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, 2007
Commission File Number: 000-28027
GLOBAL BEVERAGE SOLUTIONS, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 90-0093439
------ ----------
(State or Jurisdiction of (IRS Employer ID No)
Incorporation or Organization)
2 S. UNIVERSITY DR., SUITE 220, PLANTATION, FL 33324
----------------------------------------------------
(Address of principal executive office) (Zip code)
(954) 473-0850
--------------
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of March 31, 2007 was 147,267,501 shares.
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX
Page
No.
------
Part I Financial Information
Item 1: Condensed Financial Statements
Statements of Net Assets as of March 31, 2007 and
December 31, 2006 3
Statements of Operations - For the Three Months
Ended March 31, 2007 and 2006 4
Statements of Cash Flows - For the Three Months
Ended March 31, 2007 and 2006 5
Statements of Changes in Net Assets - For the
Three Months Ended March 31, 2007 and 2006 6
Financial Highlights - For the Three Months Ended
March 31, 2007 and 2006 7
Schedule of Investments as of March 31, 2007 and
December 31, 2006 8-9
Notes to Financial Statements 10-20
Item 2: Managements Discussion and Analysis of Financial
Condition and Results of Operations 21-30
Item 3: Quantitative and Qualitative Disclosure about
Market Risk 31
Item 4: Controls and Procedures 31-32
Part II Other Information
Item 1: Legal Proceedings 33
Item 1A: Risk Factors 33
Item 2: Unregistered Sales of Equity Securities and Use
of Proceeds 33
Item 3: Defaults Upon Senior Securities 33
Item 4: Submission of Matters to a Vote of Security Holders 33
Item 5: Other Information 33
Item 6: Exhibits 33
Signatures 34
Exhibits 35-36
2
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF NET ASSETS
MARCH 31, 2007 AND DECEMBER 31, 2006
2007 2006
-------------- --------------
(Unaudited)
ASSETS
Investments in portfolio companies:
Controlled affiliate (cost $22,250,952 at March 31, 2007 and
$6,669,760 at December 31, 2006) $ 17,156,192 $ 1,575,000
Non-controlled affiliate (cost $1,011,500 at March 31, 2007 and
December 31, 2006 - -
Unaffiliated issuers (cost $200,000 at March 31, 2007 and
December 31, 2006) - -
-------------- --------------
Total investments 17,156,192 1,575,000
Cash and cash equivalents 69,381 472
Deposits and prepaid expenses 2,516 474
-------------- --------------
TOTAL ASSETS 17,228,089 1,575,946
-------------- --------------
LIABILITIES
Notes payable 4,388,582 1,335,000
Accounts payable 40,244 103,486
Accrued expenses 128,010 48,064
-------------- --------------
TOTAL LIABILITIES 4,556,836 1,486,550
-------------- --------------
NET ASSETS $ 12,671,253 $ 89,396
============== ==============
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;
147,267,501 and 43,665,067 shares issued and outstanding at
March 31, 2007 and December 31, 2006, respectively 147,267 43,665
Additional paid in capital 30,968,809 17,130,808
Stock subscription receivable (1,024,112) -
Deferred option compensation (101,124) (121,349)
Accumulated deficit:
Accumulated net operating loss (9,134,912) (8,779,053)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized depreciation of investments (6,306,260) (6,306,260)
-------------- --------------
Net assets $ 12,671,253 $ 89,396
============== ==============
Net asset value per share $ 0.0860 $ 0.0020
============== ==============
See accompanying notes to condensed financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
-------------- --------------
INCOME FROM OPERATIONS:
Interest income from controlled affiliates $ - $ 1,257
Interest income from non-controlled affiliates - 2,179
Management income from non-controlled affiliates - 6,000
-------------- --------------
- 9,436
-------------- --------------
EXPENSES:
Officer and employee compensation and benefits 100,204 44,109
Director fees 3,000 1,500
Professional fees 134,070 42,581
Shareholder services and communications 19,415 21,582
Interest expense 66,042 -
Amortization of intrinsic value of common stock options 20,225 -
Other general and administrative expense 12,903 5,876
-------------- --------------
355,859 115,648
-------------- --------------
Loss before income taxes and realized and unrealized losses (355,859) (106,212)
Income taxes - -
-------------- --------------
NET LOSS FROM OPERATIONS (355,859) (106,212)
-------------- --------------
NET REALIZED AND UNREALIZED LOSSES:
Net realized loss on investments, net of income tax benefits of $0 - -
Change in unrealized depreciation of portfolio investments, net
of deferred tax benefit of $0 - -
-------------- --------------
Net realized and unrealized losses - -
-------------- --------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (355,859) $ (106,212)
============== ==============
Net decrease in net assets from operations per share, basic
and diluted $ (0.0043) $ (0.0026)
============== ==============
Weighted average shares outstanding 83,730,378 41,319,513
============== ==============
See accompanying notes to condensed financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets from operations $ (355,859) $ (106,212)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Amortization of intrinsic value of common stock options 20,225 -
Common stock issued for services 1,500 -
Amortization of notes payable discount 17,046 -
Changes in operating assets and liabilities: - -
Interest and fees receivable from portfolio companies - (9,436)
Deposits and prepaid expenses (2,042) 8,237
Accounts payable and accrued expenses 17,361 (47,704)
-------------- --------------
Net cash used in operating activities (301,769) (155,115)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to portfolio companies (725,976) (585,000)
-------------- --------------
Net cash used in investing activities (725,976) (585,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 1,955,783 685,000
Repayment of notes payable (859,129) -
-------------- --------------
Net cash provided by financing activities 1,096,654 685,000
-------------- --------------
Net increase (decrease) in cash and cash equivalents 68,909 (55,115)
Cash and cash equivalents, beginning of period 472 245,370
-------------- --------------
Cash and cash equivalents, end of period $ 69,381 $ 190,255
============== ==============
Supplemental Cash Flow Information:
Cash paid for interest and income taxes:
