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: SEPTEMBER 30, 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of September 30, 2006 was 43,661,515 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 September 30, 2006 and
December 31, 2005 3
Statements of Operations - For the Three Months Ended
September 30, 2006 and 2005 4
Statements of Operations - For the Nine Months Ended
September 30, 2006 and 2005 5
Statements of Cash Flows - For the Nine Months Ended
September 30, 2006 and 2005 6
Statements of Changes in Net Assets - For the Nine
Months Ended September 30, 2006 and 2005 7
Financial Highlights for the Nine Months Ended
September 30, 2006 and 2005 8
Schedule of Investments as of September 30, 2006 and
December 31, 2005 9-10
Notes to Financial Statements 11-19
Item 2: Managements Discussion and Analysis of Financial
Condition and Results of Operations 20-29
Item 3: Quantitative and Qualitative Disclosure about Market Risk 30
Item 4: Controls and Procedures 30
Part II Other Information 31-32
Item 1: Legal Proceedings
Item 1A: Risk Factors
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 33-36
2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Net Assets
September 30, 2006 and December 31, 2005
2006 2005
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(Unaudited)
ASSETS
Investments in controlled portfolio companies (cost $7,398,869
at September 30, 2006 and $5,715,000 at December 31, 2005) $ 6,387,369 $ 5,715,000
Investments in non-afilliated portfolio companies (cost $200,000
at September 30, 2006 and December 31, 2005) - -
------------- -------------
Total investments 6,387,369 5,715,000
Cash and cash equivalents 215,314 245,370
Interest and fees receivable from controlled portfolio companies 53,798 13,889
Deposits and prepaid expenses 9,387 13,072
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TOTAL ASSETS 6,665,868 5,987,331
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LIABILITIES
Secured convertible promissory notes payable (Note 3) 1,185,000 -
Accounts payable 93,423 25,857
Accrued expenses 22,838 134,350
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TOTAL LIABILITIES 1,301,261 160,207
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NET ASSETS $ 5,364,607 $ 5,827,124
============= =============
Commitments and contingencies (Note 6)
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;
43,661,515 and 41,312,391 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively 43,661 41,312
Additional paid in capital 16,965,284 15,443,102
Accumulated deficit:
Accumulated net operating loss (8,554,423) (7,578,875)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized depreciation of investments (1,211,500) (200,000)
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Net assets $ 5,364,607 $ 5,827,124
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Net asset value per share $ 0.1229 $ 0.1411
============= =============
See accompanying notes to condensed financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Operations
Three Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
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INCOME FROM OPERATIONS:
Interest income from portfolio companies $ 36,312 $ -
Management income from portfolio companies 6,000 -
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42,312 -
EXPENSES:
Officer and employee compensation 36,500 54,407
Director fees - 4,500
Professional fees 35,073 14,517
Shareholder services and communications 17,378 12,528
Interest expense (Note 3) 552,875 -
Bad debt expense - portfolio company 50,369 -
Other general and administrative expense 6,484 24,130
Loss on sale of furniture and fixtures - 12,874
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698,679 122,956
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LOSS BEFORE INCOME TAXES (656,367) (122,956)
INCOME TAXES - -
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NET LOSS FROM OPERATIONS (656,367) (122,956)
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NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on investments, net of income tax benefit
of $0 - -
Change in unrealized depreciation of controlled affiliate
investments, net of deferred tax benefit of -0- (1,011,500) (405,177)
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Net realized and unrealized losses (1,011,500) (405,177)
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NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,667,867) $ (528,133)
============= =============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.0382) $ (0.0188)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 43,638,996 28,074,230
============= =============
See accompanying notes to condensed financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Operations
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
---- ----
INCOME FROM OPERATIONS:
Interest income from portfolio companies $ 72,278 $ -
Management income from portfolio companies 18,000 -
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90,278 -
EXPENSES:
Officer and employee compensation 113,000 166,498
Director fees 1,500 13,800
Professional fees 185,322 314,052
Shareholder services and communications 66,183 19,040
Lawsuit settlement 78,000 -
Bad debt expense - portfolio company 50,369 -
Interest expense (Note 3) 552,875 306,500
Other general and administrative expense 18,577 94,540
Loss on sale of furniture and fixtures - 12,874
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1,065,826 927,304
