UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 27, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
BEVSYSTEMS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Florida 84-1352529
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1315 Cleveland Street
Clearwater, Florida 33755
(Address of principal executive offices)
(786) 425-0811
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of October 13, 2003 there
were 56,500,934 shares of common stock, par value $0.0001 per share, of the
issuer outstanding.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements. F-1
Item 2. Management's Discussion and Analysis or Plan of Operation. 1
Item 3. Controls and Procedures. 6
PART II--OTHER INFORMATION
Item 1. Legal Proceedings. 6
Item 2. Changes in Securities. 7
Item 3. Defaults Upon Senior Securities. 9
Item 4. Submission of Matters to a Vote of Security Holders. 9
Item 5. Other Information. 9
Item 6. Exhibits and Reports on Form 8-K. 9
SIGNATURES 10
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
SEPTEMBER 27, 2003
Page Number
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 27,
2003 (unaudited) and March 29, 2003 F-2 to F-3
Consolidated Statement of Operations and
Comprehensive Loss for the three and six
months ended September 27, 2003
(unaudited) and September 28, 2002 (unaudited) F-4
Consolidated Statement of Changes in Shareholders'
Deficiency for the six months ended September 27,
2003 (unaudited) F-5
Consolidated Statement of Cash Flows for the
six months ended September 27, 2003 (unaudited)
and September 28, 2002 (unaudited) F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-34
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 2003
ASSETS
September 27, 2003
(unaudited) March 29, 2003
Current assets:
Cash and cash equivalents $ 332 $ 136
Accounts receivable, net 9,541 -
Marketable Securities 7,000 5,500
----------- -----------
Total current assets 16,873 5,636
----------- -----------
Property and equipment, net 951,534 1,003,363
----------- -----------
Total assets $ 968,407 $ 1,008,999
=========== ============
See accompanying notes to the consolidated financial statements (unaudited)
F-2
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 27, 2003
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
September 27, 2003
(unaudited) March 29, 2003
Current liabilities:
Accounts payable $ 1,577,278 $ 1,665,132
Accrued expenses 2,850,264 2,320,371
Convertible notes payable 655,000 785,000
Notes payable secured by assets 750,635 778,873
Deferred revenue 72,170 94,170
-------------- -------------
Total current liabilities 5,905,347 5,643,546
-------------- -------------
Commitments and contingencies
Shareholders' deficiency:
Preferred stock; no par value, 5,000,000 shares authorized; 100 shares
issued and outstanding nonvoting and convertible
into 874 shares of common stock 74,601 74,601
Common stock; $.0001 par value, 650,000,000 shares
authorized; 41,071,462 and, 11,311,272 issued and outstanding 4,107 1,132
Additional paid-in capital 32,772,324 30,064,193
Unearned services (746,213) (629,067)
Deferred interest (26,412) -
Accumulated comprehensive income 1,500 -
Accumulated deficit (37,016,847) (34,145,406)
-------------- -------------
Total shareholders' deficiency (4,936,940) (4,634,547)
-------------- -------------
Total liabilities and shareholders' deficiency $ 968,407 $ 1,008,999
============== =============
See accompanying notes to the consolidated financial statements (unaudited)
F-3
BEVSYSTEMS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 27, 2003
AND SEPTEMBER 28, 2002
Three months ended Six months ended
------------------ ----------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues $ 18,680 $ 230,298 $ 34,647 $ 443,620
Cost of revenues 15,119 133,066 15,434 298,766
------------- ------------- ------------- -------------
Gross (loss) profit 3,561 97,232 19,213 144,854
------------- ------------- ------------- -------------
Operating expenses:
Selling and marketing 7,507 596,082 7,507 1,193,588
General and administrative 1,113,625 1,690,418 2,470,925 3,875,961
------------- ------------- ------------- -------------
Total operating expenses 1,121,132 2,286,500 2,478,432 5,069,549
------------- ------------- ------------- -------------
Loss before other income (expense) (1,117,571) (2,189,268) (2,459,219) (4,924,695)
------------- ------------- ------------- -------------
Other income (expense):
Asset impairment charges (6,040) (11,946,032) (6,040) (11,946,032)
Interest and financing expense (392,930) (225,838) (434,105) (409,254)
Other income - - 27,923 -
------------- ------------- ------------- -------------
Total other income (expense) (398,970) (12,171,870) (412,222) (12,355,286)
------------- ------------- ------------- -------------
Net loss (1,516,541) (14,361,138) (2,871,441) (17,279,981)
Other comprehensive income (loss):
Net unrealized (loss) gain on securities (7,500) - 1,500 -
------------- ------------- ------------- -------------
Comprehensive loss $ (1,524,041) $(14,361,138) $ (2,869,941) $(17,279,981)
============= ============= ============= =============
Basic loss per common share $ (0.04) $ (56.42) $ (0.11) $ (73.78)
============= ============= ============= =============
Weighted average common shares outstanding 35,477,663 254,532 26,920,906 234,194
============= ============= ============= =============
See accompanying notes to the consolidated financial statements (unaudited)
F-4
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIENCY
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
Common Stock, $.0001
par value
Additional Accumulated
Number of Paid-in Preferred Unearned Deferred Comprehensive Accumulated
Shares Amount Capital Stock Services Interest Income Deficit Total
----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
Balance at March 29,
2003 11,311,272 $ 1,132 $30,064,193 $ 74,601 $ (629,067) - - (34,145,406) (4,634,547)
Common stock issued
for services and
financing 17,228,834 1,718 1,573,552 - (583,375) - - - 991,895
Common stock issued
for settlement of
payables 2,644,884 269 240,873 - (33,000) - - - 208,142
Common stock issued
for conversion
of convertible notes
payable 1,602,995 160 146,355 - - - - - 146,515
Cashless exercise of
warrants 2,033,477 203 (203) - - - - - -
Exercise of stock
options 6,250,000 625 61,875 - - - - - 62,500
Common stock owed
for consulting
services - - - - (369,643) - - - (369,643)
Grant of warrants
for financing - - 198,181 - - (52,825) - - 145,356
Grant of employee
stock options - - 487,498 - - - - - 487,498
Amortization of
unearned services - - - - 868,872 - - - 868,872
Amortization of
deferred interest - - - - - 26,413 - - 26,413
Change in unrealized
gain on
marketable securities - - - - - - 1,500 - 1,500
Net loss for the six
months ended
September 27, 2003 - - - - - - - (2,871,441) (2,871,441)
----------- ----------- ------------ ----------- ------------ ----------- ----------- ------------ ------------
Balance at September
27, 2003 41,071,462 $ 4,107 $32,772,324 $ 74,601 $ (746,213) $ (26,412) $ 1,500 (37,016,847) (4,936,940)
See accompanying notes to the consolidated financial statements (unaudited).
F-5
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss $ (2,871,441) (17,279,981)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,088 449,175
Asset impairment charges 6,040 11,946,032
Amortization of unearned services 868,872 -
Amortization of debt discount - -
Issuance of common stock for services and financing 742,779 2,416,025
Issuance of warrants in connection with financing 171,769 140,153
Grant of employee stock options 487,498 -
Changes in operating assets and liabilities, net of acquisitions:
Increase in accounts receivable (9,541) (51,771)
Increase in inventory - (48,369)
Decrease (increase) in prepaid expenses and other current assets - (90,586)
Increase in accounts payable and accrued expenses 615,632 720,091
Decrease in deferred revenue (22,000) -
------------ ------------
Net cash provided by (used in) operating activities 196 (1,799,231)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment - (36,937)
------------ ------------
Net cash used in investing activities - (36,937)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and shareholder advances - 416,387
Repayments of notes payable - (330,524)
Proceeds from issuance of convertible notes payable - 728,000
Proceeds from issuance of common stock - 50,000
Proceeds from exercise of stock options - 5,500
Net proceeds from exercise of warrants - 959,356
------------ ------------
Net cash provided by financing activities - 1,828,719
------------ ------------
Net increase in cash and cash equivalents 196 (7,449)
Cash and cash equivalents, beginning of period 136 8,296
------------ ------------
Cash and cash equivalents, end of period 332 847
============ ============
See accompanying notes to the consolidated financial statements (unaudited)
F-6
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003 AND SEPTEMBER 28, 2002 (cont'd)
Supplemental disclosure of non-cash information: 2003 2002
------------ ------------
Cash paid during the year for:
Interest $ - $ 45,625
============ ============
Income taxes $ - $ -
============ ============
Schedule of non-cash investing and financing activities:
Issuance of common stock for services $ 616,375 $ -
============ ============
Stock issued in connection with the settlement of trade payables $ 241,142 $ 1,613,010
============ ============
Stock issued in connection with conversion of notes payable $ - $ 68,912
============ ============
Stock issued in connection with prepaid expenses $ - $ 173,188
============ ============
Stock issued in connection with conversion of convertible
notes payable $ 130,000 $ 50,000
============ ============
Stock issued in connection with settlement of accrued expenses $ 232,631 $ -
============ ============
Cashless exercise of warrants in lieu of accounts payable $ - $ 49,702
============ ============
Cashless exercise of stock options in lieu of accounts payable $ 62,500 $ 9,000
============ ============
Issuance of warrants in connection with convertible debentures $ - $ 477,177
============ ============
Issuance of warrants in connection with financing $ 26,413 $ 974,441
============ ============
See accompanying notes to the consolidated financial statements (unaudited)
F-7
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 1 - ORGANIZATION, HISTORY AND NATURE OF BUSINESS
BEVsystems International, Inc. and Subsidiaries (collectively the
"Company") is a provider of oxygenated water. The Company
distributes its products primarily through an international
distribution network. The Company's fiscal year ends on the
Saturday nearest to March 31.
On July 12, 2001, the Company acquired the net assets of the
beverage division of Life International, a provider of oxygenated
water. The net assets included oxygenation equipment, bottles,
proprietary seals, marketing materials, office equipment,
trademarks, patent rights and other intangible assets (see Note
4). On February 25, 2002, the Company consummated a merger with
Aqua Clara Bottling and Distribution, Inc. and Subsidiary (see
Note 4).
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles in the United States of America for interim financial
information, the instructions to Form 10-QSB and Items 303 and
310(B) of Regulation S-B. In the opinion of management, the
unaudited financial statements have been prepared on the same
basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position at September
27, 2003 and the results of the operations and cash flows for the
six months ended September 27, 2003 and September 28, 2002. The
results for the six months ended September 27, 2003 are not
necessarily indicative of the results to be expected for any
subsequent quarter or the entire fiscal year ending March 29,
2004. The balance sheet at March 29, 2003 has been derived from
the audited financial statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles in the United States of America
have been condensed or omitted pursuant to the Securities and
Exchange Commission's ("SEC") rules and regulations.
These unaudited financial statements should be read in
conjunction with the Company's audited financial statements and
notes thereto for the year ended March 29, 2003 as included in
the Company's report on Form 10-KSB filed on September 15, 2003.
Loss per common share is computed pursuant to Financial
Accounting Standards Board, Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share" ("EPS"). Basic
income (loss) per share is computed as net income (loss)
available to common shareholders divided by the weighted average
number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common
stock issuable through stock based compensation including stock
options, restrictive stock awards, warrants and other convertible
securities. Diluted EPS is not presented since the effect would
be anti-dilutive.
F-8
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 3 - GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. The Company has incurred operating losses, negative cash
flows from operating activities, negative working capital and has
a shareholder's deficit. At September 27, 2003 and March 29,
2003, the Company's accumulated deficit was $37,016,847 and
$34,145,406, respectively, and its working capital deficiency was
$5,888,474 and $5,637,910, respectively. For the years ended
March 29, 2003 and March 30, 2002, the Company had a net loss
from operations of $29,560,198 and $4,585,208, respectively. In
addition, the Company is in default of its debt agreement for
nonpayment and certain debtors have filed actions against the
Company, including foreclosing property. These conditions raise
substantial doubt about the Company's ability to continue as a
going concern.
The Company has initiated several actions to generate working
capital and improve operating performances, including equity and
debt financing, cost reduction measures, renegotiating and
settling certain liabilities and redefining its business and
marketing strategy. However, there can be no assurance that it
will be able to increase revenues or to raise additional capital.
The financial statements do not include adjustments relating to
the recoverability and realization of assets and classification
of liabilities that might be necessary should the Company be
unable to continue in operation.
NOTE 4 - ACQUISITIONS
LIFE INTERNATIONAL
Effective July 12, 2001, the Company consummated a merger with
Life International, an oxygenated beverage company. Pursuant to
the merger, the Company issued 57,894 shares of common stock to
Life International and 16,664 warrants for additional shares. The
warrants were exercised prior to March 30, 2002 and provided Life
International with a 49% ownership in the Company. There was no
cost to exercise the warrants and they had no expiration date.
The stocks and warrants were assigned a value of $4,899,871,
based on the sales price of common stock sold by the Company in
two separate identically priced private placements which occurred
before and after the acquisition.