Interest $ 8,666 $ -
Income taxes - -
Non-cash investing and financing activities:
Common stock issued for:
Legal settlements $ - $ 60,000
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. 625,000 -
Acquisition of Beverage Networks of Maryland, Inc. 8,896,500 -
Acquisition of Aqua Maestro, Inc. 1,431,250 -
Liability of Rudy Beverage, Inc. 7,458 -
Notes payable issued as partial consideration for:
Acquisition of Beverage Networks of Maryland, Inc. 3,704,652 -
Acquisition of Aqua Maestro, Inc. 190,356 -
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CHANGES IN NET ASSETS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
-------------- --------------
CHANGES IN NET ASSETS FROM OPERATIONS:
Net loss from operations $ (355,859) $ (106,212)
Net realized loss on sale of investments, net - -
Change in net unrealized depreciation of investments, net - -
-------------- --------------
Net decrease in net assets from operations (355,859) (106,212)
-------------- --------------
CAPITAL STOCK TRANSACTIONS:
Common stock issued for:
Cash 1,955,783 685,000
Amounts due Rudy Ruettiger by Rudy Beverage, Inc. 625,000 -
Acquisition of Beverage Network of Maryland, Inc. 8,896,500 -
Acquisition of Aqua Maestro, Inc. 1,431,250 -
Services 1,500 -
Notes and other debts 7,458 60,000
Amortization of intrinsic value of common stock options 20,225 -
-------------- --------------
Net increase in net assets from stock transactions 12,937,716 745,000
-------------- --------------
Net increase in net assets 12,581,857 638,788
Net assets, beginning of period 89,396 5,827,124
-------------- --------------
Net assets, end of period $ 12,671,253 $ 6,465,912
============== ==============
See accompanying notes to condensed financial statements.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
(UNAUDITED)
2007 2006
-------------- --------------
PER SHARE INFORMATION
Net asset value, beginning of period $ 0.0020 $ 0.1411
Net decrease from operations (0.0043) (0.0026)
Net change in realized losses and unrealized
depreciation of investments, net - -
Net increase from stock transactions 0.0883 0.0104
-------------- --------------
Net asset value, end of period $ 0.0860 $ 0.1489
============== ==============
Per share market value:
Beginning of period $ 0.42 $ 1.67
End of period 0.28 1.15
Investment return, based on market price at end of period (1) -34.5% -31.1%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 12,671,253 $ 6,465,912
Average net assets 5,786,062 5,962,391
Annualized ratio of expenses to average net assets 25% 8%
Annualized ratio of net decrease in net assets from
operations to average net assets -25% -7%
Shares outstanding at end of period 147,267,501 43,439,105
Weighted average shares outstanding during period 83,730,378 41,319,513
(1) Periods of less than one year are not annualized
See accompanying notes to condensed financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 2007
DATE OF HISTORICAL FAIR % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCK IN UNAFFILIATED ISSUERS
- ------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
============== ============= ======
COMMON STOCK IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc., privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 - 0%
============== ============= ======
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ---------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc., privately held; sells and
manufactures beverages higher in nutritional
value and lower in sugar than most existing
brands 7,303,043 2,208,283 17%
100% Feb-07 Beverage Network of Maryland, Inc., wholly-
owned subsidiary; distributor of beverages in
the Mid-Atlantic States 13,015,496 13,015,496 103%
100% Mar-07 Aqua Maestro, Inc., wholly-owned subsidiary;
engaged in wholesale and retail distribution
of domestic and imported bottled water 1,932,413 1,932,413 15%
-------------- ------------- ------
Total investments at December 31, 2006 $ 22,250,952 17,156,192 135%
==============
Cash and other assets, less liabilities (4,484,939) -35%
------------- ------
Net assets at December 31, 2006 $ 12,671,253 100%
============= ======
See accompanying notes to financial statements.
8
GLOBAL BEVERAGE SOLUTIONS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2006
DATE OF HISTORICAL FAIR % NET
SHARES ACQUISITION COST VALUE ASSETS
COMMON STOCK IN UNAFFILIATED ISSUERS
- ------------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
============== ============= ======
COMMON STOCK IN NON-CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- -------------------------------------------------------------
44% Jul-05 EON Beverage Group, Inc., privately held;
manufactures structured water pursuant to
proprietary process 1,011,500 - 0%
============== ============= ======
COMMON STOCK IN CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ---------------------------------------------------------
80% Nov-05 Rudy Beverage, Inc., privately held; sells and
manufactures beverages higher in nutritional
value and lower in sugar than most existing
brands 6,669,760 1,575,000 1762%
--------------
Total investments at December 31, 2006 $ 6,669,760 1,575,000 1762%
==============
Cash and other assets, less liabilities (1,485,604) -1662%
------------- ------
Net assets at December 31, 2006 $ 89,396 100%
============= ======
See accompanying notes to 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.
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.
On October 10, 2005, the Company changed its name to Global Beverage Solutions,
Inc. and began trading on the OTC Bulletin Board under the symbol GBVS.OB.
Beginning with the original incorporation on January 29, 1977, the Company has
had several name changes, including, Mercury Software, MedEx Corp., Aussie
Apparel Group, Ltd., Bluetorch, Inc., Pacific Crest Investments and Pacific Peak
Investments.
(B) CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements have been prepared by the
Company 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, 2007, 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,
2006 audited financial statements on Form 10-K. The results of operations for
the interim periods presented are not necessarily indicative of the operating
results for the full years.
(C) RECLASSIFICATIONS
Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.
