UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: MARCH 31, 2006
Commission File Number: 000-28027
GLOBAL BEVERAGE SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 90-0093439
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(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)
7633 EAST 63RD PLACE, SUITE 220, TULSA, OK 74133
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(Address of principal executive office) (zip code)
(918) 459-8469
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(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of March 31, 2006 was 43,439,105 shares.
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX
Page
No.
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Part I Financial Information
Item 1. Condensed Financial Statements
Statements of Net Assets as of March 31, 2006 and December 31, 2005 3
Statements of Operations - For the Three Months Ended March 31, 2006 and 2005 4
Statements of Cash Flows - For the Three Months Ended March 31, 2006 and 2005 5
Statements of Changes in Net Assets - For the Three Months Ended March 31, 2006
and 2005 6
Financial Highlights for the Three Months Ended March 31, 2006 and 2005 7
Schedule of Investments as of March 31, 2006 and December 31, 2005 8-9
Notes to Financial Statements 10-17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations 18-20
Item 3. Quantitative and Qualitative Disclosure about Market Risk 21-22
Item 4. Controls and Procedures 23
Part II Other Information 24-29
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures
Exhibits
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF NET ASSETS
MARCH 31, 2006 AND DECEMBER 31, 2005
2006 2005
------------ ------------
(Unaudited)
ASSETS
Investments in portfolio companies (cost $6,500,000 at March 31,
2006 and $5,915,000 at December 31, 2005) $ 6,300,000 $ 5,715,000
Cash and cash equivalents 190,255 245,370
Interest and fees receivable from portfolio companies 23,325 13,889
Deposits and prepaid expenses 4,835 13,072
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TOTAL ASSETS 6,518,415 5,987,331
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LIABILITIES
Accounts payable 15,615 25,857
Accrued expenses 36,888 134,350
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TOTAL LIABILITIES 52,503 160,207
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NET ASSETS $ 6,465,912 $ 5,827,124
============ ============
Commitments and contingencies (Note 4)
Composition of net assets:
Preferred stock, $.001 par value; 50,000,000 shares
authorized; no shares issued and outstanding $ - $ -
Common stock, $.0001 par value, authorized 950,000,000 shares;
43,439,105 and 41,312,391 shares issued and outstanding at
March 31, 2006 and December 31, 2005, respectively 43,439 41,312
Additional paid in capital 16,185,975 15,443,102
Accumulated deficit:
Accumulated net operating loss (7,685,087) (7,578,875)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized depreciation of investments (200,000) (200,000)
------------ ------------
Net assets $ 6,465,912 $ 5,827,124
============ ============
Net asset value per share $ 0.1489 $ 0.1411
============ ============
See accompanying notes to condensed financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
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INCOME FROM OPERATIONS:
Interest income from portfolio companies $ 3,436 $ -
Management income from portfolio companies 6,000 -
------------ ------------
9,436 -
EXPENSES:
Selling, general and administrative expense 115,648 143,129
Interest expense - 306,500
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115,648 449,629
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LOSS BEFORE INCOME TAXES (106,212) (449,629)
INCOME TAXES - -
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NET LOSS FROM OPERATIONS (106,212) (449,629)
------------ ------------
NET REALIZED LOSSES:
Net realized loss on investments, net of income tax benefit
of $0 for 2005 - (69,826)
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Net realized losses - (69,826)
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Net decrease in net assets from operations $ (106,212) $ (519,455)
============ ============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.0026) $ (2.7045)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 41,319,513 192,069
============ ============
See accompanying notes to condensed financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $ (106,212) $ (519,455)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Depreciation - 4,182
Amortization of deferred financing costs - 28,125
Amortization of beneficial conversion feature on convertible
debentures - 234,926
Changes in operating assets and liabilities:
Interest and fees receivable from portfolio companies (9,436) -
Deposits and prepaid expenses 8,237 43,449
Accounts payable and accrued expenses (3,704) 42,394
------------ ------------
Net cash used in operating activities (111,115) (166,379)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to portfolio investment companies (585,000) (9,000)
------------ ------------
Net cash used in investing activities (585,000) (9,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 641,000 -
Proceeds from convertible debenture - 50,000
Proceeds from sale of common stock - 91,019
