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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ___________
Commission File No. 000-29477
D'ANGELO BRANDS, INC.
(exact name of registrant as specified in its charter)
Nevada 87-063686
(state of organization) (I.R.S. Employer Identification No.)
14 BREWSTER ROAD, BRAMPTON, ONTARIO, CANADA, L6T 5B7
(address of principal executive offices)
(905) 794-0335
Registrant's telephone number, including area code
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
20,582,863 Class A Common shares and 30,854,396 Class B Common shares as at
September 17, 2002.
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1
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains statements that are
forward-looking statements within the meaning of the federal securities laws.
These include statements about our expectations, beliefs, intentions or
strategies for the future, which we indicate by words or phrases such as
"anticipate," "expect," intend," "plan," "will," "believe" and similar language.
These statements involve known and unknown risks, including whether or not we
will be able to obtain the funding we need to continue our operations, whether
or not we are able to attract and retain qualified personnel to help us in
developing our business, whether or not we will be able to compete with larger,
well-funded competitors in the industry, whether or not consumer tastes for
juice drinks will change and other business conditions, and are subject to
uncertainties and assumptions set forth elsewhere in this report. Our actual
results may differ materially from results anticipated in these forward-looking
statements. We base our forward looking statements on information currently
available to us, and we assume no obligation to update these statements.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets (Unaudited) as at July 31, 2002 and July 31, 2001
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the
three months then ended
Consolidated Statements of Stockholder's Equity (Deficiency) (Unaudited) for the
three months then ended
Consolidated Statements of Cash Flows (Unaudited) for the three months then
ended
Notes to the Consolidated Financial Statements
CONTENTS Page
- -------- ----
Consolidated Financial Statements:
Balance Sheets (Unaudited) F-1
Statements of Operations and Comprehensive Loss (Unaudited) F-2
Statements of Stockholders' Equity (Deficiency) (Unaudited) F-3
Statements of Cash Flows (Unaudited) F-4
Notes to Financial Statements (Unaudited) F-6
2
F-1
D'ANGELO BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT JULY 31
(Unaudited)
2002 2001
----------- -----------
ASSETS
CURRENT
Accounts receivable $ 77,023 $ 34,444
Inventories 121,716 --
Prepaid expenses and deposits 68,472 --
Deposit on building -- 65,390
----------- -----------
267,211 99,834
----------- -----------
CAPITAL ASSETS, NET 2,698,786 33,512
----------- -----------
2,698,786 33,512
----------- -----------
$ 2,965,997 $ 133,346
=========== ===========
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 2,958,387 $ 472,429
Mortgages and other debt 3,386,227 --
----------- -----------
6,344,614 472,429
COMMITMENTS & CONTINGENCIES (NOTE 7) -- --
----------- -----------
$ 6,344,614 $ 472,429
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK, PAR VALUE $0.001;
Class A - 200,000,000 shares authorized;
20,582,863 and 35,892,724 shares issued and outstanding $ 20,583 $ 35,893
Class B - 50,000,000 shares authorized;
30,854,396 and 0 shares issued and outstanding 30,854 --
ADDITIONAL PAID-IN CAPITAL 3,573,577 1,107,352
STOCK SUBSCRIPTION RECEIVABLE (33,302) --
ADVANCES TO DIRECTOR (333,483) (233,867)
ACCUMULATED OTHER COMPREHENSIVE GAIN 57,533 13,487
ACCUMULATED DEFICIT (6,694,379) (1,261,948)
----------- -----------
(3,378,617) (339,083)
----------- -----------
$ 2,965,997 $ 133,346
=========== ===========
3
F-2
D'ANGELO BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED JULY 31
(Unaudited)
2002 2001
---------- ----------
SALES $ 743,978 $ 298,979
COST OF SALES 860,427 251,539
---------- ----------
GROSS PROFIT (116,449) 47,440
Selling, Marketing, Distribution and Warehousing Expenses 153,749 102,838
General and Administrative Expenses 270,958 165,158
---------- ----------
424,707 267,996
---------- ----------
LOSS BEFORE OTHER EXPENSES (541,156) (220,556)
OTHER EXPENSES
Financing Expenses 288,000 56,533
Interest 107,218 0
---------- ----------
395,218 56,533
---------- ----------
LOSS BEFORE INCOME TAXES (936,374) (277,089)
Provision for income taxes 0 0
---------- ----------
NET LOSS (936,374) (277,089)
Other comprehensive gain (loss), net of taxes -
foreign currency translation 23,361 (20,975)
---------- ----------
COMPREHENSIVE LOSS $ (913,013) $ (298,064)
========== ==========
LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.06) $ (0.01)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 15,598,033 35,860,334
========== ==========
4
F-3
D'ANGELO BRANDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
Common Stock Additional Stock
---------------------------------------------- Paid-In Subscription
Class A Amount Class B Amount Capital Receivable
----------- -------- ---------- -------- ---------- -------------