The merger was accounted for using the purchase method of
accounting. The Company determined the purchase price to be
$5,913,490, which consisted of a cash payment of $1,020,000, the
value of the shares and warrants of $4,899,871, less the net
assets of $6,381, which consisted of $96,381 of fixed assets,
less liabilities assumed of $90,000. The purchase price in excess
of net assets was allocated as follows:
DESCRIPTION AMOUNT
-------------- --------------
Process technology $ 3,887,000
Trademarks 830,000
Goodwill 796,490
Customer relations 400,000
--------------
$ 5,913,490
==============
F-9
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 4 - ACQUISITIONS (cont'd)
The Company obtained an independent valuation of the assets of
Life International in order to determine the fair value of the
assets purchased at July 12, 2001. Subsequent to the purchase,
the Company obtained additional independent valuations of the
assets and determined that the above assets were impaired. Based
upon the independent valuations, the Company has recorded a
one-time non-cash charge of $5,913,490 to write off the carrying
value of its intangible assets at March 29, 2003. In calculating
the impairment charge for goodwill of $796,490 recorded during
the second quarter of fiscal 2003, the fair value was estimated
using quoted market prices. The amount of the impairment
primarily reflects the decline in the Company's stock price since
the acquisition of the goodwill. In calculating the impairment
charge for the remaining intangible assets of $5,117,000 recorded
during the fourth quarter of fiscal 2003, the fair value was
estimated using the discounted cash flow method. The amount of
the impairment primarily reflects the Company's insolvency, the
cessation of production, and the fact that the Company is not
currently producing significant revenues to cover its cost of
operations and continue as a going concern.
AQUA CLARA BOTTLING & DISTRIBUTION, INC.
Effective February 25, 2002, the Company consummated a merger
with Aqua Clara Bottling & Distribution, Inc. and Subsidiary
(Aqua Clara), an oxygenated beverage company. The merger was
accounted for as a reverse merger using the purchase method of
accounting. Accordingly, the acquisition has been treated as an
acquisition of Aqua Clara by BEVsystems International, Inc.
("BEVsystems") and as a recapitalization of BEVsystems. As a
result, the assets and liabilities of BEVsystems are recorded at
historical values and the assets and liabilities of Aqua Clara
are recorded at their estimated fair value at the date of the
merger. As a result, the Company recorded an additional 39,996
shares of common stock, 100 shares of preferred stock (valued as
if converted to 874 shares of common stock) and options to
purchase 25,884 shares of common stock.
The Company determined the purchase price to be $13,831,661,
which consisted of the value assigned to the stocks and options
of $14,685,806, based on the closing price of the stock of $1.10
per share on February 25, 2002, the closing date of the
transaction, less the estimated proceeds from the exercise of the
options of $2,573,561, plus the net liabilities assumed of
$1,719,416. The net liabilities assumed consisted of cash of
$6,559, accounts receivable of $22,581, inventory of $37,139,
other assets of $5,891 less liabilities assumed of $1,791,586.
The purchase was allocated as follows:
DESCRIPTION AMOUNT
----------- -----------
Goodwill $11,149,542
Trademarks 910,000
Building 784,454
Equipment 757,665
Customer relations 140,000
Land 90,000
---------------
$13,831,661
===============
F-10
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 4 - ACQUISITIONS (cont'd)
The Company obtained an independent valuation of the assets of
Aqua Clara in order to determine the fair value of the assets
purchased at February 25, 2002. Subsequent to the purchase, the
Company obtained additional independent valuations of the assets
and determined that the above assets were impaired. Based upon
the valuations, the Company recorded a one-time non-cash charge
of $12,199,542 to write off the carrying value of its intangible
assets during the year ended March 29, 2003. In calculating the
impairment charge for goodwill of $11,149,542 recorded during the
second quarter of fiscal 2003, the fair value was estimated using
quoted market prices. The amount of the impairment primarily
reflects the decline in the Company's stock price since the
acquisition of the goodwill. In calculating the impairment charge
for the remaining intangible assets of $1,050,000 recorded during
the fourth quarter of fiscal 2003, the fair value was estimated
using the discounted cash flow method. The amount of the
impairment primarily reflects the Company's insolvency, the
cessation of production, and the fact that the Company is not
currently producing significant revenues to cover its cost of
operations and continue as a going concern.
NOTE 5 - MARKETABLE SECURITIES
Marketable securities, which consist of equity securities, have
been categorized as available for sale and, as a result, are
stated at fair value based generally on quoted market prices.
Marketable securities available for current operations are
classified as current assets. Unrealized holding gains and
losses, net of applicable deferred taxes, are included as a
component of shareholders' deficiency until realized. For the six
months ended September 27, 2003, the unrealized gain on
marketable securities was $1,500. For purposes of determining
gross realized gains and losses, the cost of investment
securities sold is based upon specific identification.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consisted of the following at September 27, 2003
and March 29, 2003:
September 27, March 29,
2003 2003
--------------- ---------------
Payroll and related costs $ 1,046,131 $ 767,554
Settlements 585,416 765,559
Other 779,899 455,136
Interest 201,491 137,990
Professional fees 207,327 154,132
Directors fees 30,000 40,000
--------------- ----------------
$ 2,850,264 $ 2,320,371
=============== ================
NOTE 7 - CONVERTIBLE NOTES PAYABLE
On October 22, 2001, the Company entered into a series of three
convertible promissory notes with Financial Partners Network
Corporation in the amount of $100,000, $100,000 and $62,584. The
notes were due April 22, 2002 and had an interest rate of 10.5%
per year. The notes were convertible, at the option of the
holder, into shares of the Company's common stock at an initial
conversion price of $65.99 per share. The conversion price was
subject to adjustment if the Company issued additional shares of
its common stock without consideration or for a consideration per
share less than the conversion price in effect immediately prior
to the issuance
F-11
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (cont'd)
of such additional shares of common stock. On August 29, 2002, in
consideration for extending the maturity dates on the notes, the
Company granted warrants to purchase 2,574 shares of the
Company's common stock at an exercise price of $0.01 per share
expiring May 15, 2005. On January 21, 2003, all three notes,
inclusive of accrued interest of $34,464, were converted into
1,710,753 shares of the Company's common stock at a rate of
$0.108 per share. The Company also granted warrants to Financial
Partners Network Corporation to purchase 2,198 shares of the
Company's common stock at an exercise price of $65.99 per share
expiring November 10, 2006. In lieu of exercising the warrant by
paying the per share warrant price, the holder may execute a
cashless exercise in accordance with the formula set forth in the
warrant agreement. In September 2003, Financial Partners Network
exercised their right to purchase 2,574 shares of the Company's
common stock via a cashless exercise, resulting in the issuance
of 2,504 shares of the Company's common stock.
On November 5, 2001, the Company entered into a $100,000
convertible promissory note with an investor. The note is
currently in default and was due November 5, 2002 and has an
interest rate of 10.5% per year. The note is convertible, at the
option of the holder, into shares of the Company's common stock
at an initial conversion price of $65.99 per share. The
conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or
for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional
shares of common stock. Accrued interest of $19,082 is included
in accrued expenses in the accompanying consolidated balance
sheet. The Company also granted warrants to purchase 609 shares
of the Company's common stock at an exercise price of $65.99 per
share expiring November 5, 2004. The warrants were exercised on
January 24, 2003 for a total of $40,000.
On November 15, 2001, the Company entered into a $200,000
convertible promissory note with the Chief Executive Officer
("CEO"). The note was due May 15, 2002 and had an interest rate
of 10.5% per year. The note was convertible, at the option of the
holder, into shares of the Company's common stock at an initial
conversion price of $65.99 per share. The conversion price was
subject to adjustment if the Company issued additional shares of
its common stock without consideration or for a consideration per
share less than the conversion price in effect immediately prior
to the issuance of such additional shares of common stock. On
August 29, 2002, in consideration for extending the maturity date
on the note, the Company granted warrants to purchase 1,961
shares of the Company's common stock to the CEO at an exercise
price of $0.01 per share expiring May 15, 2005. On January 21,
2003, the note, including accrued interest of $24,500, was
converted into 3,571,424 shares of the Company's common stock at
a rate of $0.108 per share. In September 2003, the CEO exercised
his right to purchase 1,961 shares of the Company's common stock
via a cashless exercise, resulting in the issuance of 1,908
shares of the Company's common stock.
On December 21, 2001, the Company entered into a $20,000
convertible promissory note with an investor. The note is
currently in default and was due June 21, 2002 and has an
interest rate of 10.5% per year. The note is convertible, at the
option of the holder, into shares of the Company's common stock
at an initial conversion price of $65.99 per share. The
conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or
for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional
shares of common stock. Accrued interest of $3,675 is included in
F-12
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (cont'd)
accrued expenses in the accompanying consolidated balance sheet.
The Company also granted warrants to the investor to purchase 122
shares of the Company's common stock at an exercise price of
$65.99 per share expiring November 5, 2004.
On December 21, 2001, the Company entered into a $40,000
convertible promissory note with an investor. The note is
currently in default and was originally due June 21, 2002 and has
an interest rate of 10.5% per year. The note is convertible, at
the option of the holder, into shares of the Company's common
stock at an initial conversion price of $65.99 per share. The
conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or
for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional
shares of common stock. Accrued interest of $7,350 is included in
accrued expenses in the accompanying consolidated balance sheet.
The Company also granted warrants to purchase 243 shares of the
Company's common stock at an exercise price of $65.99 per share
expiring November 5, 2004. On July 30, 2002, in consideration for
extending the maturity date on the note to June 21, 2003, the
Company granted warrants to the investor to purchase 100 shares
of the Company's common stock at an exercise price of $48.00 per
share expiring May 15, 2005.
In April 2002, the Company entered into several convertible
promissory notes with several investors for a total value of
$200,000. The notes were due April 30, 2003 and have an interest
rate of 12%. The notes are convertible, at the option of the
holders, into shares of the Company's common stock at an initial
conversion price per share equal to the lesser of (i) the average
of the lowest three-day trading prices during the five trading
days immediately prior to the conversion date discounted by 25%,
or (ii) the average of the lowest three-day trading prices during
the five trading days immediately prior to the funding. The
conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or
for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional
shares of common stock. During the year ended March 29, 2003, one
investor converted his $50,000 note into 1,755 shares of the
Company's common stock. In August 2003, another investor
converted his $50,000 note, including accrued interest of $8,000,
into 773,333 shares of the Company's common stock. On September
22, 2003, another investor converted his $50,000 note, including
accrued interest of $8,515, into 329,662 shares of the Company's
common stock. The balance of the notes was $50,000 at September
27, 2003. Accrued interest of $8,567 is included in accrued
expenses in the accompanying consolidated balance sheet relating
to the outstanding notes. The Company also granted these
noteholders warrants to purchase a total of 3,000 shares of the
Company's common stock at an exercise price equal to the lesser
of (i) the average of the lowest three day trading prices during
the five trading days immediately prior to the conversion date
discounted by 25%, or (ii) the average of the lowest three day
trading prices during the five trading days immediately prior to
the funding date. The warrants are callable by the Company when
the five-day average closing stock price exceeds 120% of the
five-day average closing price prior to the funding date. The
warrants expire on April 30, 2005. On September 22, 2003, one
noteholder exercised his warrants and purchased 750 shares of
the Company's common stock for $133. The proceeds are currently
due from the noteholder. Subsequent to the quarter ended
September 27, 2003, on September 30, 2003, a noteholder
converted his $50,000 note, including accrued interest of $8,433,
into 417,378 shares of the Company's common stock.
F-13
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (cont'd)
On May 15, 2002, the Company entered into an $80,000 convertible
promissory note with a director. The note was due August 15, 2002
and had an interest rate of 12.0% per year. The note was
convertible, at the option of the holder, into shares of the
Company's common stock at an initial conversion price per share
equal to the lesser of (i) the average of the lowest 3 day
trading prices during the 5 trading days immediately prior to the
conversion date discounted by 25%, or (ii) the average of the
lowest 3 day trading prices during the 5 trading days immediately
prior to the funding date. The conversion price was subject to
adjustment. On August 29, 2002, in consideration for extending
the maturity date on the note, the Company granted warrants to
purchase 784 shares of the Company's common stock at an exercise
price of $0.01 per share expiring May 15, 2005. On January 21,
2003, this note, as well as a $363,000 secured note with the
director, including accrued interest was converted into 4,440,044
shares of the Company's common stock. The Company also granted to
the director warrants to purchase 1,200 shares of the Company's
common stock at an exercise price equal to the lesser of (i) the
average of the lowest three day trading prices during the five
trading days immediately prior to the conversion date discounted
by 25%, or (ii) the average of the lowest three day trading
prices during the five trading day immediately prior to the
funding date. The warrants to purchase 1,200 shares of the
Company's common stock were exercised on August 7, 2002. On
August 29, 2002, in consideration for extending the maturity date
of the aforementioned secured note with this director the Company
granted warrants to purchase 3,845 shares of the Company's common
stock at an exercise price of $0.01 per share expiring May 15,
2005. On September 22, 2003, the director exercised his right to
purchase 4,629 shares of the Company's common stock via a
cashless exercise, resulting in the issuance of 4,504 shares of
the Company's common stock.