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LOSS BEFORE INCOME TAXES (975,548) (927,304)
INCOME TAXES - -
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NET LOSS FROM OPERATIONS (975,548) (927,304)
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NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on investments, net of income tax benefit
of $0 for 2005 - (69,825)
Change in unrealized depreciation of controlled affiliate
investments, net of deferred tax benefit of -0- (1,011,500) (405,177)
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Net realized and unrealized losses (1,011,500) (475,002)
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NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,987,048) $ (1,402,306)
============= =============
NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE,
BASIC AND DILUTED $ (0.0464) $ (0.1184)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 42,847,225 11,848,650
============= =============
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $ (1,987,048) $ (1,402,306)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of investments 1,011,500 405,177
Bad debt expense - portfolio company 50,369 -
Depreciation - 12,546
Amortization of deferred financing costs - 28,125
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes 538,000 -
Beneficial conversion feature on convertible debentures - 234,926
Loss on sale of furniture and fixtures - 12,874
Changes in operating assets and liabilities:
Interest and fees receivable from portfolio companies (90,278) -
Deposits and prepaid expenses 3,684 47,368
Accounts payable and accrued expenses 117,586 67,409
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Net cash used in operating activities (356,187) (593,881)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to portfolio investment companies (1,683,869) (627,699)
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Net cash used in investing activities (1,683,869) (627,699)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 825,000 1,105,000
Proceeds from secured convertible promissory notes 1,185,000 -
Proceeds from convertible debenture - 50,000
Advance from related party - 11,500
Proceeds from sale of common stock - 91,019
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Net cash provided by financing activities 2,010,000 1,257,519
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Net increase (decrease) in cash and cash equivalents (30,056) 35,939
Cash and cash equivalents, beginning of period 245,370 43,466
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Cash and cash equivalents, end of period $ 215,314 $ 79,405
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ - $ -
Income taxes - -
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred series B to common stock $ - $ 57
Common stock issued upon conversion of convertible debentures - 293,750
Common stock issued for notes and other debts 161,531 -
See accompanying notes to condensed financial statements.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Changes in Net Assets
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
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CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (975,548) $ (927,304)
Net realized loss on sale of investments, net - (69,825)
Change in net unrealized depreciation of investments, net (1,011,500) (405,177)
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Net decrease in net assets from operations (1,987,048) (1,402,306)
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CAPITAL STOCK TRANSACTIONS:
Common stock issued for cash 825,000 1,196,019
Common stock issued for liabilities 161,531 -
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes 538,000 -
Conversion of convertible debentures - 293,751
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Net increase in net assets from stock transactions 1,524,531 1,489,770
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Net increase in net assets (462,517) 87,464
Net assets, beginning of period 5,827,124 396,001
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Net assets, end of period $ 5,364,607 $ 483,465
============= =============
See accompanying notes to condensed financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
Financial Highlights
Nine Months Ended September 30, 2006 and 2005
(Unaudited)
2006 2005
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PER SHARE INFORMATION
Net asset value, beginning of period $ 0.1411 $ 2.1302
Net decrease from operations (0.0228) (0.0783)
Net change in realized losses and unrealized
depreciation of investments, net (0.0236) (0.0401)
Net increase from stock transactions 0.0282 (1.9967)
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Net asset value, end of period $ 0.1229 $ 0.0151
============= =============
Per share market value:
Beginning of period $ 1.67 $ 13.00
End of period 0.60 0.69
Investment return, based on market price at end of period (1) -64.1% -94.7%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 5,364,607 $ 483,465
Average net assets 6,311,920 404,882
Annualized ratio of expenses to average net assets 23% 305%
Annualized ratio of net decrease in net assets from operations to
average net assets 42% 462%
Shares outstanding at end of period 44,784,750 31,975,969
Weighted average shares outstanding during period 42,847,225 11,848,650
(1) Periods of less than one year are not annualized
See accompanying notes to condensed financial statements.