BALANCE AT APRIL 30, 2001 35,594,736 $35,595 0 $0 $916,189 $0
Shares issued for cash 297,989 $298 $191,163
Advances to Director
Foreign Currency Translation Adj
Net Loss
----------- -------- ---------- -------- ---------- -----------
BALANCE AT JULY 31, 2001 35,892,724 $35,893 0 $0 $1,107,352 $0
Shares issued for cash before the
acquisition of D'Angelo Acquisition Inc. 107,276 $107 $28,612
Issuance of class B common stock (36,000,000) $(36,000) 36,000,000 $36,000
Issuance of common stock on
acquisition of D'Angelo Acquisition Inc. 7,532,259 $7,532 $(7,532)
Conversion of Class-B to Class-A shares 50,000 $50 (50,000) $(50)
Shares issued for cash 2,100,000 $2,100 $239,835
Stock subscription receivable $(96,774)
Expense for shares sold below market value $698,065
Shares issued for services rendered 5,805,000 $5,805 $1,507,245
Advances to Director
Foreign Currency Translation Adj
Net Loss
----------- -------- ---------- -------- ---------- -----------
BALANCE AT APRIL 30, 2002 15,487,259 $15,487 35,950,000 $35,950 $3,573,577 $(96,774)
Conversion of Class-B to Class-A shares 5,095,604 $5,096 (5,095,604) $(5,096)
Stock subscription receivable $63,472
Advances to Director
Foreign Currency Translation Adj
Net Loss
----------- -------- ---------- -------- ---------- -----------
BALANCE AT JULY 31, 2002 20,582,863 $20,583 30,854,396 $30,854 $3,573,577 $(33,302)
=========== ======== ========== ======== ========== ===========
Advances to Accumulated Other Accumulated Stockholders
Director Comprehensive Deficit Equity
Gain /(Deficiency)
----------- ----------------- ----------- -------------
BALANCE AT APRIL 30, 2001 $0 $34,462 $(984,859) $1,387
Shares issued for cash $191,461
Advances to Director $(233,867) $(233,867)
Foreign Currency Translation Adj $(20,975) $(20,975)
Net Loss $(277,089) $(277,089)
--------- -------- ----------- -----------
BALANCE AT JULY 31, 2001 $(233,867) $13,487 $(1,261,948) $(339,083)
Shares issued for cash before the
acquisition of D'Angelo Acquisition Inc. $28,719
Issuance of class B common stock $0
Issuance of common stock on
acquisition of D'Angelo Acquisition Inc. $0
Conversion of Class-B to Class-A shares $0
Shares issued for cash $241,935
Stock subscription receivable $(96,774)
Expense for shares sold below market value $698,065
Shares issued for services rendered $1,513,050
Advances to Director $(57,213) $(57,213)
Foreign Currency Translation Adj $20,685 $20,685
Net Loss $(4,496,057) $(4,496,057)
--------- -------- ----------- -----------
BALANCE AT APRIL 30, 2002 $(291,080) $34,172 $(5,758,005) $(2,486,673)
Conversion of Class-B to Class-A shares $0
Stock subscription receivable $63,472
Advances to Director $(42,403) $(42,403)
Foreign Currency Translation Adj $23,361 $23,361
Net Loss $(936,374) $(936,374)
--------- -------- ----------- -----------
BALANCE AT JULY 31, 2002 $(333,483) $57,533 $(6,694,379) $(3,378,617)
========= ======== =========== ===========
5
F-4
D'ANGELO BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31
(Unaudited)
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(936,374) $(277,089)
Adjustments to reconcile net loss to
net cash used for operating activities:
Deferred Expenses -- 55,545
Depreciation 33,832 --
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (59,118) 42,090
Inventories (23,511) --
Prepaid expenses and deposits (49,326) --
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities 690,031 230,954
--------- ---------
Net cash (used for)/provided from operating activities: (344,466) 51,500
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to capital assets (31,752) --
--------- ---------
Net cash used for investing activities: (31,752) --
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgages and other debt 331,788 --
Issuance of capital stock -- 191,461
Decrease in stock subscription receivable 63,472 --
Advances to Director (42,403) (233,867)
--------- ---------
Net cash provided from/(used for) financing activities: 352,857 (42,406)
CHANGE IN FOREIGN CURRENCY TRANSLATION ADJUSTMENT 23,361 (20,975)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS -- (11,881)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -- 11,881
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
INTEREST PAID $ 85,132 $ --
========= =========
INCOME TAXES PAID $ -- $ --
========= =========
6
F-5
Supplemental disclosure of non-cash investing and financing transactions:
For the three months ended July 31, 2002, the Company:
On or about May 29, 2002, the Company had not registered, within 180 days, the
600,000 shares as required per a Registration Rights Agreement with Penguin
Petroleum Products Inc. ("Penguin") dated November 30, 2001. As a result, as per
the Registration Rights Agreement, Penguin will receive an additional 300,000
registerable securities of the Company. The Company recorded an expense for this
penalty in the amount of $45,000, the fair market value for these shares on the
date of the breach.
On June 21, 2002, $317,360 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note in the same amount. In consideration of the
advance, the company agreed to issue 500,000 free trading shares of the Company,
with a fair market value of $120,000, to D. Dunsmuir Investments Canada Limited.