10
(D) GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. As of March 31, 2007, the Company has an accumulated deficit of
$17,319,587 and had net losses totaling $355,859 for the three months ended
March 31, 2007. Additionally, as of March 31, 2007, the Company had total assets
excluding investments of $71,897 and had total liabilities of $4,556,836. 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
$1,800,000 to meet its operating cash flow requirements and its currently
committed follow-on investments for the balance of 2007. The total requirements
include the $1,050,000 in debt service requirements; $150,000 in follow-on
investments to the portfolio companies; and an estimated $600,000 for working
capital and overhead requirements. The Company expects to collect the $1,024,112
stock subscription receivable and will need to secure additional funding of
approximately $800,000 to meet its anticipated requirements. If the Company is
unable to obtain the additional funding, it may be forced to substantially
reduce follow-on investments, overhead and possible restructure existing debt.
It is expected that the $1,335,000 convertible notes will be converted into the
Company's common stock.
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.
As part of this strategic process, the Company previously decided to
concentrate its efforts in the beverage industry. It is believed that this
direction will both reduce the risk for the Company and its shareholders
as well as provide the best opportunity for long-term shareholder value.
In addition, with the acquisitions completed in the first quarter, the
Company has moved away from start-up companies and is concentrating
efforts in companies that have some established track-record.
On January 3, 2007, the Company filed notification of a de minimus sale
under Regulation E of the Securities Act of 1933. A total of 700,000
shares of common stock were sold for $87,500. A second notification was
filed under Regulation E on January 3, 2007 but this Offering was
withdrawn and no sales were made pursuant to this offering. An Amended
Offering Circular was filed on February 5, 2007. As of March 31, 2007,
21,333,333 shares had been sold for net cash proceeds of $1,868,283 and a
stock subscription receivable of $1,024,112.
11
Whereas 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
BEVERAGE NETWORK OF MARYLAND, INC. ("BNM")
On February 23, 2007, the Company completed the purchase of BNM from XStream
Beverage Network, Inc. ("XStream"). The transaction was structured as a merger
of BNM into the Company's wholly owned subsidiary Global Merger Corp., a Nevada
corporation, pursuant to the Agreement and Plan of Merger between the parties
dated January 31, 2007, and as amended and completed on February 23, 2007.
Based in Jessup, Maryland, BNM engages in the distribution of beverages in the
Mid-Atlantic States.
As a part of the transaction we issued 60,500,000 shares of our common stock and
a $2,000,000 note payable to XStream. At closing, we paid $229,000 on the note
and pursuant to the agreements will pay 40% of any subsequent cash proceeds
received from the February 5, 2007, 1-E Offering. The remaining note balance is
to be paid in monthly installments of $25,000 commencing September 1, 2007.
Additionally, if we raise any equity capital while the note is still
outstanding, we are required to apply 35% of the net proceeds to reduce the
note.
Summary financial information for BNM as of March 31, 2007 and for the three
months then ended is as follows:
Current assets $ 937,313
Property and equipment, net 81,893
Intangible assets, net 1,735,578
Other assets 46,372
-----------------
Total assets $ 2,801,156
=================
Current liabilities $ 832,720
Amounts due Global 3,398,505
-----------------
Total liabilities 4,231,225
Stockholder's deficit (1,430,069)
-----------------
Total liabilities and stockholder's deficit $ 2,801,156
=================
Revenues $ 2,176,702
=================
Net loss $ 168,878
=================
12
Management reviewed the accounting guidance related to the acquisition of BNM,
which included EITF 90-13 and originally concluded that in future financial
statements of the Company this transaction would be reported as a reverse
merger. Upon discussion with the SEC, it was determined that EITF 90-13 would
not act to control the status of a business development company under the
Investment Company Act of 1940 and the Company's financial statements should be
presented as investment company financial statements, notwithstanding a change
in control of the Company.
AQUA MAESTRO, INC. ("AM")
On March 29, 2007, the Company completed the purchase of AM from the
shareholders of AM. The transaction was structured as a merger of AM into the
Company's wholly owned subsidiary, Global Beverage Acquisition Corp., a Florida
corporation, pursuant to the Agreement and Plan of Merger and Reorganization
between the parties dated March 29, 2007.
With the business office in Boca Raton, Florida and logistics in Fort
Lauderdale, Florida, AM is engaged in the wholesale and retail distribution of
domestic and imported bottled water, comprising forty-four brands and over one
hundred-seventy different items. The wholesale client base is across North
America and the Caribbean, including well-known hotels and resorts. In its
retail home delivery division, AM provides product through its Internet site
aquamaestro.com.
Consideration for the acquisition of AM includes $500,000 in cash, 10,000,000
shares of our common stock and an earn-out. The cash is payable $300,000 at
closing and the balance in equal monthly installments of $22,222 beginning April
15, 2007. The earn-out is a percentage of defined gross profit equal to 10% of
calendar 2008 gross profit, 5% of calendar 2009 gross profit and 3% of calendar
2010 gross profit.
Summary financial information for AM as of March 31, 2007 and for the three
months then ended is as follows:
Current assets $ 430,102
Property and equipment, net 17,387
Other assets 27,220
-----------------
Total assets $ 474,709
=================
Accounts payable and accrued expenses $ 202,536
Note payable 150,000
Amounts due Global 50,000
-----------------
Total liabilities 402,536
Stockholder's equity 72,173
-----------------
Total liabilities and stockholder's equity $ 474,709
=================
Revenues $ 607,552
=================
Net earnings $ 44,307
==================
13
RUDY PARTNERS, LTD. ("PARTNERS")
On January 18, 2007, the Company executed an agreement with Partners wherein the
Company agreed to sell its 80% interest in Rudy for an 8% secured promissory
note in the amount of $6,000,000 plus assumption of the advances and receivables
owed to the Company by Rudy. The agreement closed on May 11, 2007. The note will
be collateralized by 11,000,000 shares of the Company's common stock and will be
payable in six annual installments of $1,000,000 commencing January 31, 2008. In
addition, Partners agreed to convert any notes payable by Rudy to the Company,
once Partners becomes publicly-traded or a subsidiary of a publicly-traded
company, into no more than 20% of the common stock of the publicly traded
entity, based upon the market value of the public entity's common stock.