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Net cash provided by financing activities 641,000 141,019
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Net decrease in cash and cash equivalents (55,115) (34,360)
Cash and cash equivalents, beginning of period 245,370 43,466
------------ ------------
Cash and cash equivalents, end of period $ 190,255 $ 9,106
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for accounts payable and
accrued expenses $ 104,000 $ -
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CHANGES IN NET ASSETS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
------------ ------------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (106,212) $ (449,629)
Net realized loss on sale of investments, net - (69,826)
Change in net unrealized depreciation of investments, net - -
------------ ------------
Net decrease in net assets from operations (106,212) (519,455)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Common stock issued for cash 641,000 -
Common stock issued for liabilities 104,000
Conversion of convertible debentures - 273,750
Proceeds from sale of common stock - 91,019
------------ ------------
Net increase in net assets from stock transactions 745,000 364,769
------------ ------------
Net increase in net assets 638,788 (154,686)
Net assets, beginning of period 5,827,124 396,001
------------ ------------
Net assets, end of period $ 6,465,912 $ 241,315
============ ============
See accompanying notes to condensed financial statements.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
Financial Highlights
Three Months Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
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PER SHARE INFORMATION
Net asset value, beginning of period $ 0.1411 $ 2.13
Net decrease from operations (0.0026) (2.34)
Net change in realized losses and unrealized
depreciation of investments, net - (0.36)
Net increase from stock transactions 0.0104 1.68
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Net asset value, end of period $ 0.1489 $ 1.11
============ ============
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 6,465,912 $ 241,315
Average net assets 5,962,391 442,369
Ratio of expenses to average net assets 1.9% 117.4%
Ratio of net loss to average net assets 1.8% 117.4%
Shares outstanding at end of period 43,439,105 217,185
Weighted average shares outstanding during period 41,319,513 192,069
See accompanying notes to condensed financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
March 31, 2006
(Unaudited)
Date of Original Fair
Shares Acquisition Cost Value
COMMON STOCK IN PORTFOLIO COMPANIES
9% Jul-05 EON Beverage Group, Inc., privately held;
11% of net assets; manufactures structured water
pursuant to proprietary process $ 725,000 $ 725,000
80% Nov-05 Rudy Beverage, Inc., privately held; 86% of net
assets; manufactures and sells beverages higher in
nutritional value and lower in sugar than existing
brands 5,575,000 5,575,000
Investments with $0 value - see schedule below 200,000 -
------------ ------------
Total investments at March 31, 2006 $ 6,500,000 6,300,000
============
Cash and other assets, less liabilities 165,912
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Net assets at March 31, 2006 $ 6,465,912
============
SCHEDULE OF INVESTMENTS WITH $0 VALUE
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ -
------------ ------------
$ 200,000 $ -
============ ============
See accompanying notes to condensed financial statements
8
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2005
Date of Historical Fair
Shares Acquisition Cost Value
COMMON STOCK IN PORTFOLIO COMPANIES
9% Jul-05 EON Beverage Group, Inc., privately held;
10% of net assets; manufactures structured water
pursuant to proprietary process $ 585,000 $ 585,000
80% Nov-05 Rudy Beverage, Inc., privately held; 85% of net
assets; manufactures and sells beverages higher in
nutritional value and lower in sugar than existing
brands 5,130,000 5,130,000
Investments with $0 value - see schedule below 200,000 -
------------- -------------
Total investments at December 31, 2005 $ 5,915,000 5,715,000
=============
Cash and other assets, less liabilities 112,124
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Net assets at December 31, 2005 $ 5,827,124
=============
SCHEDULE OF INVESTMENTS WITH $0 VALUE
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ -
51% Aug-04 Island Tribe, Inc., privately held; 0% of net assets;
distributor of extreme sports apparel 396,777 -
100% Costs associated with previously discontinued - -
businesses, Unboxed Distribution, Inc. and Total
Sports Distribution, Inc. 69,826 -
Discontinued investments (466,603)
------------- -------------
$ 200,000 $ -
============= =============
See accompanying notes to condensed financial statements.
9
GLOBAL BEVERAGE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS
(A) ORGANIZATION AND BUSINESS
- -----------------------------
The condensed financial statements include the accounts of Global Beverage
Solutions, Inc. ("Global" or the "Company"). Pursuant to Regulation S-X Rule 6,
the Company will operate on a non-consolidated basis. Operations of the
portfolio companies will be reported at the subsidiary level and only the
appreciation or impairment of these investments in portfolio companies will be
included in the Company's financial statements.
