UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended: MARCH 31,SEPTEMBER 30, 2007
Commission File Number: 000-28027
GLOBAL BEVERAGE SOLUTIONS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 90-0093439
------ ----------
(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)
2 S. UNIVERSITY DR., SUITE 220, PLANTATION, FL 33324
----------------------------------------------------
(Address of principal executive office) (Zip code)
(954) 473-0850
--------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of MarchOctober 31, 2007 was 147,267,501147,467,501 shares.
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX
Page
No.
----------
Part I Financial Information (unaudited)
Item 1: Condensed Financial Statements
Statements of Net Assets as of March 31,September 30, 2007 and
December 31, 2006 3
Statements of Operations - For the Three Months Ended
March 31,September 30, 2007 and 2006 4
Statements of Operations - For the Nine Months Ended
September 30, 2007 and 2006 5
Statements of Cash Flows - For the ThreeNine Months Ended
March 31,September 30, 2007 and 2006 56
Statements of Changes in Net Assets - For the ThreeNine
Months Ended March 31,September 30, 2007 and 2006 67
Financial Highlights - For the ThreeNine Months Ended
March 31,September 30, 2007 and 2006 78
Schedule of Investments as of March 31,September 30, 2007
and December 31, 2006 8-99-10
Notes to Condensed Financial Statements 10-2011-24
Item 2: ManagementsManagement's Discussion and Analysis of Financial
Condition and Results of Operations 21-3025-29
Item 3: Quantitative and Qualitative Disclosure about Market Risk 3130
Item 4: Controls and Procedures 31-3230
Part II Other Information 31-34
Item 1: Legal Proceedings
33
Item 1A: Risk Factors 33
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
33
Item 3: Defaults Upon Senior Securities 33
Item 4: Submission of Matters to a Vote of Security Holders
33
Item 5: Other Information
33
Item 6: Exhibits
33
Signatures
34
Exhibits 35-36
2
PART 1:I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF NET ASSETS
MARCH 31,Condensed Statements of Net Assets
September 30, 2007 AND DECEMBERand December 31, 2006
2007 2006
-------------- -------------------------- ------------
(Unaudited)
ASSETS
Investments in portfolio companies:
Controlled affiliateaffiliates (cost $22,250,952$15,027,265 at
March 31,September 30, 2007 and $6,669,760 at
December 31, 2006)2006 $ 17,156,1927,126,113 $ 1,575,000
Non-controlled affiliate (cost $8,314,543 at
September 30, 2007 and $1,011,500 at March 31, 2007 and
December 31, 2006 - -
Unaffiliated issuers (cost $200,000 at March 31, 2007 and
December 31, 2006) - -
-------------- --------------700,000 --
------------ ------------
Total investments 17,156,1927,826,113 1,575,000
Cash and cash equivalents 69,381529 472
Deposits and prepaid expenses 2,5161,994 474
-------------- --------------Office equipment, net 2,812 --
------------ ------------
TOTAL ASSETS 17,228,0897,831,448 1,575,946
-------------- -------------------------- ------------
LIABILITIES
Notes payable 4,388,582(Note 3) 4,249,177 1,335,000
Accounts payable 40,24482,032 103,486
Accrued expenses 128,010440,364 48,064
-------------- -------------------------- ------------
TOTAL LIABILITIES 4,556,8364,771,573 1,486,550
-------------- -------------------------- ------------
NET ASSETS $ 12,671,2533,059,875 $ 89,396
============== ========================== ============
Commitments and contingencies (Note 6)
Composition of net assets:5)
COMPOSITION OF NET ASSETS
Preferred stock, $.001$0.001 par value; 50,000,000 shares
authorized; no shares issued and outstanding $ --- $ ---
Common stock, $.0001$0.0001 par value, authorizedvalue; 950,000,000 shares;
147,267,501shares
authorized; 147,467,501 and 43,665,067 shares
issued and outstanding at March 31,September 30, 2007
and December 31, 2006, respectively 147,267147,467 43,665
Additional paid in capital 30,968,80930,485,062 17,130,808
Stock subscription receivable (1,024,112) -
Deferred option compensation (101,124)(60,674) (121,349)
Accumulated deficit:
Accumulated net operating loss (9,134,912)(9,917,870) (8,779,053)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized depreciation ofloss on investments (15,715,695) (6,306,260)
(6,306,260)
-------------- --------------
Net assets------------ ------------
NET ASSETS $ 12,671,2533,059,875 $ 89,396
============== ========================== ============
Net asset value per share $ 0.08600.0207 $ 0.0020
============== ========================== ============
See accompanying notes to condensed financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,Condensed Statements of Operations
Three Months Ended September 30, 2007 ANDand 2006
(UNAUDITED)(Unaudited)
2007 2006
-------------- --------------------------- -------------
INCOME FROM OPERATIONS:
Interest income from controlled affiliates $ --- $ 1,25728,646
Interest income from non-controlled affiliates - 2,179-- 7,666
Management income from non-controlled affiliates --- 6,000
-------------- --------------
- 9,436
-------------- --------------------------- -------------
-- 42,312
------------- -------------
EXPENSES:
Officer and employee compensation and benefits 100,204 44,109
Director fees 3,000 1,500103,403 36,500
Professional fees 134,070 42,58181,954 35,073
Shareholder services and communications 19,415 21,582835 17,378
Interest expense 66,042154,570 552,875
Bad debt expense - portfolio company -- 50,369
Amortization of intrinsic value of common stock options 20,225 ---
Rent and utilities 15,526 3,000
Other general and administrative expense 12,903 5,876
-------------- --------------
355,859 115,648
-------------- --------------13,879 3,484
------------- -------------
390,392 698,679
------------- -------------
Loss before income taxes and realized and unrealized losses (355,859) (106,212)(390,392) (656,367)
Income taxes - -
-------------- ---------------- --
------------- -------------
NET LOSS FROM OPERATIONS (355,859) (106,212)
-------------- --------------(390,392) (656,367)
------------- -------------
NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on investments, net of income tax benefits of $0 - --- --
Change in unrealized depreciation of portfolio
investments, net of deferred tax benefit of $0 - -
-------------- --------------(7,751,152) (1,011,500)
------------- -------------
Net realized and unrealized losses - -
-------------- --------------gains (losses) (7,751,152) (1,011,500)
------------- -------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (355,859)(8,141,544) $ (106,212)
============== ==============(1,667,867)
============= =============
Net decrease in net assets from operations per share, basic
and diluted $ (0.0043)(0.0552) $ (0.0026)
============== ==============(0.0382)
============= =============
Weighted average shares outstanding 83,730,378 41,319,513
============== ==============147,454,458 43,638,996
============= =============
See accompanying notes to condensed financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,Condensed Statements of Operations
Nine Months Ended September 30, 2007 ANDand 2006
(UNAUDITED)(Unaudited)
2007 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:------------- -------------
Income from operations:
Interest income from controlled affiliates $ -- $ 52,301
Interest income from non-controlled affiliates -- 19,977
Management income from non-controlled affiliates -- 18,000
------------- -------------
-- 90,278
------------- -------------
Expenses:
Officer and employee compensation and benefits 234,133 113,000
Director fees 3,000 1,500
Professional fees 369,898 185,322
Shareholder services and communications 33,815 66,183
Interest expense 369,499 552,875
Bad debt expense - portfolio company -- 50,369
Amortization of intrinsic value of common stock options 60,675 --
Rent and utilities 34,943 9,000
Lawsuit settlement -- 78,000
Other general and administrative expense 32,854 9,577
------------- -------------
1,138,817 1,065,826
------------- -------------
Loss before income taxes and realized and unrealized losses (1,138,817) (975,548)
Income taxes -- --
------------- -------------
Net loss from operations (1,138,817) (975,548)
------------- -------------
Net realized and unrealized losses:
Net realized loss on investments, net of income tax benefits of $0 -- --
Change in unrealized depreciation of portfolio investments, net
of deferred tax benefit of $0 (9,409,435) (1,011,500)
------------- -------------
Net realized and unrealized losses (9,409,435) (1,011,500)
------------- -------------
Net decrease in net assets from operations $ (355,859)(10,548,252) $ (106,212)(1,987,048)
============= =============
Net decrease in net assets from operations per share, basic
and diluted $ (0.0835) $ (0.0464)
============= =============
Weighted average shares outstanding 126,384,200 42,847,225
============= =============
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
Cash flows from operating activities:
Net decrease in net assets from operations $(10,548,252) $ (1,987,048)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of portfolio investments 9,409,435 1,011,500
Amortization of intrinsic value of common stock options 20,22560,675 --
Bad debt expense - portfolio company -- 50,369
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes -- 538,000
Accretion of discount on notes payable 120,790 --
Depreciation 360 --
Common stock issued for services 1,500 -
Amortization of notes payable discount 17,046 ---
Changes in operating assets and liabilities: - -
Interest and fees receivable from portfolio companies - (9,436)-- (90,278)
Deposits and prepaid expenses (2,042) 8,237(1,520) 3,684
Accounts payable and accrued expenses 17,361 (47,704)
-------------- --------------370,846 117,586
------------ ------------
Net cash used in operating activities (301,769) (155,115)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:(586,166) (356,187)
------------ ------------
Cash flows from investing activities:
Investments in and advances to portfolio companies (725,976) (585,000)
-------------- --------------(793,332) (1,683,869)
Purchase of office equipment (3,172) --
------------ ------------
Net cash used in investing activities (725,976) (585,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:(796,504) (1,683,869)
------------ ------------
Cash flows from financing activities:
Common stock issued for cash 1,955,783 685,0002,484,348 825,000
Proceeds from convertible notes 223,450 1,185,000
Repayment of notes payable (859,129) -
-------------- --------------(1,325,071) --
------------ ------------
