40 the warrant holder is due $.10 of stock value.  Therefore they would be issued an additional 1/4 share of common stock ($.10 due / $.40 average value = 1/4.)   If the average trading price of our common stock for the 60 days following the 24th month was $.10 the warrant holder is due $.40 of stock value.  Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($.40 due / $.10 average value = 4 reduced to 2 because of maximum.)





F-16


DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009


The Company issued 14,750,000 Warrants exercisable for a maximum of 29,500,000 shares of common stock from August to December 2009 in conjunction with the sale of common stock at $0.05 per Unit, each Unit consisting of a share of common stock and a Warrant which expire between November 15, 2010 and March 15, 2011.  In the event that the average trading price exceeds $0.15 per share in the three-month period between the 12th and 15th months following the issue date of the Warrants (the “Measurement Period”), the Warrants may be redeemed by the Company at a nominal amount.  In the event that the average trading price does not exceed $0.15 per share during the Measurement Period, the Warrant may be exercised by the holder.  The Warrant is redeemable into the number of shares that would need to be issued to cause the holder to have achieved an average selling price of $0.15 per share had they sold their shares during the Measurement Period. The warrants are exercisable at an exercise price of $0.00 no additional funds need be provided by the holders in order to exercise the warrants and to obtain the underlying shares once the milestone set forth above that allows for exercise is met. As the Measurement Period has not yet passed, the number of shares of common stock for which the Warrants may be redeemed is not yet determinable. For example if the average trading price of our common stock for the three-month period following the 12th month was $.10 the warrant holder is due $.05 of stock value.  Therefore they would be issued an additional  1⁄2 shares of common stock ($.05 due / $.10 average value =  1⁄2.)  If the average trading price of our common stock for the three-month period following the 12th month was $.20 the warrant holder is due no additional stock value.  Therefore no additional shares of stock would need to be issued.  If the average trading price of our common stock for the 60 days following the 24th month was $.03 the warrant holder is due $.12 of stock value.  Therefore, because of the two share maximum, they would be issued an additional 2 share of common stock ($.12 due / $.03 average value = 4 reduced to 2 because of maximum.)





During 2010 2 million shares were issued in satisfaction of one warrant that reached maturity.  Also during 2010 nine warrants were purchased by the company for $9 because the stock traded above the target rate in excess of the required days during the life of the warrant.  This leaves the total warrants outstanding at 19,230,000 exercisable for a maximum of 38,460,000 shares of common stock.
 
 The warrant holders will receive restricted shares of common stock upon exercise of their warrants; however following exercise they will be entitled to piggyback registration rights under certain specified circumstances.
 
 In June 2010, the Company issued a Warrant to one of its debt holders in conjunction with the restructuring of its debt. The Warrant is exercisable for 25,000,000 shares of the Company’s common stock at an exercise price of $.01 per share.  The Warrant contains a limitation on exercise that provides that the holder cannot exercise the warrant if such exercise would cause the holder to own in excess of 4.99% of the outstanding shares of common stock of the Company.  Such limitation can be waived by the holder upon 60 days notice.  The debt holder exercised all 25 million shares in 2010.


Stock Rights





The Company’s CEO has the right to demand that the Company issue him 12,263,267 shares of common stock.  The right stems from his employment agreement, whereby he was entitled to receive shares, such that his ownership interest would equal 56.25% of outstanding common stock.   The Company recorded compensation expense as these rights were earned, prior to June 2007 when he relinquished the right to earn additional shares.





Transactions involving common stock subsequent to December 31, 2010, are set forth in Note 10. Subsequent Events.


8.
Share Based Compensation Expense
 
 The Company recognizes expense associated with shares issued for services over the service period. The shares are valued based upon the fair value of the common stock on the date that the Company becomes obligated to issue the shares.  Expenses associated with shares issued for services are as follows:
  Twelve months ended Dec 31,2010


2009General and administrative

$
1,156,440


$
597,338Sales and marketing


357,068



35,204$
1,513,508


$
632,542
 
  F-17
 DC Brands International, Inc.
 Notes to Consolidated Financial Statements
 December 31, 2010 and 2009
 9.
Related Party Transactions
 
 The Company had related party payables of $637,392 and $1,659,277 at December 21, 2010 and December 31, 2009, respectively consisting primarily of deferred salaries payable and royalties payable to its officers.  In June of 2010 $1,650,841 of related party payables were converted into two notes callable with 366 days notice and earning 10% interest.  The Company is party to a royalty agreement with two of the Company’s officers whereby the officers are entitled to receive $0.05 per cap for each bottle cap sold.  The bottle cap is a specialized cap that contains the vitamin supplements in the Company’s functional water system.  The officers collectively deferred $667,672 and $513,247 in salaries and $13,648 and $13,376 in royalties during the twelve months ended December, 2010 and 2009, respectively.  The related party payables are non-interest bearing and due on demand.
 