On June 4, 2002, the Company entered into a $100,000 convertible
promissory note with an investor. The note was due June 4, 2003
and has an interest rate of 12%. The note is convertible, at the
option of the holder, into shares of the Company's common stock
at an initial conversion price per share equal to the lesser of
(i) the average of the lowest three-day trading prices during the
five trading days immediately prior to the conversion date
discounted by 25%, or (ii) the average of the lowest three-day
trading prices during the five trading days immediately prior to
the funding. The conversion price is subject to adjustment if the
Company issues additional shares of its common stock without
consideration or for a consideration per share less than the
conversion price in effect immediately prior to the issuance of
such additional shares of common stock. Accrued interest of
$15,867 is included in accrued expenses in the accompanying
consolidated balance sheet. The Company also granted warrants to
this investor to purchase 1,500 shares of the Company's common
stock at an exercise price equal to the lesser of (i) the average
of the lowest three day trading prices during the five trading
days immediately prior to the conversion date discounted by 25%,
or (ii) the average of the lowest three day trading prices during
the five trading day immediately prior to the funding date. The
warrant is callable by the Company when the five-day average
closing stock price exceeds 120% of the five-day average closing
price prior to the funding date. The warrant expires on April 30,
2005. Subsequent to the quarter ended September 27, 2003, on
September 30, 2003, the investor converted his note, including
accrued interest of $15,879, into 2,000,000 shares of the
Company's common stock.
On June 27, 2002, the Company entered into a $50,000 convertible
promissory note with an investor. The note was due April 30, 2003
and has an interest rate of 12%. The note is convertible, at the
option of the holder, into shares of the Company's common stock
at an initial
F-14
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (cont'd)
conversion price per share equal to the lesser of (i) the average
of the lowest three-day trading prices during the five trading
days immediately prior to the conversion date discounted by 25%,
or (ii) the average of the lowest three-day trading prices during
the five trading days immediately prior to the funding. The
conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or
for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional
shares of common stock. Accrued interest of $7,550 is included in
accrued expenses in the accompanying consolidated balance sheet.
The Company also granted warrants to this investor to purchase
750 shares of the Company's common stock at an exercise price
equal to the lesser of (i) the average of the lowest three day
trading prices during the five trading days immediately prior to
the conversion date discounted by 25%, or (ii) the average of the
lowest three day trading prices during the five trading day
immediately prior to the funding date. The warrant is callable by
the Company when the five-day average closing stock price exceeds
120% of the five-day average closing price prior to the funding
date. The warrant expires on April 30, 2005.
On July 5, 2002, the Company entered into a $250,000 convertible
promissory note with an investor. The note was due July 5, 2003
and does not bear interest, except in the case of default. The
note is convertible, at the option of the holder, into shares of
the Company's common stock at an initial conversion price per
share equal to the lesser of (i) the average of the 5-day closing
bid prices during the 5 trading days immediately prior to the
conversion date discounted by 25%, or (ii) $60. The conversion
price is subject to adjustment if the Company issues additional
shares of its common stock without consideration or for a
consideration per share less than the conversion price in effect
immediately prior to the issuance of such additional shares of
common stock. The conversion price is also subject to adjustment
so that the number of shares into which the note is converted
does not exceed the number of shares such that, when aggregated
with all other shares of common stock then beneficially or deemed
beneficially owned by the holder, would result in the holder
owning more than 9.999% of all such shares of common stock as
would be outstanding on the conversion date. In August 2003,
$30,000 of the note was converted into 500,000 shares of the
Company's common stock. Accrued interest due to the default of
the Company of $128,404 is included in accrued expenses in the
accompanying consolidated balance sheet. The Company also granted
warrants to the investor to purchase 1,667 shares of the
Company's common stock at an exercise price of $72.00 per share.
The warrant is callable at the Company's option, provided that
the closing bid prices for the five days preceding the date the
Company exercises such option exceeds 140% of the warrant
exercise price and that an effective registration statement is in
place. Subsequent to the quarter ended September 27, 2003, on
September 30, 2003, the remaining balance of the note, including
the default interest of $128,404, was converted into 2,500,000
shares of the Company's common stock.
On August 4, 2002, the Company entered into a $75,000 convertible
promissory note with an investor bearing interest at 10% per
annum with principal and all accrued interest payable in full on
March 4, 2003. The note is secured by 50,000 shares of the
Company's common stock. The holder of the note is entitled, at
its option, to convert at any time, the principal amount of the
note and accrued interest at a conversion price equal to the
latest five-day average of the closing bid price of the Company's
common stock into such shares of the Company's common stock. The
shares to be issued pursuant to this note shall contain unlimited
piggyback registration rights. Any overdue payment of principal
on the note shall bear interest at 15% per annum until paid. On
February 5, 2003, the Company issued 50,000 shares of its common
stock, valued at
F-15
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 7 - CONVERTIBLE NOTES PAYABLE (cont'd)
$85,000, in consideration for extending the maturity date of the
note. Accrued interest of $7,500 is included in accrued expenses
in the accompanying consolidated balance sheet. In June 2003, a
related party-shareholder purchased the note from the investor.
In consideration for extending the maturity date of the note to
November 16, 2003 the related party-shareholder was granted
warrants to purchase 250,000 shares of the Company's common stock
at an exercise price of $0.01 per share. The fair value of the
warrants using the Black-Scholes Option Pricing Model was $52,825
and is being amortized to interest and financing expense over the
term of the note. On September 22, 2003, the related
party-shareholder exercised his warrants via a cashless exercise,
resulting in the issuance of 249,306 shares of the Company's
common stock.
The proceeds from the issuance of each of the convertible notes
payable with the warrants were allocated between the warrants and
the notes payable, based on their relative fair values at the
time of issuance. The fair value of the warrants issued prior to
March 29, 2003 of $459,792 was calculated using the Black-Scholes
Option Pricing Model and was accounted for as additional paid-in
capital and interest and financing expense during the year ended
March 29, 2003.
NOTE 8 - NOTES PAYABLE - SECURED BY ASSETS
On July 31, 2002, the Company refinanced their manufacturing
plant located in Clearwater, Florida. The amount of the mortgage
note totaled $420,000. The mortgage note is secured by the
underlying building and land. The note was due in monthly
installments of principal and interest through 2032 and has an
initial interest rate of 12.99%. The interest rate will be
adjusted annually to a rate equal to 6.00% above the prime rate
and shall never be less than 12.00% per year. At September 27,
2003, the interest rate was 12%. Due to the default, the mortgage
is now currently due and has been reclassified as a current
liability. At September 27, 2003, the outstanding principal
balance was $419,806. Accrued interest of $75,600 is included in
accrued expenses in the accompanying consolidated balance sheet.
In May 2002, the Company entered into an agreement with Brickell
Bay Capital Fund, LLC ("Brickell Bay") to extend the maturity
date of its $300,000 convertible promissory note to October 4,
2002. As part of the agreement, the Company was required to pay
past due interest totaling $23,625 and issue warrants to purchase
2,511 shares of the Company's common stock at an exercise price
of $65.99 per share. The fair value of the warrants of $290,531
was calculated using the Black-Scholes Option Pricing Model and
was accounted for as additional paid in capital and interest and
financing expense during the year ended March 29, 2003. Accrued
interest of $31,500 is included in accrued expenses in the
accompanying consolidated balance sheet at September 27, 2003. On
May 30, 2002, Brickell Bay exercised warrants relating to a
previous agreement to purchase 2,511 shares of the Company's
common stock for a total consideration of $165,706. In addition,
on April 4, 2002, the Company entered into a Collateral
Assignment of Rents, Leases and Profits ("Collateral Assignment")
with Brickell Bay whereby the Company's manufacturing plant in
Clearwater, Florida and land was assigned to Brickell Bay as
collateral for the $300,000 note. In June 2003, Brickell Bay
filed a foreclosure action against the Company for nonpayment
(See Note 14).
F-16
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 8 - NOTES PAYABLE - SECURED BY ASSETS (cont'd)
At September 27, 2003, the Company has a note payable currently
in default. Certain vehicles of the Company secured the note.
During the quarter ended September 27, 2003, the noteholder sold
three of the vehicles securing the note thereby reducing the
amount due to $30,829. One secured vehicle remains under the
note. The Company recorded an impairment loss of $6,040 as a
result of the write-down of the vehicles sold.
NOTE 9 - SHAREHOLDERS' DEFICIENCY
Reverse Stock Split
On January 2, 2003, the Board of Directors authorized a 200:1
reverse stock split. All references in the accompanying
consolidated financial statements to the number of common shares
and per share amounts have been restated to reflect the reverse
stock split.
Change in Domestication and Common Stock
On October 21, 2002, at a special meeting of the shareholders,
the holders of a majority of the shares entitled to vote adopted
the Board of Directors' recommendation that the Company change
its domicile from Colorado to Florida. The Company subsequently
filed a Certificate of Domestication with the state of Florida,
and a withdrawal of its authority in Colorado, resulting in the
Company becoming a Florida corporation. As a result of the
shareholder's adoption of the recommendation of the Board of
Directors at the October 21, 2002 meeting, the number of
authorized common shares were increased from 100,000,000 to
650,000,000, with a par value of $.0001 per share.
In connection with the acquisition of Aqua Clara, all shares of
common stock outstanding prior to the acquisition date were
exchanged at the ratio of 1.6738 per share. All shares of common
stock and prices have been restated in the accompanying
consolidated financial statements and notes.
Issuance of Warrants
In May 2002, the Company granted warrants to purchase 1,500
shares of the Company's common stock at an exercise price equal
to the average of the lowest closing 3 day trading prices during
the 5 trading days immediately prior to the exercise date,
discounted by 25%. The warrant is callable by the Company when
the five-day average closing stock price exceeds 120% of the
5-day average closing price prior to the warrant issue date. The
warrants have a term of three years. The Company has valued the
warrants at $147 using the Black-Scholes pricing model. The value
of the warrants was recorded as interest and financing expense
during the year ended March 29, 2003.
F-17
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
Issuance of Warrants for Settlement of Debt
The Company was indebted to a consulting firm for financial
consulting and advisory services in the amount of $50,000. The
Company entered into an agreement to settle the amount owed for
these services and on October 28, 2002, the Company issued
warrants to the consulting firm to purchase 12,500 shares of the
Company's common stock at an exercise price of $8 per share. The
warrants have a term of five years. The Company has valued the
warrants at $89,691 using the Black-Scholes pricing model. The
value of the warrants was recorded as consulting expense during
the year ended March 29, 2003.
Issuance of Warrants for Financing
On July 28, 2003, the Company issued warrants to purchase
1,823,796 shares of the Company's common stock at an exercise
price of $0.01 per share. The warrants were issued to the Chief
Executive Officer (for 390,305 shares) a director (for 921,305
shares) and to Financial Partners Network Corporation (for
512,295 shares). The warrants expire on May 15, 2006. The
warrants were issued in consideration for previous and continued
funding via the payment of expenses and liabilities of the
Company by the parties. The Company has valued the warrants at
$145,356 using the Black-Scholes Pricing Model. The value of the
warrants was recorded as a financing expense during the six
months ended September 27, 2003. On September 22, 2003, the
above-mentioned parties exercised their warrants via a cashless
exercise, resulting in the issuance of 1,774,504 shares of the
Company's common stock.
Issuance of Common Stock for Settlement of Debt
In April 2002, the Company issued 125 shares of its common stock
in settlement of debt.
In January 2003, the Company entered into an agreement with the
Chief Executive Officer and his spouse, a director and Financial
Partners Network Corporation whereby the Company issued a total
of 9,722,221 shares of its restricted common stock to such
shareholders in satisfaction of all debt, convertible notes,
security interest and other equity owed to the shareholders by
the Company, which aggregated approximately $1,050,000.
In August 2003, the Company issued 50,000 shares of its common
stock, valued at $5,000, in partial settlement of debt. The
Company also agreed to pay the Creditor at the rate of $2.00 for
every case of the Company's bottled water product sold through
the direct efforts of the Creditor which will be applied towards
the remaining debt due to the Creditor. The Creditor will also
receive in cash a sales commission for every case of the
Company's bottled water product sold through the direct efforts
of the Creditor. No limit has been placed on the amount of
commissions earned or cases sold.
In August 2003, the Company issued 275,000 shares of its common
stock, valued at $50,325, in settlement of debt with a
consultant.
In September 2003, the Company issued 100,000 shares of its
common stock, valued at $18,300, in partial settlement of debt
with a consultant. An additional 150,000 shares, valued at
$27,450, is due to this consultant in accordance with the
agreement.
F-18
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
Issuance of Common Stock and Warrants for Consulting Services
In January 2002, the Company issued 110 shares of common stock
for services rendered. The Company recorded $7,200 of expense
during the year ended March 29, 2002.