Net cash provided by financing activities 1,096,654 685,000
-------------- --------------1,382,727 2,010,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 68,909 (55,115)57 (30,056)
Cash and cash equivalents, beginning of period 472 245,370
-------------- -------------------------- ------------
Cash and cash equivalents, end of period $ 69,381529 $ 190,255
============== ==============215,314
============ ============
Supplemental Cash Flow Information:
Cash paid for interest and income taxes:
Interest $ 8,66627,470 $ ---
Income taxes - --- --
Non-cash investing and financing activities:
Common stock issued for:
Legal settlementsCommon stock issued for notes and other debts $ --- $ 60,000161,531
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. 625,000 ---
Acquisition of Beverage Networks of Maryland, Inc. 8,896,500 ---
Acquisition of Aqua Maestro, Inc. 1,431,250 ---
Liability of Rudy Beverage, Inc. 7,458 ---
Notes payable issued as partial consideration for:
Acquisition of Beverage Networks of Maryland, Inc. 3,704,652 ---
Acquisition of Aqua Maestro, Inc. 190,356 -
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CHANGES IN NET ASSETS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
-------------- --------------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (355,859) $ (106,212)
Net realized loss on sale of investments, net - -
Change in net unrealized depreciation of investments, net - -
-------------- --------------
Net decrease in net assets from operations (355,859) (106,212)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Common stock issued for:
Cash 1,955,783 685,000
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. 625,000 -
Acquisition of Beverage Network of Maryland, Inc. 8,896,500 -
Acquisition of Aqua Maestro, Inc. 1,431,250 -
Services 1,500 -
Notes and other debts 7,458 60,000
Amortization of intrinsic value of common stock options 20,225 -
-------------- --------------
Net increase in net assets from stock transactions 12,937,716 745,000
-------------- --------------
Net increase in net assets 12,581,857 638,788
Net assets, beginning of period 89,396 5,827,124
-------------- --------------
Net assets, end of period $ 12,671,253 $ 6,465,912
============== ==============--
See accompanying notes to condensed financial statements.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED MARCH 31,Condensed Statements of Changes in Net Assets
Nine Months Ended September 30, 2007 ANDand 2006
(UNAUDITED)(Unaudited)
2007 2006
------------ ------------
Changes in net assets from operations:
Net loss from operations $ (1,138,817) $ (975,548)
Net realized loss on sale of investments, net -- --
Change in net unrealized depreciation of investments, net (9,409,435) (1,011,500)
------------ ------------
Net decrease in net assets from operations (10,548,252) (1,987,048)
------------ ------------
Capital stock transactions:
Common stock issued for:
Cash 2,484,348 825,000
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. 625,000 --
Acquisition of Beverage Network of Maryland, Inc. 8,896,500 --
Acquisition of Aqua Maestro, Inc. 1,431,250 --
Services 1,500 --
Notes and other debts 7,458 161,531
Loan extension fee 12,000 --
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes -- 538,000
Amortization of intrinsic value of common stock options 60,675 --
------------ ------------
Net increase in net assets from stock transactions 13,518,731 1,524,531
------------ ------------
Net increase in net assets 2,970,479 (462,517)
Net assets, beginning of period 89,396 5,827,124
------------ ------------
Net assets, end of period $ 3,059,875 $ 5,364,607
============ ============
See accompanying notes to condensed financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
Financial Highlights
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
-------------- --------------
PER SHARE INFORMATION
Net asset value, beginning of period $ 0.0020 $ 0.1411
Net decrease from operations (0.0043) (0.0026)(0.0090) (0.0228)
Net change in realized losses and unrealized
depreciation of investments, net - -(0.0745) (0.0236)
Net increase from stock transactions 0.0883 0.01040.1022 0.0282
-------------- --------------
Net asset value, end of period $ 0.08600.0207 $ 0.14890.1229
============== ==============
Per share market value:
Beginning of period $ 0.42 $ 1.67
End of period 0.28 1.150.04 0.60
Investment return, based on changes in market price at end of period (1) -34.5% -31.1%price(1) 90.5% -64.1%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 12,671,2533,059,875 $ 6,465,9125,364,607
Average net assets 5,786,062 5,962,3916,679,067 6,311,920
Annualized ratio of expenses to average net assets 25% 8%23% 23%
Annualized ratio of net decrease in net assets from
operations to average net assets -25% -7%-211% -42%
Shares outstanding at end of period 147,267,501 43,439,105147,467,501 44,784,750
Weighted average shares outstanding during period 83,730,378 41,319,513126,384,200 42,847,225
(1) Periods of less than one year are not annualized
See accompanying notes to condensed financial statements.
78
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
MARCH 31,Schedule of Investments
September 30, 2007
DATE OF HISTORICAL FAIRShares/ Date of Historical Fair % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCKNet
% (1) Acquisition Cost Value Assets
INVESTMENT IN UNAFFILIATED ISSUERS
- ----------------------------------------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
============== ============= ======
COMMON STOCK------------- ------------ ----------
INVESTMENT IN AND ADVANCES TO NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ----------------------------------------------------------------------------------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc., privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 - 0%
============== ============= ======
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ---------------------------------------------------------
80% Nov-05N/A Jan-07 Note receivable from Rudy Beverage, Inc., privately held; which
may be converted under certain circumstances
into shares of common stock of Rudy Beverage,
Inc.; Rudy sells and manufactures beverages 1,818,043 - 0%
higher in nutritional value and lower in sugar
than most existing brands
7,303,043 2,208,283 17%N/A May-07 Note receivable from Rudy Partners, Ltd. in face
amount of $6,000,000, received in sale of 80%
of Rudy Beverage, Inc. owned by the Company;
collateralized with 11 million shares of the
Company's common stock 5,485,000 700,000 23%
------------- ------------ ----------
8,314,543 700,000 23%
------------- ------------ ----------
INVESTMENTS IN AND ADVANCES TO CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ------------------------------------------------------------------------
100% Feb-07 Beverage Network of Maryland, Inc., wholly-
owned subsidiary;owned; distributor of beverages in
the Mid-Atlantic States 13,015,496 13,015,496 103%13,008,293 5,107,141 167%
100% Mar-07 Aqua Maestro, Inc., wholly-owned subsidiary;wholly-owned; engaged
in wholesale and retail distribution
of domestic and imported bottled water 1,932,413 1,932,4132,018,972 2,018,972 15%
-------------- ------------- ------------------
15,027,265 7,126,113
------------- ------------ ----------
Total investments at December 31, 2006September 30, 2007 $ 22,250,952 17,156,192 135%
==============23,541,808 7,826,113 256%
=============
Cash and other assets, less liabilities (4,484,939) -35%
------------- ------(4,766,238) -156%
------------ ----------
Net assets at December 31, 2006September 30, 2007 $ 12,671,2533,059,875 100%
============= ================== ==========
(1) All of the Company's investments listed above are in stock of or notes
receivable from private companies.
See accompanying notes to condensed financial statements.
89
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
DECEMBERSchedule of Investments
December 31, 2006
DATE OF HISTORICAL FAIRShares/ Date of Historical Fair % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCKNet
% (1) Acquisition Cost Value Assets
INVESTMENTS IN UNAFFILIATED ISSUERS
- -----------------------------------------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
============== ============= ======
COMMON STOCK============ ============ ===========
INVESTMENTS IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -------------------------------------------------------------------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc., privately held;
manufactures structured water pursuant to
proprietary process $ 1,011,500 - 0%
============== ============= ======
COMMON STOCK============ ============ ===========
INVESTMENTS IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -----------------------------------------------------------------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc., privately held; sells and
manufactures beverages higher in nutritional
value and lower in sugar than most existing
brands 6,669,760 1,575,000 1762%
-------------------------- ------------ -----------
Total investments at December 31, 2006 $ 6,669,760 1,575,000 1762%
==========================
Cash and other assets, less liabilities (1,485,604) -1662%
------------- ------------------ -----------
Net assets at December 31, 2006 $ 89,396 100%
============= ================== ===========
(1) All of the Company's investments listed above are in stock of or notes
receivable from private companies.
See accompanying notes to condensed financial statements.
910
GLOBAL BEVERAGE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
(A) ORGANIZATION AND BUSINESS
- -----------------------------
The condensed financial statements include the accounts of Global Beverage
Solutions, Inc. ("Global" or the "Company"). Pursuant to Article 6 of Regulation
S-X, Rule 6, the Company will operate on a non-consolidated basis. Operationsbasis and the financial
results of the Company's portfolio companies will be reported atare not consolidated in the
subsidiary level and onlyCompany's financial statements. Only the appreciation or impairmentdepreciation of these
investments in portfolio companies will be included in the Company's financial
statements.
On June 19, 2003, the Company became a business development company ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940.
On April 18, 2005, the Company completed a 2,500-to-1 reverse stock split. The
accompanying financial statements have been restated to reflect this stock split
for all periods presented.1940 (the
"1940 Act").
