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, 2007
Commission File Number: 000-28027
GLOBAL BEVERAGE SOLUTIONS, INC.
-------------------------------
(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)
2 S. UNIVERSITY DR., SUITE 220, PLANTATION, FL 33324
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(Address of principal executive office) (Zip code)
(954) 473-0850
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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 October 31, 2007 was 147,467,501 shares.
GLOBAL BEVERAGE SOLUTIONS, INC.
INDEX
Page
No.
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Part I Financial Information (unaudited)
Item 1: Condensed Financial Statements
Statements of Net Assets as of September 30, 2007 and
December 31, 2006 3
Statements of Operations - For the Three Months Ended
September 30, 2007 and 2006 4
Statements of Operations - For the Nine Months Ended
September 30, 2007 and 2006 5
Statements of Cash Flows - For the Nine Months Ended
September 30, 2007 and 2006 6
Statements of Changes in Net Assets - For the Nine
Months Ended September 30, 2007 and 2006 7
Financial Highlights - For the Nine Months Ended
September 30, 2007 and 2006 8
Schedule of Investments as of September 30, 2007
and December 31, 2006 9-10
Notes to Condensed Financial Statements 11-24
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 25-29
Item 3: Quantitative and Qualitative Disclosure about Market Risk 30
Item 4: Controls and Procedures 30
Part II Other Information 31-34
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
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Net Assets
September 30, 2007 and December 31, 2006
2007 2006
------------ ------------
(Unaudited)
ASSETS
Investments in portfolio companies:
Controlled affiliates (cost $15,027,265 at
September 30, 2007 and $6,669,760 at
December 31, 2006 $ 7,126,113 $ 1,575,000
Non-controlled affiliate (cost $8,314,543 at
September 30, 2007 and $1,011,500 at
December 31, 2006 700,000 --
------------ ------------
Total investments 7,826,113 1,575,000
Cash and cash equivalents 529 472
Deposits and prepaid expenses 1,994 474
Office equipment, net 2,812 --
------------ ------------
TOTAL ASSETS 7,831,448 1,575,946
------------ ------------
LIABILITIES
Notes payable (Note 3) 4,249,177 1,335,000
Accounts payable 82,032 103,486
Accrued expenses 440,364 48,064
------------ ------------
TOTAL LIABILITIES 4,771,573 1,486,550
------------ ------------
NET ASSETS $ 3,059,875 $ 89,396
============ ============
Commitments and contingencies (Note 5)
COMPOSITION OF NET ASSETS
Preferred stock, $0.001 par value; 50,000,000 shares
authorized; no shares issued and outstanding $ -- $ --
Common stock, $0.0001 par value; 950,000,000 shares
authorized; 147,467,501 and 43,665,067 shares
issued and outstanding at September 30, 2007
and December 31, 2006, respectively 147,467 43,665
Additional paid in capital 30,485,062 17,130,808
Deferred option compensation (60,674) (121,349)
Accumulated deficit:
Accumulated net operating loss (9,917,870) (8,779,053)
Net realized loss on investments (1,878,415) (1,878,415)
Net unrealized loss on investments (15,715,695) (6,306,260)
------------ ------------
NET ASSETS $ 3,059,875 $ 89,396
============ ============
Net asset value per share $ 0.0207 $ 0.0020
============ ============
See accompanying notes to condensed financial statements.
3
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Operations
Three Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
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INCOME FROM OPERATIONS:
Interest income from controlled affiliates $ -- $ 28,646
Interest income from non-controlled affiliates -- 7,666
Management income from non-controlled affiliates -- 6,000
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-- 42,312
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EXPENSES:
Officer and employee compensation and benefits 103,403 36,500
Professional fees 81,954 35,073
Shareholder services and communications 835 17,378
Interest expense 154,570 552,875
Bad debt expense - portfolio company -- 50,369
Amortization of intrinsic value of common stock options 20,225 --
Rent and utilities 15,526 3,000
Other general and administrative expense 13,879 3,484
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390,392 698,679
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Loss before income taxes and realized and unrealized losses (390,392) (656,367)
Income taxes -- --
------------- -------------
NET LOSS FROM OPERATIONS (390,392) (656,367)
------------- -------------
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 (7,751,152) (1,011,500)
------------- -------------
Net realized and unrealized gains (losses) (7,751,152) (1,011,500)
------------- -------------
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (8,141,544) $ (1,667,867)
============= =============
Net decrease in net assets from operations per share, basic
and diluted $ (0.0552) $ (0.0382)
============= =============
Weighted average shares outstanding 147,454,458 43,638,996
============= =============
See accompanying notes to condensed financial statements.