The company recorded an expense for the futures issuance of these shares.
In July 2002 an agreement was signed with Penguin Petroleum Products Inc.
("Penguin") whereby the Company agreed to issue 600,000 free trading shares to
Penguin. Although the shares have not yet been issued, the expense related to
the issuance of these shares of $123,000 has been accrued as a financing
expense.
7
F-6
D'ANGELO BRANDS, INC.
NOTES TO FINANCIAL STATEMENTS
July 31, 2002
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY BACKGROUND AND NATURE OF BUSINESS:
D'Angelo Brands, Inc. ("the Company") (formerly Playandwin, Inc.) was
incorporated under the laws of the State of Nevada on June 9, 1995. The Company
was incorporated under the name Cambridge Funding Group Inc. The Company changed
its name to Agriceutials Technologies, Inc., then to Playandwin, Inc. and then
to D'Angelo Brands, Inc.
D'Angelo Acquisitions Inc. is a wholly owned subsidiary of the Company and
D'Angelo Brands Ltd. is wholly owned by D'Angelo Acquisitions Inc. D'Angelo
Brands Ltd. produces and markets branded apple juice, apple cocktail and iced
tea. These products are distributed to major retail grocery chains in the
Ontario, Canada market.
ACQUISITION AND CHANGE IN CONTROL:
The Company incorporated a wholly owned subsidiary named D'Angelo Acquisitions
Inc., ("Acquisitions") an Ontario corporation, which entered into a Share
Exchange Agreement ("the Agreement") with D'Angelo Brands Ltd. ("Brands"), an
Ontario Corporation. Pursuant to the Agreement dated October 29, 2001,
Acquisitions acquired 100% of the outstanding shares of common stock of Brands
in exchange for a total of 36,000,000 Exchangeable shares. The Exchangeable
shares are Class B Special Shares of Acquisitions, being subordinate, non-voting
special shares authorized in an unlimited number. The terms of the Exchangeable
shares are outlined in more detail in note 4 below. Pursuant to the Agreement,
the historical financial history of the Company is that of Brands, therefore
April 30, the fiscal year end of Brands was adopted.
In connection with the Share Exchange Agreement, the Company assigned to its
wholly owned subsidiary, Playandwin Canada Inc. (Playandwin Canada), all of its
licenses and rights to the racing wager game known as "RACINGO". The Company
also distributed, in the form of a stock dividend, all of the common shares of
Playandwin Canada to stockholders of record of the Company immediately before
the closing of the Share Exchange Agreement. The stock dividends were payable
November 20, 2001 to stockholders of record on October 29, 2001. On October 29,
2001 there were 701,257 Class B Special Shares of Playandwin Canada outstanding.
Each of these Class B shares may be exchanged for one common share of the
8
F-7
Company. To accommodate the exchange of shares, the Company issued a sufficient
number of common shares to a trustee for the benefit of the holders of the Class
B Playandwin Canada shares. The trustee will hold the common shares in trust
until all the conditions for the exchange of the Class B Playandwin Canada
shares have been satisfied.
BASIS OF PRESENTATION:
The financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America with the assumption that
the Company will be able to realize its assets and discharge its liabilities in
the normal course.
As reflected in the accompanying financial statements, the Company has had
recurring losses from operations, a negative cash flow from operations, and its
current liabilities exceed its current assets. These matters raise substantial
doubt about the Company's ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheet is dependent upon continued operations of the
Company, which, in turn, is dependent upon the Company's ability to continue to
raise capital and generate positive cash flows from operations. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue its existence.
Management plans to take the following steps that it believes will be sufficient
to provide the Company with the ability to continue in existence:
o The Company is continuing to develop its business plan. Management
expects the Company to become profitable by its fiscal year ended April
30, 2004.
o Management expects to fund any negative cash flows or capital
expenditures from debt or equity financing or a combination thereof as
deemed appropriate by the Company's Board of Directors.
9
F-8
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly owned and controlled subsidiaries.
USE OF ESTIMATES:
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts for revenue and expenses during
the period. Actual amounts could differ from those estimates.
FAIR VALUE:
For certain of the Company's financial instruments, none of which are held for
trading, including cash, accounts receivable, accounts payable and liabilities,
the carrying amounts approximate fair value due to their short maturities. The
amounts shown for mortgages and other debt also approximate fair value because
current interest rates and terms offered to the Company for similar debt are
substantially the same.
CASH EQUIVALENTS:
For purposes of the statement of cash flows, cash equivalents include all highly
liquid debt instruments with original maturities of three months or less which
are not securing any corporate obligations.
CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist of cash and accounts receivable. The Company places its
cash with a financial institution in Canada, which is not covered by the Canada
Deposit Insurance Corporation. The Company extends credit based on an evaluation
of the customer's financial condition, generally without collateral. Exposure to
losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses, if required.
10
F-9
INVENTORY:
Inventories are valued at the lower of cost (first-in, first-out basis) or
market.