In March 2002, the Company entered into an agreement with a
consultant for services to be provided. The Company agreed to
issue the consultant 500 shares of its common stock each month.
In addition, the Company agreed to pay the consultant up to
$600,000 of its common stock over the term of the agreement. The
consultant was also entitled to receive additional compensation
for other services provided, as defined in the agreement. The
agreement was amended on June 6, 2002, whereby the Company agreed
to grant the consultant the right to purchase 3,000 shares of the
Company's common stock at a 40% discount to the average of the
three highest closing bid prices of the Company's common stock as
of the date of notice. In April 2002, the consultant exercised
her right to purchase 500 shares of the Company's common stock.
The remaining warrants expired unexercised. The Company has
valued the warrants at $214 using the Black-Scholes Pricing
Model. The value of the warrants was expensed during fiscal 2003.
In September 2003, the Company and the consultant mutually agreed
to terminate the agreement and acknowledged no further
obligations due between the parties.
In March 2002, the Company entered into an agreement with a
consulting firm for services to be provided. The agreement was
amended on June 6, 2002, whereby the Company agreed to grant the
firm the right to purchase 3,000 shares of the Company's common
stock at a 40% discount to the average of the three highest
closing bid prices of the Company's common stock as of the date
of notice. On January 15, 2003, the Company entered into another
agreement with the same consulting firm for a period of six
months. The Company agreed to pay the firm common stock in an
amount not less than 7.00% of the fully diluted post
recapitalization shares of the Company. The firm was issued
718,553 common shares valued at $1,221,540 under this agreement,
which was expensed over the term of the agreement. During the
year ended March 29, 2003, the consulting firm exercised its
right to purchase 1,125 shares of the Company's common stock. The
remaining warrants expired unexercised. The Company has valued
the warrants at $160 using the Black-Scholes Pricing Model. The
value of the warrants was expensed during the year ended March
29, 2003. On June 30, 2003, the Company and the consulting firm
mutually agreed to terminate the agreement. The Company also
agreed to issue the consulting firm 150,000 shares of its common
stock valued at $10,500, in full settlement of the amounts due.
The Company accrued and expensed $10,500 relating to this
settlement.
In March 2002, the Company entered into a six-month consulting
agreement with another consulting firm for services to be
provided. The agreement automatically renewed on a month-to-month
basis. In connection with the agreement, the Company issued 8,440
shares of its common stock, valued at $354,456, during the year
ended March 29, 2003. In addition, on August 29, 2002, the
Company granted warrants to purchase 9,564 shares of the
Company's common stock at an exercise price of $200 per share
expiring August 29, 2007. The Company has valued the warrants at
$322,708 using the Black-Scholes Pricing Model. The value of the
warrants was expensed during the year ended March 29, 2003. On
June 30, 2003, the Company and the consulting firm mutually
agreed to terminate the agreement. Terms of the agreement are
F-19
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
the Company agreeing to issue the consulting firm 50,000 shares
of its common stock valued at $3,500 in full settlement of the
amounts due. The Company accrued and expensed $3,500 relating to
this settlement.
In April 2002, the Company issued 148 shares of its common stock
to a consultant for services to be provided, valued at $23,680.
In April 2002, the Company issued 109 shares of its common stock
to a consultant for services to be provided, valued at $17,440.
In April 2002, the Company issued 150 shares of its common stock
to a consultant for services to be provided, valued at $21,600.
In addition, on April 10, 2002, the Company also agreed to pay
the consultant $6,000 per month, beginning April 1, 2002, as a
consulting fee on an annual basis, which will be applied against
media expenditures. Should no media be placed, the $6,000 monthly
consulting fee will be paid to the consultant. On April 29, 2002,
the Company also agreed to set up a production account with the
consultant to cover various media-related expenses to be incurred
on behalf of the Company. The Company will issue approximately
$100,000 worth of restricted common stock to the consultant to
fund this account. The consultant is to liquidate the stock as
needed to pay for various media purchases made on behalf of the
Company. The consultants handling of the production account is
currently being reviewed by the Company.
In June 2002, the Company entered into a three month consulting
agreement with a consultant for services to be provided. The
Company agreed to pay the consultant 4,500 shares of its
unrestricted common stock, which vest pro-rata over the life of
the agreement. On August 30, 2002, the agreement was amended such
that the Company agreed to issue the consultant 7,500 shares of
unrestricted common stock, which vest pro-rata over the life of
the agreement. The agreement was further modified to extend the
term to eight months. In September 2003, the Company and the
consultant mutually agreed to terminate the agreement and
acknowledged no further obligations due between the parties.
In July 2002, the Company entered into an amended consulting
agreement with a consultant for services to be provided. In
consideration for these services, the Company issued warrants to
purchase up to $300,000 of the Company's common stock at a 40%
discount to the average of the three highest closing bid prices
of the Company's common stock as of the date of notice. The
warrants expire one year from the date of the agreement. During
the year ended March 29, 2003, the consultant exercised his right
to purchase 1,470,000 shares of the Company's common stock valued
at $195,300.
In August 2002, the Company entered into a six-month agreement
with a consultant whereby the consultant would provide the
Company services in connection with marketing, public relations,
strategic planning and business opportunities for the Company.
The Company issued the consultant 2,500 shares of the Company's
common stock, valued at $60,000, and a warrant to purchase 1,250
shares of the Company's stock at a purchase price equal to 120%
of the closing market price of the Company's common stock on the
date of the agreement. The Company has valued the warrants at
$18,657 using the Black-Scholes Pricing Model. The value of the
warrants was expensed during the year ended March 29, 2003. The
warrants expired unexercised.
F-20
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
In August 2002, the Company issued warrants to a consultant for
services to be provided to purchase 25,000 shares of the
Company's common stock at an exercise price of $20 per share. The
warrants had a term of one year. The warrants were exercised
during the year ended March 29, 2003. In November 2002, the
Company issued additional warrants to the same consultant for
services to be provided to purchase 25,000 shares of the
Company's common stock at an exercise price equal to a forty
percent discount to the closing bid price on the day of notice.
The warrants had a term of six months. During the year ended
March 29, 2003, 3,792 warrants were exercised. The remaining
warrants expired unexercised.
In September 2002, the Company entered into a new consulting
agreement with a current shareholder of the Company, whereby the
consultant agreed to continue to serve as a member of the Board
of Directors of the Company and assist the Company in increasing
shareholders' equity. The consultant is to provide services to
the Company for as long as he is a duly elected member of the
Board of Directors. Compensation is $5,000 per month in the form
of cash or free-trading S-8 shares of the Company's common stock.
If common stock is to be issued, they are to have a 25% discount
to the closing price on the date of issue.
In September 2002, the Company issued warrants to a consultant
for services to be provided to purchase 30,000 shares of the
Company's common stock at an exercise price of a 40% discount to
the closing bid price of the Company on the day of notice of
execution. The warrants expire six months from the date of
issuance. At the same time, the Company entered into a Stock
Option Purchase Agreement with this consultant whereby the
consultant has the option to purchase up to 30,000 shares of the
Company's common stock at a 40% discount to the closing bid price
of the Company on the day of notice of execution. The option
expires six months from the date of the agreement. In November
2002, the Company issued additional warrants to the consultant
for services to be provided to purchase 62,500 shares of the
Company's common stock at an exercise price of a 40% discount to
the closing bid price of the Company on the day of notice of
execution. The warrants expire six months from the date of
issuance. The consultant has exercised a total of 81,500 warrants
during the year ended March 29, 2003. The remaining warrants
expired unexercised. The Company valued the warrants at $802
using the Black-Scholes Pricing Model and expensed them during
the year ended March 29, 2003. In April 2003, the Company entered
into a new consulting agreement with this consultant for services
to be provided. The initial term of the engagement was for six
months and would automatically renew on a month-to-month basis.
In consideration for services to be provided, the consultant was
to receive 1,500,000 shares of the Company's unrestricted common
stock. No shares relating to this agreement were issued to the
consultant. Subsequent to the quarter ended September 27, 2003,
on September 30, 2003, the Company and the consultant mutually
agreed to terminate the agreement and acknowledged no further
obligations due between the parties.
In September 2002, the Company entered into consulting agreements
with several consultants for services to be provided. Under these
agreements, the Company issued a total of 591 shares of its
common stock valued at $4,851.
In March 2003, the Company entered into a three-month consulting
agreement with a consulting firm for services to be provided
commencing March 15, 2003. The Company irrevocably paid the
consultant 50,000 shares of its restricted common stock valued at
$22,000. The Company has three options to extend the agreement
for three months each. For each additional three-month
F-21
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
period, the Company shall pay the consultant $1,500 and $15,000
worth of the Company's common stock. The shares issued to the
consultant will have a one-year hold commencing March 15, 2003.
In the event that the consultant is unable to sell the shares
after the one-year hold, resulting from the Company's neglect, as
defined in the agreement, the Company is required to issue
"penalty shares" as defined in the agreement. On June 17, 2003,
the Company entered into an extension agreement whereby both
parties agreed to extend the contract to September 17, 2003. For
this extension, the Company issued the consulting firm 150,000
shares of its common stock valued at $15,000. The shares have a
one-year hold from the date of issuance. All other terms and
conditions from the prior contract remain unchanged.
In April 2003, the Company entered into an agreement with a
lawyer for services rendered and services to be rendered. In
exchange for providing legal services to the Company and as
payment for services already provided amounting to $45,000, the
lawyer received 750,000 shares of the Company's S-8 common stock
valued at $120,000. The lawyer is required to sell the shares and
the net proceeds to be applied as a credit against the balance
due. In the event there is an excess of proceeds, the lawyer is
required to credit the Company for future legal services. The
Company has expensed $120,000 related to this agreement.
In April 2003, the Company entered into a consulting agreement
with a consulting firm for services to be provided. The initial
term of the engagement is for six months and will automatically
renew on a month-to-month basis. In consideration for services to
be provided, the consulting firm received 1,500,000 shares of the
Company's unrestricted common stock valued at $105,000. The
Company has expensed $105,000 related to this agreement.
Subsequent to the quarter ended September 27, 2003, on September
30, 2003, the Company and the consulting firm mutually agreed to
terminate the agreement and acknowledged no further obligations
due between the parties.
In April 2003, the Company issued 300,000 shares of its common
stock valued at $36,000 to a consultant for legal services
provided and to be provided. Following the issuance of the
shares, the consultant will sell the shares on the open market.
The net proceeds shall be applied as a credit against any
outstanding legal fees and the excess, if any, shall be applied
as a credit against future legal fees. The Company has expensed
$36,000 related to this agreement.
In April 2003, the Company entered into a consulting agreement
with a consultant for services provided and to be provided. In
exchange for providing consulting services to the Company and as
payment for services already provided amounting to $27,000, the
consultant received 500,000 shares of the Company's S-8 common
stock valued at $60,000. 200,000 shares are to be issued directly
to the consultant. An additional 300,000 shares shall be issued
and held by the Company until the consultant complies with the
provisions of the agreement and it is determined that the balance
owed is not satisfied. If the balance owed is not deficient, the
Company shall return the 300,000 shares to its treasury. The
consultant is required to sell the shares on the open market and
apply the net proceeds as a credit against the balance due. In
the event that the balance due is not paid in full from the net
proceeds, then the Company will undertake to issue additional
shares of its common stock, and to register such shares pursuant
to an S-8 registration, so that additional installments of shares
can be issued to the consultant to satisfy the remaining balance.
In the event there is an excess of proceeds, the consultant is
required to credit the Company for future consulting services.
F-22
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
In May 2003, the Company issued 1,250,000 shares of its common
stock valued at $125,000 to a consultant for services to be
provided over one year. Effective June 23, 2003, the Company
amended its agreement with the consultant, whereby the consultant
agreed to provide additional services to the Company in exchange
for 3,000,000 shares of the Company's common stock valued at
$240,000. These shares were issued during the quarter ended
September 27, 2003. The Company has expensed $118,875 related to
these agreements. In July 2003, the Company entered into a new
consulting agreement with this consultant for services to be
provided. The agreement expires July 18, 2005. As consideration
for the services to be provided, upon filing of Form SB-2
registration statement with the Securities and Exchange
Commission, the Company will issue the consultant sufficient
shares of the Company's common stock such that the consultant
will receive 15% of the total shares outstanding, exclusive of
options or warrants. At September 27, 2003, in accordance with
the agreement there are 6,160,719 shares due the consultant,
which have been valued at $369,643. The Company has accrued the
value of this obligation and expensed $30,804 related to this
agreement.
In May 2003, the Company issued 1,000,000 shares of its common
stock valued at $100,000 to a consultant for services to be
provided over one year. Effective June 23, 2003, the Company
amended its consulting agreement with the consultant, whereby the
consultant was to be issued an additional 1,000,000 shares of the
Company's common stock, valued at $80,000 for services provided
through the quarter ended September 27, 2003. The shares were
issued during the quarter ended September 27, 2003. The Company
has expensed $117,500 related to these agreements.