4
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Operations
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
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Income from operations:
Interest income from controlled affiliates $ -- $ 52,301
Interest income from non-controlled affiliates -- 19,977
Management income from non-controlled affiliates -- 18,000
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-- 90,278
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Expenses:
Officer and employee compensation and benefits 234,133 113,000
Director fees 3,000 1,500
Professional fees 369,898 185,322
Shareholder services and communications 33,815 66,183
Interest expense 369,499 552,875
Bad debt expense - portfolio company -- 50,369
Amortization of intrinsic value of common stock options 60,675 --
Rent and utilities 34,943 9,000
Lawsuit settlement -- 78,000
Other general and administrative expense 32,854 9,577
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1,138,817 1,065,826
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Loss before income taxes and realized and unrealized losses (1,138,817) (975,548)
Income taxes -- --
------------- -------------
Net loss from operations (1,138,817) (975,548)
------------- -------------
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 (9,409,435) (1,011,500)
------------- -------------
Net realized and unrealized losses (9,409,435) (1,011,500)
------------- -------------
Net decrease in net assets from operations $ (10,548,252) $ (1,987,048)
============= =============
Net decrease in net assets from operations per share, basic
and diluted $ (0.0835) $ (0.0464)
============= =============
Weighted average shares outstanding 126,384,200 42,847,225
============= =============
See accompanying notes to condensed financial statements.
5
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
Cash flows from operating activities:
Net decrease in net assets from operations $(10,548,252) $ (1,987,048)
Adjustments to reconcile net decrease in net assets from
operations to net cash used in operating activities:
Change in unrealized depreciation of portfolio investments 9,409,435 1,011,500
Amortization of intrinsic value of common stock options 60,675 --
Bad debt expense - portfolio company -- 50,369
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes -- 538,000
Accretion of discount on notes payable 120,790 --
Depreciation 360 --
Common stock issued for services 1,500 --
Changes in operating assets and liabilities:
Interest and fees receivable from portfolio companies -- (90,278)
Deposits and prepaid expenses (1,520) 3,684
Accounts payable and accrued expenses 370,846 117,586
------------ ------------
Net cash used in operating activities (586,166) (356,187)
------------ ------------
Cash flows from investing activities:
Investments in and advances to portfolio companies (793,332) (1,683,869)
Purchase of office equipment (3,172) --
------------ ------------
Net cash used in investing activities (796,504) (1,683,869)
------------ ------------
Cash flows from financing activities:
Common stock issued for cash 2,484,348 825,000
Proceeds from convertible notes 223,450 1,185,000
Repayment of notes payable (1,325,071) --
------------ ------------
Net cash provided by financing activities 1,382,727 2,010,000
------------ ------------
Net increase (decrease) in cash and cash equivalents 57 (30,056)
Cash and cash equivalents, beginning of period 472 245,370
------------ ------------
Cash and cash equivalents, end of period $ 529 $ 215,314
============ ============
Supplemental Cash Flow Information:
Cash paid for interest and income taxes:
Interest $ 27,470 $ --
Income taxes -- --
Non-cash investing and financing activities:
Common stock issued for:
Common stock issued for notes and other debts $ -- $ 161,531
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.
6
GLOBAL BEVERAGE SOLUTIONS, INC.
Condensed Statements of Changes in Net Assets
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
------------ ------------
Changes in net assets from operations:
Net loss from operations $ (1,138,817) $ (975,548)
Net realized loss on sale of investments, net -- --
Change in net unrealized depreciation of investments, net (9,409,435) (1,011,500)
------------ ------------
Net decrease in net assets from operations (10,548,252) (1,987,048)
------------ ------------
Capital stock transactions:
Common stock issued for:
Cash 2,484,348 825,000
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 7,458 161,531
Loan extension fee 12,000 --
Interest expense for intrinsic value of beneficial conversion
feature on secured convertible promissory notes -- 538,000
Amortization of intrinsic value of common stock options 60,675 --
------------ ------------
Net increase in net assets from stock transactions 13,518,731 1,524,531
------------ ------------
Net increase in net assets 2,970,479 (462,517)
Net assets, beginning of period 89,396 5,827,124
------------ ------------
Net assets, end of period $ 3,059,875 $ 5,364,607
============ ============
See accompanying notes to condensed financial statements.