CAPITAL ASSETS:
Capital assets are stated at cost or net replacement amount. Depreciation, based
on the estimated useful lives of the assets, is provided on a straight-line
basis over the following periods:
Building 20 years
Manufacturing Equipment 10 years
Trucks 3 years
Depreciation expense was $33,832 and $0 for the three months ended July 31, 2002
and 2001, respectively.
REVENUE RECOGNITION:
The Company recognizes sales upon shipment of goods to customers.
IMPAIRMENT OF LONG-LIVED ASSETS:
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", long-lived assets to be
held and used are analyzed for impairment whenever events or changes in
circumstances indicate that the related carrying amounts may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. If there are
indications of impairment, the Company uses future undiscounted cash flows of
the related asset or asset grouping over the remaining life in measuring whether
the assets are recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value. Long- lived assets to be disposed of are reported at
the lower of carrying amount or fair value of asset less cost to sell.
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F-10
ADVERTISING COSTS:
Advertising costs are expensed as incurred. Advertising expense includes costs
related to promoting the D'Angelo brand name and amounted to $0 for the three
months ended July 31, 2002 and July 31, 2001.
TRANSLATION OF FOREIGN CURRENCY:
The Company translates the foreign currency financial statements of its
subsidiaries in accordance with the requirements of SFAS No. 52, "Foreign
Currency Translation". Assets and liabilities are translated at current exchange
rates and related revenues and expenses are translated at average exchange rates
in effect during the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity (deficiency). Foreign currency
transaction gains and losses are included in determining net income.
INCOME TAXES:
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences, and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
NET LOSS PER COMMON SHARE:
The Company calculates net loss per share based on SFAS No. 128, "Earnings Per
Share". Basic loss per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. At July 31, 2002, the
weighted average common shares outstanding would have been increased by
30,854,396 shares of the Company's common stock if the Exchangeable Shares had
been dilutive.
12
F-11
COMPREHENSIVE INCOME:
SFAS No. 131 "Reporting Comprehensive Income", establishes standards for the
reporting and displaying of comprehensive income and its components in the
financial statements. In accordance with SFAS No. 52, the Company has a Foreign
Currency Translation Adjustment. This is a component of the Company's
Comprehensive Loss, which is displayed as a component of the Statement of
Operation and Comprehensive Loss.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Goodwill and certain intangible
assets will remain on the balance sheet and not be amortized. On an annual
basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets must be tested for impairment, and write
downs may be necessary. The Company adopted SFAS No. 141 on July 1, 2001 and the
adoption did not have an effect on the Company's financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. The Company was required to implement SFAS No. 142 on January 1,
2002 and the adoption did not have an effect on the Company's financial position
or results of operation.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which requires companies to record the fair value of a liability
for asset retirement obligations in the period in which they are incurred. The
statement applies to a company's legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would
13
F-12
capitalize the cost, thereby increasing the carrying amount of the related
asset. The capitalized asset retirement cost is depreciated over the life of the
respective asset while the liability is accredited to its present value. Upon
settlement of the liability, the obligation is settled at its recorded amount or
the company incurs a gain or loss. The statement is effective for fiscal years
beginning after June 30, 2002. The Company does not expect the adoption to have
a material impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction
(issued 4/02)," which the Company does not believe will materially affect its
financial statements.
2. CAPITAL ASSETS
Three months ended
-----------------------------------------------------------
July 2002 July 2002
------------------------------------------- ------------
Accumulated Net Carrying Net Carrying
Cost Amortizations Amount Amount
--------- ------------- ------------ ------------
Land 938,074 -- 938,074 --
Building 1,098,292 50,044 1,048,248 --
Manufacturing Equipment 707,420 23,326 684,095 --
Office Equipment 13,780 473 13,308
Trucks 48,120 33,058 15,062 33,512
--------- ------- --------- ------
2,805,686 106,901 2,698,786 33,512
14
F-13
3. MORTGAGES AND OTHER DEBT
THREE MONTHS ENDED
---------------------
JULY 2002 July 2001
First mortgage on the property located at 14
Brewster Road, Brampton Ontario, Canada ("the
Property"). The mortgage matures on May 1,
2003. The interest rate is 10.5% per annum and
is payable monthly on the first of every month. 1,586,798 --
Second mortgage on the Property owed to
D. Dunsmuir Investments Canada Limited. The
mortgage bears interest at 16% per annum and is
payable monthly. The principal was due February
9, 2002 but was renewed on a month to month
basis after this date under the same terms. 412,567 --
Third mortgage on the Property owed to Reagens
Canada Ltd. The mortgage bears interest at 20%
per annum payable monthly. The principal was
due January 28, 2002 but was renewed on a month
to month basis after this date under the same
terms. 117,423 --
Promissory demand note owed to D. Dunsmuir
Investments Canada Limited jointly and
severally with an officer of the Company ("The
Note"). The Note bears interest at 16% per
annum up to May 1, 2002 and 20% per annum
thereafter until the date of repayment. The
principal may be repaid, in whole or in part,
at any time with or without notice. The Note is
secured by:
i) a general security agreement covering
all assets of D'Angelo Brands Ltd.
including inventory, equipment and
accounts receivable.
ii) fourth registered charge on the
Property
iii) first registered charge on all
production equipment 698,191 --
Promissory demand note owed to David Stewart
jointly and severally with an officer of the
Company. The note bears interest at 5% per
annum to the date of payment. The principal may
be repaid, in whole or in part, at any time
with or without notice. 253,888 --
Demand promissory note advanced from D.