In May 2003, the Company issued 500,000 shares of its common
stock valued at $50,000 to a consultant for services to be
provided. Following the issuance of the shares, the consultant
will sell the shares on the open market. The net proceeds shall
be applied as a credit against the fees incurred for services
rendered. In the event that the balance has not been paid in full
from the net sale proceeds of the shares, the Company will issue
additional shares of its common stock to the consultant. In the
event that there is excess, it shall be applied as a credit for
future consulting services. The Company has expensed $50,000
related to this agreement.
In May 2003, the Company entered into a six-month Attorney/Client
Agreement with an attorney for certain legal services to be
provided. The Company issued 250,000 shares of unrestricted S-8
common stock valued at $27,500. The Company has expensed $20,625
related to this agreement.
In May 2003, the Company entered into a consulting agreement with
a consultant for services to be provided over a one-year term. In
July 2003, the Company issued the consultant 250,000 shares of
its common stock valued at $35,000 related to this agreement. An
additional 150,000 shares valued at $21,000, has been accrued and
are due to the consultant at September 27, 2003. In addition, the
Company is required to issue the consultant 500,000 shares of its
common stock when the Company signs an Exclusive License
Agreement with a certain company. The term of the consulting
agreement is twelve months. The Company has expensed $21,000
relating to this agreement.
F-23
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 9 - STOCKHOLDERS' DEFICIENCY (cont'd)
In May 2003, the Company entered into a consulting agreement with
a former director for services to be provided. The Company issued
the consultant 250,000 shares of its common stock valued at
$25,000. The Company has expensed $25,000 related to this
agreement.
In June 2003, the Company issued 325,000 shares of its common
stock valued at $26,000 to a consultant for services to be
provided over one year. The Company has expensed $6,500 related
to this agreement.
In August 2003, the Company issued 100,000 shares of its common
stock valued at $9,500 to a consultant for services to be
provided over thirty days. The Company has expensed $9,500
related to this agreement.
Marketing Agreement:
On January 20, 2003, the Company entered into a six-month
Strategic Marketing Agreement with ChampionLyte Holdings, Inc.
("ChampionLyte") whereby the Company agreed to issue shares equal
to $125,000 per month of its common stock to ChampionLyte. The
shares were to be fully paid and non-assessable and bear no
restrictive legend. ChampionLyte was to issue the Company 50,000
shares of its restricted stock per month under the agreement.
These shares were to carry piggyback registration rights.
ChampionLyte was also to pay the Company up to $100,000 per month
for services to be rendered by the Company relating to the use of
their beverage knowledge and distributing the other firm's
beverage product, as well as for any and all expenses incurred on
its behalf. In connection with the agreement, the Company
received 50,000 shares of ChampionLyte common stock, valued at
$7,000 and $5,500 at September 27, 2003 and March 29, 2003,
respectively. The stock is classified as available for sale and
is included in marketable securities in the accompanying
consolidated balance sheet. During the six months ended September
27, 2003, the Company issued 1,715,000 shares of its common stock
valued at $157,900 to ChampionLyte. On May 20, 2003, the Company
and ChampionLyte mutually agreed to terminate this agreement.
NOTE 10 - INCOME TAXES
Total income tax benefit consists of the following:
Current:
Federal $ -
State and local -
-----------------
$ -
-----------------
Deferred:
Federal -
State and local -
-----------------
-
-----------------
Total income tax benefit $ -
=================
A reconciliation of income tax benefit resulting from applying
U.S. federal statutory rates to pretax loss and the reported
amount of income tax benefit at March 29, 2003 is as follows:
F-24
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 10 - INCOME TAXES (cont'd)
Tax benefit at federal statutory rate
applied to pretax loss $ 4,242,750
State and income taxes, net of
federal income tax benefit, applied
to pretax loss 1,442,500
Permanent differences (4,832,800)
Valuation allowance (852,450)
--------------------
Total income tax benefit $ -
====================
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related to the difference
between the financial statement and income tax bases of assets
and liabilities for financial statement and income tax reporting
purposes. Deferred tax assets and liabilities represent the
future tax return consequences of these temporary differences,
which will either be taxable or deductible in the year when the
assets or liabilities are recovered or settled. Accordingly,
measurement of the deferred tax assets and liabilities
attributable to the book-tax bases differential are computed at a
rate of 15% federal and 6% state and local pursuant to Statement
of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes.
The tax effect of significant items comprising the Company's net
non-current deferred tax assets and liabilities are as follows:
March 29, 2003
Net operating loss carryfowards $ 2,100,000
Stock compensation 1,030,600
Asset impairment 3,801,500
Valuation allowance (6,932,100)
----------------
Deferred non-current tax asset -
----------------
Depreciable assets -
----------------
Deferred non-current tax liability -
----------------
Net non-current deferred tax asset $ -
================
Based on management's present assessment, the Company has not yet
determined it to be more likely than not that a deferred tax
asset attributable to the future utilization of the net operating
loss carry forwards will be realized. Accordingly, the Company
has provided a 100% valuation allowance against the deferred tax
asset in the consolidated balance sheet at March 29, 2003.
The Company files separate tax returns for federal and state
purposes. As such, income tax is based on the separate taxable
income or loss of each entity. The Company has not filed its
income tax returns for the years ended March 29, 2003 or March
30, 2002. Since the Company has not filed its tax returns for
several years, management has estimated the Company's net
operating loss carry forwards available to offset future taxable
income to be approximately $9,000,000, of which some of the loss
will be subject to Internal Revenue Code Section 382 limitations.
F-25
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 11 - RELATED PARTY TRANSACTIONS
Employment Agreements:
On March 30, 2001, the Company entered into an employment
agreement with its Chief Executive Officer ("CEO") for an initial
term of five years beginning February 1, 2001 and automatically
renewing for additional one-year periods unless notified by
either the CEO or the Company's Board of Directors that such
renewal will not take place. The Company is required to pay the
CEO an annual base salary of $125,000 and the CEO is eligible to
receive annual bonuses established by the Board of Directors.
On July 15, 2003, the Company entered into an employment
agreement with its Senior Vice President of Sales and Marketing
("SVP"). The SVP's base compensation is $75,000 per year. In
addition, the SVP is entitled to receive 1,000,000 shares of the
Company's common stock over a one-year term. As of September 27,
2003, the SVP has been issued 750,000 shares valued at $52,500.
The remaining 250,000 shares will be issued on the SVP's first
employment anniversary. The Company has expensed $35,000 relating
to this agreement. Subsequent to the quarter ended September 27,
2003, on September 30, 2003, the Company issued 100,000 shares of
its common stock to the SVP valued at $24,000 for accrued salary
and advances against out-of-pocket expenses.
Transactions
At September 27, 2003, the Company had accrued expenses of
$89,332 for disbursements paid by a director on behalf of the
Company for operating expenses and payroll. In addition, at
September 27, 2003, the Company accrued $15,000 for directors'
fees due the director. During the quarter ended September 27,
2003, the Company issued the director 1,256,783 shares of its
common stock, valued at $100,543, for directors fees owed and
disbursements paid by the director on behalf of the Company.
At September 27, 2003, the Company accrued $15,000 for directors'
fees due another director. During the quarter ended September 27,
2003, the Company issued the director 750,000 shares of its
common stock, valued at $60,000, for directors' fees owed.
At September 27, 2003, the Company owed the CEO $28,641 for
disbursements paid by the CEO on behalf of the Company for
operational expenses. During the quarter ended September 27,
2003, the Company issued the CEO 1,382,467 shares of its common
stock, valued at $110,597, in settlement of accrued salary and
disbursements paid by the CEO on behalf of the Company.
As of September 27, 2003, the Company owed the daughter of the
CEO $28,682 for services rendered.
At September 27, 2003, the Company had accrued expenses of
$294,137 for disbursements paid by a consultant on behlaf of the
Company for operating expenses. Subsequent to the quarter ended
September 27, 2003, these accrued expenses were converted into a
convertible promissory note (see Note 15).
NOTE 12 - STOCK OPTION PLANS
In April 2001, the Company adopted a Stock Option Plan intended
to provide officers, directors, key employees and consultants of
the Company an opportunity to acquire stock in the Company. As of
March 30, 2002, 1,732,383 options to purchase shares at $0.33 per
share had been issued
F-26
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
and 900,000 options to purchase shares at $0.01 per share had
been issued. During the year ended March 29, 2003, the 900,000
options were exercised and the 1,732,383 options were canceled
due to terminations. The fair value of the options on the grant
date was calculated using the Black-Scholes Option Pricing Model.
There were no options granted or exercised during the six-months
ending September 27, 2003.
2003 Equity Incentive Plan:
The shareholders approved the 2003 Equity Incentive Plan (the "
Incentive Plan") in April 2003. The Incentive Plan is effective
April 1, 2003. Officers, directors, key employees and
consultants, who in the judgment of the Company render
significant service to the Company, are eligible to participate.
The Incentive Plan provides for the awards of stock-based
compensation alternatives such as non-statutory stock options and
incentive stock options. The Incentive Plan provides for
10,000,000 shares of common stock to be offered form either
authorized and unissued shares or issued shares, which have been
reacquired by the Company. Options granted under the Incentive
Plan vest at a rate of 20% per year with the first 20% becoming
exercisable on the first anniversary of the date the options were
granted.
In April 2003, the Company granted employees and directors
options to purchase 3,250,000 and 6,000,000 shares, respectively,
of the Company's common stock under the plan. The options are
fully vested as of the grant date and have an exercise price of
$0.01. Accordingly, under APB No. 25, compensation expense of
$487,500 has been recognized during the six months ended
September 27, 2003 in connection with employee stock option
grants. On August 7, 2003, 6,250,000 options were exercised.
F-27
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
2003 Stock Incentive Plan:
In April 2003, the Company's Board of Directors approved the 2003
Stock Incentive Plan ("2003 Plan"). The purpose of the 2003 Plan
is to provide long-term incentives and rewards to employees,
directors, independent contractors or agents; assist the Company
in attracting and retaining such persons; and associate the
interests of such persons with those of the Company's
stockholders. The 2003 Plan is to be administered by the Board of
Directors and the maximum number of shares issuable under the
2003 Plan may not exceed 3,500,000 shares of the Company's common
stock. No shares have been issued underahe the 2003 plan as of
June 28, 2003.
In July 2003, the Board of Directors approved a resolution for
the creation of the Company's 2003 Stock Incentive Plan #1 which
includes the issuance of a total of 2,710,750 shares of the
Company's common stock pursuant thereto and the filing of an S-8
Registration Statement to register the Plan. No shares have been
issued under the 2003 plan as of September 27, 2003.
The Company accounts for stock-based compensation using the
intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
NOTE 12 - STOCK OPTION PLANS (cont'd)
Employees," and related Interpretations ("APB No. 25") and has
adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123" ("SFAS No. 148"). Under APB No. 25,
compensation expense is only recognized when the market value of
the underlying stock at the date of grant exceeds the amount an
employee must pay to acquire the stock.
The following table illustrates the effect on net loss and loss
per share had the Company applied the fair value recognition
provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation.
Three Months Ended Six Months Ended
September 27, September 28, September 27, September 28,
2003 2002 2003 2002
----------------- ----------------- ----------------- ---------------
Net loss, as reported $ (1,516,541) $(14,361,138) $ (2,871,441) $(17,279,981)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects - (404,095) - (621,370)
----------------- ----------------- ----------------- ---------------
Pro forma net loss $ (1,516,541) $(14,765,233) (2,871,441) $(17,901,351)
================= ================= ================= ================
Loss per share:
Basic - as reported $ (0.04) $ (56.42) $ (0.11) $ (73.78)
Basic - pro forma $ (0.04) $ (58.01) $ (0.11) $ (76.44)
F-28
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
Pro forma compensation expense may not be indicative of pro forma
expense in future periods. For purposes of estimating the fair
value of each option on the date of grant, the Company utilized
the Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
NOTE 12 - STOCK OPTION PLANS (cont'd)
The weighted-average option fair values and the assumptions used
to estimate these values for grants issued during 2003 and 2002
are as follows:
2003 2002
--------------- ---------------
Expected life (years) N/A 2-3 years
Risk free interest rate N/A go 4.50% - 5.71%
Expected volatility N/A None - 110.33%
Dividend yield N/A 0.0%
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). This statement eliminates the
requirement to report gains and losses from extinguishments of
debt as extraordinary unless they meet the criteria of APB
Opinion 30. SFAS No. 145 also requires sale-leaseback accounting
for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. The changes related
to lease accounting are effective for transactions occurring
after May 15, 2002 and the changes related to debt
extinguishments are effective for fiscal years beginning after
May 15, 2002. The adoption of SFAS No. 145 did not have a
material impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146").
SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3
and requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is
incurred. This statement also establishes that fair value is the
objective for initial measurement of the liability. SFAS No. 146
did not have a material impact on the Company's financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123" ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for
an entity that voluntarily changes to the fair value
F-29
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
based method of accounting for stock-based employee compensation.