On October 10, 2005, the Company changed its name to Global Beverage Solutions,
Inc. and began trading on the OTC Bulletin Board under the symbol GBVS.OB.
Beginning with the original incorporation on January 29, 1977, the Company has
had several name changes, including, Mercury Software, MedEx Corp., Aussie
Apparel Group, Ltd., Bluetorch, Inc., Pacific Crest Investments and Pacific Peak
Investments.
(B) CONDENSED FINANCIAL STATEMENTS
- ----------------------------------
The accompanying condensed financial statements have been prepared by the
Company and are presented in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Article 10 of
Regulation S-X without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the Company's financial position as of March 31,September 30, 2007, and the results of
operations and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It is suggested
that theseThese
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2006 audited
financial statements on Form 10-K. The results of operations for the interim
periods presented are not necessarily indicative of the operating results for
the full years.
11
(C) RECLASSIFICATIONS
- ---------------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
10
(D) GOING CONCERN
- -----------------
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of March 31,September 30, 2007, the Company has an accumulated deficit of
$17,319,587$19,610,828 and had net losses totaling $355,859$2,647,100 for the threenine months ended
March 31,September 30, 2007. Additionally, as of March 31,September 30, 2007, the Company had
total assets excluding investments of $71,897$5,335 and had total liabilities of
$4,556,836.$4,771,573. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The Company intends to fund
operations through debt and equity financing arrangements which management
believes should be sufficient to fund its capital expenditures, working capital
and other cash requirements for the next twelve months. The successful outcome
of future activities cannot be determined at this time and there is no assurance
that, if achieved, the Company will have sufficient funds to execute its
intended business plan or generate positive operating results.
On October 9, 2007, the Company sold its note receivable from Rudy Partners,
Ltd. for $100,000 in cash and a note receivable for $600,000. The note is
payable in weekly installments of $75,000 commencing October 22, 2007, and the
final payment is due December 10, 2007. The Company currently estimates it will requiresold the secured promissory
note to fund its operations through the remainder of 2007 and continues to hold
a total of approximately
$1,800,000 to meet its operating cash flow requirements and its currently
committed follow-on investments for the balance of 2007. The total requirements
include the $1,050,000 in debt service requirements; $150,000 in follow-on
investments to the portfolio companies; and an estimated $600,000 for working
capital and overhead requirements. The Company expects to collect the $1,024,112
stock subscription receivable and will need to secure additional funding of
approximately $800,000 to meet its anticipated requirements. If the Company is
unable to obtain the additional funding, it$1.8 million note issued by Rudy Beverage, Inc., which may be forced to substantially
reduce follow-on investments, overhead and possible restructure existing debt.
It is expected that the $1,335,000 convertible notes will be converted under
certain circumstances into the
Company'sshares of common stock.stock of Rudy Beverage, Inc.
Management plans to take the following additional steps in response to these
issues:
It has been determined that, as an investment company, the Company will
only invest in/acquire businesses whichthat are cash flow positive and
profitable or businesses whichwith projections that indicate it can become cash
flow positive and profitable within a reasonable period. These entitiesThe Company will
seek to invest in companies that have good growth potential as a result of
access to additional capital and/or additional management acumen.
As part of this strategic process, the Company previously decided to
concentrate its efforts in the beverage industry. It is believed that this
direction will both reduce the risk for the Company and its shareholders as
well as provide the best opportunity for long-term shareholder value. In
addition, with the acquisitions completed in the first and second quarter
of 2007, the Company has moved away from start-up companies and is
concentrating efforts in companies that have some established track-record.
12
On January 3, 2007, the Company filed notification of a de minimus sale
under Regulation E of the Securities Act of 1933. A total of 700,000 shares
of common stock were sold for $87,500. A second notification was filed
under Regulation E on January 3, 2007 but this second Offering was
withdrawn and no sales were made pursuant to this offering. An Amended
Offering Circular was filed on February 5, 2007. As of March 31,September 30, 2007,
21,333,333 shares had been sold for net cash proceeds of $1,868,283 and a
stock subscription receivable of $1,024,112.
11
Whereas$2,396,848.
Although the Company believes it will be successful with its plans, due to
market factors and economic conditions, no assurance can be given that financing
will be available to the Company on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of assetsasset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(2) INVESTMENTS
BEVERAGE NETWORK OF MARYLAND, INC. ("BNM")
- ------------------------------------------
On February 23, 2007, the Company completed the purchase of BNM from XStream
Beverage Network, Inc. ("XStream"). The transaction was structured as a merger
of BNM into the Company's wholly owned subsidiary Global Merger Corp., a Nevada
corporation, pursuant to the Agreement and Plan of Merger between the parties
dated January 31, 2007, and as amended and completed on February 23, 2007.
Based in Jessup, Maryland, BNM engages in the distribution of beverages in the
Mid-Atlantic States.
As a part of the transaction, wethe Company issued 60,500,000 shares of ourits common
stock and a $2,000,000 note payable to XStream. At closing, wethe Company paid
$229,000 on the note and pursuant to the agreements willwas required to pay 40% of
any subsequent cash proceeds received from the February 5, 2007, 1-E Offering.
The remaining note balance, $1,086,525 at September 30, 2007, is to be paid in
monthly installments of $25,000 commencing September 1, 2007. Additionally, if
we raisethe Company raises any equity capital while the note is still outstanding, we areit is
required to apply 35% of the net proceeds to reduce the note.
13
Summary financial information for BNM as of March 31,September 30, 2007 and for the threenine
months then ended is as follows:
Current assets $ 937,313836,405
Property and equipment, net 81,89351,358
Intangible assets, net 1,735,5781,538,254
Other assets 46,372
-----------------46,371
-----------
Total assets $ 2,801,156
=================2,472,388
===========
Current liabilities $ 832,720716,292
Amounts due Global 3,398,505
-----------------407,141
-----------
Total liabilities 4,231,2251,123,433
Stockholder's deficit (1,430,069)
-----------------equity 1,348,955
-----------
Total liabilities and stockholder's deficitequity $ 2,801,156
=================2,472,388
===========
Revenues $ 2,176,702
=================6,695,088
===========
Net loss $ 168,878
=================
12
(535,998)
===========
Management reviewed the accounting guidance related to the acquisition of BNM,
which included EITF 90-13 and originally concluded that in future financial
statements of the Company this transaction would be reported as a reverse
merger. Upon discussion with the SEC,Securities and Exchange Commission (the "SEC"),
it was determined that EITF 90-13 would not act to control the status of a business development companyBDC
under the Investment Company1940 Act of 1940 and the Company's financial statements should be presented as
investment company financial statements, notwithstanding a change in control of
the Company.Company, if any.
AQUA MAESTRO, INC. ("AM")
- -------------------------
On March 29, 2007, the Company completed the purchase of AM from the
shareholders of AM. The transaction was structured as a merger of AM into the
Company's wholly owned subsidiary, Global Beverage Acquisition Corp., a Florida
corporation, pursuant to the Agreement and Plan of Merger and Reorganization
between the parties dated March 29, 2007.
With theits business office in Boca Raton, Florida and logistics in Fort
Lauderdale, Florida, AM is engaged in the wholesale and retail distribution of
domestic and imported bottled water, comprising forty-four brands and over one
hundred-seventy different items. TheIts wholesale client base is across North
America and the Caribbean, including well-known hotels and resorts. In its
retail home delivery division, AM provides productits products through its Internet
site aquamaestro.com.
Consideration for the acquisition of AM includesincluded $500,000 in cash, 10,000,000
shares of ourthe Company's common stock and an earn-out. The cash iswas payable
$300,000 at closing and the balance in equal monthly installments of $22,222
beginning April 15, 2007. The earn-out is a percentage of defined gross profit
equal to 10% of calendar 2008 gross profit, 5% of calendar 2009 gross profit and
3% of calendar 2010 gross profit. In accordance with SFAS 141, additional cost
will not be recognized until the earn-out amount is determinable.
14
Summary financial information for AM as of March 31,September 30, 2007 and for the threenine
months then ended is as follows:
Current assets $ 430,102428,607
Property and equipment, net 17,38714,646
Other assets 27,220
-----------------27,055
-----------
Total assets $ 474,709
=================470,308
===========
Accounts payable and accrued expenses $ 202,536324,379
Note payable 150,000
Amounts due Global 50,000
-----------------97,366
-----------
Total liabilities 402,536571,745
Stockholder's equity 72,173
-----------------deficit (101,437)
-----------
Total liabilities and stockholder's equity $ 474,709
=================470,308
===========
Revenues $ 607,552
=================1,651,045
===========
Net earningsloss $ 44,307
==================
13
(140,999)
===========
RUDY PARTNERS, LTD. ("PARTNERS")
- --------------------------------
On January 18, 2007, the Company executed an agreement with Partners wherein the
Company agreed to sell its 80% interest in Rudy Beverage, Inc. ("Rudy") for an
8% secured promissory note in the amount of $6,000,000 plus assumption of the
advances and receivables owed to the Company by Rudy. The agreement closed on
May 11, 2007. The note will
beis collateralized by 11,000,000 shares of the Company's
common stock held by Partners' owners and will be payable in six annual
installments of $1,000,000 commencing January 31, 2008. In
addition, Partners agreed to convert any notes payable by Rudy toAt June 30, 2007, the
Company once Partners becomes publicly-traded or a subsidiaryrecorded additional unrealized depreciation of a publicly-traded
company, into no more than 20% of$1,658,283 and reduced
the common stock offair value to $550,000 based on the publicly traded
entity, based upon the markettrading value of the public entity'sCompany's common
stock.stock at that time. At September 30, 2007, the Company adjusted the value to
$700,000 and recorded $150,000 in appreciation. The Company sold the $6,000,000
note for $100,000 in cash and a note receivable in the amount of $600,000 on
October 9, 2007. The note is payable in weekly installments of $75,000
commencing October 22, 2007, and the final payment is due December 10, 2007.
