- ---------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 000-25039
BRAVO! FOODS INTERNATIONAL CORP.
(Exact name of registrant as specified in its amended charter)
formerly
China Premium Food Corporation
Delaware 62-1681831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, North Palm Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 625-1411
Registrant's telephone number
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
November 10, 2005 Common Stock 141,253,751
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [x]
BRAVO! FOODS INTERNATIONAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated balance sheets as of F-1
September 30, 2005 (unaudited) and December 31, 2004
Consolidated statements of operations F-3
(unaudited) for the three and nine months ended
September 30, 2005 and 2004
Consolidated statements of cash flows F-4
(unaudited) for the nine months ended
September 30, 2005 and 2004
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 18
Condition and Results of Operations
Item 3. Controls and Procedures 32
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 33
Item 6. Exhibits 34
SIGNATURES 35
EXHIBITS
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- ------------
(unaudited)
<s> <c> <c>
Assets
Current assets:
Cash and cash equivalents $ 553,857 $ 113,888
Accounts receivable-net 201,249 51,968
Inventories 252,829 11,656
Prepaid expenses 1,724,422 551,510
----------- -----------
Total current assets 2,732,357 729,022
Furniture and equipment, net 173,078 111,206
License rights, net of accumulated amortization 362,285 67,301
Trademarks, net 67,958 10,249
Deferred product development costs 398,226 162,169
Deferred costs Master Distribution Agreement-net 11,800,833 -
Deposits 15,231 13,900
----------- -----------
Total assets $15,549,968 $ 1,093,847
=========== ===========
Liabilities and Capital Deficit
Current liabilities:
Note payable to International Paper $ 187,743 $ 187,743
Note payable to Alpha Capital 100,000 217,954
Note payable to Mid-Am Capital LLC 112,480 111,262
Note payable to Libra Finance 43,750 40,106
Note payable to Longview 104,680 54,086
Note payable to Stonestreet - 47,014
Note payable to Whalehaven - 17,082
Note payable to Bi-Coastal 6,462 13,649
Note payable to Gem Funding - 8,231
Note payable to Warner Brothers 147,115 147,115
Note payable to Gamma Capital - 59,678
Note payable to Momona Capital - 25,885
Note payable to Ellis International - 25,885
Accounts payable 5,617,708 1,763,339
Accrued liabilities 518,273 375,962
----------- -----------
Total current liabilities 6,838,211 3,094,991
Dividends payable 1,167,380 928,379
Other notes payable - 100,171
----------- -----------
Total liabilities 8,005,591 4,123,541
=========== ===========
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
------------- ------------
(unaudited)
<s> <c> <c>
Commitments and contingencies
Capital Surplus/Deficit (Note 2):
Series B convertible, 9% cumulative and redeemable
preferred stock, stated value $1.00 per share,
1,260,000 shares authorized, 107,440 shares issued
and outstanding, redeemable at $107,440 107,440 107,440
Series F convertible and redeemable preferred stock,
stated value $10.00 per share, 5,248 and 55,515
shares issued and outstanding 48,471 512,740
Series H convertible, 7% cumulative and redeemable
preferred stock, stated value $10.00 per share,
64,500 and 165,500 shares issued and outstanding 349,037 895,591
Series I convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
30,000 shares issued and outstanding - 72,192
Series J convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
200,000 shares issued and outstanding 1,854,279 1,854,279
Series K convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
95,000 shares issued and outstanding 950,000 950,000
Common stock, par value $0.001 per share,
300,000,000 shares authorized, 137,798,337 and
57,793,501 shares issued and outstanding 137,798 57,794
Additional paid-in capital 45,606,762 26,257,299
Accumulated deficit (41,485,761) (33,737,029)
Translation adjustment (23,649) -
----------- -----------
Total capital surplus/(deficit) 7,544,377 (3,029,694)
----------- -----------
Total liabilities and capital surplus/(deficit) $15,549,968 $ 1,093,847
=========== ===========
See accompanying notes.
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<s> <c> <c> <c> <c>
Revenue - unit sales $ 3,245,305 $ 747,198 $ 6,558,343 $ 2,236,383
Revenue - gross kit sales - 78,232 33,350 468,609
------------ ------------ ------------ ------------
Total revenue 3,245,305 825,430 6,591,693 2,704,992
Cost of sales (2,360,884) (628,747) (4,719,011) (1,893,834)
------------ ------------ ------------ ------------
Gross margin 884,421 196,683 1,872,682 811,158
Selling expenses 1,727,531 652,622 3,525,002 1,270,042
Product development 84,690 33,932 194,955 55,104
General and administrative expense 905,487 551,299 2,345,041 2,213,326
------------ ------------ ------------ ------------
Loss from operations (1,833,287) (1,041,170) (4,192,316) (2,727,314)
Other (income) expense
Non-recurring finder's fee 3,000,000 - 3,000,000 -
Interest expense 73,169 79,822 293,415 154,817
------------ ------------ ------------ ------------
Loss before income taxes (4,096,456) (1,120,992) (7,485,371) (2,882,131)
Provision for income taxes - - - -
------------ ------------ ------------ ------------
Net loss (4,807,289) (1,120,992) (7,485,371) (2,882,131)
Dividends accrued for Series B preferred stock (2,437) (2,437) (7,232) (7,259)
Dividends accrued for Series G preferred stock - - - (15,633)
Dividends accrued for Series H preferred stock (11,434) (29,201) (67,857) (86,967)
Dividends accrued for Series I preferred stock (460) (6,049) (11,397) (18,017)
Dividends accrued for Series J preferred stock (49,972) (40,329) (119,671) (120,109)
Dividends accrued for Series K preferred stock (23,737) (19,156) (56,844) (43,475)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $ (4,994,496) $ (1,218,164) $ (7,748,732) $ (3,173,591)
============ ============ ============ ============
Weighted average number of common shares
outstanding 113,680,645 44,374,877 82,091,556 38,254,305
============ ============ ============ ============
Basic and diluted loss per share $ (0.04) $ (0.03) $ (0.09) $ (0.08)
============ ============ ============ ============
Comprehensive loss and its components
consist of the following:
Net loss $ (4,906,456) $ (1,120,992) $ (7,485,731) $ (2,882,131)
Foreign currency translation adjustment (5,670) - (23,649) -
------------ ------------ ------------ ------------
Comprehensive loss $ (4,912,126) $ (1,120,992) $ (7,509,380) $ (2,882,131)
============ ============ ============ ============
See accompanying notes.
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30
------------------------------
2005 2004
---- ----
(unaudited) (unaudited)
<s> <c> <c>
Cash flows from operating activities:
Net loss $(7,485,731) $(2,882,131)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 560,646 248,995
Stock issuance for compensation, finders' fee and
due diligence fees 346,438 116,000
Increase (decrease) from changes in:
Accounts receivable (149,281) (8,490)
Inventories (241,173) (20,691)
Prepaid expenses (1,174,243) (271,323)
Accounts payable and accrued expenses 4,208,414 (224,031)
Deferred product development costs (1,021,518) (331,169)
----------- -----------
Net cash used in operating activities (4,956,448) (3,372,840)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (90,583) (47,647)
----------- -----------
Net cash used in investing activities (90,583) (47,647)
----------- -----------
Cash flows from financing activities:
Proceeds of Series K preferred stock - 950,000
Proceeds from conversion of warrants 2,958,509 -
Convert account payable into note payable - 1,128,386
Convertible notes payable 2,350,000 2,639,999
Private placement financing 450,000 -
Payment of note payable, bank loan and license
fee payable - (1,278,386)
Redeem warrants (100,000) -
Registration costs for financing (147,860) (20,108)
----------- -----------
Net cash provided by financing activities 5,510,649 3,419,891
----------- -----------
Effect of changes in exchange rates on cash (23,649) -
----------- -----------
Net (increase) in cash and cash equivalents 439,969 (596)
Cash and cash equivalents, beginning of period 113,888 58,859
----------- -----------
Cash and cash equivalents, end of period $ 553,857 $ 58,263
=========== ===========
See accompanying notes.
F-4
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Note 1 -Interim Periods
The accompanying unaudited consolidated financial statements include
the accounts of Bravo! Foods International Corp. and its wholly owned
subsidiary Bravo! Brands (UK) Ltd. (collectively the "Company"). The
Company is engaged in the sale of flavored milk products and flavor
ingredients in the United States, the United Kingdom and various countries
in the Middle East and is establishing infrastructures to conduct business
in Canada.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10QSB
and Article 10 of Regulation S-X. Accordingly, the accompanying financial
statements do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
All significant inter-company accounts and transactions have been
eliminated in consolidation. The consolidated financial statements are
presented in U.S. dollars. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the period
ended September 30, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report for the year ended December
31, 2004.
As shown in the accompanying consolidated financial statements, the
Company has suffered operating losses and negative cash flow from
operations since inception and has an accumulated deficit of $41,485,671,
negative working capital of $4,105,854 and is delinquent on certain of its
debts at September 30, 2005. Further, the Company's auditors stated in their
report on the Company's Consolidated Financial Statements for the year ended
December 31, 2004, that these conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management plans to
increase gross profit margins in its U.S. business, grow its international
business, obtain additional financing and launch one new product line in the
fourth quarter of 2005. While there is no assurance that funding will be
available or that the Company will be able to improve its profit margins, the
Company is continuing to actively seek equity and/or debt financing and, in
January 2005, obtained financing of $2,350,000, with $1,950,000 invested in
the six months ending June 30, 2005 and the balance invested in August 2005.
On July 13, 2005, Coca-Cola Enterprises Inc. (CCE) acquired options
to purchase shares of common stock, convertible securities and warrants,
entitling Coca-Cola Enterprises to purchase approximately 69,000,000 shares
of common stock from 9 non-affiliated shareholders of the Company (the
"Options"), representing approximately 23% of the authorized shares of the
Company's common stock. Coca-Cola Enterprises and the Company
contemporaneously commenced negotiations regarding a stock purchase
agreement for the direct sale of approximately 81 million shares of the
Company's common stock to Coca-Cola Enterprises. The consummation of the
direct sale and the exercise of the Options by Coca-Cola Enterprises would
have resulted in
F-5
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Coca-Cola Enterprises holding slightly in excess of 50% of the Company's
equity on a fully diluted basis. These transactions were contingent upon
the execution of a Master Distribution Agreement between the Company and
Coca-Cola Enterprises. On July 29, 2005, the Company and Coca-Cola
Enterprises entered into a Letter of Intent memorializing and confirming
their intention to enter into the stock purchase agreement.