7
GLOBAL BEVERAGE SOLUTIONS, INC.
Financial Highlights
Nine Months Ended September 30, 2007 and 2006
(Unaudited)
2007 2006
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PER SHARE INFORMATION
Net asset value, beginning of period $ 0.0020 $ 0.1411
Net decrease from operations (0.0090) (0.0228)
Net change in realized losses and unrealized
depreciation of investments, net (0.0745) (0.0236)
Net increase from stock transactions 0.1022 0.0282
-------------- --------------
Net asset value, end of period $ 0.0207 $ 0.1229
============== ==============
Per share market value:
Beginning of period $ 0.42 $ 1.67
End of period 0.04 0.60
Investment return, based on changes in market price(1) 90.5% -64.1%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period $ 3,059,875 $ 5,364,607
Average net assets 6,679,067 6,311,920
Annualized ratio of expenses to average net assets 23% 23%
Annualized ratio of net decrease in net assets from
operations to average net assets -211% -42%
Shares outstanding at end of period 147,467,501 44,784,750
Weighted average shares outstanding during period 126,384,200 42,847,225
(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, 2007
Shares/ Date of Historical Fair % Net
% (1) Acquisition Cost Value Assets
INVESTMENT IN UNAFFILIATED ISSUERS
- ----------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
------------- ------------ ----------
INVESTMENT IN AND ADVANCES TO 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%
N/A Jan-07 Note receivable from Rudy Beverage, Inc. which
may be converted under certain circumstances
into shares of common stock of Rudy Beverage,
Inc.; Rudy sells and manufactures beverages 1,818,043 - 0%
higher in nutritional value and lower in sugar
than most existing brands
N/A May-07 Note receivable from Rudy Partners, Ltd. in face
amount of $6,000,000, received in sale of 80%
of Rudy Beverage, Inc. owned by the Company;
collateralized with 11 million shares of the
Company's common stock 5,485,000 700,000 23%
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8,314,543 700,000 23%
------------- ------------ ----------
INVESTMENTS IN AND ADVANCES TO CONTROLLED AFFILIATED PORTFOLIO COMPANIES
- ------------------------------------------------------------------------
100% Feb-07 Beverage Network of Maryland, Inc., wholly-
owned; distributor of beverages in
the Mid-Atlantic States 13,008,293 5,107,141 167%
100% Mar-07 Aqua Maestro, Inc., wholly-owned; engaged
in wholesale and retail distribution
of domestic and imported bottled water 2,018,972 2,018,972 15%
------------- ------------
15,027,265 7,126,113
------------- ------------ ----------
Total investments at September 30, 2007 $ 23,541,808 7,826,113 256%
=============
Cash and other assets, less liabilities (4,766,238) -156%
------------ ----------
Net assets at September 30, 2007 $ 3,059,875 100%
============ ==========
(1) All of the Company's investments listed above are in stock of or notes
receivable from private companies.
See accompanying notes to condensed financial statements.
9
GLOBAL BEVERAGE SOLUTIONS, INC.
Schedule of Investments
December 31, 2006
Shares/ Date of Historical Fair % Net
% (1) Acquisition Cost Value Assets
INVESTMENTS IN UNAFFILIATED ISSUERS
- -----------------------------------
8% Jun-05 Titanium Design Studio, Inc., privately held;
a titanium jewelry manufacturer $ 200,000 $ - 0%
============ ============ ===========
INVESTMENTS 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%
============ ============ ===========
INVESTMENTS 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%
============ ===========
(1) All of the Company's investments listed above are in stock of or notes
receivable from private companies.
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 Article 6 of Regulation
S-X, the Company will operate on a non-consolidated basis and the financial
results of the Company's portfolio companies are not consolidated in the
Company's financial statements. Only the appreciation or depreciation 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 (the
"1940 Act").
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 and are presented in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the requirements for reporting on Form 10-Q and Article 10 of
Regulation S-X without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the Company's financial position as of September 30, 2007, and the results of
operations and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. These
condensed financial statements should 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.
11
(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, 2007, the Company has an accumulated deficit of
$19,610,828 and had net losses totaling $2,647,100 for the nine months ended
September 30, 2007. Additionally, as of September 30, 2007, the Company had
total assets excluding investments of $5,335 and had total liabilities of
$4,771,573. 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.