8
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
September 30, 2006
(Unaudited)
DATE OF HISTORICAL FAIR % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCK IN PORTFOLIO COMPANIES
CONTROLLED
44% Jul-05 EON Beverage Group, Inc., privately held;
Mar-06 manufactures structured water pursuant to
proprietary process $ 1,011,500 $ - 0%
80% Nov-05 Rudy Beverage, Inc., privately held; manufactures
and sells beverages higher in nutritional value
and lower in sugar than existing brands 6,387,369 6,387,369 119%
------------ ------------ -------
7,398,869 6,387,369 119%
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NON-AFFILIATED
Investments with $0 value - see schedule below 200,000 -
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Total investments at September 30, 2006 $ 7,598,869 6,387,369 119%
===========
Cash and other assets, less liabilities (1,022,762) -19%
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Net assets at September 30, 2006 $ 5,364,607 100%
============ =======
SCHEDULE OF INVESTMENTS WITH $0 VALUE
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ -
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$ 200,000 $ -
=========== ============
See accompanying notes to condensed financial statements
9
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2005
DATE OF HISTORICAL FAIR % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCK IN PORTFOLIO COMPANIES
CONTROLLED
9% Jul-05 EON Beverage Group, Inc., privately held;
10% of net assets; manufactures structured water
pursuant to proprietary process $ 585,000 $ 585,000 10%
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 88%
------------ ------------ -------
5,715,000 5,715,000 98%
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NON-AFFILIATED
Investments with $0 value - see schedule below 200,000 - 0%
------------ ------------ -------
Total investments at December 31, 2005 $ 5,915,000 5,715,000 98%
============
Cash and other assets, less liabilities 112,124 2%
------------ -------
Net assets at December 31, 2005 $ 5,827,124 100%
============ =======
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.
10
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 2,600
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
again 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.
11
(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 September 30, 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 September 30, 2006, the Company has an accumulated deficit of
$11,644,338 and had net losses totaling $1,987,048 for the nine months ended
September 30, 2006. Additionally, as of September 30, 2006, the Company had a
working capital deficit of $1,022,762. 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.
As of September 30, 2006, the Company estimates it will require approximately
$100,000 to meet its operating cash flow requirements and approximately $350,000
to meet its currently committed follow-on investments for the balance of 2006.
The Company has cash of $215,314 at September 30, 2006, and management expects
to continue to raise funds as needed to meet its requirements.
Management plans to take the following additional steps in response to these
issues:
It has been determined that, as an investment company, the Company will
only invest in/acquire businesses which are cash flow positive and
profitable or businesses which projections indicate can become cash flow
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.
12
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 September 30, 2006, the
Company had sold 841,000 shares and raised $859,000 against this limit
(which includes cash in the amount of $781,000 and notes and other debts
of the Company in the amount of $78,000). During the first quarter of
2006, the Company completed a prior Offering Circular and sold 1,485,714
shares for $104,000, which included $44,000 in cash and $60,000 in other
debts of the Company. The Company has also issued 22,410 restricted shares
for $23,531 in debts of Rudy.
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 the Company's 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 may incorporate the hydration capabilities of EON
Structured Water (see below regarding discontinuance of support to EON by the
Company). Rudy began sales during the quarter ended June 30, 2006, of its 55oz
size drink and is currently expanding its production capability to include an
8oz size, a 16oz size, a 20oz size and a 32oz size. The Company has made
follow-on investments in the form of loans in the total amount of $1,527,369 as
of September 30, 2006, to Rudy.
13
EON BEVERAGE GROUP, INC.
On July 8, 2005, the Company consummated the transactions contemplated by the
Share Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc.
("EON") and, as a result, the Company invested $400,000 in exchange for 9% of
the issued and outstanding common stock of EON. EON manufactures structured
water through a proprietary process (patent pending) which alters the molecular
structure of purified water. Structured water is a relatively new concept which
is generally defined as water molecules organized through hydrogen bonding into
distinct molecular structures. This allows the users of EON water to achieve
enhanced intra-cellular hydration through significant absorption capability that
is crucial for maximum biological activity and improved athletic performance,
based on the representations of EON. The Company had made follow-on investments
in the form of loans in the total amount of $611,500 as of September 30, 2006,
to EON. These amounts were fully reserved at September 30, 2006, as discussed
below.