Subsequent to the execution of the Letter of Intent, in lieu of the
exercise of the Options and the stock purchase agreement, the parties
agreed to enter into the Master Distribution Agreement with the attendant
grant of three year warrants by the Company to Coca-Cola Enterprises for
the right to purchase 30 million shares of the Company's common stock at an
exercise price of $0.36 per share. On August 31, 2005, the Company issued
the warrants to Coca-Cola Enterprises, and the parties executed a ten year
exclusive Master Distribution Agreement that will significantly expand the
distribution and sales of the Company's products. The Company presently is
seeking from $10 - $15 million in new financing to promote the expanded
sales anticipated with the implementation of the Master Distribution
Agreement and for general working capital.
The Company recorded a $3,000,000 one time, non-recurring finder's
fee payable to a third party in connection with the execution of the Master
Distribution Agreement with Coca-Cola Enterprises, Inc. in the quarter ending
September 30, 2005. In addition, the Company recorded $99,168, pro-rata, of an
$11,900,000 net charge in deferred distribution costs for the issuance of a
three year warrant to Coca-Cola Enterprises to purchase of 30,000,000 shares
of our common stock in connection with the execution of the Master
Distribution Agreement. The Company will recognize that cost as a selling
expense over the 10-year term of the Master Distribution Agreement.
No assurances can be given that the Company will be successful in
carrying out its plans. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Revenue Recognition
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of finished product to wholesale
buyers. Commencing with the first quarter 2004, the Company no longer uses
the sale of "kits" as a revenue event in the United States. Rather, the
Company takes title to its branded flavored milks when they are shipped by
the Company's third party processors and recognize as revenue the gross
wholesale price charged to the Company's wholesale customers. Expenses for
slotting fees and certain promotions are treated as a reduction of reported
revenue. The Company determines gross margin by deducting from the
reported wholesale price the cost charged by the Company's third party
processors to produce the branded milk products. The sale of "kits" will
remain as the revenue model for the Company's international business, with
the exception of the United Kingdom and Canada, where the domestic business
model will be implemented.
The Company recognizes revenue for its international business at the
gross amount of its invoices for the sale of flavor ingredients and
production rights (collectively referred to as "kits") at the time of
shipment of flavor ingredients to processor dairies with whom the Company
has production contracts for extended shelf life and aseptic long life
milk. The Company recognizes revenue based upon its role as the principal
in these transactions, its discretion in establishing kit prices (including
the price of flavor ingredients and production rights fees), its
development and refinement of flavors and flavor modifications, its
discretion in supplier selection and its credit risk to pay for ingredients
if processors do not pay ingredient suppliers. The revenue generated by
the production contracts under this model is allocated for the processors'
purchase of flavor
F-6
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
ingredients and fees charged by the Company to the processors for
production rights. The Company formulates the price of production rights
to cover its royalties under intellectual property licenses, which varies
by licensor as a percentage of the total cost of a kit sold to the
processor dairy under the production agreement. The Company recognizes
revenue on the gross amount of "kit" invoices to the dairy processors and
simultaneously records as cost of goods sold the cost of flavor ingredients
paid by the processor dairies to ingredients suppliers. The recognition of
revenue generated from the sale of production rights associated with the
flavor ingredients is complete upon shipment of the ingredients to the
processor, given the short utilization cycle of the ingredients shipped.
The criteria to meet this guideline are: 1) persuasive evidence that an
arrangement exists, 2) delivery has occurred or services have been
rendered, 3) the price to the buyer is fixed or determinable and 4)
collectibility is reasonably assured.
The Company follows the final consensus reached by the Emerging
Issues Task Force (EITF) 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent". In certain circumstances in its U.S. business,
the Company is required to pay slotting fees, give promotional discounts or
make marketing allowances in order to secure wholesale customers. These
payments, discounts and allowances reduce the Company's reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff
Accounting Bulletin No. 104. Pursuant to EITF 99-19, international sales
of kits made directly to customers by the Company are reflected in the
statements of operations on a gross basis, whereby the total amount billed
to the customer is recognized as revenue.
Stock-based Compensation
The Company has adopted the intrinsic value method of accounting for
employee stock options as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123)
and discloses the pro forma effect on net loss and loss per share as if the
fair value based method had been applied. For equity instruments,
including stock options issued to non-employees, the fair value of the
equity instruments or the fair value of the consideration received,
whichever is more readily determinable, is used to determine the value of
services or goods received and the corresponding charge to operations.
On April 6, 2005, the Company's Board of Directors voted to adopt a
Stock Incentive Plan for the issuance of incentive options for up to
10,397,745 shares of the Company's common stock to management, employees
and certain key third party service providers. On May 12, 2005, the Board
received and reviewed a Report of the Compensation Committee recommending
an allocation schedule for the allotted incentive option shares and voted
to implement the Stock Incentive Plan for distribution of such options to
the Corporation's present management, employees, directors and service
providers as set forth in the Compensation Committee Report. The Company
has not as yet issued the Incentive Stock Option Grant contracts.
F-7
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Note 2 - Transactions in Capital Surplus/Deficit
Quarter Ending March 31, 2005
-----------------------------
New Financing: January 2005 Convertible Notes. On January 31, 2005,
we closed a funding transaction with Longview Fund, LP, Longview Equity
Fund, LP, Longview International Equity Fund, LP, Alpha Capital
Aktiengesellschaft and Whalehaven Funds Limited, five institutional
accredited investors, for the issuance and sale to the Subscribers of up to
$2,300,000 of principal amount of promissory notes convertible into shares
of our common stock, and Warrants to purchase shares of common stock at
100% coverage of the common stock issuable in accordance with the principal
amount of the notes. One Million One Hundred Fifty Thousand Dollars
($1,150,000) of the purchase price was paid on the initial closing date,
and One Million One Hundred Fifty Thousand Dollars ($1,150,000) of the
purchase price will be payable within five (5) business days after the
actual effectiveness of an SB-2 Registration Statement as defined in the
Subscription Agreement. The initial closing notes were at prime plus 4%
interest in the aggregate amount of $1,150,000, plus five-year Warrants for
the purchase of, in the aggregate, 9,200,000 shares of common stock, at the
lesser of (i) $0.16, or (ii) 101% of the closing bid price of the Common
Stock as reported by Bloomberg L.P. for the OTC Bulletin Board for the
trading day preceding the Closing Date. The notes are convertible into
shares of our common stock at $0.125 per common share. Conversions are
limited to a maximum ownership of 9.99% of the underlying common stock at
any one time. The notes have a maturity date two years from closing and
are payable in twelve equal monthly installments, commencing June 1, 2005.
The installment payments consist of principal equal to 1/20th of the initial
principal amount which, subject to certain conditions concerning trading
volume and price, can be paid in cash at 103% of the monthly installment,
or common stock or a combination of both. The notes have an acceleration
provision upon the change in a majority of the present Board of Directors
except as the result of the death of one or more directors, or a change in
the present CEO. In connection with this transaction, we issued restricted
common stock in the aggregate amount of 460,000 shares plus the aggregate
cash amount of $57,500 for due diligence fees to the investors in this
transaction. We issued the Convertible Promissory Note and the underlying
common stock upon conversion to an accredited investor, pursuant to a
Regulation D offering. The underlying common stock is now registered
pursuant to a Form SB-2 registration statement declared effective August 2,
2005.
November 2003 Convertible Notes. We converted $25,000 of our
November 2003 Convertible Promissory Notes into 549,340 shares of common
stock pursuant to a notice of conversion from Gamma Opportunity Capital
Partners LP, at a fixed conversion price of $0.05. The conversion included
$2,467 of accrued and unpaid interest on the converted amount. We issued
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 3, 2004.
April 2004 Convertible Notes. We converted $99,999 of our April 2004
Convertible Promissory Notes into 1,141,387 shares of common stock pursuant
to notices of conversion from Longview Fund LP, at a fixed conversion price
of $0.10. The conversions included $14,138 of
F-8
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
accrued and unpaid interest. We issued the underlying common stock upon
conversion pursuant to our SB-2 registration statement, declared effective
on August 3, 2004.
June 2004 Convertible Notes. We converted $41,666 of our June 2004
Convertible Promissory Notes into 430,327 shares of restricted common stock
pursuant to a notice of conversion from Longview Fund LP, at a fixed
conversion price of $0.15. The conversion included $22,822 of accrued and
unpaid interest. We issued the Convertible Promissory Note and the
underlying common stock upon conversion to an accredited investor, pursuant
to a Regulation D offering. The underlying common stock is now registered
pursuant to a Form SB-2 registration statement declared effective April 18,
2005.
Quarter Ending June 30, 2005
----------------------------
New Financing: April 2005 Convertible Note. On April 21, 2005, we
closed a funding transaction with Alpha Capital Aktiengesellschaft for the
issuance of a convertible 10% note in the aggregate amount of $300,000.
The promissory note is convertible into shares of common stock of the
Company at $0.20 per common share. Conversions are limited to a maximum
ownership of 9.99% of the Company's common stock at any one time. The note
has an October 31, 2005 maturity and is payable in five equal monthly
installments, commencing June 1, 2005. The installment payments consist of
principal (equal to 1/5th of the initial principal amount) plus accrued
interest. Installments can be paid in cash or common stock valued at the
average closing price of the Company's common stock during the five trading
days immediately preceding the relevant installment due date. The Company
has repriced Class B Warrants issued on June 30, 2004 from $2.00 per share
to $0.125 per share and issued restricted common stock in the aggregate
amount of 93,750 shares for finder's fees to a third-party to facilitate
this transaction. The Company has the right to prepay the promissory note
by paying to the holder cash equal to 120% of the principal to be prepaid
plus accrued interest. The notes have an acceleration provision upon the
change in a majority of the present Board of Directors except as the result
of the death of one or more directors or a change in the present CEO of the
Company. The common stock underlying the note and the finder's fee common
stock have "piggy back" registration rights. We issued the convertible
note and finder's fee common stock to accredited investors, pursuant to a
Regulation D offering.