On October 9, 2007, the Company sold its note receivable from Rudy Partners,
Ltd. for $100,000 in cash and a note receivable for $600,000. The note is
payable in weekly installments of $75,000 commencing October 22, 2007, and the
final payment is due December 10, 2007. The Company sold the secured promissory
note to fund its operations through the remainder of 2007 and continues to hold
a $1.8 million note issued by Rudy Beverage, Inc., which may be converted under
certain circumstances into shares of common stock of Rudy Beverage, Inc.
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 that are cash flow positive and
profitable or businesses with projections that indicate it can become cash
flow positive and profitable within a reasonable period. The Company will
seek to invest in companies that 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 and second quarter
of 2007, the Company has moved away from start-up companies and is
concentrating efforts in companies that have some established track-record.
12
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 second Offering was
withdrawn and no sales were made pursuant to this offering. An Amended
Offering Circular was filed on February 5, 2007. As of September 30, 2007,
21,333,333 shares had been sold for net cash proceeds of $2,396,848.
Although 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 to the Company on favorable terms or at all.
The financial statements do not include any adjustments related to
recoverability and classification of asset 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, the Company issued 60,500,000 shares of its common
stock and a $2,000,000 note payable to XStream. At closing, the Company paid
$229,000 on the note and pursuant to the agreements was required to pay 40% of
any subsequent cash proceeds received from the February 5, 2007, 1-E Offering.
The remaining note balance, $1,086,525 at September 30, 2007, is to be paid in
monthly installments of $25,000 commencing September 1, 2007. Additionally, if
the Company raises any equity capital while the note is still outstanding, it is
required to apply 35% of the net proceeds to reduce the note.
13
Summary financial information for BNM as of September 30, 2007 and for the nine
months then ended is as follows:
Current assets $ 836,405
Property and equipment, net 51,358
Intangible assets, net 1,538,254
Other assets 46,371
-----------
Total assets $ 2,472,388
===========
Current liabilities $ 716,292
Amounts due Global 407,141
-----------
Total liabilities 1,123,433
Stockholder's equity 1,348,955
-----------
Total liabilities and stockholder's equity $ 2,472,388
===========
Revenues $ 6,695,088
===========
Net loss $ (535,998)
===========
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 Securities and Exchange Commission (the "SEC"),
it was determined that EITF 90-13 would not act to control the status of a BDC
under the 1940 Act and the Company's financial statements should be presented as
investment company financial statements, notwithstanding a change in control of
the Company, if any.
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 its 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. Its wholesale client base is across North
America and the Caribbean, including well-known hotels and resorts. In its
retail home delivery division, AM provides its products through its Internet
site aquamaestro.com.
Consideration for the acquisition of AM included $500,000 in cash, 10,000,000
shares of the Company's common stock and an earn-out. The cash was 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. In accordance with SFAS 141, additional cost
will not be recognized until the earn-out amount is determinable.
14
Summary financial information for AM as of September 30, 2007 and for the nine
months then ended is as follows:
Current assets $ 428,607
Property and equipment, net 14,646
Other assets 27,055
-----------
Total assets $ 470,308
===========
Accounts payable and accrued expenses $ 324,379
Note payable 150,000
Amounts due Global 97,366
-----------
Total liabilities 571,745
Stockholder's deficit (101,437)
-----------
Total liabilities and stockholder's equity $ 470,308
===========
Revenues $ 1,651,045
===========
Net loss $ (140,999)
===========
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 Beverage, Inc. ("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 is collateralized by 11,000,000 shares of the Company's
common stock held by Partners' owners and will be payable in six annual
installments of $1,000,000 commencing January 31, 2008. At June 30, 2007, the
Company recorded additional unrealized depreciation of $1,658,283 and reduced
the fair value to $550,000 based on the trading value of the Company's common
stock at that time. At September 30, 2007, the Company adjusted the value to
$700,000 and recorded $150,000 in appreciation. The Company sold the $6,000,000
note for $100,000 in cash and a note receivable in the amount of $600,000 on
October 9, 2007. The note is payable in weekly installments of $75,000
commencing October 22, 2007, and the final payment is due December 10, 2007.