On June 19, 2003, the Company became a business development company" ("BDC")
pursuant to applicable provisions of the Investment Company Act of 1940. Until
June 19, 2003 the Company was a development stage enterprise under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises." Upon commencing
their operations as a BDC, the Company no longer qualified under the guidelines
of SFAS No. 7.
Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and
its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group, Ltd.
("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on
August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 6,500,000
(pre-stock split) shares of its common stock to the shareholders of the Company
in connection with the merger of the Company with MedEx Corp., whose name was
then changed to "Aussie Apparel Group, Ltd" on October 21, 2002. Since the
shareholders of the Company became the controlling shareholders of MedEx after
the exchange, the Company was treated as the acquirer for accounting purposes.
Accordingly, the financial statements, as presented here, are the historical
financial statements of the Company and include the transactions of MedEx only
from the date of acquisition, using reverse merger accounting.
The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective
November 3, 2003. On April 25, 2005, the Company changed its name to Pacific
Crest Investments and as a result of a conflict in name with an existing company
changed its name to Pacific Peak Investments on May 5, 2005. On October 10,
2005, the Company changed its name to Global Beverage Solutions, Inc. and began
trading on the OTC Bulletin Board under the symbol GBVS.OB.
On April 18, 2005, the Company completed a 2,500-to-1 reverse stock split. The
accompanying financial statements have been restated to reflect this stock split
for all periods presented.
10
(B) CONDENSED FINANCIAL STATEMENTS
- ----------------------------------
The accompanying condensed financial statements have been prepared by the
Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position as of March 31, 2006, and the results of operations and cash
flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
2005 audited financial statements on Form 10-K. The results of operations for
the interim periods presented are not necessarily indicative of the operating
results for the full years.
(C) RECLASSIFICATIONS
- ---------------------
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
(D) GOING CONCERN
- -----------------
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of March 31, 2006, the Company has an accumulated deficit of
$9,763,502 and had net losses totaling $106,212 for the three months ended March
31, 2006. Additionally, as of March 31, 2006, the Company had limited working
capital. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The Company intends to fund
operations through debt and equity financing arrangements which management
believes should be sufficient to fund its capital expenditures, working capital
and other cash requirements for the next twelve months. The successful outcome
of future activities cannot be determined at this time and there is no assurance
that, if achieved, the Company will have sufficient funds to execute its
intended business plan or generate positive operating results.
The Company currently estimates it will require a total of approximately
$1,100,000 to meet its operating cash flow requirements and its currently
committed follow-on investments in 2006. The operating cash flow requirement
estimate is approximately $435,000 and the committed follow-on investments are
approximately $665,000. As of March 31, 2006, including cash on-hand at December
31, 2005, the Company had raised approximately $860,000 of this amount and had
issued common stock in exchange for assumption of $104,000 of liabilities.
During April 2006, the Company raised an additional $60,000.
Management plans to take the following steps in response to these issues:
It has been determined that, as an investment company, the Company will
only invest in/acquire businesses which are cash flow positive and
profitable or businesses which projections indicate can become cash flow
11
positive and profitable within a reasonable period. These entities will
have good growth potential as a result of access to additional capital
and/or additional management acumen.
As part of this strategic process, the Company has decided to concentrate
its efforts in the beverage industry. It is believed that this new
direction will both reduce the risk for the Company and its shareholders as
well as provide the best opportunity for long-term shareholder value.
On March 14, 2006, the Company filed a new Offering Circular that
authorized the Company to raise up to $1,500,000 via sale of its common
stock with a minimum share price of $.90. As of March 31, 2006, the Company
had raised $641,000 against this limit.
Whereas the Company believes it will be successful with its plans, due to market
factors and economic conditions, no assurance can be given that financing will
be available on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
(2) INVESTMENTS
RUDY BEVERAGE, INC.