Dunsmuir Investments Canada Limited. Interest
on the promissory note is payable monthly at
the rate of 14% per annum up to and including
August 21, 2002 and at the rate of 20% per
annum from August 22, 2002 to the date of
repayment in full. 317,360 --
---------------------
3,386,227 --
15
F-14
4. COMMON STOCK
CLASS A COMMON STOCK
On July 31, 2002, 5,095,604 Exchangeable Shares were converted to Class A
common shares of the Company.
CLASS B COMMON STOCK
In connection with the Company's acquisition of D'Angelo Acquisitions Inc., as
outlined in note 1 above, 36,000,000 Exchangeable Shares of Acquisitions were
issued. The Exchangeable Shares issued were further described as Class B
Special, subordinated, non-voting special shares. Each share is exchangeable
into one share of the Company's common stock subject to the terms as follows:
a) each exchangeable share may be exchanged for one common share of the
Company at any time during the period ending on and including the day
of the fifth anniversary of the closing date. (October 29, 2001)
b) each exchangeable share may be exchanged for one common share at the
request of Acquisitions:
i) on the occurrence of a take over bid for all of the issued and
outstanding shares of the Company; or
ii) after the fifth anniversary of the closing date;
c) in case the Company shall:
i) subdivide its outstanding common shares into a greater number of
shares; or
ii) consolidate its outstanding common shares into a smaller number of
shares; or
iii) issue common shares of the Company to the holders of its
outstanding common shares by way of a stock dividend, then the
number of Company shares into which the Exchangeable Shares may be
converted on the effective date of such subdivision or
consolidation or on the record date for such stock dividend, as
the case may be, shall, in the case of the events referred to in
i) and ii) above, be decreased in proportion to the total number
of common shares of the Company resulting from such subdivision or
issue, or shall, in the case of the event referred to in ii)
above, be increased in proportion to the total number of
outstanding common shares of the Company resulting from such
consolidation; and
16
F-15
d) the adjustments provided for in c) above are cumulative and shall apply
to successive dividends, distributions, subdivisions, consolidations,
issues or other events resulting in any adjustment under the provisions
of c) above;
e) all of the foregoing rights, privileges and conditions and the exercise
or fulfillment thereof shall be subject to the relevant securities
laws.
On July 31, 2002, 5,095,604 Exchangeable Shares were converted to Class A common
shares of the Company.
5. SIGNIFICANT CUSTOMER
For the three months ended July 31, 2002, one customer accounted for
approximately 59% and another customer accounted for approximately 28% of the
Company's sales.
6. RELATED PARTY TRANSACTIONS
D'Angelo Brands Ltd. has entered into a 25 year Royalty Agreement for the use of
intellectual property (i.e. Trademarks etc.) held by a related Company under
common control. The agreement requires Brands to pay 3% of gross revenue from
sales of all branded products. D'Angelo Brands Ltd. is obligated to pay a
minimum of $191,410 to a maximum of $510,428 in royalties during each calendar
year. The agreement commenced on March 22, 2001. As of July 31, 2002, $271,015,
had been accrued but not paid.
As of July 31, 2002, $333,483 was owed to the Company by a director and officer.
The Advances are non-interest bearing.
In connection with the Share Exchange Agreement outlined in note 1 above, the
Company entered into a Settlement Agreement with Stewart Garner, its former
President. Under the terms of the agreement, the Company is to pay Mr. Garner
the sum of $70,000 in ten equal monthly payments of $7,000 each. The payments
are payable on the 15th of each month commencing on November 15th 2001. As of
July 31, 2002, the $70,000 has been accrued but no payments had been made.
17
F-16
7. COMMITMENTS AND CONTINGENCIES
A claim was issued in the Ontario Supreme Court of Justice on August 7, 2001 on
behalf of D'Angelo Brands Ltd. v. Les Aliments Lexus Foods Inc. The claim is an
action for outstanding commissions in the amount of $63,000 plus $319,000 in
general damages for breach of contract. Les Aliments Lexus Foods defended the
claim and subsequently counterclaimed for damages and breach of contract in the
amount of $191,000 and for fraud and negligent misrepresentation for the same
amount. Les Aliments has amended its statement of defense and counterclaim to
include the same claims as before and, in addition, a declaration that Les
Aliments has the right, title and interest in the D'Angelo trademarks. It is the
opinion of management and legal counsel that the counterclaim by Les Aliments is
spurious and simply an attempt to discourage pursuit of the commissions owing to
D'Angelo Brands Ltd.
On or about May 29, 2002, the Company had not registered, within 180 days, the
600,000 shares as required per a Registration Rights Agreement with Penguin
Petroleum Products Inc. ("Penguin") dated November 30, 2001. As a result, as per
the Registration Rights Agreement, Penguin will receive an additional 300,000
registerable securities of the Company. The Company recorded an expense for
this penalty in the amount of $45,000, the fair market value for these shares on
the date of the breach.