RUDY BEVERAGE, INC. ("RUDY")
On November 17, 2005, the Company executed a Stock Purchase Agreement with the
shareholders ("Sellers") of Rudy, a Nevada corporation, whereby the Company
exchanged 6,000,000 shares of its common stock for 80% of the issued and
outstanding common stock of Rudy. The Company's investment was valued at
$4,860,000 based upon the trading price of the Company's common stock on the
date of the transaction. The Sellers were eligible to receive up to 10,000,000
additional shares of the Company's common stock if Rudy achieved certain sales
and net revenue goals by the twelve month periods ending June 30, 2007 and 2008.
Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line of
beverages higher in nutritional value but lower in sugar than existing brands.
Rudy currently has developed two distinct products: Rudy Flying Colors, catering
to children K through 8; and Rudy Revolution, a sport drink aimed at athletes
across the board. The goal of the Rudy line of beverages is to create flavorful
juice blends lower in sugar that existing brands.
The Company originally valued its investment in Rudy at December 31, 2006, based
on the estimated value of the collateral on the Partners note of $3,375,000,
resulting in an original adjustment of $3,294,760 as unrealized depreciation of
the investment. Subsequent to December 31, 2006, based on the decline in the
collateral on the Partners note, that is, the shares of the Company's common
stock, the Company recorded an additional adjustment of $1,800,000 under
guidance in FAS 5 for the additional decline in the Company's common stock as of
April 24, 2007.
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.
14
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 portfolio
investments in September 2006.
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.
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.
15
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:
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, 2007 as follows:
o BEVERAGE NETWORK OF MARYLAND, INC.
BNM is an operating beverage distribution company which the Company
acquired on February 23, 2007. Based on the established valuation
method, the investment in BNM is valued at its original cost of
$12,601,152 plus follow-on investments of $414,344 at March 31,
2007.
16
o AQUA MAESTRO, INC.
AM operates as a wholesale and retail distributor of domestic and
imported bottled water. The acquisition was completed on March 29,
2007. Accordingly, based upon the established valuation method, the
investment in AM is valued at its original cost of $1,921,606 plus
follow-on investments of $10,807 at March 31, 2007.
o RUDY BEVERAGE, INC.
The Company valued its investment in Rudy based on the estimated
value of the collateral on the Partners note discussed above. The
value at December 31, 2006, was based on the value of the Company's
common stock at April 24, 2007. Accordingly, the investment is
valued at the same $2,200,000 value plus follow-on investments of
$8,283 at March 31, 2007.
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.
(3) NOTES PAYABLE
Notes payable at March 31, 2007, consist of the following:
17
Secured convertible promissory notes payable (1) 1,335,000
Note payable to XStream Beverage Network, Inc. with interest
at 6%; collateralized the note requires payment of 40% of
any cash proceeds received by Global from the February 5,
2007 1-E Offering with the remainder payable in monthly
installments of $25,000 commencing September 1, 2007. In a
Master Security Agreement, Global granted XStream a
continuing security interest in substantially all of its
assets as collateral as long as any obligation arising
from the Agreement and Plan of Merger, as amended, remains
outstanding. In addition, pursuant to a Stock Pledge
Agreement, the BNM stock owned by Global is pledged as
additional collateral on the obligations and BNM
guarantees the Global obligations to XStream. 1,316,528
Non-interest bearing note payable to Master Distributor
which was assumed as a part of the acquisition of BNM.
Monthly payments of $83,333 for two years; discounted at
12%; penalty provisions require a late charge of $5,000
plus interest of 1 1/2% per month for all payments made
after the 15th of the month; the Company guarantees that
the note, with a face value of $2,000,000 plus the
proceeds from 4,000,000 shares of its common stock will
equal at least $3,000,000 total 1,546,698
Non-interest bearing notes payable to the former
stockholders of Aqua Maestro, Inc.; payable in 9 equal
monthly payments of $22,222 commencing on April 15, 2007;
discounted at 12%; unsecured 190,356
--------------
Total notes payable 4,388,582
==============
(1) During the year ended December 31, 2006, the Company issued 8%, one-year
secured convertible promissory notes payable ("Secured Notes") to a group of
investors in the aggregate amount of $1,335,000. The notes were convertible into
restricted common shares at an initial rate of $.50 per share. Management has
determined that these notes qualify as conventional convertible debt pursuant to
APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants" and EITF 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," accordingly
the embedded conversion option is not a derivative. The Company computed an
intrinsic value of the beneficial conversion of $538,000 based on the quoted
stock price on the grant dates. The beneficial conversion feature was credited
to additional paid-in capital and charged to interest expense when the agreement
commenced since the Secured Notes could be converted when issued.
The Secured Notes include certain anti-dilutive provisions, such as an
adjustment for stock splits and business combinations, adjustment for common
stock dividends and distributions, adjustment for issuance of additional shares
of common stock at a price per share less than the initial conversion price, and
issuance of common stock equivalents at a price per share less than the initial
conversion price.
18
As of March 31, 2007, Secured Notes in the aggregate principal amount of
$1,335,000 are in default as the interest due on November 1, 2006 and February
1, 2007, was not paid. The default rate of interest of 12% is in effect for
these Secured Notes.
As of December 31, 2006, the Secured Notes were convertible into common stock at
the rate of $.50 per share. In January 2007, the Company sold 700,000 shares of
its common stock pursuant to its Offering Circular dated January 3, 2007, for
$87,500 ($.125/share). Accordingly, pursuant to the Secured Note agreement, the
conversion rate for the Secured Notes became $.125 on that date.
Face value of discounted notes payable $ 2,025,000
Discount (287,946)
--------------
Present value of discounted notes $ 1,737,054
==============
(4) EQUITY
COMMON STOCK:
The Company is authorized to issue up to 950,000,000 shares of common stock, par
value $.001. At March 31, 2007, there were 147,267,501 shares issued and
outstanding.
Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of
its common stock. Immediately following this reverse stock split, there were
218,500 issued and outstanding common shares of the Company.