During the first quarter of 2006, shareholders of the Company contributed their
35% ownership of EON to the Company, which increased the Company's ownership to
44%. No value was attributed to the increased interest based on the Company's
valuation at the time. During September 2006, the Company determined that,
without substantial additional capital, EON had little chance of becoming
successful. With current capital committed to Rudy, the Company elected to
discontinue funding EON and fully reserved its investment. This amounted to
$1,011,500 which is included in change in unrealized depreciation of controlled
affiliate investments and $50,369 in bad debt expense.
TITANIUM DESIGN STUDIO, INC.
On June 6, 2005, the Company signed a Share Purchase Agreement with Titanium
Design Studio, Inc. ("TDS"), a Nevada corporation, whereby the Company invested
$200,000 in cash in exchange for 8% of the issued and outstanding common stock
of TDS. TDS has a proprietary manufacturing process which allows it to cast
precision titanium jewelry resulting in a level of detail not obtainable by
milling titanium. TDS can economically produce and supply jewelry in shapes and
patterns which were previously considered to be impossible or uneconomical to
manufacture. TDS believes its technology has applications in other industries,
including aerospace, dentistry, sporting goods (fishing rods) and commemorative
coins. Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. The Board of Directors of the Company recorded a 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 required 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.
14
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 required the Company's subsidiary, Total Sports
Distribution, Inc., to cease the selling and marketing of Airwalk apparel.
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 shares of
the restricted common stock of the Company, which was valued at $372,000, based
on the trading price of the Company's common stock on that date. 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:
15
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:
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 September 30, 2006 as follows:
o RUDY BEVERAGE, INC.
Rudy began its initial sales during the quarter ended June 30, 2006,
of its 55oz bottle size in a number of flavors. Rudy completed an
initial production run of its 8oz size in July and has plans to also
produce 16oz, 20oz and 32oz sizes to meet its market needs.
Accordingly, based upon the established valuation method, the
investment in Rudy is valued at its cost of $4,860,000 plus loans of
$1,527,369 at September 30, 2006.
16
o EON BEVERAGE GROUP, INC.
EON has been involved in test marketing its structured water and has
had limited revenues during this testing phase. During the first
quarter of 2006, shareholders of the Company contributed their stock
in EON to the Company, which increased the Company's ownership to
44%. While EON expected to sell a substantial volume of its
structured water to Rudy for use in certain of its drinks, the Board
of Directors has determined that EON will not achieve profitability
without substantial additional investment, which the Company is
unwilling to provide. Accordingly, the Company fully reserved its
investment of $400,000 and fully reserved its advances of $611,500
for a total unrealized depreciation expense of $1,011,500 at
September 30, 2006. Accounts receivable in the amount of $50,369 for
interest charges and management fees were also fully reserved at
September 30, 2006.
o TITANIUM DESIGN STUDIO, INC.
Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. As a result, the Company fully reserved its
investment of $200,000 at December 31, 2005.
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 $69,825 during the three
month period ended March 31, 2005, relating to liquidating these
businesses.
(3) SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
Secured convertible promissory notes payable at September 30, 2006 consist of
the following:
Principal balance of notes $ 1,185,000
===============
During the three months ended September 30, 2006, the Company issued 8%,
one-year secured convertible promissory notes payable ("Secured Notes") to a
group of investors in the aggregate amount of $1,185,000. The notes are
convertible into restricted common shares at an initial rate of $.50 per share.
Management has determined that these notes qualify as conventional convertible
debt pursuant to APB No. 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants" and EITF 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," accordingly the embedded conversion option is not a
derivative. The Company computed an intrinsic value of the beneficial conversion
of $538,000 based on the quoted stock price on the grant dates. The beneficial
conversion feature was credited to additional paid-in capital and charged to
interest expense when the agreement commenced since the Secured Notes can be
converted when issued.
17
The Secured Notes are collateralized by the Company's common stock investment in
Rudy Beverage, Inc.
The Secured Notes include certain anti-dilutive provisions, such as an
adjustment for stock splits and business combinations, adjustment for common
stock dividends and distributions, adjustment for issuance of additional shares
of common stock at a price per share less than the initial conversion price, and
issuance of common stock equivalents at a price per share less than the initial
conversion price.
(4) 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 nine months ended September 30, 2006, the Company issued a total of
2,349,124 shares of its common stock for cash in the amount of $825,000 and
notes and other debts of the Company in the amount of $161,531. At September 30,
2006, there are 43,661,515 shares issued and outstanding.