In connection with the issuance of the Exchangeable Shares, a Registration
Rights Agreement dated November 12, 2001, was attached to 250,000 of these
shares issued to Comerica Bank. As the registration was not effective within 120
days of the date of the agreement, Comerica Bank will receive another 100,000
registrable shares of the Company. Although the shares have not yet been issued,
the expense related to the issuance of these shares of $27,000 has been accrued.
In connection with the promissory demand note to D. Dunsmuir Investments Canada
Limited, in the amount of $698,131, outlined in note 3 above, a commitment was
made to issue 1,000,000 shares of the Company, which shares were to be
restricted from trading until April 7, 2003 and 600,000 shares of the Company
which are to be free trading shares. Although the shares have not yet been
issued, the expense relating to the issuance of these shares of $374,000 has
been accrued as a financing charge.
On June 21, 2002, $317,360 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note in the same amount. In consideration of the
advance, the Company agreed to issue 500,000 free trading shares of the
Company's common stock, with a fair market value of $120,000, to D. Dunsmuir
Investments Canada Limited.
In July 2002 an agreement was signed with Penguin Petroleum Products Inc.
("Penguin") whereby the Company agreed to issue 600,000 free trading shares to
Penguin. Although the shares have not yet been issued, the expense related to
the issuance of these shares of $123,000 has been accrued as a financing
expense.
18
F-17
The Company's future minimum annual lease payments required under operating
leases that have initial or non cancelable lease terms in excess of one year
owing over the next 5 years are as follows:
THREE MONTHS ENDED
------------------
July 31, 2003 $15,308
July 31, 2004 17,689
July 31, 2005 11,123
July 31, 2006 7,200
8. INCOME TAXES
The components of the provision for income taxes is as follows:
2002 2001
---- ----
Current tax expense:
Canada -- --
United States -- --
---- ----
Total Current -- --
==== ====
Deferred tax expense:
Canada -- --
United States -- --
---- ----
Total Deferred -- --
==== ====
Total tax provision from
continuing operations -- --
==== ====
19
F-18
Deferred tax assets and liabilities reflect the net effect of temporary
differences between the carrying amount of assets and liabilities for book
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
2002 2001
---------- --------
Deferred Tax Assets:
Loss carry forwards 1,355,481 267,485
Other temporary differences 63,778 449
Less valuation allowance (1,419,259) (267,934)
Net Deferred tax assets -- --
---------- --------
At July 31, 2002, the Company has provided a valuation allowance for the
deferred tax asset since, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax asset is not realizable. Net
operating loss carry forwards expire starting in 2007.
9. SUBSEQUENT EVENTS
On September 6, 2002, the Company signed a registration rights agreement with
Penguin which replaced the registration rights agreement with Penguin dated
November 30, 2001. The Company agreed to register 2,500,000 shares before March
5, 2003.
On September 13, 2002, $756,240 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note owed jointly and severally by the Company
and an officer of the Company. The note bears interest payable monthly at 20%
per annum until the date of repayment, provided no interest shall be payable if
the principle is repaid on or before September 30, 2002. In connection with the
promissory note the Company agreed to pay a commitment fee of $378,120, issue
500,000 free trading shares of the Company to Douglas Dunsmuir and issue
warrants to purchase in total 4,000,000 free trading shares of the Company at
any time prior to September 13, 2007 at $.175 per share.
On September 16, 2002, the Company purchased a processing plant located in
Tiverton, Ontario. As consideration for the purchase of the plant, the Company
will issue an eighteen month, non-convertible debenture in the amount of
$3,165,000 at prime, along with 15 million common share purchase warrants with a
strike price of $.30 per share.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related footnotes for the
quarterly period ended July 31, 2002 included in its Quarterly Report on Form
10-QSB.
RESULTS OF OPERATIONS
Comparing the three months ended July 31, 2002 to the three months ended July
31, 2001
Sales. For the three months ended July 31, 2002, sales were $743,978, an
increase of $444,999 over the $298,979 sales for the three months ended July 31,
2001. The increase in sales resulted from the sales of beverage products which
began to be produced in the Company's manufacturing facility in April 2002.
Gross Profit. Gross profit was ($116,449) for the three months ended July 31,
2002, a decrease of $163,889 compared to gross profit of $47,440 for the three
months ended July 31, 2001. The decrease in gross profit was primarily
attributable to higher repair and maintenance costs, product development costs
and ingredients and packaging usage waste related to the start-up of the new
production line in April 2002. In addition rent, property taxes, utilities,
insurance and indirect labour and other fixed costs were incurred on the
manufacturing facility in this start-up period of relatively low production.
Selling, Marketing, Distribution and Warehousing Expenses. Selling, marketing,
distribution and warehousing expenses were $153,749 for the three months ended
July 31, 2002, an increase of $50,911 over selling, marketing, distribution and
warehousing expenses of $102,838 for the three months ended July 31, 2001. This
increase was due to higher salaries and higher expenses to operate the warehouse
which was acquired later in 2001.