PREFERRED STOCK:
The Company is authorized to issue up to 50,000,000 shares of preferred stock at
$0.001 par value. At September 30, 2006, there are no preferred shares issued or
outstanding.
OPTIONS:
The Company recognizes amortization expense on a straight-line basis over the
requisite service period for each stock option grant. Total stock-based
amortization expense recognized was $20,225 and $0, during the three months
ended March 31, 2007 and 2006, respectively.
(5) 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
19
and regulations requires interpretation, the Company believes it is in
compliance with such requirements at September 30, 2006. However, no assurances
can be given that such requirements will not change or that differing
interpretations could result in non-compliance or that such matters, if they
arise, will be insignificant to the Company's financial position or results of
operations.
SEC - On March 26, 2007, the Company received comments from the SEC regarding
its Amended 1-E Offering filed on February 5, 2007 ("Amended Offering"). In its
comments, the SEC raised issues not only with the Amended Offering, but previous
1-E Offerings as well. A primary issue was its belief that the Company was not
eligible to take advantage of the Regulation E Exemption afforded 1940 Act
companies. After reviewing the SEC comments, the Company has engaged outside
counsel to determine the applicability of the comments set forth in the SEC
Letter. Presently, our attorneys have responded and begun discussions with the
SEC regarding resolution. Although the Company believes that it is currently in
compliance with the Investment Company Act of 1940, it, and its attorneys are
presently working with the SEC to resolve all issues raised in a manner which is
satisfactory to the SEC. In the event the SEC is correct in its assessment that
the Company was not eligible for using the Regulation E exemption, the Company
could be required to offer rescission to each subscriber of the Company's 1-E
offerings from September 15, 2005 to January 19, 2007.
OTHER ITEMS - The Company had a month-to-month agreement with its chief
executive officer which provided for payment of compensation of $6,000 per
month, which terminated when he resigned in January 2007. The Company's current
CEO receives a salary of $185,000 per annum.
The Company leases its office facility on a month-to-month basis at the rate of
$4,570 per month.
The Company currently estimates it will require a total of approximately
$1,800,000 to meet its operating cash flow requirements and its currently
committed follow-on investments for the balance of 2007. The total requirements
include $1,050,000 in loan payments; $150,000 in follow-on investments to the
portfolio companies; and an estimated $600,000 for working capital and overhead
requirements.
GUARANTY - The Company issued a non-interest bearing note in the amount of
$2,000,000 together with 4,000,000 shares of the Company's common stock to a
creditor of BNM. The Company has guaranteed that the creditor will receive at
least $3,000,000 from the note and the stock, providing the shares are sold by
February 23, 2009. The Company also guaranteed payment of salary to two
individuals by BNM in the total amount of $134,000 for 2007 and $26,000 for
2008, 2009 and 2010 and guaranteed reimbursement of expenses and payment of
health benefits for the same periods.
20
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 discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. On an on-going basis, we
will evaluate our estimates and judgments, including those related to revenue
recognition, valuation of investments in portfolio companies, accrued expenses,
financing operations, contingencies and litigation. We will base our estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The most significant
accounting estimates inherent in the preparation of our financial statements
include estimates as to the appropriate carrying value of certain assets and
liabilities which are not readily apparent from other sources, such as the
investments in portfolio companies. These accounting policies are described at
relevant sections in this discussion and analysis and in the "Notes to Financial
Statements" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
21
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2007 AND 2006 -
o During the 2006 period we recognized revenue in the amount of $3,436
in interest income from portfolio companies and $6,000 in management
fees from portfolio companies. We had no revenue during the 2007
period.
o During the three months ended March 31, 2007, total expenses
increased $240,211 (208%) to $355,859 from $115,648 in the prior
year period.
1. Officer and employee compensation increased $56,095 (127%) in
2007 from the amount in 2006. The increase includes a larger
staff and a full time CEO commencing in February 2007. In
addition, there was $25,000 in additional compensation for the
former CEO for his assistance in completing the acquisition of
BNM.
2. Professional fees increased $91,489 (215%) in the 2007 period
from the 2006 period. The principal cause of the increase is
the acquisition of BNM and AM.
3. Other general and administrative expense increased $7,027
(120%) in 2007 as compared to 2006. The increase is primarily
due to opening the new office location in Florida and the
duplication of certain costs during the relocation.
4. The Company recorded interest expense in the amount of $66,042
in the 2007 period and had no interest in the 2006 period. All
debt has been added during the last 12 months.
5. The Company recognized $20,225 in amortization of the
intrinsic value of common stock options in 2007. There were no
options outstanding during the 2006 period.
LIQUIDITY AND CAPITAL RESOURCES
o At March 31, 2007, we had net assets of $12,671,253 as compared to
net assets of $89,396 at December 31, 2006. During the 2007 period,
total assets increased $15,652,143 and total liabilities increased
$3,070,286, a net increase of $12,581,857. The principal increase in
assets was the increase in investments of $15,581,192. The principal
increase in liabilities was the increase in notes payable of
$3,053,582. The Company now has substantially increased assets;
however, the debt service requirements include a total of
approximately $1,050,000 in debt payments due over the balance of
2007. The Company's principal source of funding will be the
collection of the stock subscription receivable of $1,024,112 and
new equity funding.
The Company currently estimates it will require a total of
approximately $1,800,000 to meet its operating cash flow
requirements and its currently committed follow-on investments for
the balance of 2007. The total requirements include the $1,050,000
in debt service requirements; $150,000 in follow-on investments to
the portfolio companies; and an estimated $600,000 for working
capital and overhead requirements. The Company expects to collect
the $1,024,112 stock subscription receivable and will need to secure
additional funding of approximately $800,000 to meet its anticipated
22
requirements. If they are unable to obtain the additional funding,
they may be forced to substantially reduce follow-on investments,
overhead and possible restructure existing debt. It is expected that
the $1,335,000 convertible notes will be converted into the
Company's common stock.
o As of March 31, 2007, the Company had limited revenues and had an
accumulated deficit totaling $17,319,587. Additionally, as of March
31, 2007, the Company had total assets excluding investments of
$71,897 and total liabilities of $4,556,836. These factors, among
others, raise substantial doubt about the Company's ability to
continue as a going concern. The Company intends to fund operations
through debt and equity financing arrangements which management
believes should be sufficient to fund its capital expenditures,
working capital and other cash requirements for the next twelve
months. The successful outcome of future activities cannot be
determined at this time and there is no assurance that, if achieved,
the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.