New Financing: May 2005 Convertible Notes. On May 23, 2005, we
closed a funding transaction (the "May '05 Transaction") with Longview
Fund, LP, Whalehaven Funds Limited, Ellis International Ltd., and Osher
Capital Corp., four institutional accredited investors, for the issuance
and sale to the Subscribers of Five Hundred Thousand Dollars ($500,000) of
principal amount of promissory notes convertible into shares of our common
stock and Warrants to purchase shares of common stock at 100% coverage of
the common stock issuable in accordance with the principal amount of the
notes. This May '05 Transaction was a part of a January 23, 2005 funding
transaction for an aggregate of Two Million Three Hundred Thousand Dollars
($2,300,000), One Million One Hundred Fifty Thousand Dollars ($1,150,000)
of which was paid on the initial closing date, and One Million One Hundred
Fifty Thousand Dollars ($1,150,000) of which (the "Second Tranche") was to
be payable within five (5) business days after the actual
F-9
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
effectiveness of an SB-2 Registration Statement covering the aggregate
transaction, as defined in the Subscription Agreement. The May '05
Transaction for Five Hundred Thousand Dollars ($500,000) is a partial
interim closing of the Second Tranche, which occurred prior to the
anticipated effectiveness of the SB-2 Registration Statement covering the
aggregate transaction. Contemporaneous with the May '05 Transaction, we
agreed to a modification of the January 23, 2005 aggregate transaction for
the substitution of Ellis International Ltd. and Osher Capital Corp. in the
place of Alpha Capital Aktiengesellschaft, one of the original investors.
The May '05 Transaction convertible notes are at prime plus 4% interest in
the aggregate amount of $500,000, plus five-year Warrants for the purchase
of, in the aggregate, 4,000,000 shares of common stock, at an exercise
price of $0.129. The notes are convertible into shares of our common stock
at $0.125 per common share. Conversions are limited to a maximum ownership
of 9.99% of the underlying common stock at any one time. The notes have a
maturity date two years from closing and are payable in twelve equal
monthly installments, commencing June 1, 2005. The installment payments
consist of principal equal to 1/20th of the initial principal amount which,
subject to certain conditions concerning trading volume and price, can be
paid in cash at 103% of the monthly installment or common stock or a
combination of both. The notes have an acceleration provision upon the
change in a majority of the present Board of Directors except as the result
of the death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 200,000 shares plus the aggregate cash amount of
$25,000 for due diligence fees to Longview Fund, LP, Gem Funding LLC, Ellis
International Ltd., and Osher Capital Corp. in this transaction. The
Second Tranche of the January 23, 2005 aggregate transaction, now in the
amount of $650,000, remains outstanding and will be triggered by the
effectiveness of the pending SB-2 registration statement.
Conversions: November 2003 Convertible Notes. We converted $50,000
of our November 2003 Convertible Promissory Note into 1,106,740 shares of
common stock pursuant to a notice of conversion from Gamma Opportunity
Capital Partners LP, at a fixed conversion price of $0.05. The conversion
included $5,337 of accrued and unpaid interest. We issued the underlying
common stock upon conversion pursuant to a Form SB-2 registration
statement, declared effective on August 3, 2004.
Warrant Exercise: November 2003 Warrant. We issued 1,000,000 shares
of common stock to Gamma Opportunity Capital Partners LP pursuant to the
exercise of a Warrant issued in connection with the November 2003 financing
transaction, and received $50,000 in warrant exercise payments. The shares
of common stock underlying the warrant were issued pursuant to a Form SB-2
shelf registration statement, declared effective by the SEC on August 3,
2004.
Warrant Exercise: April 2004 Warrant. We issued 1,500,000 shares of
common stock to Longview Fund LP pursuant to the exercise of a Warrant
issued in connection with the April 2004 financing transaction, and
received $225,000 in warrant exercise payments. The shares of common stock
underlying the warrant were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 3, 2004.
F-10
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Conversions: June 2004 Convertible Notes. We converted $528,573 of
our June 2004 Convertible Promissory Notes into 5,633,039 shares of common
stock pursuant to notices of conversion from Longview Fund LP, Gem Funding
LLC, Whalehaven Capital Fund Limited, Stonestreet Limited Partnership and
Bi-Coastal Consulting Corp. at a fixed conversion price of $0.10. The
conversion included $33,689 of accrued and unpaid interest. We issued the
common stock upon conversion pursuant to a Form SB-2 registration statement
declared effective by the Securities and Exchange Commission on April 18,
2005.
Warrant Exercise: June 2004 Warrant. We issued 2,200,000 shares of
common stock to Longview Fund LP, Whalehaven Capital Fund Limited and
Stonestreet Limited Partnership pursuant to the exercise of Warrants issued
in connection with the June 2004 financing transaction, and received
$309,000 in warrant exercise payments. The shares of common stock
underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on April 18, 2005.
Conversions: October 2004 Convertible Notes. We converted $446,250
of our October 2004 Convertible Promissory Notes into 4,718,514 shares of
common stock pursuant to notices of conversion from Longview Fund LP, Gem
Funding LLC, Whalehaven Capital Fund Limited, Stonestreet Limited
Partnership and Bi-Coastal Consulting Corp. at a fixed conversion price of
$0.10. The conversion included $25,602 of accrued and unpaid interest. We
issued the common stock upon conversion pursuant to a Form SB-2
registration statement declared effective by the Securities and Exchange
Commission on April 18, 2005.
Warrant Exercise: October 2004 Warrant. We issued 1,700,000 shares
of common stock to Longview Fund LP, Whalehaven Capital Fund Limited and
Stonestreet Limited Partnership pursuant to the exercise of Warrants issued
in connection with the October 2004 financing transaction, and received
$248,700 in warrant exercise payments. The shares of common stock
underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on April 18, 2005.
Conversions: December 2004 Convertible Notes. We converted $210,000
of our December 2004 Convertible Promissory Notes into 2,176,706 shares of
common stock pursuant to notices of conversion, to Momona Capital Corp. and
Ellis International Ltd Inc., at a fixed conversion price of $0.10 per
share. The conversion included $7,450 of accrued and unpaid interest. We
issued the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
Warrant Exercise: December 2004 Warrant. We issued 500,000 shares of
common stock to Momona Capital Corp. and Ellis International Ltd Inc.,
pursuant to the exercise of Warrants issued in connection with the December
2004 financing transaction, and received $72,500 in warrant exercise
payments. The shares of common stock underlying the warrants were issued
pursuant to a Form SB-2 shelf registration statement, declared effective by
the SEC on April 18, 2005.
F-11
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Conversions: January 2005 Convertible Notes. We converted $534,304
of our January 2005 Convertible Promissory Notes into 4,461,685 shares of
restricted common stock pursuant to notices of conversion, to Longview Fund
LP, Longview Equity Fund LP and Longview International Equity Fund LP at a
fixed conversion price of $0.125 per share. We issued the Convertible
Promissory Note and the underlying common stock upon conversion to an
accredited investor, pursuant to a Regulation D offering. The underlying
common stock is now registered pursuant to a Form SB-2 registration
statement declared effective August 2, 2005.
Conversions: Series F Convertible Preferred. We converted 31,134
shares of our Series F Convertible Preferred, having a stated value of
$311,340 into 2,903,839 shares of common stock pursuant to notices of
conversion, to Austinvest Anstalt Balzers and Esquire Trade & Finance Inc.
We issued the Series F Convertible Preferred and the underlying common
stock upon conversion to accredited investors, pursuant to a Regulation D
offering and Rule 144(k).
Conversions: Series H Convertible Preferred. We converted 100,000
shares of our Series H Convertible Preferred, having a stated value of
$1,000,000 into 2,500,000 shares of common stock pursuant to notices of
conversion, to four individual and two institutional investors. We issued
the Convertible Preferred and the underlying common stock upon conversion
to accredited investors, pursuant to a Regulation D offering and Rule
144(k).
Conversions: Series I Convertible Preferred. We converted 20,000
shares of our Series I Convertible Preferred, having a stated value of
$200,000 into 2,354,808 shares of common stock pursuant to a notice of
conversion, to Alpha Capital AG. We issued the Convertible Preferred and
the underlying common stock upon conversion to accredited investors,
pursuant to a Regulation D offering and Rule 144(k).
Warrant Exercise: Series I Warrant. We issued 1,333,333 shares of
restricted common stock to Alpha Capital AG, pursuant to the exercise of
Warrants issued in connection with the Series I financing transaction, and
received $133,333 in warrant exercise payments. The shares of common stock
underlying the warrants are now registered pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 2, 2005.
Private Placements. On May 17, 2005 we issued the aggregate of 27,500
restricted shares of the Company's common stock, with a recorded value of
$4,950, to eleven product sales brokers as a bonus for the performance of
services for the Company. We issued the restricted common stock pursuant to
Section 4(6) of the Securities Act of 1933, which provides an exemption from
the registration requirements of the Act for transactions not involving a
public offering.
S-8 Registration. On April 14, 2005 and April 18, 2005, we issued
750,000 and 250,000 shares, respectively, of our common stock to Geoffrey
Eiten, for services rendered for strategic business planning. These shares
were part of 1,500,000 shares of the Company's common stock registered
under a Form S-8 registration statement filed December 23, 2004.
F-12
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Warrant Issue. On June 20, 2005, we issued one year Warrant to
Marvel Enterprises Inc. to purchase 1,000,000 shares of our common stock a
$0.05 per share. This Warrant was issued in connection with the execution
of a License Agreement with Marvel for the United States, Canada and
Mexico. We issued the Warrant pursuant to Section 4(6) of the Securities
Act of 1933, which provides an exemption from the registration requirements
of the Act for transactions not involving a public offering.
Quarter Ending September 30, 2005
---------------------------------
Warrant Exercise: Series D Warrant. We issued 696,042 shares of
common stock to Longview Fund LP, Longview Equity Fund LP, Longview
International Equity Fund LP and Esquire Trade & Finance Inc., pursuant to
the cashless exercises of warrants for 763,750 shares of common stock. We
issued the Warrants and the underlying common stock upon exercise to
accredited investors, pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series F Convertible Preferred. We converted 19,133
shares of our Series F Convertible Preferred, having a stated value of
$191,330 into 804,752 shares of common stock pursuant to notices of
conversion to Amro International, SA. We issued the Series F Convertible
Preferred and the underlying common stock upon conversion to accredited
investors, pursuant to a Regulation D offering and Rule 144(k).
Warrant Exercise: Series F Warrant. We issued 3,345,417 shares of
common stock to Austinvest Anstalt Balzers and Esquire Trade & Finance Inc.
and Libra Finance, SA., pursuant to the cashless exercise of warrants for
3,676,518 shares of common stock. We issued the Warrants and the underlying
common stock upon exercise to accredited investors, pursuant to a
Regulation D offering and Rule 144(k).