It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to
stock-based employee compensation. The Company has chosen to
continue to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and
related interpretations as provided for under SFAS No. 148.
Accordingly, compensation expense is only recognized when the
market value of the Company's stock at the date of grant exceeds
the amount an employee must pay to acquire the stock. The
adoption of SFAS No. 148 did not have a material impact on the
Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45"). FIN 45 requires that upon issuance of a
guarantee, a guarantor must
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS (cont'd)
recognize a liability for the fair value of an obligation assumed
under a guarantee. FIN 45 also requires additional disclosures by
a guarantor in its interim and annual financial statements about
the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees
issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of
the disclosure requirements of FIN 45 did not have a material
impact on the Company's financial position or results of
operations. The Company is currently evaluating the effects of
the recognition provision of FIN 45, but does not expect the
adoption to have a material impact on the Company's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46
"Consolidation of Variable Interest Entities" ("FIN 46"). In
general, a variable interest entity is a corporation,
partnership, trust, or any other legal structure used for
business purposes that either (a) does not have equity investors
with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support
its activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other
property. A variable interest entity may be essentially passive
or it may engage in activities on behalf of another company.
Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the
entity through voting interests. FIN 46 changes that by requiring
a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from
the variable interest entity's activities or entitled to receive
a majority of the entity's residual returns or both. FIN 46's
consolidation requirements apply immediately to variable interest
entities created or acquired after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15, 2003.
Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company adopted FIN
46 effective January 31, 2003. The adoption of FIN 46 will not
have a material impact on the Company's consolidated financial
condition or results of operations taken as a whole.
F-30
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except
for mandatory redeemable financial instruments of nonpublic
entities. The adoption of SFAS No. 150 is not expected to have a
material impact on the Company's financial position or results of
operations.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Litigation:
A former officer of Aqua Clara filed suit against Aqua Clara for
approximately $227,000 of accrued wages, loans that took the form
of a mortgage on the property, and other damages. This claim also
sought 1,350,000 shares of the Company's common stock. At March
30 2002 the Company had provided approximately $180,000 related
to the accrued wages, loans and other damages in the accompanying
financial statements, which was accrued by Aqua Clara prior to
the acquisition. However, the Company asserts that all or a
majority of the number of common
NOTE 14 - COMMITMENTS AND CONTINGENCIES (cont'd)
shares due was a frivolous claim and did not include any amount
related to these shares in the related financial statements. In
September 2003 the Company settled this suit for $450,000. The
terms include 16 monthly installment payments and 3,000,000
shares of S-8 common stock of the Company to be escrowed as
collateral, to be released upon satisfaction of the settlement
amount. The $450,000 settlement amount is included in accrued
expenses.
During the fiscal year ended March 29, 2003 and subsequent to
such, various vendors, consultants and professionals have filed
actions against the Company, including some having received
default judgments. The unsettled claims aggregate approximately
$180,000. The Company has included in accrued expenses at March
29, 2003 approximately $154,000 of these settlements based on
this assessment, certain of the balances were previously included
as accounts payable. During the fiscal year ended March 29, 2003
and subsequent to such, various former employees of the Company
and certain related Company's have filed actions against the
Company to recover severance pay, back wages, personal property
and interest. One such group of claims has obtained a judgment
against the Company's bottling equipment and is forcing a
disposition of the equipment through an auction. The unsettled
claims aggregate approximately $985,000. The Company has included
in accrued expenses at March 29, 2003 approximately $792,000 as a
contingency related to these unsettled claims, actions and
judgments based on the Company's and counsel's assessments.
During the six months ended September 27, 2003, the Company
issued 1,369,884 shares of its common stock valued at
approximately $82,000 in settlement of claims.
An action was filed on June 26, 2003. The suit is a foreclosure
action against the Company by a secured mortgage holder for
non-payment. The Plaintiff seeks to recover possession of the
collateral, consisting of real property and machinery. The
principal amount of the note is approximately $300,000. In
addition to this amount, back interest, attorneys' fees and costs
are being sought in the amount of approximately $50,000. The
complaint in this action has been received by the Company, the
Company's answer has been filed and the Company is awaiting
discovery.
F-31
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
Subsequent to the year ended March 29, 2003, the Company entered
into settlement agreements with certain professionals,
consultants, vendors and former employees. In connection with
certain of these settlement agreements, the Company is required
to issue 1,375,000 shares of its common stock. As of September
27, 2003, the Company has issued 1,225,000 shares related to
these settlements, valued at $97,950. At September 27, 2003,
approximately $330,000 is due under these settlements and are
included in accrued expenses. An additional 150,000 shares of
common stock remain to be issued under these agreements. Certain
plaintiffs are required to sell these shares and, once sold, if
there is any remaining balance, the Company is required to pay
the plaintiffs an aggregate of $15,000 per month, beginning
November 1, 2003, until the obligation is satisfied.
The Company is a defendant in an action commenced by an
individual and a related company, which action was filed on June
6, 2003. The Plaintiff in this action served a 13-count
complaint, which includes claims of breach of contract, ejectment
and foreclosure of a security agreement.
Further, the Plaintiff is claiming that he is entitled to receive
shares of Preferred Stock of the Company, which are convertible
into 15% of the issued and outstanding shares of the Company.
NOTE 14 - COMMITMENTS AND CONTINGENCIES (cont'd)
The Plaintiff has not specified an amount of damages. The
satisfaction of the conditions upon which the Company agreed to
issue such shares and the consideration for the issuance of such
shares are in dispute. Accordingly, the Company believes the
individual is no longer entitled to receive such shares. The
Company and counsel handling the action believe that the Company
will prevail in the defense of these transactions due to the
Plaintiff's failure to satisfy its consideration obligations.
Although the Company believes that such action is without merit,
and it is vigorously defending such action, there can be no
assurance that such action will not be successful.
In July 2003, the Company and one of its directors entered into a
Mutual Release Agreement, whereby the Company and the director
mutually agreed to terminate and release each other from their
current relationship for a consideration of $5,000.
The Company is party to various legal proceedings generally
incidental to its business as is the case with other companies in
the same industry.
Operating Leases
The Company has an operating lease for office space. The lease is
subject to escalation for the Company's proportionate share of
increases in real estate taxes and certain other operating
expenses.
The approximate future minimum rentals under the operating lease
in effect on March 29, 2003 is as follows:
2004 $ 69,142
2005 69,132
2006 69,132
---------------------
$ 207,406
=====================
F-32
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
License and Trademark Agreement:
On May 7, 2003, the Company entered into a new exclusive license
and trademark agreement with StonePoint Group, Limited
("StonePoint") whereby the Company granted StonePoint the
exclusive, unlimited royalty-free right and license to all the
intellectual property, know-how and technology for use in the
production, licensing, marketing, distribution, use, sublicense,
subcontract, sale and transfer of the products (as defined in the
agreement) within the established territory. The territory
includes the countries of Japan, Taiwan, the Philippines, China,
North Korea, South Korea, Singapore, Vietnam, Thailand, Malaysia,
Indonesia, Cambodia and Laos. No royalties or fees of any kind
shall ever be due to the Company and the term of the agreement is
perpetual.
The Company was paid $1,742,000 in the following form:
Cash of $400,000 pursuant to a prior license and trademark
agreement dated January 8, 2002;
NOTE 14 - COMMITMENTS AND CONTINGENCIES (cont'd)
Cash of $342,000 spent by StonePoint during 2002 for costs
incurred by StonePoint for remedial actions taken by
StonePoint to regain and recapture StonePoint's business
relationship with its Distributor and to protect and
preserve the Distributor and StonePoint Supply and Purchase
Agreement as a result of contaminated product purchased by
the Company; and
The assumption by StonePoint of the Company's debt
obligation to Distributor in the amount of $1 million in
future product rebates, in settlement of the $3 million loss
suffered by Distributor as a result of the recall caused by
the contaminated product purchased by the Company.
As a result of the above, the Company recognized $1,342,000 in
settlement expense, of which $1,092,000 was recognized during the
year ended March 29, 2003 and $250,000 was recognized during the
year ended March 30, 2002. The Company recognized $1,342,000 in
exclusive license agreement revenue, related to the new
agreement. Such amounts are included in settlements in other
income and expense in the accompanying consolidated statements of
operations.
The Company also recognized under the prior agreement $371,999 in
net revenues during the year ended March 29, 2003 and $39,001,
was recognized during the year ended March 30, 2002.
Lack of Insurance:
The Company, at September 27, 2003, did not maintain any
liability insurance or any other form of general insurance. The
Company is also lacking insurance coverage for Directors and
Officers Liability, workman's compensation, disability, and
business discontinuance. Although the Company is not aware of any
claims resulting from non-coverage, there is no assurance that
none exist. Management plans to obtain coverage as soon as
possible.
F-33
BEVSYSTEMS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED SEPTEMBER 27, 2003
(UNAUDITED)
NOTE 15 - SUBSEQUENT EVENT
Marketing Agreement
In August 2003, the Company entered into a marketing agreement
with Benchmark Career Fund ("BCF"), whereby BCF agreed to provide
athletic and other professional endorsement services for the
Company's bottled water product through initiating contact with
athletes and other selected professionals. BCF will receive $0.50
for every case of the Company's product sold within the
continental United States, Hawaii, and Alaska, through the
expiration of the agreement. In addition, BCF will receive
10,000,000 shares of the Company's common stock to be used to
attract and manage athletes as an initial payment. The agreement
is for a period of two years, commencing on the date the
10,000,000 shares are issued to BCF. On September 30, 2003, the
Company issued BCF 10,000,000 shares, valued at $2,400,000.
Conversion of Accrued Expenses
On September 30, 2003 the Company issued two Series A Convertible
Promissory Notes, to a Director of the Company and a consultant
for the Company. The notes were issued as a conversion of accrued
expenses related to amounts advanced to the Company by the
parties. The notes aggregated $338,199, and bear interest at a
rate of 8.0% per annum. The notes mature on October 30, 2003.
Interest is due and payable at the end of each calendar quarter.
At the option of the Holders, the interest may be paid in cash or
converted into common stock. The principal amount of the note may
be converted, in whole or in part, into common stock at the
option of the Holder. The initial conversion price per share
shall be equal to the lesser of (i) the average of the 5-day
closing prices during the 5 days immediately prior to the
conversion date discounted by 25%, or (ii) $0.25.
F-34
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion of our financial condition and results of our
operations should be read in conjunction with the Financial Statements and Notes
thereto. This document contains certain forward-looking statements including,
among others, anticipated trends in our financial condition and results of
operations and our business strategy. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties. Actual results could differ materially from these forward-looking
statements. Important factors to consider in evaluating such forward-looking
statements include (i) changes in external factors or in the our internal
budgeting process which might impact trends in our results of operations; (ii)
unanticipated working capital or other cash requirements; (iii) changes in our
business strategy or an inability to execute its strategy due to unanticipated
changes in the industries in which it operates; and (iv) various competitive
market factors that may prevent us from competing successfully in the
marketplace.
Overview
BEVsystems International, Inc. and Subsidiaries (collectively the "Company") is
a provider of oxygenated water. The Company distributes its products primarily
through an international distribution network. The Company's fiscal year ends on
the Saturday nearest to March 31.
On July 12, 2001, the Company acquired the assets of the beverage division of
Life International, a provider of oxygenated water. The assets included
oxygenation equipment, bottles, proprietary seals, marketing materials, office
equipment, trademarks, patent rights and other intangible assets. On February
25, 2002, the Company consummated a merger with Aqua Clara Bottling and
Distribution, Inc. and its subsidiary.
Results of Operations
Results of Operations - Three Months Ended September 27, 2003 Compared to the
Three Months Ended September 28, 2002.
Revenues
4
Revenues generated during the three months ended September 27, 2003,
aggregated $18,680, as compared to $ 230,298 for the three months ended
September 28, 2002. The decrease in revenues of $211,618 from the prior period
is primarily due to the closing of the manufacturing plant in Clearwater,
Florida and the transitioning from a direct sales organization to an
organization that provides licensees of its products on a national and
international basis.
Costs of Revenues
Cost of Revenues for the three months ended September 27, 2003,
aggregated $15,199 or 81% of revenue, as compared to $133,066 or 58% of revenue
for the three months ended September 28, 2002. The decrease for the three months
ended September 27, 2003 of $117,947, was primarily due to the closing of the
manufacturing plant in Clearwater, Florida and the transitioning from a direct
sales organization to an organization that provides licensees of its products on
a national and international basis.
Operating Expenses
Operating Expenses incurred for the three months ended September 27,
2003, aggregated $1,121,132, as compared to $2,286,500 for the three months
ended September 28, 2002. The decrease of $1,165,368 is directly attributable to
the closing of the manufacturing plant in Clearwater, Florida and the
transitioning from a direct sales organization to an organization that provides
licensees of its products on a national and international basis..