NET ASSET VALUE
As a BDC, certain of our activities and disclosures are made in reference to Net
Asset Value ("NAV") which is the value of our portfolio assets less debt and
preferred stock. This may be viewed, simply and generalized, as the value of our
assets available to our common stock holders. As of the date of the financial
information in this report, the value of our portfolio of assets including
investments and securities in portfolio companies and cash is $17,228,089 and
from this, are subtracted liabilities and debts of $4,556,836. There are no
shares of preferred stock outstanding but the rights of preferred stockholders
would be included if there were. The NAV is therefore $12,671,253. The Net Asset
Value per Share ("NAV/S") is calculated by dividing the NAV by the number of
common shares outstanding (147,267,501). The NAV/S is $.0860.
23
OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
MANAGEMENT'S ANALYSIS OF BUSINESS
We will have significant relative flexibility in selecting and structuring our
investments. We will not be subject to many of the regulatory limitations that
govern traditional lending institutions such as banks. We will seek to structure
our investments so as to take into account the uncertain and potentially
variable financial performance of our portfolio companies. This should enable
our portfolio companies to retain access to committed capital at different
stages in their development and eliminate some of the uncertainty surrounding
their capital allocation decisions. We will calculate rates of return on
invested capital based on a combination of up-front commitment fees, current and
deferred interest rates and residual values, which may take the form of common
stock, warrants, equity appreciation rights or future contract payments. We
believe that this flexible approach to structuring investments will facilitate
positive, long-term relationships with our portfolio companies and enable us to
become a preferred source of capital to them. We also believe our approach
should enable debt financing to develop into a viable alternative capital source
for funding the growth of target companies that wish to avoid the dilutive
effects of equity financings for existing equity holders.
Longer Investment Horizon - We will not be subject to periodic capital return
requirements. These requirements, which are standard for most private equity and
venture capital funds, typically require that these funds return to investors
the initial capital investment after a pre-agreed time, together with any
capital gains on such capital investment. These provisions often force such
funds to seek the return of their investments in portfolio companies through
mergers, public equity offerings or other liquidity events more quickly than
they otherwise might, which can result in a lower overall return to investors
and adversely affect the ultimate viability of the affected portfolio companies.
Because we may invest in the same portfolio companies as these funds, we are
subject to these risks if these funds demand a return on their investments in
the portfolio companies. We believe that our flexibility to take a longer-term
view should help us to maximize returns on our invested capital while still
meeting the needs of our portfolio companies.
Established Deal Sourcing Network - We believe that, through our management and
directors, we have solid contacts and sources from which to generate investment
opportunities. These contacts and sources include:
o public and private companies,
o investment bankers,
o attorneys,
o accountants,
o consultants, and
o commercial bankers.
However, we cannot assure you that such relationships will lead to the
origination of debt or other investments.
24
INVESTMENT CRITERIA
As a matter of policy, we will not purchase or sell real estate or interests in
real estate or real estate investment trusts except that we may:
o purchase and sell real estate or interests in real estate in
connection with the orderly liquidation of investments, or in
connection with foreclosure on collateral;
o own the securities of companies that are in the business of buying,
selling or developing real estate; or
o finance the purchase of real estate by our portfolio companies.
We will limit our investments in more traditional securities (stock and debt
instruments) and will not, as a matter of policy:
o sell securities short except with regard to managing the risks
associated with publicly-traded securities issued by our portfolio
companies;
o purchase securities on margin (except to the extent that we may
purchase securities with borrowed money); or
o engage in the purchase or sale of commodities or commodity
contracts, including futures contracts except where necessary in
working out a distressed loan; or in those investment situations
where hedging the risks associated with interest rate fluctuations
is appropriate, and, in such cases, only after all necessary
registrations or exemptions from registration with the Commodity
Futures Trading Commission have been obtained.
Prospective Portfolio Company Characteristics - We have identified several
criteria that we believe will prove important in seeking our investment
objective with respect to target companies. These criteria will provide general
guidelines for our investment decisions; however, we caution readers that not
all of these criteria will be met by each prospective portfolio company in which
we choose to invest.
Experienced Management - We will generally require that our portfolio companies
have an experienced president or management team. We will also require the
portfolio companies to have in place proper incentives to induce management to
succeed and to act in concert with our interests as investors, including having
significant equity interests. We intend to provide assistance in this area
either supervising management or providing management for our portfolio
companies.
Products or Services - We will seek companies that are involved in products or
services that do not require significant additional capital or research
expenditures. In general, we will seek target companies that make innovative use
of proven technologies or methods.
Proprietary Advantage - We expect to favor companies that can demonstrate some
kind of proprietary sustainable advantage with respect to their competition.
Proprietary advantages include, but are not limited to:
o patents or trade secrets with respect to owning or manufacturing its
products, and
o a demonstrable and sustainable marketing advantage over its
competition
25
Marketing strategies impose unusual burdens on management to be continuously
ahead of its competition, either through some kind of technological advantage or
by being continuously more creative than its competition.
Profitable or Nearly Profitable Operations Based on Cash Flow from Operations -
We will focus on target companies that are profitable or nearly profitable on an
operating cash flow basis. Typically, we would not expect to invest in start-up
companies unless there is a clear exit strategy in place.