Conversions: Series H Convertible Preferred. We converted 1,000
shares of our Series H Convertible Preferred, having a stated value of
$10,000 into 25,000 shares of common stock pursuant to notices of
conversion, to one individual investor. We issued the Convertible
Preferred and the underlying common stock upon conversion to accredited
investors, pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series I Convertible Preferred. We converted 10,000
shares of our Series I Convertible Preferred, having a stated value of
$100,000 into 656,953 shares of common stock pursuant to a notice of
conversion, to Tradersbloom Limited. The conversion included $24,000 of
accrued and unpaid interest. We issued the Convertible Preferred and the
underlying common stock upon conversion to accredited investors, pursuant
to a Regulation D offering and Rule 144(k).
Conversions: April 2004 Convertible Notes. We converted $250,000 of
our April 2004 Convertible Promissory Notes into 2,808,219 shares of common
stock pursuant to notices of conversion from Osher Capital Inc., Ellis
International Ltd Inc. and Alpha Capital AG. The conversion included
$3,082 of accrued and unpaid interest on the converted amount. We issued
F-13
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 4, 2004.
Conversions: June 2004 Convertible Notes. We converted $250,000 of
our June 2004 Convertible Promissory Notes into 2,796,575 shares of common
stock pursuant to notices of conversion from Alpha Capital AG at a fixed
conversion price of $0.10. The conversion included $29,657 of accrued
and unpaid interest on the converted amount. We issued the common stock
upon conversion pursuant to a Form SB-2 registration statement declared
effective by the Securities and Exchange Commission on April 18, 2005.
Conversions: October 2004 Convertible Notes. We converted $125,000
of our October 2004 Convertible Promissory Notes into 1,342,808 shares of
common stock pursuant to notices of conversion from Alpha Capital AG at a
fixed conversion price of $0.10. The conversion included $9,280 of accrued
and unpaid interest on the converted amount. We issued the common stock
upon conversion pursuant to a Form SB-2 registration statement declared
effective by the Securities and Exchange Commission on April 18, 2005.
Warrant Exercise: December 2004 Warrant. We issued 300,000 shares of
common stock to Momona Capital Corp. pursuant to the exercise of Warrants
issued in connection with the December 2004 financing transaction, and
received $30,000 in warrant exercise payments. The shares of common stock
underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on April 18, 2005.
Conversions: January 2005 Convertible Notes. We converted
$500,071 of our January 2005 Convertible Promissory Notes into 4,186,644
shares of restricted common stock pursuant to notices of conversion, to
Longview Fund LP, Longview Equity Fund LP and Longview International Equity
Fund LP at a fixed conversion price of $0.125 per share. The conversion
included $23,260 of accrued and unpaid interest on the converted amount.
We issued the common stock upon conversion pursuant to a Form SB-2
registration statement declared effective by the Securities and Exchange
Commission on August 2, 2005.
Warrant Exercise: January 2005 Warrant. We issued 7,200,000 shares
of common stock to Whalehaven Capital Fund Limited, Longview Fund LP,
Longview Equity Fund LP and Longview International Equity Fund LP pursuant
to the exercise of Warrants issued in connection with the January 2005
financing transaction, and received $720,000 in warrant exercise payments.
The shares of common stock underlying the warrants were issued pursuant to
a Form SB-2 shelf registration statement, declared effective by the SEC on
August 2, 2005.
Conversions: April 2005 Convertible Notes. We converted $300,000 of
our April 2005 Convertible Promissory Note into 1,556,438 shares of
restricted common stock pursuant to notices of conversion, to Alpha Capital
AG at a fixed conversion price of $0.20 per share. The conversion included
$11,288 of accrued and unpaid interest on the converted amount. We issued
the common stock upon conversion pursuant to a Form SB-2 registration
statement declared effective by the Securities and Exchange Commission
on August 2, 2005.
F-14
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Conversions: May 2005 Convertible Notes. We converted $475,000 of
our May 2005 Convertible Promissory Notes into 4,141,270 shares of
restricted common stock pursuant to notices of conversion, to Whalehaven
Capital Fund Limited, Ellis International Ltd, Longview Fund LP and Osher
Capital Corp. The conversion included $9,317 of accrued and unpaid
interest on the converted amount. We issued the common stock upon
conversion pursuant to a Form SB-2 registration statement declared
effective by the Securities and Exchange Commission on August 2, 2005.
Warrant Exercise: May 2005 Warrant. We issued 4,000,000 shares of
common stock to Whalehaven Capital Fund Limited, Ellis International Ltd,
Longview Fund LP and Osher Capital Corp. pursuant to the exercise of
Warrants issued in connection with the January 2005 financing transaction,
and received $400,000 in warrant exercise payments. The shares of common
stock underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 2, 2005.
New Financing: August 2005 Convertible Notes. On August 18, 2005, we
closed a funding transaction (the "August '05 Transaction") with Longview
Fund, LP, Longview Equity Fund, LP and Longview International Equity Fund,
LP, three institutional accredited investors, for the issuance and sale to
the Subscribers of Six Hundred Fifty Thousand Dollars ($650,000) of
principal amount of promissory notes convertible into shares of our common
stock and Warrants to purchase shares of common stock at 100% coverage of
the common stock issuable in accordance with the principal amount of the
notes. This August'05 Transaction was a part of a January 23, 2005 funding
transaction for an aggregate of Two Million Three Hundred Thousand Dollars
($2,300,000). The August '05 Transaction is the Second Tranche of the
January '05 transaction, which occurred upon the effectiveness of the SB-2
Registration Statement covering the aggregate transaction. The August'05
Transaction convertible notes are at prime plus 4% interest in the
aggregate amount of $650,000, plus five-year Warrants for the purchase of,
in the aggregate, 5,200,000 shares of common stock, at an exercise price of
$0.129. The notes are convertible into shares of our common stock at
$0.125 per common share. Conversions are limited to a maximum ownership of
9.99% of the underlying common stock at any one time. The notes have a
maturity date two years from closing and are payable in twelve equal
monthly installments. The installment payments consist of principal equal
to 1/20th of the initial principal amount which, subject to certain
conditions concerning trading volume and price, can be paid in cash at 103%
of the monthly installment, or common stock or a combination of both. The
notes have an acceleration provision upon the change in a majority of the
present Board of Directors except as the result of the death of one or more
directors, or a change in the present CEO. In connection with this
transaction, we issued restricted common stock in the aggregate amount of
260,000 shares plus the aggregate cash amount of $32,500 for due diligence
fees to Longview Fund companies. We issued the equity equivalents, the
underlying common stock upon conversion and the finders' fee common stock
pursuant to a Form SB-2 registration statement declared effective by the
Securities and Exchange Commission on August 2, 2005.
F-15
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
On September 30, 2005, we repaid $250,000 of the aggregate $650,000
of the August '05 Transaction notes, as follows: $57,692 to Longview Fund,
LP, $144,231 to Longview Equity Fund, LP and $ $48,077 to Longview
International Equity Fund, LP. The holders of these notes waived the
prepayment premium in lieu of their retention of warrants attached to
August '05 Transaction.
Conversions: August 2005 Convertible Notes. We converted $91,217
of our August 2005 Convertible Promissory Notes into 743,750 shares of
restricted common stock pursuant to a notice of conversion, to Longview
Fund LP, at a fixed conversion price of $0.125 per share. The conversion
included $1,752 of accrued and unpaid interest on the converted amount.
We issued the common stock upon conversion pursuant to a Form SB-2
registration statement declared effective by the Securities and Exchange
Commission on August 2, 2005.
Warrant Exercise: August 2005 Warrant. We issued 5,200,000 shares of
common stock to Longview Fund LP, Longview Equity Fund LP and Longview
International Equity Fund LP pursuant to the exercise of Warrants issued in
connection with the August 2005 financing transaction, and received
$520,000 in warrant exercise payments. The shares of common stock
underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 2, 2005.
Private Placements. On August 3, 2005 we issued 500,000 restricted
shares of our common stock to Geoffrey Eiten, for services rendered for
strategic business planning. We issued the restricted common stock
pursuant to Section 4(6) of the Securities Act of 1933, which provides an
exemption from the registration requirements of the Act for transactions
not involving a public offering.
On August 29 and September 19, 2005 we issued the aggregate of
1,000,000 restricted shares of our common stock to National Financial
Communications Corp. pursuant to the exercise of Warrants issued in
connection with a consulting agreement for services rendered for strategic
business planning. We issued the restricted common stock pursuant to
Section 4(6) of the Securities Act of 1933, which provides an exemption
from the registration requirements of the Act for transactions not
involving a public offering.
On September 19, 2005, we issued 450,000 restricted shares of our
common stock to Alpha Capital AG, an accredited investor, in a sale not
involving a public offering at a price of $1.00 per share. We issued the
common stock pursuant to a Regulation D offering.
Warrant Issue. On August 31, 2005, we issued a three year Warrant to
Coca-Cola Enterprises Inc. to purchase 30,000,000 shares of our common
stock a $0.36 per share. During the first 18 months of the exercise
period, the Company has the option to "call" the exercise of up to
10,000,000 shares of common stock issuable upon exercise of the Warrant,
upon the Company's satisfaction of certain conditions, including a trading
price of not less than $1.08 per share for 20 consecutive trading days.
This Warrant was issued in connection with the execution of a Master
Distribution Agreement on August 31, 2005. We issued the Warrant pursuant
to
F-16
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
(UNAUDITED)
Section 4(6) of the Securities Act of 1933, which provides an exemption
from the registration requirements of the Act for transactions not
involving a public offering. The Company will record and $11,900,000 net
charge in deferred distribution costs for the issuance of a three year
warrant to Coca-Cola Enterprises to purchase of 30,000,000 shares of our
common stock in connection with the Master Distribution Agreement. The
Company will recognize that cost as a selling expense over the 10-year
term of the agreement.
Note 3 - Business Segment and Geographic Information
The Company operates principally in the single serve flavored milk
industry segment, under two distinct business models. In the United
States, the Company is responsible for the sale of finished Slammers(R)
flavored milk (referred to as "unit sales") to retail outlets. For these
unit sales, the Company recognizes as revenue the invoiced wholesale prices
that the Company charges to the retail outlets that purchase the
Slammers(R) flavored milks. In countries other than the United States, the
Company's revenue generally is generated by the sale of kits to dairy
processors. Each kit consists of flavor ingredients for the Company's
Slammers(R) flavored milks and production rights to manufacture and sell
the milks. In line with the Company's revenue recognition policies, the
Company recognizes the full invoiced kit price as revenue. In earlier periods,
the Company reported the sale of kits to SADAFCO, a third party dairy
processor located in Saudi Arabia, for distribution to nine Middle Eastern
countries, and Neolac, a third party dairy processor located in Mexico. The
Company did not have sales to these third party processors in the quarter
ending September 30, 2005.