Comprehensive Loss and Loss Per Share
The comprehensive loss and the basic net loss per weighted average
share were $1,524,041 and $(.04), respectively, for the three months ended
September 27, 2003, as compared to $14,361,138 and $(56.42), respectively, for
the three months ended September 28, 2002. The loss from operations decreased
from the previous period primarily as a result of the transitioning from a
direct sales organization to an organization that provides licensees of its
products on a national and international basis.. The basic loss per share also
was affected by a 200:1 reverse stock split on January 2, 2003.
Results of Operations - Six Months Ended September 27, 2003 Compared to the Six
Months Ended September 28, 2002.
Revenues
Revenues generated during the six months ended September 27, 2003,
aggregated $34,647 as compared to $443,620 for the six months ended September
28, 2002. The decrease in revenues of $408,973 from the prior period is
primarily due to the transitioning from a direct sales organization to an
organization that provides licensees of its products on a national and
international basis.
Costs of Revenues
Cost of Revenues for the six months ended September 27, 2003,
aggregated $15,434 or 45% of revenue, as compared to $298,766 or 67% of revenue
for the six months ended September 28, 2002. The decrease for the six months
ended September 27, 2003 of $283,332, was primarily due to a decrease in sales
resulting from the transition from a direct sales organization to an
organization that provides licensees of its products on a national and
international basis.
Operating Expenses
5
Operating Expenses incurred for the six months ended September 27,
2003, aggregated $2,478,432, as compared to $5,069,549 for the six months ended
September 28, 2002. The decrease of $2,591,117 for the six months ended
September 27, 2003, was primarily due to the continued implementation by
management of a plan to reduce various costs, including but not limited to the
closing of the manufacturing plant in Clearwater, Florida and the transitioning
from a direct sales organization to an organization that provides licensees of
its products on a national and international basis.
Comprehensive Loss and Loss Per Share
The comprehensive loss and the basic loss per weighted average share
was $2,869,941 and $(.11), respectively, for the six months ended September 27,
2003, as compared to comprehensive loss of $17,279,981 and $(73.78),
respectively, for the six months ended September 28, 2002. The comprehensive
loss from operations decreased from the previous period primarily as a result of
the transitioning from a direct sales organization to an organization that
provides licensees of its products on a national and international basis. The
basic loss per share also was affected by a 200:1 reverse stock split on January
2, 2003.
Liquidity and Capital Resources
At September 27, 2003, we had working capital deficit of $5,888,474 as
compared with $5,637,910 at March 29, 2003. The increase in the working capital
deficit is primarily the result of an increase in the Company's accrued
expenses.
Our primary source of liquidity has historically consisted of sales of equity
securities and debt instruments. The Company is currently engaged in discussions
with numerous parties with respect to raising additional capital, provided,
however, the Company cannot provide any assurance as to whether the Company will
be able to raise funding in connection with these negotiations. The Company has
no definitive plans or arrangements in place with respect to additional capital
sources at this time. The Company has no lines of credit available to it at this
time. There is no assurance that additional capital will be available to the
Company when or if required.
On October 22, 2001, the Company entered into a series of three
convertible promissory notes with Financial Partners Network Corporation in the
amount of $100,000, $100,000 and $62,584. The notes were due April 22, 2002 and
had an interest rate of 10.5% per year. The notes were convertible, at the
option of the holder. On August 29, 2002, in consideration for extending the
maturity dates on the notes, the Company granted warrants to purchase 2,574
shares of the Company's common stock at an exercise price of $0.01 per share
expiring May 15, 2005. On January 21, 2003, all three notes, inclusive of
accrued interest of $34,464, were converted into 1,710,753 shares of the
Company's common stock at a rate of $0.108 per share. In lieu of exercising the
warrant by paying the per share warrant price, the holder may execute a cashless
exercise in accordance with the formula set forth in the warrant agreement. In
September 2003, Financial Partners Network exercised their right to purchase
2,574 shares of the Company's common stock via a cashless exercise, resulting in
the issuance of 2,504 shares of the Company's common stock.
On November 15, 2001, the Company entered into a $200,000 convertible
promissory note with the Chief Executive Officer ("CEO") of the Company. The
note was due May 15, 2002 and had an interest rate of 10.5% per year. On August
29, 2002, in consideration for extending the maturity date on the note, the
Company granted warrants to purchase 1,961 shares of the Company's common stock
to the CEO at an exercise price of $0.01 per share expiring May 15, 2005. On
January 21, 2003, the note, including accrued interest of $24,500, was converted
into 3,571,424 shares of the Company's common stock at a rate of $0.108 per
share. In September 2003, the CEO
6
exercised his right to purchase 1,961 shares of the Company's common stock via a
cashless exercise, resulting in the issuance of 1,908 shares of the Company's
common stock.
In April 2002, the Company entered into several convertible promissory
notes with several investors for a total value of $200,000. The notes were due
April 30, 2003 and have an interest rate of 12%. The notes are convertible, at
the option of the holders, into shares of the Company's common stock at an
initial conversion price per share equal to the lesser of (i) the average of the
lowest three-day trading prices during the five trading days immediately prior
to the conversion date discounted by 25%, or (ii) the average of the lowest
three-day trading prices during the five trading days immediately prior to the
funding. The conversion price is subject to adjustment if the Company issues
additional shares of its common stock without consideration or for a
consideration per share less than the conversion price in effect immediately
prior to the issuance of such additional shares of common stock.
On May 15, 2002, the Company entered into an $80,000 convertible
promissory note with a director of the Company. The note was due August 15, 2002
and had an interest rate of 12.0% per year. The note was convertible, at the
option of the holder, into shares of the Company's common stock at an initial
conversion price per share equal to the lesser of (i) the average of the lowest
3 day trading prices during the 5 trading days immediately prior to the
conversion date discounted by 25%, or (ii) the average of the lowest 3 day
trading prices during the 5 trading days immediately prior to the funding date.
The conversion price was subject to adjustment. On August 29, 2002, in
consideration for extending the maturity date on the note, the Company granted
warrants to purchase 784 shares of the Company's common stock at an exercise
price of $0.01 per share expiring May 15, 2005. On January 21, 2003, this note,
as well as a $363,000 secured note with the director, including accrued
interest, was converted into 4,440,044 shares of the Company's common stock. The
Company also granted to the director warrants to purchase 1,200 shares of the
Company's common stock at an exercise price equal to the lesser of (i) the
average of the lowest three day trading prices during the five trading days
immediately prior to the conversion date discounted by 25%, or (ii) the average
of the lowest three day trading prices during the five trading day immediately
prior to the funding date. The warrants to purchase 1,200 shares of the
Company's common stock were exercised on August 7, 2002. On August 29, 2002, in
consideration for extending the maturity date of the aforementioned secured note
with this director, the Company granted warrants to purchase 3,845 shares of the
Company's common stock at an exercise price of $0.01 per share expiring May 15,
2005. On September 22, 2003, the director exercised his right to purchase 4,629
shares of the Company's common stock via a cashless exercise, resulting in the
issuance of 4,504 shares of the Company's common stock.
On June 4, 2002, the Company entered into a $100,000 convertible
promissory note with an investor. The note was due June 4, 2003 and has an
interest rate of 12%. The note is convertible, at the option of the holder, into
shares of the Company's common stock at an initial conversion price per share
equal to the lesser of (i) the average of the lowest three-day trading prices
during the five trading days immediately prior to the conversion date discounted
by 25%, or (ii) the average of the lowest three-day trading prices during the
five trading days immediately prior to the funding. The conversion price is
subject to adjustment if the Company issues additional shares of its common
stock without consideration or for a consideration per share less than the
conversion price in effect immediately prior to the issuance of such additional
shares of common stock. Accrued interest of $15,867 is included in accrued
expenses in the accompanying consolidated balance sheet. The Company also
granted warrants to this investor to purchase 1,500 shares of the Company's
common stock at an exercise price equal to the lesser of (i) the average of the
lowest three day trading prices during the five trading days immediately prior
to the conversion date discounted by 25%, or (ii) the average of the lowest
three day trading prices during the five trading day immediately prior to the
funding date. The warrant is callable by the Company when the five-day average
closing stock price exceeds 120% of the five-day average closing price prior to
the funding date. The warrant expires on April 30, 2005. Subsequent to the
quarter ended September 27, 2003, on September 30, 2003, the investor converted
his note, including accrued interest of $15,879, into 2,000,000 shares of the
Company's common stock.
7
On July 5, 2002, the Company entered into a $250,000 convertible
promissory note with an investor. The note was due July 5, 2003 and does not
bear interest, except in the case of default. The note is convertible, at the
option of the holder, into shares of the Company's common stock at an initial
conversion price per share equal to the lesser of (i) the average of the 5-day
closing bid prices during the 5 trading days immediately prior to the conversion
date discounted by 25%, or (ii) $60. The conversion price is subject to
adjustment if the Company issues additional shares of its common stock without
consideration or for a consideration per share less than the conversion price in
effect immediately prior to the issuance of such additional shares of common
stock. The conversion price is also subject to adjustment so that the number of
shares into which the note is converted does not exceed the number of shares
such that, when aggregated with all other shares of common stock then
beneficially or deemed beneficially owned by the holder, would result in the
holder owning more than 9.999% of all such shares of common stock as would be
outstanding on the conversion date. In August 2003, $30,000 of the note was
converted into 500,000 shares of the Company's common stock. Accrued interest
due to the default of the Company of $128,404 is included in accrued expenses in
the accompanying consolidated balance sheet. The Company also granted warrants
to the investor to purchase 1,667 shares of the Company's common stock at an
exercise price of $72.00 per share. The warrant is callable at the Company's
option, provided that the closing bid prices for the five days preceding the
date the Company exercises such option exceeds 140% of the warrant exercise
price and that an effective registration statement is in place. Subsequent to
the quarter ended September 27, 2003, on September 30, 2003, the remaining
balance of the note, including the default interest of $128,404, were converted
into 2,500,000 shares of the Company's common stock.
On August 4, 2002, the Company entered into a $75,000 convertible
promissory note with an investor bearing interest at 10% per annum with
principal and all accrued interest payable in full on March 4, 2003. The note is
secured by 50,000 shares of the Company's common stock. The holder of the note
is entitled, at its option, to convert at any time, the principal amount of the
note and accrued interest at a conversion price equal to the latest five-day
average of the closing bid price of the Company's common stock into such shares
of the Company's common stock. The shares to be issued pursuant to this note
shall contain unlimited piggyback registration rights. Any overdue payment of
principal on the note shall bear interest at 15% per annum until paid. On
February 5, 2003, the Company issued 50,000 shares of its common stock, valued
at $85,000, in consideration for extending the maturity date of the note.
Accrued interest of $7,500 is included in accrued expenses in the accompanying
consolidated balance sheet. In June 2003, a related party-shareholder purchased
the note from the investor. In consideration for extending the maturity date of
the note to when, the related party-shareholder was granted warrants to purchase
250,000 shares of the Company's common stock at an exercise price of $0.01 per
share. The fair value of the warrants using the Black-Scholes Option Pricing
Model was $52,825 and is being amortized to interest and financing expense over
the term of the expense. On September 22, 2003, the related party-shareholder
exercised his warrants via a cashless exercise, resulting in the issuance of
249,306 shares of the Company's common stock.
In August 2003, an investor converted his $50,000 note, including
accrued interest of $8,000, into 773,333 shares of the Company's common stock.
On September 22, 2003, an investor converted his $50,000 note, including accrued
interest of $8,515, into 329,662 shares of the Company's common stock. The
balance of these notes was $50,000 at September 27, 2003. Accrued interest of
$8,567 is included in accrued expenses in the accompanying consolidated balance
sheet relating to the outstanding notes. The Company also granted these note
holders warrants to purchase a total of 3,000 shares of the Company's common
stock at an exercise price equal to the lesser of (i) the average of the lowest
three day trading prices during the five trading days immediately prior to the
conversion date discounted by 25%, or (ii) the average of the lowest three day
trading prices during the five trading days immediately prior to the funding
date. The warrants are callable by the Company when the five-day average closing
stock price exceeds 120% of the five-day average closing price prior to the
funding date. The warrants expire on April 30, 2005. On September 22, 2003, one
note holder exercised his warrants and purchased 750 shares of the Company's
common stock for $133, the proceeds are currently due from the note holder.
Subsequent to the quarter ended September 27, 2003, on September 30, 2003, a
note holder converted his $50,000 note, including accrued interest of $8,433,
into 417,378 shares of the Company's common stock.
8
If we need to obtain capital, no assurance can be given that we will be
able to obtain this capital on acceptable terms, if at all. In such an event,
this may have a materially adverse effect on our business, operating results and
financial condition. If the need arises, we may attempt to obtain funding
through the use of various types of short term funding, loans or working capital
financing arrangements from banks or financial institutions.