- -------------------
On November 17, 2005, the Company executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy Beverage, Inc. ("Rudy"), a Nevada corporation,
whereby the Company exchanged 6,000,000 shares of its common stock for 80% of
the issued and outstanding common stock of Rudy. The Company's investment was
valued at $4,860,000 based upon the trading price of the Company's common stock
on the date of the transaction. The Sellers can receive up to 10,000,000
additional shares of our common stock if Rudy achieves certain sales and net
revenue goals by the twelve month periods ended June 30, 2007 and 2008. Rudy was
founded by Rudy Ruettiger and Drew Carver to create a unique line of beverages
higher in nutritional value but lower in sugar than existing brands. Rudy
currently has developed two distinct products: Rudy Flying Colors, catering to
children K1 through 8; and Rudy Revolution, a sport drink aimed at athletes
across the board. The goal of the Rudy line of beverages is to create flavorful
juice blends, some of which will incorporate the hydration capabilities of EON
Structured Water. Rudy had product available for sale in April 2006. The Company
has made follow-on investments in the form of loans in the total amount of
$715,000 as of March 31, 2006, to Rudy.
EON BEVERAGE GROUP, INC.
- ------------------------
On July 8, 2005, we consummated the transactions contemplated by the Share
Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc. ("EON")
and, as a result, we invested $400,000 in exchange for 9% of the issued and
outstanding common stock of EON. EON manufactures structured water through a
proprietary process (patent pending) which alters the molecular structure of
12
purified water. Structured water is a relatively new concept which is generally
defined as water molecules organized through hydrogen bonding into distinct
molecular structures. This allows the users of EON water to achieve enhanced
intra-cellular hydration through significant absorption capability that is
crucial for maximum biological activity and improved athletic performance, based
on the representations of EON. The Company has made follow-on investments in the
form of loans in the total amount of $325,000 as of March 31, 2006, to EON.
On January 23, 2006, the Company executed a letter of intent with certain
shareholders of EON which could increase the Company's ownership of EON to 53%,
subject to due diligence and a definitive contract. The agreement has been
delayed pending completion of additional due diligence.
TITANIUM DESIGN STUDIO, INC.
- ----------------------------
On June 6, 2005, we signed a Share Purchase Agreement with Titanium Design
Studio, Inc. ("TDS"), a Nevada corporation, whereby we invested $200,000 in cash
in exchange for 8% of the issued and outstanding common stock of TDS. TDS has a
proprietary manufacturing process which allows it to cast precision titanium
jewelry resulting in a level of detail not obtainable by milling titanium. TDS
can economically produce and supply jewelry in shapes and patterns which were
previously considered to be impossible or uneconomical to manufacture. TDS
believes its technology has applications in other industries, including
aerospace, dentistry, sporting goods (fishing rods) and commemorative coins.
Early in 2006, TDS relocated its operations to Thailand in order to access
cheaper labor. The Board of Directors of the Company recorded a reserve in the
amount of $200,000 relating to this investment at December 31, 2005.
INVESTMENTS DISCONTINUED IN 2004 AND 2005
-----------------------------------------
UNBOXED DISTRIBUTION, INC.
- --------------------------
On August 21, 2003, the Company formed Unboxed Distribution, Inc. ("Unboxed")
for the purpose of owning and operating the Bluetorch license agreement.
On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed
Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha
Brands Inc., the Bluetorch licensor, and this agreement requires the Company's
subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of
Bluetorch apparel. In keeping with this agreement, the Company also agreed to
change its corporate name by April 20, 2005.
TOTAL SPORTS DISTRIBUTION, INC.
- -------------------------------
On October 21, 2003, the Company formed Total Sports Distribution, Inc. ("Total
Sports") for the purpose of owning and operating the True Skate Apparel brand
("TSABrand)". Furthermore, on February 19, 2004 Total Sports signed a definitive
agreement with Collective Licensing International, LLC to license the Airwalk
brand for apparel in the United States market.
On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports
Distribution, Inc., signed a Mutual Settlement and Release Agreement with
Collective Licensing International, LLC, the licensor of the Airwalk apparel
brand, and this agreement requires the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel.
13
ISLAND TRIBE, INC.
- ------------------
Effective August 1, 2004, the Company acquired a 51% interest in Island Tribe,
Inc., ("Island Tribe") a surf apparel company in exchange for 12,000 (30,000,000
shares pre-split) shares of the restricted common stock of the Company, which
was valued at $372,000, based on the current trading value of the Company's
common stock. Over the next 4 years, this purchase agreement provided for the
Company to receive an additional 24% ownership of Island Tribe, Inc. Effective
November 20, 2005, the Company exchanged its 51% ownership in Island Tribe for
the 12,000 restricted common shares originally issued to acquire Island Tribe.
VALUATION OF INVESTMENTS
As required by the SEC's Accounting Series Release ("ASR") 118, the investment
committee of the Company is required to assign a fair value to all investments.