General and Administrative Expenses. General and administrative expenses were
$270,958 for the three months ended July 31, 2002, an increase of $105,800 over
general and administrative expenses of $165,158 for the three months ended July
31, 2001. The increase was due to higher salaries, higher amortization and
higher legal and accounting expenses. The higher legal and accounting expenses
are primarily as a result of the Company becoming a publicly reporting company
pursuant to securities laws.
21
Financing Expenses. Financing expenses were $288,000 for the three months ended
July 31, 2002, an increase of $231,467 over the financing expenses of $56,533
for the three months ended July 31, 2001. The large increase is a result of
providing for shares to be issued at below market value to Penguin Petroleum
Products Inc. and D. Dunsmuir Investments Canada Limited.
Interest. Interest was $107,218 for the three months ended July 31, 2002, an
increase of $107,218 over interest of $0 for the three months ended July 31,
2001. The increase was a result of financing the warehouse, corporate office and
manufacturing equipment.
Provision for Income Taxes. As the Company generated losses, no provision has
been made for income taxes.
Net Loss. Net Loss was $936,374 for the three months ended July 31, 2002, an
increase of $659,285 over the net loss of $277,089 for the three months ended
July 31, 2001. The increase in the net loss was a result of lower gross profit
and higher selling, marketing, distribution, warehousing, general and
administrative expenses, financing expenses and interest.
LIQUIDITY AND CAPITAL RESOURCES
Comparing the three months ended July 31, 2001 to the three months ending July
31, 2002
As of July 31, 2002, the Company had a working capital deficiency of $6,077,403
compared to a working capital deficiency of $372,595 as of July 31, 2001. The
decrease in working capital was a result of financing the cash losses and the
property located at 14 Brewster Road, Brampton, Ontario, Canada (the "Property")
and manufacturing equipment purchases through the use of short term financing in
the form of accounts payable, accrued liabilities, mortgages and other debt.
Net cash used for operating activities was $344,466 for the three months ended
July 31, 2002, an increase of $395,966 from the $51,500 net cash provided from
operating activities for the three months ended July 31, 2001. The increase
resulted mainly from the net loss offset partially by the increase in accounts
payable and accrued liabilities.
Net cash used for investing activities for the three months ended July 31, 2002
was $31,752, as compared to no net cash used for investing activities for the
three months ended July 31, 2001. The increase in net cash used for investing
activities as compared to the prior year was a result of additions to capital
assets.
Net cash provided from financing activities for the three months ended July 31,
2002 was $352,857, as compared to the $42,406 net cash used for financing
activities for the three months ended July 31, 2001. The increase in net cash
provided from financing activities was a result of the increase in mortgages and
other debt during the quarter ended July 31, 2002.
22
On May 2, 2002, a new first mortgage was registered against the Property.
On June 21, 2002, $317,360 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note in the same amount. Interest on the
promissory note is payable monthly at the rate of 14% per annum up to and
including August 21, 2002 and at the rate of 20% per annum from August 22, 2002
to the date of repayment in full. In consideration of the advance, the company
agreed to issue 500,000 free trading shares of the Company to D. Dunsmuir
Investments Canada Limited. From the proceeds of the advance, the third mortgage
on the Property (now the 4th mortgage) was repaid in full and $79,730 was
applied to pay down a portion of the balance remaining of the 2nd mortgage (now
the 3rd mortgage).
Subsequent to July 31, 2002, the Company received additional debt financing as
follows:
On September 13, 2002, $756,240 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note owed jointly and severally by the Company
and an officer of the Company. The note bears interest payable monthly at 20%
per annum until the date of repayment; provided no interest shall be payable if
the principle is repaid on or before September 30, 2002. In connection with the
promissory note the Company agreed to pay a commitment fee of $378,120, issue
500,000 free trading shares of the Company's common stock to Douglas Dunsmuir
and issue warrants to purchase in total 4,000,000 free trading shares of the
Company at any time prior to September 13, 2007 at $.175 per share. The
financing was used to repay $94,530 of the promissory note owed to David Stewart
and the remainder for working capital requirements.
On September 16, 2002, the Company purchased a processing plant located in
Tiverton, Ontario. As consideration for the purchase of the plant, the Company
will issue an eighteen month, non-convertible debenture in the amount of
$3,165,000 at prime, along with 15 million common share purchase warrants with a
strike price of $.30 per share. The first interest payment on the debenture is
not due until December 2002.
The Company has certain cash requirements to expand its business, execute its
sales and marketing goals; fund working capital needs and pay down commitments
including interest and principal payments on the debt which all matures in the
next year. Management estimates that in excess of $6,000,000 will need to be
repaid or refinanced over the next fiscal year in addition to the current trade
liabilities it is incurring.