Note 4 - Subsequent Events
Conversions: January 2005 Convertible Notes. We converted $116,624
of our January 2005 Convertible Promissory Notes into 945,348 shares of
restricted common stock pursuant to notices of conversion, to Longview
Equity Fund LP and Longview International Equity Fund LP at a fixed
conversion price of $0.125 per share. The conversion included $1,446 of
accrued and unpaid interest on the converted amount. We issued the common
stock upon conversion pursuant to a Form SB-2 registration statement
declared effective by the Securities and Exchange Commission on August 2,
2005.
Conversions: August 2005 Convertible Notes. We converted $307,692
of our August 2005 Convertible Promissory Notes into 2,500,332 of restricted
common stock pursuant to a notice of conversion, to Longview Fund LP,
Longview Equity Fund LP and Longview International Equity Fund LP, at a fixed
conversion price of $0.125 per share. The conversion included $4,850 of
accrued and unpaid interest on the converted amount. We issued the common
stock upon conversion pursuant to a Form SB-2 registration statement declared
effective by the Securities and Exchange Commission on August 2, 2005.
F-17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2005
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's prospects and strategies and the Company's expectations about
growth contained in this report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the present expectations or beliefs
concerning future events. The Company cautions that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Company's actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the uncertainty as to the Company's
future profitability; the uncertainty as to whether the Company's new
business model can be implemented successfully; the accuracy of the
Company's performance projections; and the Company's ability to obtain
financing on acceptable terms to finance the Company's operations until
profitability.
OVERVIEW
The Company's business model includes the development and marketing
of a Company owned Slammers(R) trademarked brand, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the granting of production and
marketing rights to processor dairies to produce branded flavored milk.
The Company generates revenue in its international (non-US) business
through the sale of "kits" to these dairies. The price of the "kits"
consists of an invoiced price for a fixed amount of flavor ingredients per
kit used to produce the flavored milk and a fee charged to the dairy
processors for the production, promotion and sales rights for the branded
flavored milk. In the United States, the Company generates revenue from
the unit sales of finished branded flavored milks to retail consumer
outlets.
The Company's new product introduction and growth expansion continues
to be expensive, and the Company reported a net loss of $7,386,564 for the
nine-month period ended September 30, 2005. As shown in the accompanying
financial statements, the Company has suffered operating losses and
negative cash flows from operations since inception and at September 30,
2005 has an accumulated deficit of $41,386,594, and negative working capital
of $4,105,854. These conditions give rise to substantial doubt about the
Company's ability to continue as a going concern. As discussed herein, the
Company has executed a ten year exclusive Master Distribution Agreement with
Coca-Cola Enterprises Inc., the implementation of which commenced November 1,
2005, is working toward profitability in the Company's U.S. and international
business and will obtain additional financing. While there is no assurance
that funding will be available or that the Company will be able to improve
the Company's operating results, the Company is continuing to seek equity
and/or debt financing.
18
No assurances can be given, however, that management will be successful in
carrying out the Company's plans.
CORPORATE GOVERNANCE
The Board of Directors
The Company's board has positions for seven directors that are
elected as Class A or Class B directors at alternate annual meetings of the
Company's shareholders. Six of the seven current directors of the
Company's board are independent. The Company's Chairman and Chief
Executive Officer are separate. The board meets regularly, at least four
times a year, and all directors have access to the information necessary to
enable them to discharge their duties. The board, as a whole, and the
audit committee in particular, reviews the Company's financial condition
and performance on an estimated vs. actual basis and financial projections
as a regular agenda item at scheduled periodic board meetings, based upon
separate reports submitted by the Company's Chief Executive Officer and
Chief Accounting Officer. Directors are elected by the Company's
shareholders after nomination by the board or are appointed by the board
when a vacancy arises prior to an election. The Company has adopted a
nomination procedure based upon a rotating nomination committee made up of
those members of the director class not up for election. The board
presently is examining whether this procedure, as well as the make up of
the audit and compensation committees, should be the subject of an
amendment to the by-laws.
Audit Committee
The Company's audit committee is composed of three independent
directors and functions to assist the board in overseeing the Company's
accounting and reporting practices. The Company's financial information is
booked in house by the office of the Company's Chief Accounting Officer,
from which the Company prepares financial reports. These financial reports
are audited or reviewed by Lazar Levine & Felix LLP, independent registered
certified accountants and auditors. The Company's CAO reviews the
preliminary financial and non-financial information prepared in house with
the Company's General Counsel and the auditors. The committee reviews the
preparation of the Company's audited and unaudited periodic financial
reporting and internal control reports prepared by the Company's CAO. The
committee reviews significant changes in accounting policies and addresses
issues and recommendations presented by the Company's auditors. Currently,
there is one vacancy on the audit committee.
Compensation Committee
The Company's compensation committee is composed of three independent
directors who review the compensation structure and policies concerning
executive compensation. The committee develops proposals and
recommendations for executive compensation and presents those
recommendations to the full board for consideration. The committee
periodically reviews the performance of the Company's other members of
management and the recommendations of the Chief Executive Officer with
respect to the compensation of those individuals. Given the size of the
Company, all such employment contracts are periodically reviewed by the
board. The board must approve all compensation packages that involve the
issuance of the Company's stock or stock options.
19
Nominating Committee
The nominating committee was established in the second quarter 2002
and consists of those members of the director Class not up for election.
The committee is charged with determining those individuals who will be
presented to the shareholders for election at the next scheduled annual
meeting. The full board fills any mid term vacancies by appointment.
CRITICAL ACCOUNTING POLICIES
Estimates
This discussion and analysis of the Company's consolidated financial
condition and results of operations are based on the Company's consolidated
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 the Company to make
estimates and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates the Company's estimates, including those related to reserves for
bad debts and valuation allowance for deferred tax assets. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
result of which forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions. The Company's use of estimates,
however, is quite limited as the Company has adequate time to process and
record actual results from operations.
Revenue recognition
United States
- -------------
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of finished product to wholesale buyers
("unit sales"). The Company takes title to its branded flavored milks when
they are shipped by the Company's third party processors and recognize as
revenue the gross wholesale price charged to the Company's wholesale
customers. The Company's gross margin is determined by the reported
wholesale price less the cost charged by Jasper Products, the Company's
third party processor, to produce the branded milk products.
In certain circumstances in its U.S. business, the Company is
required to pay slotting fees, give promotional discounts or make marketing
allowances in order to secure wholesale customers. These payments,
discounts and allowances reduce the Company's reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff
Accounting Bulletin No. 104.
20
International Sales
- -------------------
The Company generally recognizes revenue in its international
business at the gross amount of its invoices for the sale of kits ("kit
sales") at the time of shipment of flavor ingredients to processor dairies
with which the Company has production contracts for extended shelf life and
aseptic long life milk. A "kit" consists of flavor ingredients and the
grant of production rights for the Company's branded products. The Company
bases this recognition on its role as the principal in these transactions,
its discretion in establishing kit sale prices (including the price of
flavor ingredients and production right fees), its development and
refinement of flavors and flavor modifications, its discretion in supplier
selection and its credit risk to pay for ingredients if processors do not
pay ingredient suppliers. The revenue generated by the production
contracts under this model consists of the cost of the processors' purchase
of flavor ingredients and fees charged by the Company to the processors for
production rights. The Company formulates the price of production rights
to cover the Company's intellectual property licenses, which varies by
licensor as a percentage of the total cost of a kit sold to the processor
dairy under the production agreement. The Company recognizes revenue on
the gross amount of "kit" invoices to the dairy processors and
simultaneously records as cost of goods sold the cost of flavor ingredients
paid by the processor dairies to ingredients supplier. The recognition of
revenue generated from the sale of production rights associated with the
flavor ingredients is complete upon shipment of the ingredients to the
processor, given the short utilization cycle of the ingredients shipped.
Pursuant to EITF 99-19, international sales of kits made directly to
customers by the Company are reflected in the statements of operations on a
gross basis, whereby the total amount billed to the customer is recognized
as revenue.
In certain circumstances, such as in the United Kingdom and as
anticipated in Canada, the Company recognizes revenue under the unit sales
model.
RESULTS OF OPERATIONS
Financial Condition at September 30, 2005
- -----------------------------------------
As of September 30, 2005, we had an accumulated deficit of
$41,485,761, cash on hand of $553,857 and reported total capital surplus of
$7,544,377.
For this same period of time, we had revenue of $6,591,693 and
general and administrative expense of $2,345,041.
After interest expenses of $293,415, cost of goods sold of
$4,719,011, product development costs of $194,955 and selling expenses of
$3,525,002 incurred in the operations of the Company, we had a net loss of
$7,485,371. Of this net loss amount, $3,000,000 has been recorded in the
quarter ending September 30, 2005 as a one time, non-recurring finder's fee
payable to a third-party in connection with the execution of the Master
Distribution Agreement with Coca-Cola Enterprises, Inc.
21
Nine Months Ended September 30, 2005 Compared to the Nine Months Ended
- ----------------------------------------------------------------------
September 30, 2004
- ------------------
Consolidated Revenue
We had revenues for the nine months ended September 30, 2005 of
$6,591,693, with cost of sales of $4,719,011, resulting in a gross margin
of $1,872,682. This revenue and resultant gross margin are net of slotting
fees, promotional discounts and marketing allowances for this period in the
amount of $330,699. Of the reported revenue, U.S. sales accounted for
$6,269,747, with $288,596 from UK unit sales and an additional $33,350 from
international kit sales in the Middle East. We did not have revenue in
this period in Canada or Mexico. Our reported revenue for the nine months
ended September 30, 2005 increased by $3,886,701, a 143.69% increase
compared to revenue of $2,704,992 for the same period in 2004. This
increase is the result of the Company's development of new branded product
lines in the United States, including the 2005 launch of our Slammers(R)
line of Mars' Starburst, MilkyWay and 3 Musketeers flavored milk drinks.
Our launch of Mars Slammers(R) line in the first quarter 2005 achieved
market penetration in over 30,000 grocery and convenience stores for this
line by September 30, 2005.