RUDY BEVERAGE, INC. ("RUDY")
- ----------------------------
Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line of
beverages higher in nutritional value but lower in sugar than existing brands.
Rudy developed two distinct products: Rudy Flying Colors, catering to children K
through 8, and Rudy Revolution, a sport drink primarily for athletes. The goal
of the Rudy line of beverages is to create flavorful juice blends lower in sugar
than existing brands.
On November 17, 2005, the Company executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy, a Nevada corporation, whereby the Company
exchanged 6,000,000 shares of its common stock for 80% of the issued and
outstanding common stock of Rudy. The Company's investment was valued at
$4,860,000 based upon the trading price of the Company's common stock on the
date of the transaction. The Sellers were eligible to receive up to 10,000,000
additional shares of the Company's common stock if Rudy achieved certain sales
and net revenue goals by the twelve month periods ending June 30, 2007 and 2008.
Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line of
beverages higher in nutritional value but lower in sugar than existing brands.
Rudy currently has developed two distinct products: Rudy Flying Colors, catering
to children K through 8; and Rudy Revolution, a sport drink aimed at athletes
across the board. The goal of the Rudy line of beverages is to create flavorful
juice blends lower in sugar that existing brands.15
The Company originally valued its investment in Rudy at December 31, 2006, based
on the estimated value of the collateral on the Partners note of $3,375,000,
resulting in an original adjustment of $3,294,760 as unrealized depreciation of
the investment. Subsequent to December 31, 2006, based on the decline in the
collateral on the Partners note, that is, the shares of the Company's common
stock held by Partners owners, the Company recorded an additional adjustment of
$1,800,000 under guidance in FAS 5 for the additional decline in the Company's
common stock as of April 24, 2007. On May 11, 2007, the Company completed the
sale of its investment in Rudy to Partners, as discussed above.
Upon sale of the investment in Rudy, the Company retained a note receivable from
Rudy in the amount of $1,818,043. Partners and Rudy agreed to convert any notes
payable by Rudy to the Company, once Partners becomes publicly-traded or a
subsidiary of a publicly-traded company, into no more than 20% of the common
stock of the publicly traded entity, based upon the market value of the public
entity's common stock. The Company currently carries this investment at $0
value.
EON BEVERAGE GROUP, INC.
- ------------------------
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc.
("EON") and, as a result, the Company invested $400,000 in exchange for 9% of
the issued and outstanding common stock of EON. EON manufactures structured
water through a proprietary process (patent pending) which alters the molecular
structure of purified water. Structured water is a relatively new concept which
is generally defined as water molecules organized through hydrogen bonding into
distinct molecular structures. This allows the users of EON water to achieve
enhanced intra-cellular hydration through significant absorption capability that
is crucial for maximum biological activity and improved athletic performance,
based on the representations of EON. The Company had made follow-on investments in
EON in the form of loans in the total amount of $611,500 as of September 30,
2006,
to EON.2006. These amounts were fully reserved at September 30, 2006, as discussed
below.
14
During the first quarter of 2006, certain shareholders of the Company
contributed their 35% ownership of EON to the Company, which increased the
Company's ownership to 44%. No value was attributed to the increased interest
based on the Company's valuation at the time. During September 2006, the Company
determined that, without substantial additional capital, EON had little chance
of becoming successful. With current capital committed to Rudy, the Company
elected to discontinue funding EON and fully reservedwrote-down its investment. This
amounted to $1,011,500 which iswas included in change in unrealized depreciation
of portfolio investments in September 2006.
16
TITANIUM DESIGN STUDIO, INC.
- ----------------------------
On June 6, 2005, the Company signed a Share Purchase Agreement with Titanium
Design Studio, Inc. ("TDS"), a Nevada corporation, whereby the Company invested
$200,000 in cash in exchange for 8% of the issued and outstanding common stock
of TDS. TDS has a proprietary manufacturing process which allows it to cast
precision titanium jewelry resulting in a level of detail not obtainable by
milling titanium. TDS can economically produce and supply jewelry in shapes and
patterns which were previously considered to be impossible or uneconomical to
manufacture. TDS believes its technology has applications in other industries,
including aerospace, dentistry, sporting goods (fishing rods) and commemorative
coins. Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. The Board of Directors of the Company recorded a reservean
unrealized loss in the amount of $200,000 relating to this investment at
December 31, 2005.
VALUATION OF INVESTMENTS
As required by Section 2(a)(41) of the SEC's Accounting Series Release ("ASR") 118,1940 Act, the investment
committeeboard of directors of the
Company is required to assign a fair value to all investments. To comply with
Section 2(a) (41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board
of directors to satisfy themselves that all appropriate factors relevant to the
value of securities for which market quotations are not readily available have
been considered and to determine the method of arriving at the fair value of
each such security. To the extent considered necessary, the board may appoint
persons to assist them in the determination of such value and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
15
No single standard for determining "fair value in good faith" can be laid down,exists, since fair
value depends upon the circumstances of each individual case. As a general
principle, the current "fair value" of an issue of securities being valued by
the board of directors would appear to be the amount that the owner might
reasonably expect to receive for them upon their current sale. Methods that are
in accord with this principle may, for example, be based on a multiple of
earnings, or a discount from market of a similar freely traded security, or
yield to maturity with respect to debt issues, or a combination of these and
other methods. Some of the general factors that the directors should consider in
determining a valuation method for an individual issue of securities include: 1)
the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies and other
relevant matters.
The board has arrived at the following valuation method for its investments.
Where there is not a readily available source for determining the market value
of any investment, either because the investment is not publicly traded or is
thinly traded and in absence of a recent appraisal, the value of the investment
shall be based on the following criteria:
17
1. Total amount of the Company's actual investment ("AI").investment. This amount shall
include all loans, purchase price of securities and fair value of
securities given at the time of exchange.
2. Total revenues for the preceding twelve months ("R").months.
3. Earnings before interest, taxes and depreciation ("EBITD")depreciation.
4. Estimate of likely sale price of investment ("ESP")investment.
5. Net assets of investment ("NA")investment.
6. Likelihood of investment generating positive returns (going
concern).
The estimated value of each investment shall be determined as follows:
- - Where no or limited revenues or earnings are present, then the value shall be
the greater of the investment's a) net assets, b) estimated sales price, or c)
total amount of actual investment.
- - Where revenues and/or earnings are present, then the value shall be the
greater of one-time (1x) revenues or three times (3x) earnings, plus the greater
of the net assets of the investment or the total amount of the actual
investment.
- - Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
the investment or if there is reasonable doubt about the investment's ability to
continue as a going concern.
Based on the previous methodology, the Board of Directors of the Company
determined that itsthe Company's investments should be valued at March 31,September 30, 2007
as follows:
o BEVERAGE NETWORK OF MARYLAND, INC. BNM is an operating beverage
distribution company which the Company acquired on February 23,
2007. Based on the established valuation method, the investment in
BNM is valued at its original cost of
$12,601,152$4,700,000 plus net follow-on investments of
$414,344$407,141 at March 31,September 30, 2007.
16
o AQUA MAESTRO, INC. AM operates as a wholesale and retail
distributor of domestic and imported bottled water. The
acquisition was completed on March 29, 2007. Accordingly, based
upon the established valuation method, the investment in AM is
valued at its original cost of $1,921,606 ($300,000 cash) plus
follow-on investments of $10,807$97,366 ($12,000 non-cash) at March 31,September
30, 2007.
o RUDY PARTNERS, LTD. The Company valued its note receivable
investment from Partners at $700,000, the price for which it was
sold on October 9, 2007.
o RUDY BEVERAGE, INC. The Company valued its investmentCompany's note receivable from Rudy in Rudy based on the
estimated
valueamount of the collateral on the Partners note discussed above. The
value at December 31, 2006, was based on the value of the Company's
common stock at April 24, 2007. Accordingly, the investment$1,818,043 is valued at $0. $825 in cash was advanced
during the same $2,200,000 value plus follow-on investments of
$8,283 at March 31, 2007.current year and fully depreciated.
18
o EON BEVERAGE GROUP, INC. EON has been involved in test marketing
its structured water and has had limited revenues during this
testing phase. During the first quarter of 2006, certain
shareholders of the Company contributed their stock in EON to the
Company, which increased the Company's ownership to 44%. While EON
expected to sell a substantial volume of its structured water to
Rudy for use in certain of its drinks, the Board of Directors
has determined that EON will not achieve profitability without
substantial additional investment, which the Company is unwilling
to provide. Accordingly, the Company fully reservedrecorded an unrealized loss
on its investment of $400,000 and fully reserved its advances of $611,500 for a
total unrealized depreciation expense of $1,011,500 at September
30, 2006. Accounts receivable in the amount of $50,369 for
interest charges and management fees were also fully reserved at
September 30, 2006.
o TITANIUM DESIGN STUDIO, INC. Early in 2006, TDS relocated its
operations to Thailand in order to access cheaper labor. As a
result, the Company fully reservedrecorded an unrealized loss on its investment
in the full amount of $200,000 at December 31, 2005.