Potential for Future Growth - We will generally require that a prospective
target company, in addition to generating sufficient cash flow to cover its
operating costs and service its debt, demonstrate an ability to increase its
revenues and operating cash flow over time. The anticipated growth rate of a
prospective target company will be a key factor in determining the value that we
ascribe to any warrants or other equity securities that we may acquire in
connection with an investment in debt securities.
Exit Strategy - Prior to making an investment in a portfolio company, we will
analyze the potential for that company to increase the liquidity of its common
equity through a future event that would enable us to realize appreciation, if
any, in the value of our equity interest. Liquidity events may include:
o an initial public offering,
o a private sale of our equity interest to a third party,
o a merger or an acquisition of the portfolio company, or
o a purchase of our equity position by the portfolio company or one of
its stockholders.
We may acquire warrants to purchase equity securities and/or convertible
preferred stock of the eligible portfolio companies in connection with providing
financing. The terms of the warrants, including the expiration date, exercise
price and terms of the equity security for which the warrant may be exercised,
will be negotiated individually with each eligible portfolio company, and will
likely be affected by the price and terms of securities issued by the eligible
portfolio company to other venture capitalists and other holders. We anticipate
that most warrants will be for a term of five to ten years, and will have an
exercise price based upon the price at which the eligible portfolio company most
recently issued its equity securities or, if a new equity offering is imminent,
the price at which such new equity securities will be offered. The equity
securities for which the warrant will be exercised generally will be common
stock of which there may be one or more classes or convertible preferred stock.
Substantially all the warrants and underlying equity securities will be
restricted securities under the 1933 Act at the time of the issuance. We will
generally negotiate for registration rights with the issuer that may provide:
o "piggyback" registration rights, which will permit us under certain
circumstances, to include some or all of the securities owned by us
in a registration statement filed by the eligible portfolio company,
or
26
o in circumstances, "demand" registration rights permitting us under
certain circumstances, to require the eligible portfolio company to
register the securities under the 1933 Act, in some cases at our
expense. We will generally negotiate net issuance provisions in the
warrants, which will allow us to receive upon exercise of the
warrant without payment of any cash a net amount of shares
determined by the increase in the value of the issuer's stock above
the exercise price stated in the warrant.
Liquidation Value of Assets - Although we do not intend to operate as an
asset-based lender, the prospective liquidation value of the assets, if any,
collateralizing any debt securities that we hold will be an important factor in
our credit analysis. We will emphasize both tangible assets, such as:
o accounts receivable,
o inventory, and
o equipment,
and intangible assets, such as:
o intellectual property,
o customer lists,
o networks, and
o databases.
INVESTMENT PROCESS
Due Diligence - If a target company generally meets the characteristics
described above, we will perform initial due diligence, including:
o company and technology assessments,
o evaluation of existing management team,
o market analysis,
o competitive analysis,
o evaluation of management, risk analysis and transaction size,
o pricing, and
o structure analysis.
Much of this work will be done by management and professionals who are well
known by management. The criteria delineated above provide general parameters
for our investment decisions. We intend to pursue an investment strategy by
further imposing such criteria and reviews that best insures the value of our
investments. As unique circumstances may arise or be uncovered, not all of such
criteria will be followed in each instance but the process provides a guideline
by which investments can be prudently made and managed. Upon successful
completion of the preliminary evaluation, we will decide whether to deliver a
non-binding letter of intent and move forward towards the completion of a
transaction.
27
In our review of the management team, we look at the following:
o Interviews with management and significant shareholders, including
any financial or strategic sponsor;
o Review of financing history;
o Review of management's track record with respect to:
o product development and marketing,
o mergers and acquisitions,
o alliances,
o collaborations,
o research and development outsourcing and other strategic
activities;
o Assessment of competition; and
o Review of exit strategies.
In our review of the financial conditions, we look at the following:
o Evaluation of future financing needs and plans;
o Detailed analysis of financial performance;
o Development of pro forma financial projections; and
o Review of assets and liabilities, including contingent liabilities,
if any, and legal and regulatory risks.
In our review of the products and services of the portfolio company, we look at
the following:
o Evaluation of intellectual property position;
o Review of existing customer or similar agreements and arrangements;
o Analysis of core technology;
o Assessment of collaborations;
o Review of sales and marketing procedures; and
o Assessment of market and growth potential.
Upon completion of these analyses, we will conduct on-site visits with the
target company's management team. Also, in cases in which a target company is at
a mature stage of development and if other matters that warrant such an
evaluation, we will obtain an independent appraisal of the target company.
ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES
Monitoring - We will continuously monitor our portfolio companies in order to
determine whether they are meeting our financing criteria and their respective
business plans. We may decline to make additional investments in portfolio
companies that do not continue to meet our financing criteria. However, we may
choose to make additional investments in portfolio companies that do not do so,
but we believe that we will nevertheless perform well in the future.
We will monitor the financial trends of each portfolio company to assess the
appropriate course of action for each company and to evaluate overall portfolio
quality. Our management team and consulting professionals, who are well known by
our management team, will closely monitor the status and performance of each
individual company on at least a quarterly and, in some cases, a monthly basis.
28
We will use several methods of evaluating and monitoring the performance and
fair value of our debt and equity positions, including but not limited to the
following:
o Assessment of business development success, including product
development, financings, profitability and the portfolio company's
overall adherence to its business plan;
o Periodic and regular contact with portfolio company management to
discuss financial position, requirements and accomplishments;
o Periodic and regular formal update interviews with portfolio company
management and, if appropriate, the financial or strategic sponsor;
o Attendance at and participation in board meetings;
o Review of monthly and quarterly financial statements and financial
projections for portfolio companies.
Managerial Assistance - As a business development company, we will offer, and in
many cases may provide, significant managerial assistance to our portfolio
companies. This assistance will typically involve:
o monitoring the operations of our portfolio companies,
o participating in their board and management meetings,
o consulting with and advising their officers, and
o providing other organizational and financial guidance.