Consolidated Cost of Sales
We incurred cost of goods sold of $4,719,011 for the nine months
ended September 30, 2005, $4,506,616 of which was incurred in our U.S.
business, $209,782 in connection with our UK operation and $2,613 in
connection with our international sales in the Middle East. Cost of goods
sold in this period increased by $2,825,177 a 149.18% increase compared to
$1,893,834 for the same period in 2004. The increase in cost of goods sold
reflects an increase in sales, the concomitant increase in reported cost of
goods sold associated with that increase and the economic inefficiencies of
low production volume associated with the initial launch of the Slammers(R)
line in the UK.
In countries except the United States and the United Kingdom, our
revenue is generated by the sale of kits to dairy processors. Each kit
consists of flavor ingredients for flavored milks and production rights to
manufacture and sell the milks. In line with our revenue recognition
policies, we recognize the full invoiced kit price as revenue, less the
cost of production charged by the processor, which we record as cost of
goods sold.
In the United States and the United Kingdom, we are responsible for
the sale of finished Slammers(R) flavored milk (referred to as "unit
sales") to retail outlets. For these unit sales, we recognize as revenue
the invoiced wholesale prices that we charge to the retail outlets that
purchase the Slammers(R) flavored milks. We report as cost of goods sold
the price charged to the Company by third party processors that produce the
finished Slammers(R) products.
Segmented Revenues and Costs of Sales
The following table presents revenue by source and type against costs
of goods sold, as well as combined gross revenues and gross margins. In
countries other than the United States
22
and the United Kingdom , revenues for the period ended September 30 2005
were generated by kit sales to third party processors. The Company's
revenue from the sale of finished product to retail outlets is recorded as
"unit sales" on the following table.
Nine Months Ended United Total
September 30, 2005 United States Mexico Middle East Kingdom Company
- ------------------ ------------- ------ ----------- ------- -------
<s> <c> <c> <c> <c> <c>
Revenue - unit sales $ 6,269,747 $ - $ - $ 288,596 $ 6,558,343
Revenue - gross kit sales - - 33,350 - 33,350
----------- -------- -------- --------- -----------
Total revenue 6,269,747 - 33,350 288,596 6,591,693
Cost of goods sold (4,506,616) - (2,613) (209,782) (4,719,011)
----------- -------- -------- --------- -----------
Gross margin $ 1,763,131 $ - $ 30,737 $ 78,814 $ 1,872,682
=========== ======== ======== ========= ===========
Nine Months Ended United Total
September 30, 2004 United States Mexico Middle East Kingdom Company
- ------------------ ------------- ------ ----------- ------- -------
<s> <c> <c> <c> <c> <c>
Revenue - unit sales $ 2,236,383 $ - $ - $ - $ 2,236,383
Revenue - gross kit sales 65,461 83,518 319,630 - 468,609
----------- -------- -------- --------- -----------
Total revenue 2,301,844 83,518 319,630 - 2,704,992
Cost of goods sold (1,820,432) (31,101) (42,301) - (1,893,834)
----------- -------- -------- --------- -----------
Gross margin $ 481,412 $ 52,417 $277,329 $ - $ 811,158
=========== ======== ======== ========= ===========
United States
-------------
Revenues for the period ended September 30, 2005 from unit sales in
the United States increased from $2,236,383 for the same period in 2004 to
$6,269,747 in 2005, a 180.4% increase. The increase is the result of the
introduction of the Company's new product lines during this period.
In the period ended September 30, 2005, our gross margin for U.S.
sales of $1,763,131, increased by $1,281,719, or by 266.24%, from $481,412
for the same period in 2004. The increase in gross margin was the result
of the increased sales and greater efficiencies in the production of our
products.
Foreign Sales
-------------
Revenues for the period ended September 30, 2005 from kit sales in
foreign countries decreased from $403,148 for the same period in 2004 to
$321,946, a 20.14 % decrease. The decrease is the result of the lack of
sales in Mexico and a reduction of sales in the Middle East during this
period offset by the commencement of sales in the United Kingdom.
We recorded $212,395 in costs of sales in foreign countries for the
period ended September 30, 2005, an increase of $138,993 or 189.36% from
$73,402 for the same period in
23
2004. The increase was the result of the costs associated with
establishing a new business in the United Kingdom based upon the Company's
unit sales model.
For the period ended September 30, 2005, our gross profit of $109,551
for sales in foreign countries decreased by $220,195, or 66.78%, from
$329,746 for the same period in 2004. The decrease in gross profit was
consistent with the decrease in sales volume for this period.
Consolidated Operating Expenses
We incurred selling expenses of $3,525,002 for the period ended
September 30, 2005, $3,260,493 of which was incurred in our United States
operations. Our selling expense for this period increased by $2,254,960, a
177.5% increase compared to our selling expense of $1,270,042 for the same
period in 2004. The increase in selling expenses in the current period was
due to increased freight and promotional charges, including media
advertising, associated with increased sales and our development of four
new product lines, utilizing newly licensed and directly owned branded
trademarks. In addition, the Company recorded $99,168, pro-rata, of an
$11,900,000 net charge in deferred distribution costs for the issuance of a
three warrant to Coca-Cola Enterprises to purchase of 30,000,000 shares of
our common stock in connection with the execution of a Master Distribution
Agreement. The Company will recognize that cost as a selling expense over
the 10-year term of the Master Distribution Agreement.
We incurred general and administrative expenses of $2,345,041 for the
period ended September 30, 2005, $2,183,598 of which we incurred in our
United States business operations and $161,443 for the enlargement of our
international business into the United Kingdom and Canada. Our general and
administrative expenses for this period increased by $131,715, a 5.95%
increase compared to $2,213,326 for the same period in 2004.
As a percentage of total revenue, the Company's general and
administrative expenses decreased from 81.8% in the period ended September
30, 2004, to 35.6% for the current period in 2005. We anticipate a
continued effort to reduce these expenses as a percentage of sales through
revenue growth, cost cutting efforts and the refinement of business
operations.
Interest Expense
We incurred interest expense for the period ended September 30, 2005
of $293,415. Our interest expense increased by $138,598, a 89.52% increase
compared to $154,817 for the same period in 2004. The increase was due to
using additional debt to finance the Company's operations during this
period, including the development and launch of new product lines and
expenses associated with increased promotional and marketing sponsorships.
Loss Per Share
We accrued dividends payable of $263,001 for various series of
preferred stock during the period ended September 30, 2005. The accrued
dividends decreased for this period by $28,459, or 9.76%, from $291,460 for
the same period in 2004. The net loss before accrued dividends for the
current period increased $4,603,600, from $2,882,131 for the period ended
September 30, 2004 to $7,485,731 for the current period. The increase in
the net loss resulted in an increase in the Company's current period loss
per share from $0.08 for the same period in 2004, to a loss per share of
$0.09 for the current period. Of the $7,485,370 net loss, $3,000,000 has
been recorded in the quarter ending September 30, 2005 as a one time, non-
recurring finder's fee payable to a third party in connection with the
execution of the Master Distribution
24
Agreement with Coca-Cola Enterprises, Inc. Absent the $3,000,000 non-
recurring finder's fee charge, the Company's increased net loss per share
was offset by an increase in the weighted average of common shares
outstanding from 38,254,305 shares for the nine months ended September
2004 to 82,091,556 shares for the current nine month period, resulting in a
current period loss per share of $0.06.
Three Months Ended September 30, 2005 Compared to the Three Months Ended
- ------------------------------------------------------------------------
September 30, 2004
- ------------------
Revenue
The Company had revenues for the three months ended September 30,
2005 of $3,245,305, with cost of sales of $2,360,884, resulting in a gross
profit of $884,421, or 27.3% of sales, $2,956,709 of which were generated
by the Company's U.S. operation and $288,596 from the Company's UK
business. The Company did not report any sales for Canada, Mexico or the
Middle East in the three months ended September 30, 2005. Our revenue for
the three months ended September 30, 2005 increased by $2,419,875, a 293%
increase compared to revenue of $825,430 for the three months ended September
30, 2005. The increase in revenue in the United States for the three
months ended September 30, 2005 is the result of the continuing rollout of
the Company's new product lines during this period and the launch of the
Company's business in the United Kingdom.
Cost of Goods Sold
The Company incurred cost of goods sold of $2,360,884 for the three
months ended September 30, 2005, $2,151,102 of which was incurred in our
U.S. operations in the third quarter. Our cost of goods sold for this
period increased by $1,732,137, a 275.5% increase compared to $628,747 for
the three months ended September 30, 2004. The increase in cost of goods
sold in the United States for the three months ended September 30, 2005 is
the result of increased sales and the corresponding increase in the costs
of good sold.
Operating Expense
The Company incurred selling expenses of $1,727,531 for the three
months ended September 30, 2005, $634,580 of which was incurred in our
U.S. operation. Selling expenses increased for the three months ended
September 30, 2005 by $1,074,909, a 164.7% increase compared to the selling
expense of $652,622 for the three months ended September 30, 2004. The
increase in selling expenses is the result of increased sales, including
promotional expenses, the costs associated with guaranteed royalties under
our third-party intellectual property license agreements and deferred
distribution costs for the issuance of a warrant in connection wit the
execution a Master Distribution Agreement with Coca-Cola Enterprises Inc.
The Company incurred general and administrative expenses of $905,487
for the three months ended September 30, 2005, $844,464 of which was
incurred in the U.S. operations. General and administrative expenses for
the three months ended September 30, 2005 increased by $354,188, a 64.25%
increase compared to $551,299 for the same period in 2004. The increase in
general and administrative expenses for the current period is the result of
greater management activities in the promotion and continued rollout of the
Company's new product lines in the United States and the establishment of
the Company's business in the United Kingdom.
25
Interest Expense
The Company incurred interest expense for the three months ended
September 30, 2005 of $73,169. Interest expense for the three months ended
September 30, 2005 decreased by $6,653, an 8.3% decrease compared to
$79,822, for the same period in 2004. This decrease was the result of
of reduced debt in this period.