Settlement of Debt
In January 2003, the Company entered into an agreement with the Chief
Executive Officer and his spouse, a director of the Company and Financial
Partners Network Corporation whereby the Company issued a total of 9,722,221
shares of its restricted common stock to such shareholders in satisfaction of
all debt, convertible notes, security interest and other securities owed to
these parties, which aggregated approximately $1,050,000.
In August 2003, the Company issued 50,000 shares of its common stock,
valued at $5,000, in partial settlement of debt. The Company also agreed to pay
the creditor at the rate of $2.00 for every case of the Company's bottled water
product sold through the direct efforts of the creditor, which will be applied
towards the remaining debt due to the creditor. The creditor will also receive,
in cash. a sales commission for every case of the Company's bottled water
product sold through the direct efforts of the creditor. No limit has been
placed on the amount of commissions earned or cases sold.
In August 2003, the Company issued 275,000 shares of its common stock,
valued at $50,325, in settlement of debt with a consultant.
In September 2003, the Company issued 100,000 shares of its common
stock, valued at $18,300, in partial settlement of debt with a consultant. An
additional 150,000 shares, valued at $27,450, is due to this consultant in
accordance with the agreement.
At September 27, 2003, the Company had accrued expenses of $89,332 for
disbursements paid by a director on behalf of the Company for operating expenses
and payroll. In addition, at September 27, 2003, the Company accrued $15,000 for
directors' fees due to the director. During the quarter ended September 27,
2003, the Company issued the director 1,256,783 shares of its common stock,
valued at $100,543, for directors fees owed and disbursements paid by the
director on behalf of the Company.
At September 27, 2003, the Company owed the CEO $28,641 for
disbursements paid by the CEO on behalf of the Company for operational expenses.
During the quarter ended September 27, 2003, the Company issued the CEO
1,382,467 shares of its common stock, valued at $110,597, in settlement of
accrued salary and disbursements paid by the CEO on behalf of the Company.
At September 27, 2003, the Company accrued $15,000 for directors' fees
due to a director. During the quarter ended September 27, 2003, the Company
issued the director 750,000 shares of its common stock, valued at $60,000, for
directors' fees owed.
A former officer of Aqua Clara filed suit against Aqua Clara for
approximately $227,000 of accrued wages, loans and other damages. In connection
with this lawsuit, a lien was filed against the Company's assets. The former
officer also sought 1,350,000 shares of the Company's common stock. As of March
30, 2002, the Company accrued approximately $180,000 related to the accrued
wages, loans and other damages in the accompanying financial statements, which
was accrued by Aqua Clara prior to the acquisition. In September 2003, the
Company settled this suit for $450,000. The terms include 16 monthly installment
payments and 3,000,000 shares of common stock of the Company to be escrowed as
collateral, to be released upon satisfaction of the settlement amount. The
$450,000 settlement amount is included in accrued expenses.
9
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
BEVsystems maintains disclosure controls and procedures (as defined in Rule
13a-14(c) and Rule 15d-14(c) of the Exchange Act) designed to ensure that
information required to be disclosed in the reports of BEVsystems filed under
the Exchange Act is recorded, processed, summarized, and reported within the
required time periods. BEVsystems' Chief Executive Officer and Chief Financial
Officer has concluded, based upon his evaluation of these disclosure controls
and procedures as of a date within 90 days of the filing date of this report,
that, as of the date of his evaluation, these disclosure controls and procedures
were effective at ensuring that the required information will be disclosed on a
timely basis in the reports of BEVsystems filed under the Exchange Act.
(b) Changes in Internal Controls.
BEVsystems maintains a system of internal controls that is designed to provide
reasonable assurance that the books and records of BEVsystems accurately reflect
BEVsystems' transactions and that the established policies and procedures of
BEVsystems are followed. There were no significant changes to the internal
controls of BEVsystesm or in other factors that could significantly affect such
internal controls subsequent to the date of the evaluation of such internal
controls by the Chief Executive Officer and Chief Financial Officer, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to legal proceedings as set forth below:
Thorp & Company v. BEVsystems Int'l, Inc., et al., Case No. 02-27983-CA-13. This
action was filed in the Eleventh Judicial Circuit for Miami-Dade County on
November 8, 2002. The Plaintiff is asserting a claim to recover $35,000 of
accounts payable. The Plaintiff in this case has obtained a motion for default
judgment in the amount of approximately $42,000.
Freeman Decorating Co. v. BEVsystems Int'l, Inc., et al., Case No.
02-22432-CA(09). This action was filed in the Seventh Judicial Circuit for Dade
County on September 10, 2002. The Plaintiff in the action seeks payment for
advertising services rendered. The plaintiff obtained a default judgment for
approximately $18,995.
Young & Rubicam, L.P. v. BEVsystems Int'l, Inc., et al., Case No.
02-31444-CA-08. This action was filed in the Eleventh Judicial District for
Miami-Dade County. The plaintiff obtained a default judgment for approximately
$58,000.
Zinno v. BEVsystems Int'l, Inc., et al., Case No. 03-4199-CO-41. This action was
filed in the Sixth Judicial Circuit for Pinellas County, Florida on July 7,
2003. The Plaintiff, a former employee of the Company, filed suit against both
the Company and Wasser Merger, Inc. for approximately $6,475 of back wages,
personal property, expenses and interest. The Company has filed a cross-claim
against Wasser Merger, Inc., pursuant to an indemnification agreement Wasser
executed with the Company to assume all payroll as of February 2003. Defenses
have been filed. The Company has a reasonable likelihood of prevailing on the
merits of the case.
Brickell Bay Capital Fund, LLC v. BEVsystems Int'l, Inc., et al., Case No.
03-4936-CI-015. This action was filed in the Sixth Judicial Circuit for Pinellas
County, Florida on June 26, 2003. The suit is a foreclosure action against the
Company by a secured mortgage holder for non-payment. The Plaintiff seeks to
recover possession of the collateral, consisting of real property and machinery.
The principal amount of the note is approximately $300,000. The plaintiff is
also seeking payment for back interest, attorneys' fees and costs are being
sought in the amount of approximately $50,000. In addition, Brickell Bay Fund
purchased the first security position from Yale Mortgage, and, as a result,
Brickell Bay Fund currently holds a mortgage on the property in the amount of
approximately $740,000. The Company is currently in settlement discussions with
Brickell Bay Fund, which such discussions may result in Brickell Bay Fund
foreclosing on the property.
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Burkhardt, et al. v. BEVsystems Int'l, Inc., et al., Case No. 03-13379-CA-08.
This action was filed in the Eleventh Judicial Circuit for Miami-Dade County,
Florida on June 6, 2003. The Plaintiff served a 13-count complaint which
includes claims of breach of contract, ejectment and foreclosure of a security
agreement. Further, the Plaintiff is claiming that he is entitled to receive
shares of Preferred Stock of the Company, which are convertible into 15% of the
issued and outstanding shares of the Company. The Plaintiff has not specified an
amount of damages. The satisfaction of the conditions upon which the Company
agreed to issue such shares and the consideration for the issuance of such
shares are in dispute. Accordingly, the Company believes the individual is no
longer entitled to receive such shares. The Company filed a motion to transfer
venue and the motion is pending. The Company and counsel handling the action
believe that the Company will prevail in the defense of these transactions due
to the Plaintiff's failure to satisfy its consideration obligations. Although
the Company believes that such action is without merit, and it is vigorously
defending such action, there can be no assurance that such action will not be
successful.
Bell Industries, Inc. v. BEVsystems Int'l, Inc., et al., Case No. 03-362-CC-26
(04). This action was filed in the Sixth Judicial Circuit for Pinellas County,
Florida on January 16, 2003. The Plaintiff commenced the action to recover
approximately $17,683 for advertising services rendered. The Plaintiff obtained
a default judgment on April 9, 2003.
GBS v. BEVsystems Int'l, Inc., Case No. 02-5341-A-21. This action was filed in
Pinellas County, Florida. The Plaintiff obtained a default judgment in the
approximate amount of $30,000.
R.R. Donnelly, Inc. v. BEVsystems Int'l, Inc., Case No. 02-4360-CO-41. This
action was filed in Pinellas County, Florida. The Plaintiff obtained a default
judgment in the approximate amount of $13,000.
Bowne of NYC, LLC v. Aqua Clara. This action was filed in New York City, New
York. The Plaintiff seeks recovery of approximately $5,481 allegedly owed to it
for accounts payable by the Company. Management has not filed an answer to this
complaint. Since the initial complaint, no notice of any other adverse action
has been received by the Company.
Plunkett v. BEVsystems Int'l, Inc, et al. This action was filed in the Sixth
Judicial Circuit for Pinellas County on February 11, 2003. Former employees of
the Company filed the action to recover severance pay as a result of their
termination and/or for salary accruals. The Plaintiffs in this case obtained a
judgment in the amount of approximately $438,620, have attached the Company's
bottling equipment in Clearwater, Florida and forced a sheriff's auction to
dispose of the equipment. Approximately $25,000 was raised from the auction,
which proceeds are being held by the sheriff due to a dispute between Plunkett
and Brickell Bay Fund.
Item 2. Changes in Securities
BEVsystems issued the following securities during the period covered by this
report without registering the securities under the Securities Act. All of the
bellow issuances, offerings and sales were either registered or were deemed to
be exempt under Rule 506 of Regulation D and/or Section 4(2) of the Securities
Act of 1933, as amended (the "1933 Act"). With respect to the issuances which
were deemed to be exempt, no advertising or general solicitation was employed in
offering the securities. The offerings and sales of exempt issuances were made
to a limited number of persons, all of whom were accredited investors, business
associates of the Company or executive officers of the Company, and transfer was
restricted by the Company in accordance with the requirements of the 1933 Act.
The below-referenced persons represented that they were accredited or
sophisticated investors, and that they were capable of analyzing the merits and
risks of their investment, and that they understood the speculative nature of
their investment.
Issuance of Securities
During the quarter ended September 27, 2003, the Company issued 2,639,250 shares
of common stock to two directors of the Company in connection with the
settlement of payable owed by the Company.
During the quarter ended September 27, 2003, the Company issued 1,602,995 shares
of common stock to three accredited investors in connection with their
conversion of their convertible notes.
During the quarter ended September 27, 2003, the Company issued 2,033,477 shares
of common stock to five parties in connection with their cashless exercise of
their warrants.
11
During the quarter ended September 27, 2003, the Company issued 6,250,000 shares
of common stock to three individuals in connection with the exercise of stock
options.
Item 3. Defaults Upon Senior Securities
On July 31, 2002, the Company refinanced their manufacturing plant located in
Clearwater, Florida. The amount of the mortgage note totaled $420,000. The
mortgage note is secured by the underlying building and land. The note was due
in monthly installments of principal and interest through 2032 and has an
initial interest rate of 12.99%. The interest rate will be adjusted annually to
a rate equal to 6.00% above the prime rate and shall never be less than 12.00%
per year. At June 28, 2003, the interest rate was 12%. Due to the Company's
failure to make the required payments under the note, the mortgage is now in
default and is currently due and has been reclassified as a current liability.
At September 27, 2003, the outstanding principal balance was $419,806.
In May 2002, the Company entered into an agreement with Brickell Bay Capital
Fund, LLC ("Brickell Bay") to extend the maturity date of its $300,000
convertible promissory note to October 4, 2002. As part of the agreement, the
Company was required to pay past due interest totaling $23,625 and issue
warrants to purchase 2,511 shares of the Company's common stock at an exercise
price of $65.99 per share. On May 30, 2002, Brickell Bay exercised warrants
relating to a previous agreement to purchase 2,511 shares of the Company's
common stock for a total consideration of $165,706. In addition, on April 4,
2002, the Company entered into a Collateral Assignment of Rents, Leases and
Profits ("Collateral Assignment") with Brickell Bay whereby the Company's
manufacturing plant in Clearwater, Florida and land was assigned to Brickell Bay
as collateral for the $300,000 note. In June 2003, Brickell Bay filed a
foreclosure action against the Company for nonpayment.
The Company has a note payable in the amount of $30,829 that is secured by
several vehicles owned by the Company. The note holder is currently seeking to
repossess these vehicles.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description of Exhibit
No.
31.1 Certification by the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(filed herewith)
32.1 Certification by the Chief Executive Officer and Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(filed herewith)
(b) Reports on Form 8-K
On August 29, 2003, the Company filed a Form 8-K reporting under Item 5 with
respect to the filing of its Form 10-KSB for the year ended March 31, 2003 and
the Form 10-QSB for the quarter ended March 31, 2003.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
Date: October 14, 2003 BEVSYSTEMS INTERNATIONAL, INC.
By: /s/ G. Robert Tatum
---------------------
G. Robert Tatum
CEO, CFO & Chairman
Pursuant to the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Capacity Date
/s/ G. Robert Tatum CEO, CFO & Chairman October 14, 2003
--------------------
G. Robert Tatum
/s/ James Dale Davidson Director October 14, 2003
-----------------------
James Dale Davidson
/s/ E. Douglas Cifers Director October 14, 2003
----------------------
E. Douglas Cifers
13