RUDY BEVERAGE, INC. ("RUDY")
- ----------------------------
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 developed two distinct products: Rudy Flying Colors, catering to children K
through 8, and Rudy Revolution, a sport drink primarily for athletes. The goal
of the Rudy line of beverages is to create flavorful juice blends lower in sugar
than existing brands.
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.
15
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 held by Partners owners, 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. On May 11, 2007, the Company completed the
sale of its investment in Rudy to Partners, as discussed above.
Upon sale of the investment in Rudy, the Company retained a note receivable from
Rudy in the amount of $1,818,043. Partners and Rudy 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. The Company currently carries this investment at $0
value.
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 made follow-on investments in
EON in the form of loans in the total amount of $611,500 as of September 30,
2006. These amounts were fully reserved at September 30, 2006, as discussed
below.
During the first quarter of 2006, certain 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 wrote-down its investment. This
amounted to $1,011,500 which was included in change in unrealized depreciation
of portfolio investments in September 2006.
16
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 an
unrealized loss in the amount of $200,000 relating to this investment at
December 31, 2005.
VALUATION OF INVESTMENTS
As required by Section 2(a)(41) of the 1940 Act, the board of directors 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, 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" exists, 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:
17
1. Total amount of the Company's actual investment. 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.
3. Earnings before interest, taxes and depreciation.
4. Estimate of likely sale price of investment.
5. Net assets of investment.
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 Board of Directors of the Company
determined that the Company's investments should be valued at September 30, 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 $4,700,000 plus net follow-on investments of
$407,141 at September 30, 2007.
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 ($300,000 cash) plus
follow-on investments of $97,366 ($12,000 non-cash) at September
30, 2007.
o RUDY PARTNERS, LTD. The Company valued its note receivable
investment from Partners at $700,000, the price for which it was
sold on October 9, 2007.
o RUDY BEVERAGE, INC. The Company's note receivable from Rudy in the
amount of $1,818,043 is valued at $0. $825 in cash was advanced
during the current year and fully depreciated.
18
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, certain
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
determined that EON will not achieve profitability without
substantial additional investment, which the Company is unwilling
to provide. Accordingly, the Company recorded an unrealized loss
on its investment of $400,000 and 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 recorded an unrealized loss on its investment
in the full amount of $200,000 at December 31, 2005.
19
(3) NOTES PAYABLE
Notes payable at September 30, 2007, consist of the following:
Secured convertible promissory notes payable (1) $1,326,000
Note payable to XStream Beverage Network, Inc. with interest at 6%;
the collateralized note required 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 1,042,485
----------
2,368,485
----------
DISCOUNTED NOTES
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; and note is past due at September 30, 2007, with
$250,000 of $583,333 in scheduled payments made 1,584,823
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%; collateralized by inventory of Aqua
Maestro 65,133
Non-interest bearing note payable to a company (2) 230,736
----------
1,880,692
----------
Total notes payable $4,249,177
==========
(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.
20
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.
As of September 30, 2007, Secured Notes in the aggregate principal amount of
$1,326,000 are in default as the interest due on November 1, 2006, February 1,
2007, May 1, 1007 and August 1, 2007 was not paid. The default rate of interest
of 12% is in effect for these Secured Notes and is included in accrued expenses
on the balance sheet.
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. These notes are
currently convertible under the same terms as the note discussed in (2) below.
(2) On July 6, 2007, the Company entered into a Note Purchase Agreement
("Agreement") with a certain accredited investor ("Investor") for the private
placement of a promissory note ("Note") in the principal amount of $259,202 for
a purchase price of $233,450. The maturity date of the Note is August 31, 2008.
If and when the Company withdraws its election to be regulated as a BDC under
the 1940 Act, the Note will become convertible, at the option of the Investor,
into a number of shares of the Company's common stock as determined in
accordance with a formula set forth in the Agreement (at a conversion rate of
75% of the average of the lowest trade price of the common stock during any
three business days for the ten business day period prior to such conversion
election, as reported by Bloomberg L.P.).
In connection with the Agreement, the Company entered into a letter agreement
with Palladium Capital Advisors, LLC as placement agent, pursuant to which the
Company paid the placement agent for its services, a cash fee of $33,333. In
addition, $16,667 is payable within 120 days of the date of the Agreement either
in cash or, if and when the Company withdraws its election to be a BDC pursuant
to the 1940 Act, through the issuance of the Company's common stock.