 10.
Subsequent Events
 
 Subsequent to December 31, 2010, the Company issued common stock as follows:
  AdditionalCommon


Paid inShares


Stock


Capital


AmountFor conversion of debt


23,250,000


$
23,250


$
1,599,250


$
1,622,500In conjunction with debt offering


3,050,000



3,050



189,450



192,500In exchange for services


15,946,070



15,946



994,615



1,010,56142,246,070


$
42,246


$
2,783,315


$
2,825,561
 
 Subsequent to year-end we entered into a $10 million equity funding facility with Centurion Private Equity, LLC. This facility gives us the right to sell shares of our common stock to Centurion at a price determined by the current market. These sales are limited by our trading volume and price limitations determined by the Company and there can be no assurance that we will be able to use such facility. We have reserved 40 million shares of common stock for this facility. This line will not be available until a filing of an S-1 to register these shares is completed.
 Subsequent to year-end we received advances on our revolving line of credit in the amount of $325,500.
 F-18
 
 SIGNATURES
 
 In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form 10-K and authorized this registration statement to be signed on its behalf by the undersigned, in Wheat Ridge, Colorado, on March 31, 2011.
 
 DC BRANDS INTERNATIONAL, INC.By:
/s/ Richard PearceRichard Pearce, Chief Executive Officer
 
 Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
 
 Signature

Title

Date/s/ Richard Pearce

Chairman and Chief Executive Officer

March 31, 2011Richard Pearce

(Principal Executive Officer)/s/ Bob Armstrong

Chief Financial Officer

March 31, 2011Bob Armstrong

(Principal Accounting Officer)/s/ Jeremy Alcamo

Executive Vice President and Director

March 31, 2011Jeremy Alcamo/s/ Wade Brantley

Director

March 31, 2011Wade Brantley/s/ Peter Papilion

Director

March 31, 2011Peter Papilion
 37
 
 
 Exhibit No.
Description3.1
Articles of Incorporation filed on April 29, 1998 (1)3.2
By-laws (1)3.3
Articles of Amendment filed on August 23, 2004 (1)3.4
Articles of Amendment filed on December 3, 2004 (1)3.5
Articles of Amendment filed on January 31, 2006 (1)3.6
Certificate of Designations for Series A Preferred Stock filed on May 21, 2007 (1)3.7
Articles of Amendment filed on August 31, 2007 (1)3.8
Certificate of Correction to Certificate of Designations filed on May 6, 2010 (1)3.9
Articles of Amendment filed on July 9, 2010 (3)4.1
Form of Warrant for purchase of up to 4,000,000 shares of common stock(1)4.2
Form of Warrant for purchase of up to 2,000,000 shares of common stock(1)4.3
Form of Warrant for purchase of up to 25,000,000 shares of common stock4.4
Form of Promissory Note10.1
License Agreement, dated as of January 1, 2008, between the Company and Richard Pearce and Jeremy Alcamo (1)10.2
Employment Agreement, dated October 10, 2004, between the Company and Richard Pearce (1)10.3
Exchange Agreement, dated as of June 8, 2007, between the Company and Richard Pearce (1)10.4
Exchange Agreement, dated as of March 24, 2008, between the Company and Richard Pearce (1)10.5
Employment Agreement, dated as of May 1, 2010, between the Company and Jeremy Alcamo (1)10.6
Endorsement Agreement, dated October 21, 2009, between the Company and Chris Andersen (2)10.7
Sales Representative Contract, dated as of March 15, 2010, between the Company and Acosta, Inc. (2)10.8
Purchase and Sale Agreement, dated as of June 4, 2010, between the Company and Liquid Capital Exchange, Inc. (2)10.9
Investment Agreement, dated as of Janaury 31, 2011, between the Company and Centurion Private Equity, LLC (4)10.10
Registration Rights Agreement, dated as of January 31, 2011, between the Company and Centurion Private Equity, LLC (4)14
Code of Conduct (5)21.1

31.1

31.2

32.1

32.2
List of Subsidiaries (1)

Certification pursuant to Rule 13a-14(a)/15d-14(a) (5)

Certification pursuant to Rule 13a-14(a)/15d-14(a) (5)

Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002(5)

Certification pursuant to Section 1350 of the Sarbanes-Oxley Act of 2002(5)
   (1)
Incorporated herein by reference to the Company’s registration statement filed on Form S-1 with the Securities and Exchange Commission on May 10, 2010.
  (2)
Incorporated herein by reference to Amendment No. 1 to the Company’s registration statement filed on Form S-1/A with the Securities and Exchange Commission on June 22, 2010.
  (3)
Incorporated herein by reference to Amendment No. 2 to the Company’s registration statement filed on Form S-1/A with the Securities and Exchange Commission on July 14, 2010.
  (4)
Incorporated herein by reference to the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on February 2, 2011
  (5)
Filed herewith
     38