19
(3) NOTES PAYABLE
Notes payable at March 31,September 30, 2007, consist of the following:
17
Secured convertible promissory notes payable (1) 1,335,000
Note payable to XStream Beverage Network, Inc. with interest
at 6%; collateralized the note requires payment of 40% of
any cash proceeds received by Global from the February 5,
2007 1-E Offering with the remainder payable in monthly
installments of $25,000 commencing September 1, 2007. In a
Master Security Agreement, Global granted XStream a
continuing security interest in substantially all of its
assets as collateral as long as any obligation arising
from the Agreement and Plan of Merger, as amended, remains
outstanding. In addition, pursuant to a Stock Pledge
Agreement, the BNM stock owned by Global is pledged as
additional collateral on the obligations and BNM
guarantees the Global obligations to XStream. 1,316,528
Non-interest bearing note payable to Master Distributor
which was assumed as a part of the acquisition of BNM.
Monthly payments of $83,333 for two years; discounted at
12%; penalty provisions require a late charge of $5,000
plus interest of 1 1/2% per month for all payments made
after the 15th of the month; the Company guarantees that
the note, with a face value of $2,000,000 plus the
proceeds from 4,000,000 shares of its common stock will
equal at least $3,000,000 total 1,546,698
Non-interest bearing notes payable to the former
stockholders of Aqua Maestro, Inc.; payable in 9 equal
monthly payments of $22,222 commencing on April 15, 2007;
discounted at 12%; unsecured 190,356
--------------
Total notes payable 4,388,582
==============
Secured convertible promissory notes payable (1) $1,326,000
Note payable to XStream Beverage Network, Inc. with interest at 6%;
the collateralized note required payment of 40% of any cash proceeds received
by Global from the February 5, 2007 1-E Offering with the remainder payable in
monthly installments of $25,000 commencing September 1, 2007. In a Master
Security Agreement, Global granted XStream a continuing security interest in
substantially all of its assets as collateral as long as any obligation
arising from the Agreement and Plan of Merger, as amended, remains
outstanding. In addition, pursuant to a Stock Pledge Agreement, the BNM stock
owned by Global is pledged as additional collateral on the obligations and BNM
guarantees the Global obligations
to XStream 1,042,485
----------
2,368,485
----------
DISCOUNTED NOTES
Non-interest bearing note payable to Master Distributor which was assumed as a
part of the acquisition of BNM. Monthly payments of $83,333 for two years;
discounted at 12%; penalty provisions require a late charge of $5,000 plus
interest of 1 1/2% per month for all payments made after the 15th of the
month; the Company guarantees that the note, with a face value of $2,000,000
plus the proceeds from 4,000,000 shares of its common stock will equal at
least $3,000,000 total; and note is past due at September 30, 2007, with
$250,000 of $583,333 in scheduled payments made 1,584,823
Non-interest bearing notes payable to the former stockholders of Aqua
Maestro, Inc.; payable in 9 equal monthly payments of $22,222 commencing
on April 15, 2007; discounted at 12%; collateralized by inventory of Aqua
Maestro 65,133
Non-interest bearing note payable to a company (2) 230,736
----------
1,880,692
----------
Total notes payable $4,249,177
==========
(1) During the year ended December 31, 2006, the Company issued 8%, one-year
secured convertible promissory notes payable ("Secured Notes") to a group of
investors in the aggregate amount of $1,335,000. The notes were convertible into
restricted common shares at an initial rate of $.50 per share. Management has
determined that these notes qualify as conventional convertible debt pursuant to
APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" and EITF 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," accordingly
the embedded conversion option is not a derivative. The Company computed an
intrinsic value of the beneficial conversion of $538,000 based on the quoted
stock price on the grant dates. The beneficial conversion feature was credited
to additional paid-in capital and charged to interest expense when the agreement
commenced since the Secured Notes could be converted when issued.
20
The Secured Notes include certain anti-dilutive provisions, such as an
adjustment for stock splits and business combinations, adjustment for common
stock dividends and distributions, adjustment for issuance of additional shares
of common stock at a price per share less than the initial conversion price, and
issuance of common stock equivalents at a price per share less than the initial
conversion price.
18
As of March 31,September 30, 2007, Secured Notes in the aggregate principal amount of
$1,335,000$1,326,000 are in default as the interest due on November 1, 2006, February 1,
2007, May 1, 1007 and FebruaryAugust 1, 2007 was not paid. The default rate of interest
of 12% is in effect for these Secured Notes.Notes and is included in accrued expenses
on the balance sheet.
As of December 31, 2006, the Secured Notes were convertible into common stock at
the rate of $.50 per share. In January 2007, the Company sold 700,000 shares of
its common stock pursuant to its Offering Circular dated January 3, 2007, for
$87,500 ($.125/share). Accordingly, pursuant to the Secured Note agreement, the
conversion rate for the Secured Notes became $.125 on that date. These notes are
currently convertible under the same terms as the note discussed in (2) below.
(2) On July 6, 2007, the Company entered into a Note Purchase Agreement
("Agreement") with a certain accredited investor ("Investor") for the private
placement of a promissory note ("Note") in the principal amount of $259,202 for
a purchase price of $233,450. The maturity date of the Note is August 31, 2008.
If and when the Company withdraws its election to be regulated as a BDC under
the 1940 Act, the Note will become convertible, at the option of the Investor,
into a number of shares of the Company's common stock as determined in
accordance with a formula set forth in the Agreement (at a conversion rate of
75% of the average of the lowest trade price of the common stock during any
three business days for the ten business day period prior to such conversion
election, as reported by Bloomberg L.P.).
In connection with the Agreement, the Company entered into a letter agreement
with Palladium Capital Advisors, LLC as placement agent, pursuant to which the
Company paid the placement agent for its services, a cash fee of $33,333. In
addition, $16,667 is payable within 120 days of the date of the Agreement either
in cash or, if and when the Company withdraws its election to be a BDC pursuant
to the 1940 Act, through the issuance of the Company's common stock.
The Company and the Investor also entered into a Registration Rights Agreement
("RRA") pursuant to which the Company has agreed to provide certain registration
rights with respect to shares of its common stock issuable upon the Investor's
election to exercise the conversion right contained in the Note. Pursuant to the
RRA, the Company is required to file a Registration Statement no more than 60
days after filing to withdraw its election to be regulated as a BDC under the
1940 Act and is required to have the Registration Statement declared effective
no more than 75 days after filing the Registration Statement. In the event the
Company does not meet the required dates, the Company would be required to pay a
cash fee of 1% of the outstanding loan balance for each of the first two months
the Company is late and 2% for each subsequent month the Company is late, the
maximum exposure to the Company should be $34,000. This requirement should end
when the stock can become free trading pursuant to Rule 144.
21
The three discounted notes may be summarized as follows:
Face value of discounted notes payable $ 2,025,0002,017,313
Discount (287,946)
--------------(136,621)
-----------
Present value of discounted notes $ 1,737,054
==============1,880,692
===========
(4) EQUITY
COMMON STOCK:
- -------------
The Company is authorized to issue up to 950,000,000 shares of common stock, par
value $.001. At March 31,September 30, 2007, there were 147,267,501 shares issued and
outstanding.
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
PREFERRED STOCK:
- ----------------
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. At September 30, 2006,2007, there arewere no preferred shares issued
or outstanding.
OPTIONS:
- --------
The Company recognizes amortization expense on a straight-line basis over the
requisite service period for each stock option grant. Total stock-based
amortization expense recognized was $20,225$60,675 and $0 during the threenine months ended
March 31,September 30, 2007 and 2006, respectively.
STOCK SUBSCRIPTION RECEIVABLE:
- ------------------------------
On June 28, 2007, the Company reduced its remaining stock subscription
receivable from $820,350 to $273,450 to more correctly reflect the current
trading price of the common stock. The receivable was collected in July 2007.
(5) COMMITMENTS AND CONTINGENCIES
GENERAL - The Company's commitments and contingencies include the usual
obligations of a BDCwhich arise in the normal course of business. In the opinion of
management, these matters are not expected to have a material adverse effect on
the Company's financial position and results of operations. In addition,
whereasalthough the Company may be indirectly impacted by claims and other obligations
that arise at its portfolio companies, management is not aware of any such
claims.
REGULATORY COMPLIANCE - As a BDC, the Company operates in a highly regulated
environment and must comply with the requirements of the 1940 Act. The Company
endeavors to be in compliance with the requirements of the Act as part of its
investment strategy and oversight functions. Whereas compliance with such laws
19
and regulations requires interpretation, the Company believes it is in
compliance with such requirements at September 30, 2006. However, no assurances
can be given that such requirements will not change or that differing
interpretations could result in non-compliance or that such matters, if they
arise, will be insignificant to the Company's financial position or results of
operations.