The Company and the Investor also entered into a Registration Rights Agreement
("RRA") pursuant to which the Company has agreed to provide certain registration
rights with respect to shares of its common stock issuable upon the Investor's
election to exercise the conversion right contained in the Note. Pursuant to the
RRA, the Company is required to file a Registration Statement no more than 60
days after filing to withdraw its election to be regulated as a BDC under the
1940 Act and is required to have the Registration Statement declared effective
no more than 75 days after filing the Registration Statement. In the event the
Company does not meet the required dates, the Company would be required to pay a
cash fee of 1% of the outstanding loan balance for each of the first two months
the Company is late and 2% for each subsequent month the Company is late, the
maximum exposure to the Company should be $34,000. This requirement should end
when the stock can become free trading pursuant to Rule 144.
21
The three discounted notes may be summarized as follows:
Face value of discounted notes payable $ 2,017,313
Discount (136,621)
-----------
Present value of discounted notes $ 1,880,692
===========
(4) EQUITY
COMMON STOCK:
- -------------
The Company is authorized to issue up to 950,000,000 shares of common stock, par
value $.001. At September 30, 2007, there were 147,267,501 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, 2007, there were 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 $60,675 and $0 during the nine months ended
September 30, 2007 and 2006, respectively.
STOCK SUBSCRIPTION RECEIVABLE:
- ------------------------------
On June 28, 2007, the Company reduced its remaining stock subscription
receivable from $820,350 to $273,450 to more correctly reflect the current
trading price of the common stock. The receivable was collected in July 2007.
(5) COMMITMENTS AND CONTINGENCIES
GENERAL - The Company's commitments and contingencies include the usual
obligations which arise 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,
although 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.
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, and previous
1-E Offerings, but also with respect to the Company's compliance with other
provisions of the 1940 Act. A primary issue was its belief that the Company was
not eligible to take advantage of the Regulation E Exemption afforded to 1940
Act companies. In the event the SEC is correct in its assessment that the
22
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. In addition, we currently
understand that we may be out of compliance with certain other rules and
regulations governing BDCs. We cannot predict with certainty what, if any,
regulatory or financial consequences may result from the foregoing.
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 has 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.
On October 9, 2007, the Company sold its note receivable from Rudy Partners,
Ltd. for $100,000 in cash and a note receivable for $600,000. The note is
payable in weekly installments of $75,000 commencing October 22, 2007, and the
final payment is due December 10, 2007. The Company sold the secured promissory
note to fund its operations through the remainder of 2007 and continues to hold
a $1.8 million note issued by Rudy Beverage, Inc., which may be converted under
certain circumstances into shares of common stock of Rudy Beverage, Inc.
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.
(6) SUBSEQUENT EVENTS
WITHDRAWAL OF ELECTION TO BE TREATED AS A BUSINESS DEVELOPMENT COMPANY
On July 13, 2007, the Company filed its preliminary information statement on
Schedule 14C which was provided on behalf of the board of directors ("Board") of
the Company to record holders of shares of the Company's common stock
("Shareholders") as of the close of business on the record date of July 12,
2007. This information statement provided notice that the Board has recommended,
and holders of a majority of the voting power of the Company's common stock have
voted to approve authorization to the Board to withdraw the Company's election
to be treated as a business development company under the 1940 Act. The
definitive information statement on Schedule 14C was filed on October 2, 2007.
The action will become effective upon the Company filing Form N-54C with the
SEC.
23
Overview and Business Strategy
Subsequent to the filing of the Form N-54C, the Company intends to pursue a
business model whereby it would acquire majority ownership stakes in
beverage-related companies (the "New Business Model"). In this regard, the
Company would remain active in the imported bottled water category and New Age
beverage category through its two wholly owned entities: Aqua Maestro and
Beverage Network of Maryland.
Under the New Business Model, the Company will at all times conduct its
activities in such a way that it will not be deemed an "investment company"
subject to regulation under the 1940 Act. Thus, it will not hold itself out as
being engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, the Company will conduct its business in such a manner
as to ensure that it will at no time own or propose to acquire investment
securities having a value exceeding 40 percent of the Company's total assets at
any one time.
Aqua Maestro is based in Boca Raton, FL and imports and sells bottled water
through company owned distribution to retailers and consumers in South Florida,
direct sales to retailers outside of South Florida, direct sales to consumers
generated through its website at aquamaestro.com and sales to third party
distributors.