PREFERRED STOCK:
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. At September 30, 2006, there are no preferred shares issued or
outstanding.
(5) STOCK SUBSCRIPTIONS CONVERTED TO SECURED CONVERTIBLE PROMISSORY NOTES
During the second quarter, the Company received $350,000 pursuant to common
stock subscription agreements. The common stock was recorded as issued, based on
state law, at June 30, 2006. Subsequent to the issuance of the second quarter
Form 10Q, the Company mutually agreed with the investors to exchange these stock
subscriptions for the Secured Notes described in Note 3. The Secured Notes are
convertible into common shares at the rate of $.50 per share.
(6) 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.
18
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 September 30, 2006. However, no assurances
can be given that such requirements will not change or that differing
interpretations could result in non-compliance or that such matters, if they
arise, will be insignificant to the Company's financial position or results of
operations.
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 retired in exchange for 60,000 shares of the
Company's common stock on May 10, 2006.
In addition, the Company agreed to settle a lawsuit in which they were a
potential third party defendant. The Company accrued the $78,000 settlement
amount in May 2006. On May 10, 2006, the Company issued 60,000 shares of its
common stock in exchange for this liability.
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. Effective September 1, 2006, this amount was
reduced to $6,000 per month.
The Company leases its office facility on a month-to-month basis at the rate of
$1,000 per month.
As of September 30, 2006, the Company has advanced Rudy $1,527,369. Based on
current projections, the Company expects it will provide an additional $700,000
until Rudy reaches break-even. Of this amount, approximately $350,000 is
expected to be required during the balance of 2006.
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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.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005 -
o During the 2006 period we recognized revenue in the amount of
$36,312 in interest income from portfolio companies and $6,000 in
management fees from portfolio companies. We had no revenue during
the 2005 period.
o During the three months ended September 30, 2006, total expenses
increased $575,723 (468%) to $698,679 from $122,956 in the prior
year period.
1. During the 2006 period, professional fees were $35,073 (142%)
higher than in the 2005 period. The increase is primarily due
to reversing previously accrued consulting fees associated
with our investments in 2005 in the amount of $25,000.
2. Officer and employee compensation declined $17,907 (33%) in
2006 from the amount in 2005. The decline includes a smaller
staff and use of a part-time consultant for CFO in 2006.
3. Other general and administrative expense declined $17,646
(73%) in 2006 as compared to 2005. This decline is primarily
due to lower costs for insurance, rent, communications and
travel in 2006 than experienced in 2005.
4. The Company accrued $14,875 in interest expense on its new
debt during the quarter ended September 30, 2006 and recorded
the intrinsic value of the beneficial conversion feature
relating to its secured convertible promissory notes payable
("Secured Notes") in the amount of $538,000.
5. The Company recognized $50,369 in bad debt expense in 2006
related to its investment in EON which was fully reserved in
September 2006.
NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005 -
o During the 2006 period we recognized revenue in the amount of
$77,278 in interest income from portfolio companies and $18,000 in
management fees from portfolio companies. We had no revenue during
the 2005 period.
o Total expense amounted to $1,065,826 in 2006 as compared to $927,304
in 2005, an increase of $138,522 (15%).
1. Officer and employee compensation declined $53,498 (32%) due
to a smaller staff in 2006 and use of a part-time consultant
for CFO.
2. Professional fees declined $128,730 (41%) in 2006 from the
amount in 2005, primarily due to elimination of the consulting
fees associated with our investments in 2005 in the amount of
$121,578.
3. Other general and administrative expenses declined $75,963
(80%) in the 2006 period primarily due to lower insurance,
rent, communications and travel costs.
4. We had interest expense of $306,500 in 2005 relating to the
beneficial conversion feature of convertible debentures which
were all retired in 2005 and interest expense of $552,875 in
2006 on the Secured Notes added during the quarter ended
September 30, 2006 (including the intrinsic value of the
beneficial conversion feature on the Secured Notes in the
amount of $538,000).
5. The Company recognized $50,369 in bad debt expense in 2006
related to its investment in EON which was fully reserved in
September 2006.