SEC - On March 26, 2007, the Company received comments from the SEC regarding
its Amended 1-E Offering filed on February 5, 2007 ("Amended Offering"). In its
comments, the SEC raised issues not only with the Amended Offering, butand previous
1-E Offerings, as well.but also with respect to the Company's compliance with other
provisions of the 1940 Act. A primary issue was its belief that the Company was
not eligible to take advantage of the Regulation E Exemption afforded to 1940
Act companies. After reviewing the SEC comments, the Company has engaged outside
counsel to determine the applicability of the comments set forth in the SEC
Letter. Presently, our attorneys have responded and begun discussions with the
SEC regarding resolution. Although the Company believes that it is currently in
compliance with the Investment Company Act of 1940, it, and its attorneys are
presently working with the SEC to resolve all issues raised in a manner which is
satisfactory to the SEC. In the event the SEC is correct in its assessment that the
22
Company was not eligible for using the Regulation E exemption, the Company could
be required to offer rescission to each subscriber of the Company's 1-E
offerings from September 15, 2005 to January 19, 2007. In addition, we currently
understand that we may be out of compliance with certain other rules and
regulations governing BDCs. We cannot predict with certainty what, if any,
regulatory or financial consequences may result from the foregoing.
OTHER ITEMS - The Company had a month-to-month agreement with its chief
executive officer which provided for payment of compensation of $6,000 per
month, which terminated when he resigned in January 2007. The Company's current
CEO receiveshas a salary of $185,000 per annum.
The Company leases its office facility on a month-to-month basis at the rate of
$4,570 per month.
On October 9, 2007, the Company sold its note receivable from Rudy Partners,
Ltd. for $100,000 in cash and a note receivable for $600,000. The note is
payable in weekly installments of $75,000 commencing October 22, 2007, and the
final payment is due December 10, 2007. The Company currently estimates it will requiresold the secured promissory
note to fund its operations through the remainder of 2007 and continues to hold
a total$1.8 million note issued by Rudy Beverage, Inc., which may be converted under
certain circumstances into shares of approximately
$1,800,000 to meet its operating cash flow requirements and its currently
committed follow-on investments for the balancecommon stock of 2007. The total requirements
include $1,050,000 in loan payments; $150,000 in follow-on investments to the
portfolio companies; and an estimated $600,000 for working capital and overhead
requirements.Rudy Beverage, Inc.
GUARANTY - The Company issued a non-interest bearing note in the amount of
$2,000,000 together with 4,000,000 shares of the Company's common stock to a
creditor of BNM. The Company has guaranteed that the creditor will receive at
least $3,000,000 from the note and the stock, providing the shares are sold by
February 23, 2009. The Company also guaranteed payment of salary to two
individuals by BNM in the total amount of $134,000 for 2007 and $26,000 for
2008, 2009 and 2010 and guaranteed reimbursement of expenses and payment of
health benefits for the same periods.
20(6) SUBSEQUENT EVENTS
WITHDRAWAL OF ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY
On July 13, 2007, the Company filed its preliminary information statement on
Schedule 14C which was provided on behalf of the board of directors ("Board") of
the Company to record holders of shares of the Company's common stock
("Shareholders") as of the close of business on the record date of July 12,
2007. This information statement provided notice that the Board has recommended,
and holders of a majority of the voting power of the Company's common stock have
voted to approve authorization to the Board to withdraw the Company's election
to be treated as a business development company under the 1940 Act. The
definitive information statement on Schedule 14C was filed on October 2, 2007.
The action will become effective upon the Company filing Form N-54C with the
SEC.
23
Overview and Business Strategy
Subsequent to the filing of the Form N-54C, the Company intends to pursue a
business model whereby it would acquire majority ownership stakes in
beverage-related companies (the "New Business Model"). In this regard, the
Company would remain active in the imported bottled water category and New Age
beverage category through its two wholly owned entities: Aqua Maestro and
Beverage Network of Maryland.
Under the New Business Model, the Company will at all times conduct its
activities in such a way that it will not be deemed an "investment company"
subject to regulation under the 1940 Act. Thus, it will not hold itself out as
being engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, the Company will conduct its business in such a manner
as to ensure that it will at no time own or propose to acquire investment
securities having a value exceeding 40 percent of the Company's total assets at
any one time.
Aqua Maestro is based in Boca Raton, FL and imports and sells bottled water
through company owned distribution to retailers and consumers in South Florida,
direct sales to retailers outside of South Florida, direct sales to consumers
generated through its website at aquamaestro.com and sales to third party
distributors.
Beverage Network of Maryland is a New Age distributor based in Jessup, Maryland
and distributes brands such as Welch's and Fiji water to retailers in Washington
DC, Northern Virginia, and the entire state of Maryland.
Our strategy would be to grow the third party branded revenue base in each of
these entities while developing and/or acquiring bottled water or New Age
beverage brands. Thus, through these entities, we will sell our own proprietary
brands as well as third party brands.
SALE OF NOTE RECEIVABLE
The Company sold its $6,000,000 note receivable from Rudy Partners, Ltd. for
$100,000 in cash and a note receivable in the amount of $600,000 on October 9,
2007. The note is payable in weekly installments of $75,000 commencing October
22, 2007, and the final payment is due December 10, 2007.
24
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information statementForm 10-Q contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. There are a number of factors that could cause our actual
results to differ materially from those indicated by such forward-looking
statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume responsibility
for the accuracy and completeness of such forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this information statementForm 10-Q to conform such statements to actual results. Management's
discussion and analysis should be read in conjunction with our financial
statements and the notes herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. On an on-going basis, we
will evaluate our estimates and judgments, including those related to revenue
recognition, valuation of investments in portfolio companies, accrued expenses,
financing operations, contingencies and litigation. We will base our estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources, such as the
investments in portfolio companies. These accounting policies are described at
relevant sections in this discussion and analysis and in the "Notes to Financial
Statements" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
2125
WITHDRAWAL OF ELECTION TO BE TREATED AS A BDC
- ---------------------------------------------
On July 13, 2007, we filed our preliminary information statement on Schedule 14C
and on October 2, 2007, we filed our definitive information statement on
Schedule 14C which was provided on behalf of our board of directors ("Board") to
record holders of shares of our common stock ("Shareholders") as of the close of
business on the record date of July 12, 2007. This information statement
provided notice that the Board has recommended, and holders of a majority of the
voting power of our common stock have voted to approve authorization to the
Board to withdraw our election to be treated as a business development company
under the 1940 Act. The action will become effective upon our filing a Form
N-54C with the Securities and Exchange Commission.
OVERVIEW AND BUSINESS STRATEGY
Subsequent to the filing of the Form N-54C, the Company intends to pursue a
business model whereby it would acquire majority ownership stakes in
beverage-related companies (the "New Business Model"). In this regard, the
Company would remain active in the imported bottled water category and New Age
beverage category through its two wholly owned entities: Aqua Maestro and
Beverage Network of Maryland.
Under the New Business Model, the Company will at all times conduct its
activities in such a way that it will not be deemed an "investment company"
subject to regulation under the 1940 Act. Thus, it will not hold itself out as
being engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, the Company will conduct its business in such a manner
as to ensure that it will at no time own or propose to acquire investment
securities having a value exceeding 40 percent of the Company's total assets at
any one time.
Aqua Maestro is based in Boca Raton, FL and imports and sells bottled water
through company owned distribution to retailers and consumers in South Florida,
direct sales to retailers outside of South Florida, direct sales to consumers
generated through its website at aquamaestro.com and sales to third party
distributors.
Beverage Network of Maryland is a New Age distributor based in Jessup, Maryland
and distributes brands such as Welch's and Fiji water to retailers in Washington
DC, Northern Virginia, and the entire state of Maryland.
Our strategy would be to grow the third party branded revenue base in each of
these entities while developing and/or acquiring bottled water or New Age
beverage brands. Thus, through these entities, we will sell our own proprietary
brands as well as third party brands.
26
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2007 AND 2006 -
- --------------------------------------------------------------
o During the 2006 period we recognized revenue in the amount of
$3,436$36,312 in interest income from portfolio companies and $6,000 in
management fees from portfolio companies. We had no revenue during
the 2007 period.
o During the three months ended March 31,September 30, 2007, total expenses
increased $240,211 (208%decreased $308,287 (44%) to $355,859$390,392 from $115,648$698,679 in the prior
year period.
1. Officer and employee compensation increased $56,095 (127%$66,903 (183%) in
2007 from the amount in 2006. The increase is attributed to a
larger staff and a full time CEO commencing in February 2007.
2. Professional fees increased $45,061 (128%) in the 2007 period
from the 2006 period, primarily due to the fees associated
with the convertible note funded in July 2007.
3. We recorded interest expense in the amount of $154,570 in the
2007 period and had $552,875 in interest expense in the 2006
period. The 2006 amount includes the computed intrinsic value
of the beneficial conversion of $538,000 for convertible debt
added during that period. In 2007, we incurred new debt with
the acquisitions completed in the first quarter of 2007.
4. We recognized $20,225 in amortization of the intrinsic value
of common stock options in 2007. There were no options
outstanding during the 2006 period.
5. We recorded bad debt expense of $50,369 in 2006 when they
fully reserved the receivables from EON. There was no bad
debt expense in 2007.
6. We had rent and utility expense of $15,526 in 2007 and $3,000
in 2006. The increase in 2007 resulted from our move to new
offices and an increase in staffing.
o During the 2007 period we recorded unrealized depreciation on our
investments in the amount of $7,751,152. During the 2006 period,
we recorded unrealized depreciation of $1,011,500 on our
investments.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 -
- -------------------------------------------------------------
o During the 2006 period we recognized revenue in the amount of
$72,278 in interest income from portfolio companies and $18,000 in
management fees from portfolio companies. We had no revenue during
the 2007 period.
o During the nine months ended September 30, 2007, total expenses
increased $72,991 (7%) to $1,138,817 from $1,065,826 in the prior
year period.