Beverage Network of Maryland is a New Age distributor based in Jessup, Maryland
and distributes brands such as Welch's and Fiji water to retailers in Washington
DC, Northern Virginia, and the entire state of Maryland.
Our strategy would be to grow the third party branded revenue base in each of
these entities while developing and/or acquiring bottled water or New Age
beverage brands. Thus, through these entities, we will sell our own proprietary
brands as well as third party brands.
SALE OF NOTE RECEIVABLE
The Company sold its $6,000,000 note receivable from Rudy Partners, Ltd. for
$100,000 in cash and a note receivable in the amount of $600,000 on October 9,
2007. The note is payable in weekly installments of $75,000 commencing October
22, 2007, and the final payment is due December 10, 2007.
24
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q 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 Form 10-Q 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.
25
WITHDRAWAL OF ELECTION TO BE TREATED AS A BDC
- ---------------------------------------------
On July 13, 2007, we filed our preliminary information statement on Schedule 14C
and on October 2, 2007, we filed our definitive information statement on
Schedule 14C which was provided on behalf of our board of directors ("Board") to
record holders of shares of our common stock ("Shareholders") as of the close of
business on the record date of July 12, 2007. This information statement
provided notice that the Board has recommended, and holders of a majority of the
voting power of our common stock have voted to approve authorization to the
Board to withdraw our election to be treated as a business development company
under the 1940 Act. The action will become effective upon our filing a Form
N-54C with the Securities and Exchange Commission.
OVERVIEW AND BUSINESS STRATEGY
Subsequent to the filing of the Form N-54C, the Company intends to pursue a
business model whereby it would acquire majority ownership stakes in
beverage-related companies (the "New Business Model"). In this regard, the
Company would remain active in the imported bottled water category and New Age
beverage category through its two wholly owned entities: Aqua Maestro and
Beverage Network of Maryland.
Under the New Business Model, the Company will at all times conduct its
activities in such a way that it will not be deemed an "investment company"
subject to regulation under the 1940 Act. Thus, it will not hold itself out as
being engaged primarily in the business of investing, reinvesting or trading in
securities. In addition, the Company will conduct its business in such a manner
as to ensure that it will at no time own or propose to acquire investment
securities having a value exceeding 40 percent of the Company's total assets at
any one time.
Aqua Maestro is based in Boca Raton, FL and imports and sells bottled water
through company owned distribution to retailers and consumers in South Florida,
direct sales to retailers outside of South Florida, direct sales to consumers
generated through its website at aquamaestro.com and sales to third party
distributors.
Beverage Network of Maryland is a New Age distributor based in Jessup, Maryland
and distributes brands such as Welch's and Fiji water to retailers in Washington
DC, Northern Virginia, and the entire state of Maryland.
Our strategy would be to grow the third party branded revenue base in each of
these entities while developing and/or acquiring bottled water or New Age
beverage brands. Thus, through these entities, we will sell our own proprietary
brands as well as third party brands.
26
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 -
- --------------------------------------------------------------
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 2007 period.
o During the three months ended September 30, 2007, total expenses
decreased $308,287 (44%) to $390,392 from $698,679 in the prior
year period.
1. Officer and employee compensation increased $66,903 (183%) in
2007 from the amount in 2006. The increase is attributed to a
larger staff and a full time CEO commencing in February 2007.
2. Professional fees increased $45,061 (128%) in the 2007 period
from the 2006 period, primarily due to the fees associated
with the convertible note funded in July 2007.
3. We recorded interest expense in the amount of $154,570 in the
2007 period and had $552,875 in interest expense in the 2006
period. The 2006 amount includes the computed intrinsic value
of the beneficial conversion of $538,000 for convertible debt
added during that period. In 2007, we incurred new debt with
the acquisitions completed in the first quarter of 2007.
4. We recognized $20,225 in amortization of the intrinsic value
of common stock options in 2007. There were no options
outstanding during the 2006 period.
5. We recorded bad debt expense of $50,369 in 2006 when they
fully reserved the receivables from EON. There was no bad
debt expense in 2007.