To comply with Section 2(a) (41) of the Investment Company Act and Rule 2a-4
under the Investment Company Act, it is incumbent upon the board of directors to
satisfy themselves that all appropriate factors relevant to the value of
securities for which market quotations are not readily available have been
considered and to determine the method of arriving at the fair value of each
such security. To the extent considered necessary, the board may appoint persons
to assist them in the determination of such value and to make the actual
calculations pursuant to the board's direction. The board must also, consistent
with this responsibility, continuously review the appropriateness of the method
used in valuing each issue of security in the Company's portfolio. The directors
must recognize their responsibilities in this matter and whenever technical
assistance is requested from individuals who are not directors, the findings of
such individuals must be carefully reviewed by the directors in order to satisfy
themselves that the resulting valuations are fair.
No single standard for determining "fair value in good faith" can be laid down,
since fair value depends upon the circumstances of each individual case. As a
general principle, the current "fair value" of an issue of securities being
valued by the board of directors would appear to be the amount that the owner
might reasonably expect to receive for them upon their current sale. Methods
that are in accord with this principle may, for example, be based on a multiple
of earnings, or a discount from market of a similar freely traded security, or
yield to maturity with respect to debt issues, or a combination of these and
other methods. Some of the general factors that the directors should consider in
determining a valuation method for an individual issue of securities include: 1)
the fundamental analytical data relating to the investment, 2) the nature and
duration of restrictions on disposition of the securities, and 3) an evaluation
of the forces which influence the market in which these securities are purchased
and sold. Among the more specific factors which are to be considered are: type
of security, financial statements, cost at date of purchase, size of holding,
discount from market value of unrestricted securities of the same class at time
of purchase, special reports prepared by analysts, information as to any
transactions or offers with respect to the security, existence of merger
proposals or tender offers affecting the securities, price and extent of public
trading in similar securities of the issuer or comparable companies and other
relevant matters.
The board has arrived at the following valuation method for its investments.
Where there is not a readily available source for determining the market value
of any investment, either because the investment is not publicly traded or is
thinly traded and in absence of a recent appraisal, the value of the investment
shall be based on the following criteria:
14
1. Total amount of the Company's actual investment ("AI"). This amount
shall include all loans, purchase price of securities and fair value
of securities given at the time of exchange.
2. Total revenues for the preceding twelve months ("R").
3. Earnings before interest, taxes and depreciation ("EBITD")
4. Estimate of likely sale price of investment ("ESP")
5. Net assets of investment ("NA")
6. Likelihood of investment generating positive returns (going concern).
The estimated value of each investment shall be determined as follows:
- - Where no or limited revenues or earnings are present, then the value shall be
the greater of the investment's a) net assets, b) estimated sales price, or c)
total amount of actual investment.
- - Where revenues and/or earnings are present, then the value shall be the
greater of one-time (1x) revenues or three times (3x) earnings, plus the greater
of the net assets of the investment or the total amount of the actual
investment.
- - Under both scenarios, the value of the investment shall be adjusted down if
there is a reasonable expectation that the Company will not be able to recoup
the investment or if there is reasonable doubt about the investment's ability to
continue as a going concern.
Based on the previous methodology, the Company determined that its investments
should be valued at March 31, 2006 as follows:
o RUDY BEVERAGE, INC.
Rudy has not yet developed revenues and is currently testing its
products and developing marketing plans and made its first shipment in
April 2006. Accordingly, based upon the established valuation method,
Rudy is valued at its cost of $4,860,000 at March 31, 2006.
o EON BEVERAGE GROUP, INC.
EON has been involved in test marketing its structured water produce
and has had limited revenues during this testing phase. On January 23,
2006, the Company entered into a letter of intent with certain
shareholders of EON which would increase the Company's ownership from
9% to 53%, in exchange for 1,750,000 shares of Global common stock.
The agreement is subject to due diligence and a definitive contract.
In addition, EON expects to sell a substantial volume of its
structured water to Rudy for use in certain of its drinks.
Accordingly, based on the established valuation method, EON is valued
at its cost of $400,000 at March 31, 2006.
o TITANIUM DESIGN STUDIO, INC.
Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. As a result, the Company fully reserved its
investment of $200,000.
15
INVESTMENTS DISCONTINUED IN 2004 AND 2005
o ISLAND TRIBE, INC.