Net Loss
The Company had a net loss for the three months ended September 30,
2005 of $4,906,456 compared with a net loss of $1,120,992 for the same
period in 2004. The net loss increased by $3,785,464 or 337.7% compared
to the same period in 2004. Of the $4,906,456 net loss, $3,000,000 represents
a one time, non-recurring finder's fee payable to a third party in connection
with the execution of the Master Distribution Agreement with Coca-Cola
Enterprises, Inc. Absent the $3,000,000 non-recurring finder's fee charge,
the Company's increased net loss per share was offset by an increase in the
weighted average of common shares outstanding from 44,374,877 shares for the
three months ending September 2004 to 113,680,645 shares for the current three
month period, resulting in a current three month period loss per share of
$0.016.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, we reported that net cash used in operating
activities was $4,956,448, net cash provided by financing activities was
$5,510,649 and net cash used in investing activities was $90,583. We had a
negative working capital of $4,105,854 as of September 30, 2005.
Compared to $3,372,840 of net cash used in operating activities in
the period ended September 30, 2004, our current period net cash used in
operating activities increased by $1,583,608 to $4,956,448. This increase
was the result of changes in deferred product development costs, prepaid
expenses, accounts payable and accrued expenses, including a $3,000,000
finder's fee payable in connection with the execution of the Coca-Cola
Enterprises Master Distribution Agreement. Included in the net loss in
this current period were depreciation and amortization and stock compensation
for a finder fee aggregating $907,087, compared to $364,995 for the same period
in 2004.
Changes in accounts receivable in this current period in 2005
resulted in a cash decrease of $149,281, compared to a cash decrease in
receivables of $8,490 for the same period in 2004, having a net result of
an decrease of $140,791. The changes in accounts payable and accrued
liabilities in the period ended of September 30, 2004 contributed to a cash
decrease of $224,031, whereas the changes in accounts payable and accrued
liabilities for the current period in 2005 amounted to an increase of
$4,208,414. Cash flow generated through our operating activities was
inadequate to cover all of our cash disbursement needs in the period ended
September 30, 2005, and we had to rely on equity and debt financing to
cover expenses.
26
Cash used in the period ended September 30, 2005 in our investing
activities for equipment was $90,583 for software, computer equipment,
telephone system, Company van, mobile communication devices and leasehold
improvements in the U.S., compared to $47,647 for the same period in 2004.
Net cash provided by our financing activities for the period ended
September 30, 2005 was $5,510,649. Net cash provided by financing
activities for the same period in 2004 was $3,419,891. The increase was
due to a greater need for financing to fund the Company's operations during
this period and the exercise of warrants generating $2,958,509.
The Company used the proceeds of the current period financing for
working capital purposes to support the continued launch of new product
lines under a license with Masterfoods USA and for new product development.
Going forward, our primary requirements for cash consist of the
following:
* the continued development of our business model in the United
States and on an international basis;
* promotional and logistic production support for the capacity
demands presented by our Master Distribution Agreement with
Coca-Cola Enterprises
* general overhead expenses for personnel to support the new
business activities;
* development, launch and marketing costs for our line of new
branded flavored milk products, and
* the payment of guaranteed license royalties.
We estimate that our need for financing to meet cash requirements for
operations will continue through the fourth quarter of 2005, when we expect
that cash supplied by operating activities will approach the anticipated
cash requirements for operating expenses. We anticipate the need for
additional financing in 2005 to reduce our liabilities, assist in marketing
and to improve shareholders' equity status. No assurances can be given
that we will be able to obtain additional financing, or that operating cash
flows will be sufficient to fund our operations.
We currently have monthly working capital needs of approximately
$300,000. We will continue to incur significant selling and other expenses
in 2005 in order to derive more revenue in retail markets, through the
introduction and ongoing support of our new products and the implementation
of the Master Distribution Agreement with Coca-Cola Enterprises. Certain
of these expenses, such as slotting fees and freight charges, will be
reduced as a function of unit sales costs as we expand our sales markets
and increase our sales within established markets. Freight charges will be
reduced as we are able to ship more full truckloads of product given the
reduced per unit cost associated with full truckloads versus less than full
truckloads. Similarly, slotting fees, which are paid to warehouses or
chain stores as initial set up or shelf space fees, are essentially one-
time charges per new customer. We believe that along with the increase in
our unit sales volume, the average unit selling expense and associated
costs will decrease, resulting in gross margins sufficient to mitigate cash
needs. In addition, we are actively seeking additional financing to
support our operational needs and to develop an expanded promotional
program for our products.
27
Material Events
- ---------------
In January 2005, we launched our Slammers(R) Starburst line of Fruit
& Cream Smoothies utilizing a "shelf stable" re-sealable plastic bottle for
milk products that does not require refrigeration. Until that launch, all
single served flavored milk in plastic bottles required refrigeration for
storage, distribution, and shelf placement. The tactical advantage of
distributing milk products ambient enables us to side-step a major entry
barrier in our immediate consumption strategy. Refrigerated milk is
relegated to dairy direct-store-delivery systems that are controlled by
either regional dairy processors or larger national dairy holding
companies. Shelf stable re-sealable plastic bottle allows us to use a more
traditional distribution network that accommodates the non-refrigerated
beverages. Also, milk products packaged in shelf stable re-sealable
plastic bottles have significantly longer shelf life for storage, allowing
us to ship in full truckloads resulting in decreased freight costs. We
currently are converting all of our products to "shelf stable" re-sealable
plastic bottle.
On July 13, 2005, Coca-Cola Enterprises Inc. (CCE) acquired options
to purchase shares of common stock, convertible securities and warrants,
entitling Coca-Cola Enterprises to purchase approximately 69,000,000 shares
of common stock from 9 non-affiliated shareholders of the Company (the
"Options"), representing approximately 23% of the authorized shares of the
Company's common stock. Coca-Cola Enterprises and the Company
contemporaneously commenced negotiations regarding a stock purchase
agreement for the direct sale of approximately 81 million shares of the
Company's common stock to Coca-Cola Enterprises. The consummation of the
direct sale and the exercise of the Options by Coca-Cola Enterprises would
have resulted in Coca-Cola Enterprises holding slightly in excess of 50% of
the Company's equity on a fully diluted basis. These transactions were
contingent upon the execution of a Master Distribution Agreement between
the Company and Coca-Cola Enterprises. On July 29, 2005, the Company and
Coca-Cola Enterprises entered into a Letter of Intent memorializing and
confirming their intention to enter into the stock purchase agreement.
Subsequent to the execution of the Letter of Intent, in lieu of the
exercise of the Options and the stock purchase agreement, the parties
agreed to enter into the Master Distribution Agreement with the attendant
grant of three year warrants by the Company to Coca-Cola Enterprises for
the right to purchase 30 million shares of the Company's common stock at an
exercise price of $0.36 per share. On August 31, 2005, the Company issued
the warrants to Coca-Cola Enterprises and the parties executed a ten year
exclusive Master Distribution Agreement that will significantly expand the
distribution and sales of the Company's products. The Company will recognize
a $11,900,000 net charge in deferred distribution costs for the warrant issued
to Coca-Cola Enterprises over the 10-year term of the Master Distribution
Agreement. The Company presently is seeking from $10 - $15 million in new
financing to promote the expanded sales anticipated with the implementation
of the Master Distribution Agreement, and for general working capital.
External Sources of Liquidity
- -----------------------------
Individual Loans
----------------
On November 6 and 7, 2001, respectively, we received the proceeds of
two loans aggregating $100,000 from two offshore lenders. The two
promissory notes, one for $34,000 and the other for $66,000, were payable
February 1, 2002 and bear interest at the annual rate of
28
8%. These loans are secured by a general security interest in all our
assets. On February 1, 2002, the parties agreed to extend the maturity
dates until the completion of the anticipated Series H financing. On
September 18, 2002, the respective promissory note maturity dates were
extended by agreement of the parties to December 31, 2002. On September
18, 2002, we agreed to extend the expiration dates of warrants issued in
connection with our Series D and F preferred until September 17, 2005 and
to reduce the exercise price of certain of those warrants to $1.00, in
partial consideration for the maturity date extension. The holders of these
notes have agreed to extend the maturity dates, and the notes are now
payable on a demand basis.
On May 6, 2004, we issued a secured promissory note to Mid- Am
Capital LLC in the principal amount of $750,000. The note provides for 8%
interest. The note's original maturity date of September 4, 2004 has been
extended. We issued warrants to purchase 3,000,000 shares of our common
stock to Mid-Am in connection with this promissory note. The warrants are
exercisable for one year from issue at an exercise price of $0.25 per
share. We used the proceeds of this promissory note to pay the promissory
note issued to Jasper Products in January 2004.
Convertible Debentures
----------------------
To obtain funding for our ongoing operations, we entered into the
following financing transactions in 2005.
January 2005
- ------------
On January 31, 2005, we closed a funding transaction with Longview
Fund, LP, Longview Equity Fund, LP, Longview International Equity Fund, LP,
Alpha Capital Aktiengesellschaft and Whalehaven Funds Limited, five
institutional accredited investors, for the issuance and sale to the
Subscribers of up to $2,300,000 of principal amount of promissory notes
convertible into shares of our common stock, and Warrants to purchase
shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. One Million One Hundred
Fifty Thousand Dollars ($1,150,000) of the purchase price was paid on the
initial closing date, and One Million One Hundred Fifty Thousand Dollars
($1,150,000) of the purchase price will be payable within five (5) business
days after the actual effectiveness of an SB-2 Registration Statement as
defined in the Subscription Agreement.
The initial closing notes were at prime plus 4% interest in the
aggregate amount of $1,150,000, plus five-year Warrants for the purchase
of, in the aggregate, 9,200,000 shares of common stock, at the lesser of
(i) $0.16, or (ii) 101% of the closing bid price of the Common Stock as
reported by Bloomberg L.P. for the OTC Bulletin Board for the trading day
preceding the Closing Date.
The notes are convertible into shares of our common stock at $0.125
per common share. Conversions are limited to a maximum ownership of 9.99%
of the underlying common stock at any one time. The notes have a maturity
date two yeas from closing and are payable in twelve equal monthly
installments, commencing June 1, 2005. The installment payments consist of
principal equal to 1/20th of the initial principal amount which, subject to
certain conditions concerning trading volume and price, can be paid in cash
at 103% of the monthly installment, or common stock or a combination of
both. The notes have an acceleration provision upon the
29
change in a majority of the present Board of Directors except as the result
of the death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 460,000 shares plus the aggregate cash amount of
$57,500 for due diligence fees to the investors in this transaction
April 2005
- ----------
On April 21, 2005, the Company closed a funding transaction with one
institutional investor for the issuance and sale to the Subscriber of a
promissory note of the Company in the principal amount of $300,000. The
promissory note bears 10% interest and is convertible into shares of common
stock of the Company at $0.20 per common share. Conversions are limited to
a maximum ownership of 9.99% of the Company's common stock at any one time.