1. Officer and employee compensation increased $121,133 (107%)
in 2007 from the amount in 2006. The increase is attributed
to a larger staff and a full time CEO commencing in February
2007. In addition, there was $25,000 in additional
compensation for the former CEO for his assistance in
completing the acquisition of BNM.
27
2. Professional fees increased $91,489 (215%$182,756 (99%) in the 2007 period
from the 2006 period. The principal cause of the increase is
the acquisition of BNM and AM.AM and the fees associated with
the convertible note funded in July 2007.
3. Shareholder services and communications decreased to $33,815
in 2007 from $66,183 in 2006, primarily due to a decrease in
public relations costs.
4. Other general and administrative expense increased $7,027
(120%$22,467
(235%) in 2007 as compared to 2006. The increase is primarily
due to opening the new office location in Florida and the
duplication of certain costs during the relocation.
4. The Company5. We recorded interest expense in the amount of $66,042$369,499 in the
2007 period and had no$552,875 in interest expense in the 2006
period. AllNew debt has beenwas added in the first and second quarters
of 2007 as a result of the acquisitions of BNM and AM. The
2006 amount includes the computed intrinsic value of the
beneficial conversion of $538,000 for convertible debt added
during the last 12 months.
5. The Companythat period.
6. We recognized $20,225$60,675 in amortization of the intrinsic value
of common stock options in 2007. There were no options
outstanding during the 2006 period.
7. Rent and utilities amounted to $34,943 in 2007 as compared to
$9,000 in 2006. The principal reason for the increase is the
relocation of the corporate office and the increased staff.
8. We incurred bad debt expense of $50,369 in 2006 and none in
the 2007 period.
9. We recorded a lawsuit settlement of $78,000 in 2006 and had
none in the 2007 period.
o During the 2007 period we recorded net unrealized depreciation on
our investments in the amount of $9,409,435. We had $1,011,500 in
unrealized depreciation in 2006 relating to our investments.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
o At March 31,September 30, 2007, we had net assets of $12,671,253$3,059,875 as compared to
net assets of $89,396 at December 31, 2006. During the 2007 period,
total assets increased $15,652,143$6,255,502 and total liabilities increased
$3,070,286,$3,285,023, resulting in a net increase of $12,581,857.$2,970,479. The principal
increase in assets was the net increase in investments of $15,581,192.$6,251,113.
The principal increase in liabilities was the net increase in notes
payable of $3,053,582.$2,914,177. The Company now has substantially increased
assets; however, the debt service requirements includehave increased beyond
the cash flow available from existing investments.
On October 9, 2007, the Company sold its note receivable from Rudy
Partners, Ltd. for $100,000 in cash and a totalnote receivable for $600,000.
The note is payable in weekly installments of approximately $1,050,000 in debt payments$75,000 commencing
October 22, 2007, and the final payment is due over the balance ofDecember 10, 2007. The
Company's principal sourceCompany sold the secured promissory note to fund its operations through
the remainder of funding will be the
collection of the stock subscription receivable of $1,024,1122007 and new equity funding.
The Company currently estimates it will requirecontinues to hold a total of
approximately $1,800,000 to meet its operating cash flow
requirements and its currently committed follow-on investments for
the balance of 2007. The total requirements include the $1,050,000
in debt service requirements; $150,000 in follow-on investments to
the portfolio companies; and an estimated $600,000 for working
capital and overhead requirements. The Company expects to collect
the $1,024,112 stock subscription receivable and will need to secure
additional funding of approximately $800,000 to meet its anticipated
22
requirements. If they are unable to obtain the additional funding,
they$1.8 million note issued
by Rudy Beverage, Inc., which may be forced to substantially reduce follow-on investments,
overhead and possible restructure existing debt. It is expected that
the $1,335,000 convertible notes will be converted under certain
circumstances into the
Company'sshares of common stock.stock of Rudy Beverage, Inc.
28
o As of March 31,September 30, 2007, the Company had limitedno revenues and had an
accumulated deficit totaling $17,319,587.$27,511,980. Additionally, as of March
31,September
30, 2007, the Company had total assets excluding investments of $71,897$5,335
and total liabilities of $4,556,836.$4,771,573. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern. The Company intends to fund operations through debt and equity
financing arrangements which management believes should be sufficient
to fund its capital expenditures, working capital and other cash
requirements for the next twelve months. The successful outcome of
future activities cannot be determined at this time and there is no
assurance that, if achieved, the Company will have sufficient funds to
execute its intended business plan or generate positive operating
results.
NET ASSET VALUE
- ---------------
As a BDC, certain of our activities and disclosures are made in reference to Net
Asset Value ("NAV") which is the value of our portfolio assets less debt and
preferred stock. This may be viewed, simply and generalized, as the value of our
assets available to our common stock holders. As of the date of the financial
information in this report, the value of our portfolio of assets including
investments and securities in portfolio companies and cash is $17,228,089$7,831,448 and
from this, are subtracted liabilities and debts of $4,556,836.$4,771,573. There are no
shares of preferred stock outstanding but the rights of preferred stockholders
would be included if there were. The NAV is therefore $12,671,253.$3,059,875. The Net Asset
Value per Share ("NAV/S") is calculated by dividing the NAV by the number of
common shares outstanding (147,267,501)(147,467,501). The NAV/S is $.0860.
23
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
MANAGEMENT'S ANALYSIS OF BUSINESS
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will seek to structure
our investments so as to take into account the uncertain and potentially
variable financial performance of our portfolio companies. This should enable
our portfolio companies to retain access to committed capital at different
stages in their development and eliminate some of the uncertainty surrounding
their capital allocation decisions. We will calculate rates of return on
invested capital based on a combination of up-front commitment fees, current and
deferred interest rates and residual values, which may take the form of common
stock, warrants, equity appreciation rights or future contract payments. We
believe that this flexible approach to structuring investments will facilitate
positive, long-term relationships with our portfolio companies and enable us to
become a preferred source of capital to them. We also believe our approach
should enable debt financing to develop into a viable alternative capital source
for funding the growth of target companies that wish to avoid the dilutive
effects of equity financings for existing equity holders.
Longer Investment Horizon$0.0207.
Off Balance Sheet Arrangements
- We will not be subject to periodic capital return
requirements. These requirements, which are standard for most private equity and
venture capital funds, typically require that these funds return to investors
the initial capital investment after a pre-agreed time, together with any
capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through
mergers, public equity offerings or other liquidity events more quickly than
they otherwise might, which can result in a lower overall return to investors
and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are
subject to these risks if these funds demand a return on their investments in
the portfolio companies. We believe that our flexibility to take a longer-term
view should help us to maximize returns on our invested capital while still
meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and
directors, we have solid contacts and sources from which to generate investment
opportunities. These contacts and sources include:
o public and private companies,
o investment bankers,
o attorneys,
o accountants,
o consultants, and
o commercial bankers.
However, we cannot assure you that such relationships will lead to the
origination of debt or other investments.
24
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in
real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments, or in
connection with foreclosure on collateral;
o own the securities of companies that are in the business of buying,
selling or developing real estate; or
o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt
instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks
associated with publicly-traded securities issued by our portfolio
companies;
o purchase securities on margin (except to the extent that we may
purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity
contracts, including futures contracts except where necessary in
working out a distressed loan; or in those investment situations
where hedging the risks associated with interest rate fluctuations
is appropriate, and, in such cases, only after all necessary
registrations or exemptions from registration with the Commodity
Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide general
guidelines for our investment decisions; however, we caution readers that not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will also require the
portfolio companies to have in place proper incentives to induce management to
succeed and to act in concert with our interests as investors, including having
significant equity interests. We intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative use
of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some
kind of proprietary sustainable advantage with respect to their competition.
Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its
products, and
o a demonstrable and sustainable marketing advantage over its
competition
25
Marketing strategies impose unusual burdens on management to be continuously
ahead of its competition, either through some kind of technological advantage or
by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations -
We will focus on target companies that are profitable or nearly profitable on an
operating cash flow basis. Typically, we would not expect to invest in start-up
companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective
target company, in addition to generating sufficient cash flow to cover its
operating costs and service its debt, demonstrate an ability to increase its
revenues and operating cash flow over time. The anticipated growth rate of a
prospective target company will be a key factor in determining the value that we
ascribe to any warrants or other equity securities that we may acquire in
connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will
analyze the potential for that company to increase the liquidity of its common
equity through a future event that would enable us to realize appreciation, if
any, in the value of our equity interest. Liquidity events may include:
o an initial public offering,
o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or
o a purchase of our equity position by the portfolio company or one of
its stockholders.
We may acquire warrants to purchase equity securities and/or convertible
preferred stock of the eligible portfolio companies in connection with providing
financing. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
will be negotiated individually with each eligible portfolio company, and will
likely be affected by the price and terms of securities issued by the eligible
portfolio company to other venture capitalists and other holders. We anticipate
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the eligible portfolio company most
recently issued its equity securities or, if a new equity offering is imminent,
the price at which such new equity securities will be offered. The equity
securities for which the warrant will be exercised generally will be common
stock of which there may be one or more classes or convertible preferred stock.