As noted above, the Company sold its interest in Island Tribe on
November 20, 2005.
o UNBOXED DISTRIBUTION, INC. AND TOTAL SPORTS DISTRIBUTION, INC.
Unboxed and Total Sports were fully reserved at December 31, 2004. the
Company realized an additional loss of $69,826 during the three month
period ended March 31, 2005, relating to liquidating these businesses.
(3) EQUITY
COMMON STOCK:
- -------------
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
During the three months ended March 31, 2006, the Company issued 641,000 shares
of its common stock in exchange for cash received by the Company of $641,000
pursuant to its current Offering Circular. In addition, 1,485,714 shares were
issued for $104,000 in accounts payable and accrued expenses pursuant to the
previous Offering Circular.
PREFERRED STOCK:
- ---------------
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value.
(4) COMMITMENTS AND CONTINGENCIES
General - The Company's commitments and contingencies include the usual
obligations of a BDC in the normal course of business. In the opinion of
management, these matters are not expected to have a material adverse effect on
the Company's financial position and results of operations. In addition, whereas
the Company may be indirectly impacted by claims and other obligations that
arise at its portfolio companies, management is not aware of any such claims.
Regulatory Compliance - As a BDC, the Company operates in a highly regulated
environment and must comply with the requirements of the 1940 Act. The Company
endeavors to be in compliance with the requirements of the Act as part of its
investment strategy and oversight functions. Whereas compliance with such laws
and regulations requires interpretation, the Company believes it is in
compliance with such requirements at March 31, 2006. However, no assurances can
be given that such requirements will not change or that differing
interpretations could result in non-compliance or that such matters, if they
arise, will be insignificant to the Company's financial position or results of
operations.
16
Legal - On September 23, 2005, Golden Gate Investors, Inc. filed a complaint for
breach of contract and specific performance of contract, Case No. GIC 854356 in
the Superior Court of the State of California, County of San Diego, Central
Division, against the Company. Plaintiff claims that they are owed $53,768 in
actual losses and has further claimed they had damages in the amount of $24,851
as a result of an alleged breach of contract by the Company. Plaintiff has been
granted a judgment in the amount of approximately $60,000, which amount was
included in accrued expenses on the statements of net assets at December 31,
2005. The $60,000 liability was a part of the $104,000 in accounts payable and
accrued expenses exchanged for the Company's common stock during the three
months ended March 31, 2006.
Other Items - The Company has a month-to-month agreement with its chief
executive officer which provides for payment of compensation of $10,000 per
month, commencing in January 2006.
As a part of its January 23, 2006, letter of intent to increase its ownership of
EON to 53%, the Company agreed to loan EON an additional $350,000. The loan was
scheduled to be advanced at the rate of $70,000 per month commencing February 1,
2006. The Company advanced $140,000 as a part of this agreement in January 2006.
The remaining $210,000 has been delayed pending completion of additional due
diligence.
The Company leases its office facility on a month-to-month basis at the rate of
$1,000 per month.
The Company has agreed to loan Rudy $525,000 during its initial start-up. As of
March 31, 2006, the Company had advanced $445,000 of this amount.
17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This information statement contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may", "will",
"should", "expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. There are a number of factors that could cause
our actual results to differ materially from those indicated by such
forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, we do not assume responsibility
for the accuracy and completeness of such forward-looking statements. We are
under no duty to update any of the forward-looking statements after the date of
this information statement to conform such statements to actual results.
Management's discussion and analysis should be read in conjunction with our
financial statements and the notes herein.
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations section discusses our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. On an on-going basis, we
will evaluate our estimates and judgments, including those related to revenue
recognition, valuation of investments in portfolio companies, accrued expenses,
financing operations, contingencies and litigation. We will base our estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources, such as the
investments in portfolio companies. These accounting policies are described at
relevant sections in this discussion and analysis and in the "Notes to Financial
Statements" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
18
Results of Operations
- ---------------------
Three months ended March 31, 2006 as compared to the three months ended March
31, 2005 -
o During the three months ended March 31, 2006, selling, general and
administrative expense declined $27,482 (19%) to $115,647 from
$143,129 in the prior year period. For the 2006 period, professional
services, including accounting, legal, investment and other declined
$13,091, accounting for approximately one-half of the decrease. The
remainder of the decrease is primarily due to lower travel and office
costs.
o During the 2005 period, we recorded $306,500 in interest expense
relating to amortization of the beneficial conversion feature of our
convertible debentures.
o During the 2005 period, we recorded a realized loss in the amount of
$69,826, which is related to the net shut-down costs for Unboxed and
Total Sports.