INVESTMENT AMOUNTS
The amount of funds committed to a portfolio company and the ownership
percentage received will vary depending on the maturity of the portfolio
company, the quality and completeness of the portfolio company's management
team, the perceived business opportunity, the capital required compared to
existing capital, and the potential return. Although investment amounts will
vary considerably, we expect that the average investment, including follow-on
investments, will be between $25,000 and $5,000,000.
COMPETITION
Our primary competitors to provide financing to target companies will include
private equity and venture capital funds, other equity and non-equity based
investment funds and investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty
finance companies. Many of these entities have substantially greater financial
and managerial resources than we will have. We believe that our competitive
advantage with regard to quality target companies relates to our ability to
negotiate flexible terms and to complete our review process on a timely basis.
We cannot assure you that we will be successful in implementing our strategies.
29
OFF BALANCE SHEET ARRANGEMENTS
o None.
CONTRACTUAL OBLIGATIONS
o None.
30
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from changes in market rates and prices.
We are primarily exposed to equity price risk, which arises from exposure to
securities that represent an ownership interest in our portfolio companies. The
value of our equity securities and our other investments are based on quoted
market prices or our Board of Directors' good faith determination of their fair
value (which is based, in part, on quoted market prices). Market prices of
common equity securities, in general, are subject to fluctuations, which could
cause the amount to be realized upon the sale or exercise of the instruments to
differ significantly from the current reported value. The fluctuations may
result from perceived changes in the underlying economic characteristics of our
portfolio companies, the relative price of alternative investments, general
market conditions and supply and demand imbalances for a particular security.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
The Company's board of directors and management, including the Chief Executive
Officer ("CEO"), evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as defined in Rule 13(a)-15(e) and
15(d)-15(e) of the Exchange Act. Based upon that evaluation, the Company's board
of directors and management, including the CEO, concluded that, as of March 31,
2007, the Company's disclosure controls and procedures were effective in
alerting management on a timely basis to material Company information that would
be required to be included in our periodic filings with the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO has
also concluded that the other controls and procedures, that are designed to
ensure that information required to be disclosed in our periodic filings with
the SEC, are adequate.
Changes in Internal Control
The Company updated its internal controls as of December 31, 2005, at which time
they were adopted by the Board of Directors. There were no significant changes
made in the Company's internal controls over financial reporting since that time
that have materially affected, or are reasonably likely to materially affect,
these internal controls. Thus, no corrective actions, with regard to significant
deficiencies or material weaknesses, were necessary.
On March 26, 2007, the Company received comments from the SEC regarding its
Amended 1-E Offering filed on February 5, 2007 ("Amended Offering"). In its
comments, the SEC raised issues not only with the Amended Offering, but previous
1-E Offerings as well. This raised the issue as to whether the internal controls
were adequate. The Company has taken the position that its availing itself of
the offerings under the Regulation E Exemption afforded 1940 Act companies was
appropriate and therefore its internal controls were adequate to determine its
eligibility. After reviewing the SEC comments, the Company has engaged outside
31
counsel to determine the applicability of the comments set forth in the SEC
Letter. Although the Company believes that it is currently in compliance with
the Investment Company Act of 1940, it and its attorneys are presently working
with the SEC to resolve all issues raised in a manner which is satisfactory to
the SEC. In the event the SEC is correct in its assessment that the Company was
not eligible for using the Regulation E exemption, the Company would be required
to reassess its internal controls to determine what steps should be taken to
insure eligibility for an offering under Regulation E.
In connection with this comment letter, the matter of the controls of the
Company was raised. Controls would come into place to determine the
appropriateness of the Company's use of, and eligibility to file under, certain
filings. Controls would also come into place to manage the flow of accurate
information in order to insure timely filings. The Company believes that it has
adequate controls to insure the flow of accurate information but acknowledges
that the extraordinary nature of certain significant events indicated as
occurring subsequent to the close of our fiscal year lead to analysis and review
which required additional time. While it may be said that the Company could have
avoided late filing of its Form 10-K by holding off completion of the
contemplated transactions, the decision to pursue these transactions was a
business decision based on reasons that the Company believes to be sound and
reasonable and the result, while not unforeseen, was not unreasonable.
Additionally, the Company was aware of the claims of the Securities and Exchange
Commission regarding the recent notification to sell stock and does not believe
that the logic of the Securities and Exchange Commission is correct. This is a
business decision based on review with outside counsel and does not reflect
inadequacy of controls. Not being advised of the possibility of delays, in the
first case, or the possibility of concerns of the Securities and Exchange
Commission, in the second case, might indicate problems with our controls.
32
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 March 31, 2007: the company issued 12,000
restricted shares for services in the amount of $1,500; issued 5,000,000 shares
to Rudy Ruettiger for $625,000 owed to him by Rudy Beverage; issued 22,033,333
shares for net cash of $1,955,783 and a stock subscription receivable of
$1,024,112; issued 61,900,000 shares for the acquisition of BNM, including
1,400,000 shares for a finders fee, in total valued at $8,356,500; issued
4,000,000 shares to a creditor of BNM as part of the acquisition of BNM valued
at $540,000; 10,650,000 shares to the former shareholders of AM and a creditor
of AM valued at $1,431,250; and 7,101 shares for a liability of Rudy in the
amount of $7,458.
The shares issued for cash include 700,000 shares issued pursuant to the de
minimus 1-E Offering dated January 3, 2007, and 21,333,333 shares issued
pursuant to the Amended 1-E Offering dated February 5, 2007.
All of the shares issued were sold pursuant to an exemption from registration
under Section 4(2) promulgated under the Securities Act of 1933, as amended.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS
The following exhibits are filed with this report on Form 10-Q.
Exhibit 31 Certifications pursuant to 18 U.S.C. Section 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
33
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GLOBAL BEVERAGE SOLUTIONS, INC.
Date: May 15, 2007 By: /s/ Jerry Pearring
------------------------------------
Jerry Pearring,
Chief Executive Officer and
Chief Financial Officer
34