6. We had rent and utility expense of $15,526 in 2007 and $3,000
in 2006. The increase in 2007 resulted from our move to new
offices and an increase in staffing.
o During the 2007 period we recorded unrealized depreciation on our
investments in the amount of $7,751,152. During the 2006 period,
we recorded unrealized depreciation of $1,011,500 on our
investments.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 -
- -------------------------------------------------------------
o During the 2006 period we recognized revenue in the amount of
$72,278 in interest income from portfolio companies and $18,000 in
management fees from portfolio companies. We had no revenue during
the 2007 period.
o During the nine months ended September 30, 2007, total expenses
increased $72,991 (7%) to $1,138,817 from $1,065,826 in the prior
year period.
1. Officer and employee compensation increased $121,133 (107%)
in 2007 from the amount in 2006. The increase is attributed
to 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.
27
2. Professional fees increased $182,756 (99%) in the 2007 period
from the 2006 period. The principal cause of the increase is
the acquisition of BNM and AM and the fees associated with
the convertible note funded in July 2007.
3. Shareholder services and communications decreased to $33,815
in 2007 from $66,183 in 2006, primarily due to a decrease in
public relations costs.
4. Other general and administrative expense increased $22,467
(235%) 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.
5. We recorded interest expense in the amount of $369,499 in the
2007 period and $552,875 in interest expense in the 2006
period. New debt was added in the first and second quarters
of 2007 as a result of the acquisitions of BNM and AM. The
2006 amount includes the computed intrinsic value of the
beneficial conversion of $538,000 for convertible debt added
during that period.
6. We recognized $60,675 in amortization of the intrinsic value
of common stock options in 2007. There were no options
outstanding during the 2006 period.
7. Rent and utilities amounted to $34,943 in 2007 as compared to
$9,000 in 2006. The principal reason for the increase is the
relocation of the corporate office and the increased staff.
8. We incurred bad debt expense of $50,369 in 2006 and none in
the 2007 period.
9. We recorded a lawsuit settlement of $78,000 in 2006 and had
none in the 2007 period.
o During the 2007 period we recorded net unrealized depreciation on
our investments in the amount of $9,409,435. We had $1,011,500 in
unrealized depreciation in 2006 relating to our investments.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
o At September 30, 2007, we had net assets of $3,059,875 as compared to
net assets of $89,396 at December 31, 2006. During the 2007 period,
total assets increased $6,255,502 and total liabilities increased
$3,285,023, resulting in a net increase of $2,970,479. The principal
increase in assets was the net increase in investments of $6,251,113.
The principal increase in liabilities was the net increase in notes
payable of $2,914,177. The Company now has substantially increased
assets; however, the debt service requirements have increased beyond
the cash flow available from existing investments.
On October 9, 2007, the Company sold its note receivable from Rudy
Partners, Ltd. for $100,000 in cash and a note receivable for $600,000.
The note is payable in weekly installments of $75,000 commencing
October 22, 2007, and the final payment is due December 10, 2007. The
Company sold the secured promissory note to fund its operations through
the remainder of 2007 and continues to hold a $1.8 million note issued
by Rudy Beverage, Inc., which may be converted under certain
circumstances into shares of common stock of Rudy Beverage, Inc.
28
o As of September 30, 2007, the Company had no revenues and had an
accumulated deficit totaling $27,511,980. Additionally, as of September
30, 2007, the Company had total assets excluding investments of $5,335
and total liabilities of $4,771,573. 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 $7,831,448 and
from this, are subtracted liabilities and debts of $4,771,573. There are no
shares of preferred stock outstanding but the rights of preferred stockholders
would be included if there were. The NAV is therefore $3,059,875. The Net Asset
Value per Share ("NAV/S") is calculated by dividing the NAV by the number of
common shares outstanding (147,467,501). The NAV/S is $0.0207.
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 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 CEO concluded
that, as of September 30, 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.
Changes in Internal Control
There were no significant changes made in the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially affect, these internal controls.
30
PART II - OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS
Although we may, from time to time, be involved in litigation arising out of our
operations in the normal course of business or otherwise, we are currently not a
party to any pending material legal proceeding.
ITEM 1A: RISK FACTORS
There were no material changes from the risk factors previously disclosed in our
2006 annual report on Form 10-K.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We issued 200,000 shares of our common stock as a loan extension fee of an
obligation of Aqua Maestro. All shares were issued 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 Rule 13a-14 of the
Securities Exchange Act of 1934, as amended, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
31
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 14, 2007 By: /s/ Jerry Pearring
--------------------------
Jerry Pearring,
Chief Executive Officer
President and
Chief Financial Officer
32