6. As more fully discussed in the notes to the condensed
financial statements, we recorded a lawsuit settlement expense
of $78,000 during the second quarter of the 2006 period.
21
LIQUIDITY AND CAPITAL RESOURCES
o At September 30, 2006, we had net assets of $5,364,607 as compared
to net assets of $5,827,124 at December 31, 2005. During the 2006
period, cash decreased $30,056 to $215,314, interest and fees
receivable from controlled portfolio companies increased from
$13,889 to $53,798 (our income during the period, less bad debt
expense of $50,369) and our investments in portfolio companies
increased $672,369 ($1,683,869 increase less reserve on EON of
$1,011,500) net, from $5,715,000 to $6,387,369. Liabilities have
increased $1,141,054 during 2006, primarily due to issuing
$1,185,000 in Secured Notes during the three months ended September
30, 2006. Accordingly, the total asset increase of $678,537, when
reduced by the increase in liabilities of $1,141,054 resulted in a
decrease in net assets of $462,517.
o As of September 30, 2006, the Company had limited revenues and had
an accumulated deficit totaling $11,644,338. Additionally, as of
September 30, 2006, the Company had a working capital deficit of
$1,022,762. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The
Company intends to fund operations through debt and equity financing
arrangements which management believes should be sufficient to fund
its capital expenditures, working capital and other cash
requirements for the next twelve months. The successful outcome of
future activities cannot be determined at this time and there is no
assurance that, if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating
results.
NET ASSET VALUE
As a BDC, certain of our activities and disclosures are made in reference to Net
Asset Value ("NAV") which is the value of our portfolio assets less debt and
preferred stock. This may be viewed, simply and generalized, as the value of our
assets available to our common stock holders. As of the date of the financial
information in this report, the value of our portfolio of assets including
investments and securities in portfolio companies and cash is $6,665,868 and
from this, are subtracted liabilities and debts of $1,301,261. There are no
shares of preferred stock outstanding but the rights of preferred stockholders
would be included if there were. The NAV is therefore $5,364,607. The Net Asset
Value per Share ("NAV/S") is calculated by dividing the NAV by the number of
common shares outstanding (43,661,515). The NAV/S is $.1229.
22
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
MANAGEMENT'S ANALYSIS OF BUSINESS
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will seek to structure
our investments so as to take into account the uncertain and potentially
variable financial performance of our portfolio companies. This should enable
our portfolio companies to retain access to committed capital at different
stages in their development and eliminate some of the uncertainty surrounding
their capital allocation decisions. We will calculate rates of return on
invested capital based on a combination of up-front commitment fees, current and
deferred interest rates and residual values, which may take the form of common
stock, warrants, equity appreciation rights or future contract payments. We
believe that this flexible approach to structuring investments will facilitate
positive, long-term relationships with our portfolio companies and enable us to
become a preferred source of capital to them. We also believe our approach
should enable debt financing to develop into a viable alternative capital source
for funding the growth of target companies that wish to avoid the dilutive
effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return
requirements. These requirements, which are standard for most private equity and
venture capital funds, typically require that these funds return to investors
the initial capital investment after a pre-agreed time, together with any
capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through
mergers, public equity offerings or other liquidity events more quickly than
they otherwise might, which can result in a lower overall return to investors
and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are
subject to these risks if these funds demand a return on their investments in
the portfolio companies. We believe that our flexibility to take a longer-term
view should help us to maximize returns on our invested capital while still
meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and
directors, we have solid contacts and sources from which to generate investment
opportunities. These contacts and sources include:
o public and private companies,
o investment bankers,
o attorneys,
o accountants,
o consultants, and
o commercial bankers.
However, we cannot assure you that such relationships will lead to the
origination of debt or other investments.
23
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in
real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments, or in
connection with foreclosure on collateral;
o own the securities of companies that are in the business of buying,
selling or developing real estate; or
o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt
instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks
associated with publicly-traded securities issued by our portfolio
companies;
o purchase securities on margin (except to the extent that we may
purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity
contracts, including futures contracts except where necessary in
working out a distressed loan; or in those investment situations
where hedging the risks associated with interest rate fluctuations
is appropriate, and, in such cases, only after all necessary
registrations or exemptions from registration with the Commodity
Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide general
guidelines for our investment decisions; however, we caution readers that not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will also require the
portfolio companies to have in place proper incentives to induce management to
succeed and to act in concert with our interests as investors, including having
significant equity interests. We intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative use
of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some
kind of proprietary sustainable advantage with respect to their competition.
Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its
products, and
o a demonstrable and sustainable marketing advantage over its
competition
24
Marketing strategies impose unusual burdens on management to be continuously
ahead of its competition, either through some kind of technological advantage or
by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations -
We will focus on target companies that are profitable or nearly profitable on an
operating cash flow basis. Typically, we would not expect to invest in start-up
companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective
target company, in addition to generating sufficient cash flow to cover its
operating costs and service its debt, demonstrate an ability to increase its
revenues and operating cash flow over time. The anticipated growth rate of a
prospective target company will be a key factor in determining the value that we
ascribe to any warrants or other equity securities that we may acquire in
connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will
analyze the potential for that company to increase the liquidity of its common
equity through a future event that would enable us to realize appreciation, if
any, in the value of our equity interest. Liquidity events may include:
o an initial public offering,
o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or
o a purchase of our equity position by the portfolio company or one of
its stockholders.
We may acquire warrants to purchase equity securities and/or convertible
preferred stock of the eligible portfolio companies in connection with providing
financing. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
will be negotiated individually with each eligible portfolio company, and will
likely be affected by the price and terms of securities issued by the eligible
portfolio company to other venture capitalists and other holders. We anticipate
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the eligible portfolio company most
recently issued its equity securities or, if a new equity offering is imminent,
the price at which such new equity securities will be offered. The equity
securities for which the warrant will be exercised generally will be common
stock of which there may be one or more classes or convertible preferred stock.
Substantially all the warrants and underlying equity securities will be
restricted securities under the 1933 Act at the time of the issuance. We will
generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain
circumstances, to include some or all of the securities owned by us
in a registration statement filed by the eligible portfolio company,
or
25
o in circumstances, "demand" registration rights permitting us under
certain circumstances, to require the eligible portfolio company to
register the securities under the 1933 Act, in some cases at our
expense. We will generally negotiate net issuance provisions in the
warrants, which will allow us to receive upon exercise of the
warrant without payment of any cash a net amount of shares
determined by the increase in the value of the issuer's stock above
the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an
asset-based lender, the prospective liquidation value of the assets, if any,
collateralizing any debt securities that we hold will be an important factor in
our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable,
o inventory, and
o equipment,
and intangible assets, such as:
o intellectual property,
o customer lists,
o networks, and
o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
o company and technology assessments,
o evaluation of existing management team,
o market analysis,
o competitive analysis,
o evaluation of management, risk analysis and transaction size,
o pricing, and
o structure analysis.
Much of this work will be done by management and professionals who are well
known by management. The criteria delineated above provide general parameters
for our investment decisions. We intend to pursue an investment strategy by
further imposing such criteria and reviews that best insures the value of our
investments. As unique circumstances may arise or be uncovered, not all of such
criteria will be followed in each instance but the process provides a guideline
by which investments can be prudently made and managed. Upon successful
completion of the preliminary evaluation, we will decide whether to deliver a
non-binding letter of intent and move forward towards the completion of a
transaction.
26
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including
any financial or strategic sponsor;
o Review of financing history;
o Review of management's track record with respect to:
o product development and marketing,
o mergers and acquisitions,
o alliances,
o collaborations,
o research and development outsourcing and other strategic
activities;
o Assessment of competition; and
o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans;
o Detailed analysis of financial performance;
o Development of pro forma financial projections; and
o Review of assets and liabilities, including contingent liabilities,
if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at
the following:
o Evaluation of intellectual property position;
o Review of existing customer or similar agreements and arrangements;
o Analysis of core technology;
o Assessment of collaborations;
o Review of sales and marketing procedures; and
o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the
target company's management team. Also, in cases in which a target company is at
a mature stage of development and if other matters that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will continuously monitor our portfolio companies in order to
determine whether they are meeting our financing criteria and their respective
business plans. We may decline to make additional investments in portfolio
companies that do not continue to meet our financing criteria. However, we may
choose to make additional investments in portfolio companies that do not do so,
but we believe that we will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team and consulting professionals, who are well known by
our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
27
We will use several methods of evaluating and monitoring the performance and
fair value of our debt and equity positions, including but not limited to the
following:
o Assessment of business development success, including product
development, financings, profitability and the portfolio company's
overall adherence to its business plan;
o Periodic and regular contact with portfolio company management to
discuss financial position, requirements and accomplishments;
o Periodic and regular formal update interviews with portfolio company
management and, if appropriate, the financial or strategic sponsor;
o Attendance at and participation in board meetings;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may provide, significant managerial assistance to our portfolio
companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies,
o participating in their board and management meetings,
o consulting with and advising their officers, and
o providing other organizational and financial guidance.