The Company is currently in discussions and negotiations to obtain the financing
required to meet these obligations as they become due. The financing may be in
the form of debt or equity or a combination thereof. As a result of the
Company's current financial condition, there is no assurance that the financing
will be obtainable on favourable terms or at all.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A claim was issued in the Ontario Supreme Court of Justice on August 7, 2001 on
behalf of D'Angelo Brands Ltd. v. Les Aliments Lexus Foods Inc. The claim is an
action for outstanding commissions in the amount of $63,000 plus $319,000 in
general damages for breach of contract. Les Aliments Lexus Foods defended the
claim and subsequently counterclaimed for damages and breach of contract in the
amount of $191,000 and for fraud and negligent misrepresentation for the same
amount. Les Aliments has amended its statement of defense and counterclaim to
include the same claims as before and, in addition, a declaration that Les
Aliments has the right, title and interest in the D'Angelo trademarks. It is
the opinion of management and legal counsel that the counterclaim by Les
Aliments is spurious and simply an attempt to discourage pursuit of the
commissions owing to D'Angelo Brands Ltd.
ITEM 2. CHANGES IN SECURITIES
RECENT ISSUANCES OF UNREGISTERED SECURITIES
With respect to the issuances and transfers made, the registrant relied on
Section 4(2) of the Securities Act of 1933, as amended. No advertising or
general solicitation was employed in offering the shares. The securities were
offered for investment only and not for the purposes of resale or distribution,
and the transfer thereof was appropriately restricted.
On July 30, 2002 the Company issued 5,095,000 shares of its common stock in
exchange for 5,095,000 Exchangeable Shares. Exchangeable Shares are Class B
Special Shares of Acquisitions which are subordinate, non-voting special shares
authorized in an unlimited number, each Exchangeable Share entitling its owner
to one share of the Company's common stock on the following terms:
a) each exchangeable share may be exchanged for one common share of the
Company at any time during the period ending on and including the day
of the fifth anniversary of the closing date. (October 29, 2001)
b) each exchangeable share may be exchanged for one common share at the
request of Acquisitions:
i) on the occurrence of a take over bid for all of the issued and
outstanding shares of the Company or;
ii) after the fifth anniversary of the closing date;
ITEM 5. OTHER INFORMATION
Management has determined that certain items included in the financial
information filed by the Company on Form 10-QSB for the quarters ended October
31, 2001 and January 31, 2002 was materially incorrect. The Company is in the
process of correcting the financial information and, once corrected, will file
amended reports for these quarters. The incorrect information included in the
reports for the quarters ended October 31, 2001 and January 31, 2002 will not
require the Company to restate the financial information included in the Form
10-KSB for the year ended April 30, 2002, which was filed with the Securities
and Exchange Commission on August 13, 2002.
In July 2002 an agreement was signed with Penguin Petroleum Products Inc.
("Penguin") whereby the Company agreed to issue 600,000 free trading shares to
Penguin. Although the shares have not yet been issued, the expense related to
the issuance of these shares of has been accrued as a financing expense in the
amount of $123,000.
24
On September 6, 2002, the Company signed a registration rights agreement with
Penguin which replaced the registration rights agreement with Penguin dated
November 30, 2001. The Company agreed to register a total of 2,500,000 shares of
its common stock before March 5, 2003.
On September 13, 2002, $756,240 was advanced from D. Dunsmuir Investments Canada
Limited for a demand promissory note owed jointly and severally by the Company
and an officer of the Company. The note bears interest payable monthly at 20%
per annum until the date of repayment, provided no interest shall be payable if
the principle is repaid on or before September 30, 2002. In connection with the
promissory note the Company agreed to pay a commitment fee of $378,120, issue
500,000 free trading shares of the Company's common stock to Douglas Dunsmuir
and issue warrants to purchase in total 4,000,000 free trading shares of the
Company at any time prior to September 13, 2007 at $.175 per share. The
financing was used to repay $94,530 of the promissory note owed to David Stewart
and the remainder for working capital requirements.
On September 16, 2002, the Company purchased a processing plant located in
Tiverton, Ontario. As consideration for the purchase of the plant, the Company
will issue an eighteen month, non-convertible debenture in the amount of
$3,165,000 at prime, along with 15 million common share purchase warrants with a
strike price of $.30 per share.
ITEMS 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
2.1 Share Exchange Agreement (incorporated by reference to
exhibit 2.1 to the Company's Current Report on Form 8-K
filed with the Commission on January 15, 2002).
3.1(a) Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Amended Form 10-SB filed with the
Commission on May 31, 2000).
3.1(b) Certificate of Change in Authorized Shares Pursuant to NRS
78.209 (incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-8 filed with the
Commission October 9, 2001).
25
Exhibit No. Description
3.1(c) Certificate of Amendment re Name Change (incorporated by
reference to Exhibit 3.1 to the Company's Current Report on
Form 8-K filed with the Commission on January 15, 2002).
3.2 Restated By-laws (incorporated by reference to Exhibit 4.4
to the Company's Registration Statement on Form S-8 filed
with the Commission on October 9, 2001).
10.1 Demand promissory note to D. Dunsmuir Investment Canada
Limited, dated June 21, 2002 attached.
99.1 Certifications pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
99.2 Certification of Principal Executive and Officers pursuant
to Rules 13a-14 and 15d-14 of the Securities Exchange Act of
1934.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
D'ANGELO BRANDS, INC.
By: /s/ Frank D'Angelo
Frank D'Angelo, President and Principal Accounting Officer
Date: September 17, 2002
27