Substantially all the warrants and underlying equity securities will be
restricted securities under the 1933 Act at the time of the issuance. We will
generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain
circumstances, to include some or all of the securities owned by us
in a registration statement filed by the eligible portfolio company,
or
26
o in circumstances, "demand" registration rights permitting us under
certain circumstances, to require the eligible portfolio company to
register the securities under the 1933 Act, in some cases at our
expense. We will generally negotiate net issuance provisions in the
warrants, which will allow us to receive upon exercise of the
warrant without payment of any cash a net amount of shares
determined by the increase in the value of the issuer's stock above
the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an
asset-based lender, the prospective liquidation value of the assets, if any,
collateralizing any debt securities that we hold will be an important factor in
our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable,
o inventory, and
o equipment,
and intangible assets, such as:
o intellectual property,
o customer lists,
o networks, and
o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
o company and technology assessments,
o evaluation of existing management team,
o market analysis,
o competitive analysis,
o evaluation of management, risk analysis and transaction size,
o pricing, and
o structure analysis.
Much of this work will be done by management and professionals who are well
known by management. The criteria delineated above provide general parameters
for our investment decisions. We intend to pursue an investment strategy by
further imposing such criteria and reviews that best insures the value of our
investments. As unique circumstances may arise or be uncovered, not all of such
criteria will be followed in each instance but the process provides a guideline
by which investments can be prudently made and managed. Upon successful
completion of the preliminary evaluation, we will decide whether to deliver a
non-binding letter of intent and move forward towards the completion of a
transaction.
27
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including
any financial or strategic sponsor;
o Review of financing history;
o Review of management's track record with respect to:
o product development and marketing,
o mergers and acquisitions,
o alliances,
o collaborations,
o research and development outsourcing and other strategic
activities;
o Assessment of competition; and
o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans;
o Detailed analysis of financial performance;
o Development of pro forma financial projections; and
o Review of assets and liabilities, including contingent liabilities,
if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at
the following:
o Evaluation of intellectual property position;
o Review of existing customer or similar agreements and arrangements;
o Analysis of core technology;
o Assessment of collaborations;
o Review of sales and marketing procedures; and
o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the
target company's management team. Also, in cases in which a target company is at
a mature stage of development and if other matters that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will continuously monitor our portfolio companies in order to
determine whether they are meeting our financing criteria and their respective
business plans. We may decline to make additional investments in portfolio
companies that do not continue to meet our financing criteria. However, we may
choose to make additional investments in portfolio companies that do not do so,
but we believe that we will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team and consulting professionals, who are well known by
our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
28
We will use several methods of evaluating and monitoring the performance and
fair value of our debt and equity positions, including but not limited to the
following:
o Assessment of business development success, including product
development, financings, profitability and the portfolio company's
overall adherence to its business plan;
o Periodic and regular contact with portfolio company management to
discuss financial position, requirements and accomplishments;
o Periodic and regular formal update interviews with portfolio company
management and, if appropriate, the financial or strategic sponsor;
o Attendance at and participation in board meetings;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may provide, significant managerial assistance to our portfolio
companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies,
o participating in their board and management meetings,
o consulting with and advising their officers, and
o providing other organizational and financial guidance.
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership
percentage received will vary depending on the maturity of the portfolio
company, the quality and completeness of the portfolio company's management
team, the perceived business opportunity, the capital required compared to
existing capital, and the potential return. Although investment amounts will
vary considerably, we expect that the average investment, including follow-on
investments, will be between $25,000 and $5,000,000.
COMPETITION
Our primary competitors to provide financing to target companies will include
private equity and venture capital funds, other equity and non-equity based
investment funds and investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of these entities have substantially greater financial
and managerial resources than we will have. We believe that our competitive
advantage with regard to quality target companies relates to our ability to
negotiate flexible terms and to complete our review process on a timely basis.
We cannot assure you that we will be successful in implementing our strategies.
29
OFF BALANCE SHEET ARRANGEMENTS------------------------------
o None.
CONTRACTUAL OBLIGATIONSContractual Obligations
- -----------------------
o None.
3029
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and prices.
We are primarily exposed to equity price risk, which arises from exposure to
securities that represent an ownership interest in our portfolio companies. The
value of our equity securities and our other investments are based on quoted
market prices or our Board of Directors' good faith determination of their fair
value (which is based, in part, on quoted market prices). Market prices of
common equity securities, in general, are subject to fluctuations, which could
cause the amount to be realized upon the sale or exercise of the instruments to
differ significantly from the current reported value. The fluctuations may
result from perceived changes in the underlying economic characteristics of our
portfolio companies, the relative price of alternative investments, general
market conditions and supply and demand imbalances for a particular security.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive Officer ("CEO"),
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Rule 13(a)-15(e) and
15(d)-15(e) of the Exchange Act. Based upon that evaluation, the Company's board
of directors and management, including the CEO concluded
that, as of March 31,September 30, 2007, the Company's disclosure controls and procedures
were effective in alerting management on a timely basis to material Company
information that would be required to be included in our periodic filings with
the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO has
also concluded that the other controls and procedures, that are designed to
ensure that information required to be disclosed in our periodic filings with
the SEC, are adequate.
Changes in Internal Control
The Company updated its internal controls as of December 31, 2005, at which time
they were adopted by the Board of Directors.
There were no significant changes made in the Company's internal controls over
financial reporting since that time
that have materially affected, or are reasonably likely to
materially affect, these internal controls.
Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
On March 26, 2007, the Company received comments from the SEC regarding its
Amended 1-E Offering filed on February 5, 2007 ("Amended Offering"). In its
comments, the SEC raised issues not only with the Amended Offering, but previous
1-E Offerings as well. This raised the issue as to whether the internal controls
were adequate. The Company has taken the position that its availing itself of
the offerings under the Regulation E Exemption afforded 1940 Act companies was
appropriate and therefore its internal controls were adequate to determine its
eligibility. After reviewing the SEC comments, the Company has engaged outside
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counsel to determine the applicability of the comments set forth in the SEC
Letter. Although the Company believes that it is currently in compliance with
the Investment Company Act of 1940, it and its attorneys are presently working
with the SEC to resolve all issues raised in a manner which is satisfactory to
the SEC. In the event the SEC is correct in its assessment that the Company was
not eligible for using the Regulation E exemption, the Company would be required
to reassess its internal controls to determine what steps should be taken to
insure eligibility for an offering under Regulation E.
In connection with this comment letter, the matter of the controls of the
Company was raised. Controls would come into place to determine the
appropriateness of the Company's use of, and eligibility to file under, certain
filings. Controls would also come into place to manage the flow of accurate
information in order to insure timely filings. The Company believes that it has
adequate controls to insure the flow of accurate information but acknowledges
that the extraordinary nature of certain significant events indicated as
occurring subsequent to the close of our fiscal year lead to analysis and review
which required additional time. While it may be said that the Company could have
avoided late filing of its Form 10-K by holding off completion of the
contemplated transactions, the decision to pursue these transactions was a
business decision based on reasons that the Company believes to be sound and
reasonable and the result, while not unforeseen, was not unreasonable.
Additionally, the Company was aware of the claims of the Securities and Exchange
Commission regarding the recent notification to sell stock and does not believe
that the logic of the Securities and Exchange Commission is correct. This is a
business decision based on review with outside counsel and does not reflect
inadequacy of controls. Not being advised of the possibility of delays, in the
first case, or the possibility of concerns of the Securities and Exchange
Commission, in the second case, might indicate problems with our controls.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS
Not applicable.Although we may, from time to time, be involved in litigation arising out of our
operations in the normal course of business or otherwise, we are currently not a
party to any pending material legal proceeding.
ITEM 1A: RISK FACTORS
Not applicable.There were no material changes from the risk factors previously disclosed in our
2006 annual report on Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2007: the companyWe issued 12,000
restricted200,000 shares for services in the amount of $1,500;our common stock as a loan extension fee of an
obligation of Aqua Maestro. All shares were issued 5,000,000 shares
to Rudy Ruettiger for $625,000 owed to him by Rudy Beverage; issued 22,033,333
shares for net cash of $1,955,783 and a stock subscription receivable of
$1,024,112; issued 61,900,000 shares for the acquisition of BNM, including
1,400,000 shares for a finders fee, in total valued at $8,356,500; issued
4,000,000 shares to a creditor of BNM as part of the acquisition of BNM valued
at $540,000; 10,650,000 shares to the former shareholders of AM and a creditor
of AM valued at $1,431,250; and 7,101 shares for a liability of Rudy in the
amount of $7,458.
The shares issued for cash include 700,000 shares issued pursuant to the de
minimus 1-E Offering dated January 3, 2007, and 21,333,333 shares issued
pursuant to the Amended 1-E Offering dated February 5, 2007.
All of the shares issued were sold pursuant to an exemption from
registration under Section 4(2) promulgated under the Securities Act of 1933, as
amended.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certifications pursuant to 18 U.S.C. Section 1350Rule 13a-14 of the
Securities Exchange Act of 1934, as amended, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GLOBAL BEVERAGE SOLUTIONS, INC.
Date: May 15,November 14, 2007 By: /s/ Jerry Pearring
--------------------------------------------------------------
Jerry Pearring,
Chief Executive Officer
President and
Chief Financial Officer
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