The note has an October 31, 2005 maturity and is payable in five
equal monthly installments, commencing June 1, 2005. The installment
payments consist of principal and equal to 1/5th of the initial principal
amount plus accrued interest. Installments can be paid in cash or common
stock valued at the average closing price of the Company's common stock
during the five trading days immediately preceding the relevant installment
due date. The Company has repriced Class B Warrants issued on June 30,
2004 form $2.00 per share to $0.125 per share, and shall issue common stock
in the aggregate amount of 93,750 shares for finder's fees to a third-party
to facilitate this transaction.
The Company has the right to prepay the promissory note by paying to
the holder cash equal to 120% of the principal to be prepaid plus accrued
interest. The notes have an acceleration provision upon the change in a
majority of the present Board of Directors except as the result of the
death of one or more directors, or a change in the present CEO of the
Company.
May 2005
- --------
On May 23, 2005, we closed a funding transaction (the "May '05
Transaction") with Longview Fund, LP, Whalehaven Funds Limited, Ellis
International Ltd., and Osher Capital Corp., four institutional accredited
investors, for the issuance and sale to the Subscribers of Five Hundred
Thousand Dollars ($500,000) of principal amount of promissory notes
convertible into shares of our common stock, and Warrants to purchase
shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes.
This May '05 Transaction is a part of a January 23, 2005 funding
transaction for an aggregate of Two Million Three Hundred Thousand Dollars
($2,300,000), One Million One Hundred Fifty Thousand Dollars ($1,150,000)
of which was paid on the initial closing date, and One Million One Hundred
Fifty Thousand Dollars ($1,150,000) of which (the "Second Tranche") was to
be payable within five (5) business days after the actual effectiveness of
an SB-2 Registration Statement covering the aggregate transaction, as
defined in the Subscription Agreement. The May '05 Transaction for Five
Hundred Thousand Dollars ($500,000) is a partial interim closing of the
Second Tranche, which occurred prior to the anticipated effectiveness of
the SB-2 Registration Statement covering the aggregate transaction.
Contemporaneous with the May '05 Transaction, we agreed to a modification
of the January 23, 2005 aggregate transaction for the substitution of Ellis
International Ltd., and Osher Capital
30
Corp. in the place of Alpha Capital Aktiengesellschaft, one of the original
investors. The May '05 Transaction convertible notes are at prime plus 4%
interest in the aggregate amount of $500,000, plus five-year Warrants for
the purchase of, in the aggregate, 4,000,000 shares of common stock, at an
exercise price of $0.129. The notes are convertible into shares of our
common stock at $0.125 per common share. Conversions are limited to a
maximum ownership of 9.99% of the underlying common stock at any one time.
The notes have a maturity date two years from closing and are payable in
twelve equal monthly installments, commencing June 1, 2005. The
installment payments consist of principal equal to 1/20th of the initial
principal amount which, subject to certain conditions concerning trading
volume and price, can be paid in cash at 103% of the monthly installment,
or common stock or a combination of both. The notes have an acceleration
provision upon the change in a majority of the present Board of Directors
except as the result of the death of one or more directors, or a change in
the present CEO.
In connection with this transaction, we issued restricted common
stock in the aggregate amount of 200,000 shares plus the aggregate cash
amount of $25,000 for due diligence fees to Longview Fund, LP, Gem Funding
LLC, Ellis International Ltd., and Osher Capital Corp. in this transaction.
The Second Tranche of the January 23, 2005 aggregate transaction, now in
the amount of $650,000, remains outstanding and will be triggered by the
effectiveness of the pending SB-2 registration statement.
August 2005
- -----------
On August 18, 2005, we closed a funding transaction (the "August '05
Transaction") with Longview Fund, LP, Longview Equity Fund, LP and Longview
International Equity Fund, LP, three institutional accredited investors,
for the issuance and sale to the Subscribers of Six Hundred Fifty Thousand
Dollars ($650,000) of principal amount of promissory notes convertible into
shares of our common stock and Warrants to purchase shares of common stock
at 100% coverage of the common stock issuable in accordance with the
principal amount of the notes. This August'05 Transaction was a part of a
January 23, 2005 funding transaction for an aggregate of Two Million Three
Hundred Thousand Dollars ($2,300,000). The August '05 Transaction is the
Second Tranche of the January '05 transaction, which occurred upon the
effectiveness of the SB-2 Registration Statement covering the aggregate
transaction. The August'05 Transaction convertible notes are at prime plus
4% interest in the aggregate amount of $650,000, plus five-year Warrants
for the purchase of, in the aggregate, 5,200,000 shares of common stock, at
an exercise price of $0.129. The notes are convertible into shares of our
common stock at $0.125 per common share. Conversions are limited to a
maximum ownership of 9.99% of the underlying common stock at any one time.
The notes have a maturity date two years from closing and are payable in
twelve equal monthly installments. The installment payments consist of
principal equal to 1/20th of the initial principal amount which, subject to
certain conditions concerning trading volume and price, can be paid in cash
at 103% of the monthly installment, or common stock or a combination of
both. The notes have an acceleration provision upon the change in a
majority of the present Board of Directors except as the result of the
death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 260,000 shares plus the aggregate cash amount of
$32,500 for due diligence fees to Longview Fund companies.
31
On September 30, 2005, we repaid $250,000 of the aggregate $650,000
of the August '05 Transaction notes, as follows: $57,692 to Longview Fund,
LP, $144,231 to Longview Equity Fund, LP and $48,077 to Longview
International Equity Fund, LP. The holders of these notes waived the
prepayment premium in lieu of their retention of warrants attached to
August '05 Transaction.
EFFECTS OF INFLATION
We believe that inflation has not had any material effect on our net
sales and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and our principal accounting officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of the
filing date of this report on Form 10QSB (the Evaluation Date), have
concluded that our disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and
our consolidated subsidiary would be made known to them by others within
those entities, particularly during the period in which this report on
Form 10QSB was being prepared.
b) Changes in Internal Controls. There were no changes in our internal
controls or in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date, nor any
significant deficiencies or material weaknesses in such disclosure controls
and procedures requiring corrective actions.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Warrant Exercise: Series D Warrant. We issued 696,042 shares of
common stock to Longview Fund LP, Longview Equity Fund LP, Longview
International Equity Fund LP and Esquire Trade & Finance Inc., pursuant to
the cashless exercises of warrants for 763,750 shares of common stock. We
issued the Warrants and the underlying common stock upon exercise to
accredited investors, pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series F Convertible Preferred. We converted 19,133
shares of our Series F Convertible Preferred, having a stated value of
$191,330 into 804,752 shares of common stock pursuant to notices of
conversion to Amro International, SA. We issued the Series F Convertible
Preferred and the underlying common stock upon conversion to accredited
investors, pursuant to a Regulation D offering and Rule 144(k).
Warrant Exercise: Series F Warrant. We issued 3,345,417 shares of
common stock to Austinvest Anstalt Balzers and Esquire Trade & Finance Inc.
and Libra Finance, SA., pursuant to the cashless exercise of warrants for
3,676,518 shares of common stock. We issued the Warrants
32
and the underlying common stock upon exercise to accredited investors,
pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series H Convertible Preferred. We converted 1,000
shares of our Series H Convertible Preferred, having a stated value of
$10,000 into 25,000 shares of common stock pursuant to notices of
conversion, to one individual investor. We issued the Convertible
Preferred and the underlying common stock upon conversion to accredited
investors, pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series I Convertible Preferred. We converted 10,000
shares of our Series I Convertible Preferred, having a stated value of
$100,000 into 656,953 shares of common stock pursuant to a notice of
conversion, to Tradersbloom Limited. The conversion included $24,000 of
accrued and unpaid interest. We issued the Convertible Preferred and the
underlying common stock upon conversion to accredited investors, pursuant
to a Regulation D offering and Rule 144(k).
Private Placements. On August 3, 2005 we issued 500,000 restricted
shares of our common stock to Geoffrey Eiten, for services rendered for
strategic business planning. We issued the restricted common stock
pursuant to Section 4(6) of the Securities Act of 1933, which provides an
exemption from the registration requirements of the Act for transactions
not involving a public offering.
On August 29 and September 19, 2005 we issued the aggregate of
1,000,000 restricted shares of our common stock to National Financial
Communications Corp. pursuant to the exercise of Warrants issued in
connection with a consulting agreement for services rendered for strategic
business planning. We issued the restricted common stock pursuant to
Section 4(6) of the Securities Act of 1933, which provides an exemption
from the registration requirements of the Act for transactions not
involving a public offering.
On September 19, 2005, we issued 450,000 restricted shares of our
common stock to Alpha Capital AG, an accredited investor, in a sale not
involving a public offering at a price of $1.00 per share. We issued the
common stock pursuant to a Regulation D offering.
Warrant Issue. On August 31, 2005, we issued three year Warrant to
Coca-Cola Enterprises Inc. to purchase 30,000,000 shares of our common
stock a $0.36 per share. During the first 18 months of the exercise
period, the Company has the option to "call" the exercise of up to
10,000,000 shares of common stock issuable upon exercise of the Warrant,
upon the Company's satisfaction of certain conditions, including a trading
price of not less than $1.08 per share for 20 consecutive trading days.
This Warrant was issued in connection with the execution of a Master
Distribution Agreement on August 31, 2005. We issued the Warrant pursuant
to Section 4(6) of the Securities Act of 1933, which provides an exemption
from the registration requirements of the Act for transactions not
involving a public offering.
Subsequent Events
None
33
Item 6. Exhibits
Exhibits - Required by Item 601 of Regulation S-B:
No. 10.1 Coca-Cola Enterprises Master Distribution Agreement
No. 10.2 Oman National Dairy Products Co. Ltd. Production Agreement
No. 10.3 Marvel Enterprises License (Middle East)
No. 31: Rule 13a-14(a) / 15d-14(a) Certifications
No. 32: Section 1350 Certifications
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf of the
undersigned, duly authorized.
BRAVO! FOODS INTERNATIONAL CORP.
(Registrant)
Date: November 14, 2005
/s/Roy G. Warren
Roy G. Warren, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, Bravo! Foods
International Corp. has caused this report to be signed on its behalf by the
undersigned in the capacities and on the dates stated.
Signature Title Date
- --------- ----- ----
/S/ Roy G. Warren Chief Executive Officer November 14, 2005
and Director
/S/ Tommy E. Kee Chief Accounting Officer November 14, 2005
34