Liquidity and Capital Resources
- -------------------------------
o At March 31, 2006, we had net assets of $6,465,912 as compared to net
assets of $5,827,124 at December 31, 2005. During the 2006 period,
cash decreased $55,115 to $190,255 and our investments in portfolio
companies increased $585,000, net, from $5,715,000 to $6,300,000.
Liabilities have decreased $107,704 during 2006, primarily due to
issuing common stock for the assumption of $104,000 in liabilities.
Accordingly, the total asset increase of $531,084, when increased by
the decline in liabilities of $107,704 resulted in a increase in net
assets of $638,788.
o As of March 31, 2006, the Company had limited revenues and had an
accumulated deficit totaling $9,763,502 for the period from August 26,
2002 (inception) through March 31, 2006. Additionally, as of March 31,
2006, the Company had limited working capital. These factors, among
others, raise substantial doubt about the Company's ability to
continue as a going concern. The Company intends to fund operations
through debt and equity financing arrangements which management
believes should be sufficient to fund its capital expenditures,
working capital and other cash requirements for the next twelve
months. The successful outcome of future activities cannot be
determined at this time and there is no assurance that, if achieved,
the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
Our Plan of Operation for the Next Twelve Months
- ------------------------------------------------
Global provides equity and debt investment capital to fund growth, acquisitions
and recapitalizations of small market companies primarily located in the United
States. We are looking to invest in companies that are cash-flow positive or are
likely to become cash-flow positive in the foreseeable future based on sound
economic fundamentals. These entities will have the prospect for expansion as a
result of access to capital and/or additional management acumen provided by
Global. As part of this strategic process, we are looking for investment
opportunities in the beverage product categories and/or services that have the
19
potential for a positive return on investment, both in terms of current income
and capital appreciation. Our investments can take the form of common and
preferred stock and warrants or rights to acquire equity interests, senior and
subordinated loans, or convertible securities.
The Company currently estimates it will require a total of approximately
$1,100,000 to meet its operating cash flow requirements and its currently
committed follow-on investments in 2006. The operating cash flow requirement
estimate is approximately $435,000 and the committed follow-on investments are
approximately $665,000. As of March 31, 2006, including cash on-hand at December
31, 2005, the Company had raised approximately $860,000 of this amount and had
issued common stock in exchange for assumption of $104,000 of liabilities.
During April 2006, the Company raised an additional $60,000.
Regarding two of our portfolio investment companies, Unboxed and Total Sports,
it was clear that profitability in both entities was not possible in the near
future. It was determined that it was not in the best interests of our
shareholders to continue the flow of capital to these two portfolio investment
companies and these investments were written-off as of December 31, 2004.
In addition, it was determined that future prospects for Island Tribe were
unlikely to provide profitability in the foreseeable future sufficient to
provide a return on our investment. On November 20, 2005, we returned our 51%
interest in Island Tribe in exchange for the 12,000 restricted shares we had
originally issued for the acquisition.
Off Balance Sheet Arrangements
- ------------------------------
o None.
Contractual Obligations
- -----------------------
o None.
20
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's business activities contain elements of risk. Company management
considers the principal types of risk to be valuations of investments in
portfolio companies and fluctuations in interest rates. We consider the
management of risk essential to conducting our business. Accordingly, our risk
management systems and procedures are designed to identify and analyze our
risks, to set appropriate policies and limits and to continually monitor these
risks and limits by means of reliable administrative and information systems and
other policies and programs.
As a BDC, we plan to invest in liquid securities including debt and equity
securities of primarily private companies. Our investments are generally subject
to restrictions on resale and generally have no established trading market. Our
policy is to value our investments at fair value. There is no single standard
for determining fair value in good faith. As a result, determining fair value
requires that judgment be applied to the specific facts and circumstances of
each portfolio investment while employing a consistently applied valuation
process for each type of investment.