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership
percentage received will vary depending on the maturity of the portfolio
company, the quality and completeness of the portfolio company's management
team, the perceived business opportunity, the capital required compared to
existing capital, and the potential return. Although investment amounts will
vary considerably, we expect that the average investment, including follow-on
investments, will be between $25,000 and $5,000,000.
COMPETITION
Our primary competitors to provide financing to target companies will include
private equity and venture capital funds, other equity and non-equity based
investment funds and investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of these entities have substantially greater financial
and managerial resources than we will have. We believe that our competitive
advantage with regard to quality target companies relates to our ability to
negotiate flexible terms and to complete our review process on a timely basis.
We cannot assure you that we will be successful in implementing our strategies.
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CURRENT PORTFOLIO COMPANIES
o RUDY BEVERAGE, INC.
Rudy began its initial sales during the quarter ended June 30, 2006,
of its 55oz bottle size in a number of flavors. Rudy completed an
initial production run of its 8oz size in July and has plans to also
produce 16oz, 20oz and 32oz sizes to meet its market needs. Rudy is
now completing its full product line and is establishing itself for
a potentially significant expansion in sales.
o EON BEVERAGE GROUP, INC.
EON has been involved in test marketing its structured water and has
had limited revenues during this testing phase. While EON expected
to sell a substantial volume of its structured water to Rudy for use
in certain of its drinks, the Board of Directors has determined that
EON will not achieve profitability without substantial additional
investment, which the Company is unwilling to provide. Accordingly,
the Company fully reserved its investment of $400,000 and fully
reserved its advances of $611,500 for a total unrealized
depreciation expense of $1,011,500 at September 30, 2006. Accounts
receivable in the amount of $50,369 for interest charges and
management fees was also fully reserved at September 30, 2006.
o TITANIUM DESIGN STUDIO, INC.
Early in 2006, TDS relocated its operations to Thailand in order to
access cheaper labor. As a result, the Company fully reserved its
investment of $200,000 at December 31, 2005.
OFF BALANCE SHEET ARRANGEMENTS
o None.
CONTRACTUAL OBLIGATIONS
o None.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates
and prices. We are primarily exposed to equity price risk, which
arises from exposure to securities that represent an ownership
interest in our portfolio companies. The value of our equity
securities and our other investments are based on quoted market
prices or our Board of Directors' good faith determination of their
fair value (which is based, in part, on quoted market prices).
Market prices of common equity securities, in general, are subject
to fluctuations, which could cause the amount to be realized upon
the sale or exercise of the instruments to differ significantly from
the current reported value. The fluctuations may result from
perceived changes in the underlying economic characteristics of our
portfolio companies, the relative price of alternative investments,
general market conditions and supply and demand imbalances for a
particular security.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive
Officer ("CEO") 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 September 30, 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
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.
The Company designated its Chief Executive Officer with the added responsibility
of its Chief Compliance Officer.
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PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 1A: RISK FACTORS
Not applicable.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2006, we issued a total of 24,685
shares of our common stock. Pursuant to our current offering circular, we issued
10,000 shares for $10,000 in cash and we issued 14,685 shares in exchange for
notes and other debts of Rudy in the amount of $15,419. In addition, stock
subscription agreements for $350,000, which were reported in the second quarter
as a sale of 350,000 shares of common stock, were exchanged during the third
quarter for secured convertible promissory notes.
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
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL BEVERAGE SOLUTIONS, INC.
Date: November 17, 2006 By: /s/ Richard T. Clark
---------------------------
Richard T. Clark,
Chief Executive Officer
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