The board of directors determine fair value to be the amount for which an
investment could be exchanged in an orderly disposition over a reasonable period
of time between willing parties other than in a forced or liquidation sale. The
Company's valuation policy considers the fact that no ready market exists for
substantially all of the securities in which the Company invests. The Company's
valuation policy is intended to provide a consistent basis for determining the
fair value of the portfolio. The Company will record unrealized depreciation on
investments when the Company believes that an equity security is doubtful or
when the enterprise value of the company does not currently support the cost of
the Company's debt or equity investment. Conversely, the Company will record
unrealized appreciation if it determines that the underlying portfolio company
has appreciated in value and, therefore, the Company's equity security has also
appreciated in value. The values of any investments in public securities are
determined using quoted market prices discounted for restrictions on resale.
Without a readily ascertainable market value and because of the inherent
uncertainty of valuation, the fair value of the Company's investments in its
portfolio companies, determined in good faith by the board of directors, may
differ significantly from the values that would have been used had a ready
market existed for the investments and the differences could be material.
In addition, the illiquidity of the Company's existing investments may adversely
affect its ability to dispose of debt and equity securities at times when it may
be otherwise advantageous for the Company to liquidate such investments. In
addition, if the Company was forced to immediately liquidate some or all of the
investments in the portfolio companies, the proceeds of such liquidation may be
significantly less than the current value of such investments.
21
Because the Company may borrow money to make investments, the Company's net
investment income before net realized and unrealized gains or losses, or net
investment income, is dependent upon the difference between the rates at which
the Company borrows funds and the rate at which the Company invests these funds.
As a result, there can be no assurance that a significant change in market
interest rates will not have a material adverse effect on the Company's net
investment income. In periods of rising interest rates, the Company's cost of
funds would increase, which would reduce the Company's net investment income.
The Company may use a combination of long-term and short-term borrowings and
equity capital to finance its investing activities.
22
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based upon
that evaluation, the Company's board of directors and management, including the
CEO and CFO, concluded that, as of March 31, 2006, the Company's disclosure
controls and procedures were effective in alerting management on a timely basis
to material Company information that would be required to be included in our
periodic filings with the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that the other controls and procedures, that are
designed to ensure that information required to be disclosed in our periodic
filings with the SEC, are adequate.
Changes in Internal Control
At the time of its election as a business development company, the Company
adopted what it considered to be adequate controls and procedures (the "Old
Controls"). These Old Controls lacked time constraints that would force timely
posting of transactions and, as a result, the Company has been late with the
preparation of its financial disclosures on numerous occasions. The Company has
undertaken a review of its controls to determine what additional controls should
be implemented to insure timely filings in the future. The Company has
determined that it will retain outside `bookkeeping services' under a
contractual relationship that includes timeliness as a contractual obligation
and may adopt additional controls in the future. In the preliminary review of
the Old Controls, the Company determined that both assets of the Company and the
quality of its financial information are safeguarded but the issue of timeliness
has been problematic and requires being addressed. The Company designated its
Chief Executive Officer with the added responsibility of its Chief Compliance
Officer.
The Company updated its internal controls as of December 31, 2005, at which time
they were adopted by the Board of Directors. There were no significant changes
made in the Company's internal controls over financial reporting since that time
that have materially affected, or are reasonably likely to materially affect,
these internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
23
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
On September 23, 2005, Golden Gate Investors, Inc. filed a complaint for breach
of contract and specific performance of contract, Case No. GIC 854356 in the
Superior Court of the State of California, County of San Diego, Central
Division, against the Company. Plaintiff claims that they are owed $53,768 in
actual losses and has further claimed they had damages in the amount of $24,851
as a result of an alleged breach of contract by the Company. Plaintiff has been
granted a judgment in the amount of approximately $60,000, which amount was
included in accrued expenses on the statements of net assets at December 31,
2005. The $60,000 liability was a part of the $104,000 in accounts payable and
accrued expenses assumed in exchange for the Company's common stock during the
three months ended March 31, 2006, and will be paid by these shareholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In March 2006, the Company issued 641,000 shares of its common stock in exchange
for $641,000 in cash. In addition, the Company issued 1,485,714 shares of its
common stock in exchange for $104,000 in accounts payable and accrued expenses.
All of the shares issued were sold pursuant to an exemption from registration
under Section 4(2) promulgated under the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certifications pursuant to 18 U.S.C. Section 1350 Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certifications pursuant to 18 U.S.C. Section 1350 Section
906 of the Sarbanes-Oxley Act of 2002
24
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL BEVERAGE SOLUTIONS, INC.
Date: May 5, 2006 By: /s/ Richard T. Clark
--------------------------
Richard T. Clark,
Chief Executive Officer
25