---------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 000-25039
BRAVO! FOODS INTERNATIONAL CORP.
(Exact name of registrant as specified in its amended charter)
formerly
China Premium Food Corporation
Delaware 62-1681831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, North Palm Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 625-1411
Registrant's telephone number
--------------------------------------------------------------
(Former name, former address and former fiscal year if changed
since last report)
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
May 3, 2005 Common Stock 63,488,591
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [x]
BRAVO! FOODS INTERNATIONAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated balance sheets as of December 31, 2004 F-1
and March 31, 2005 (unaudited)
Consolidated statements of operations F-3
(unaudited) for the three months ended
March 31, 2004 and 2005
Consolidated statements of cash flows F-4
(unaudited) for the three months ended
March 31, 2004 and 2005
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds 24
Item 6. Exhibits 27
SIGNATURES 27
EXHIBITS 28
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2005
------------ ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 113,888 $ 117,559
Accounts receivable 51,968 35,124
Inventories 11,656 4,675
Prepaid expenses 551,510 740,213
------------ ------------
Total current assets 729,022 897,571
Furniture and equipment, net 111,206 114,643
License rights, net of accumulated amortization 67,301 231,045
Trademarks, net 10,249 9,945
Deferred product development costs 162,169 174,755
Deposits 13,900 13,900
------------ ------------
Total assets $ 1,093,847 $ 1,441,859
============ ============
Liabilities and Capital Deficit
Current liabilities:
Note payable to International Paper $ 187,743 $ 187,743
Note payable to Alpha Capital 217,954 277,796
Note payable to Mid-Am Capital LLC 111,262 112,480
Note payable to Libra Finance 40,106 42,709
Note payable to Longview 54,086 177,632
Note payable to Stonestreet 47,014 62,257
Note payable to Whalehaven 17,082 55,335
Note payable to Bi-Coastal 13,649 15,628
Note payable to Gem Funding 8,231 10,209
Note payable to Warner Brothers 147,115 147,115
Note payable to Gamma Capital 59,678 -
Note payable to Momona Capital 25,885 36,979
Note payable to Ellis International 25,885 36,979
Accounts payable 1,763,339 2,026,994
Accrued liabilities 375,962 480,186
------------ ------------
Total current liabilities 3,094,991 3,670,042
Dividends payable 928,379 1,023,439
Other notes payable 100,171 118,831
------------ ------------
Total liabilities 4,123,541 4,812,312
------------ ------------
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2004 2005
------------ ---------
(unaudited)
Commitments and contingencies
Capital Deficit (Note 2):
Series B convertible, 9% cumulative, and redeemable
preferred stock, stated value $1.00 per share,
1,260,000 shares authorized, 107,440 shares issued
and outstanding, redeemable at $107,440 107,440 107,440
Series F convertible and redeemable preferred stock,
stated value $10.00 per share, 55,515 shares
issued and outstanding 512,740 512,740
Series H convertible, 7% cumulative and redeemable
preferred stock, stated value $10.00 per share,
165,500 shares issued and outstanding 895,591 895,591
Series I convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
30,000 shares issued and outstanding 72,192 72,192
Series J convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
200,000 shares issued and outstanding 1,854,279 1,854,279
Series K convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
95,000 shares issued and outstanding 950,000 950,000
Common stock, par value $0.001 per share,
300,000,000 shares authorized, 57,793,501 and
61,481,295 shares issued and outstanding 57,794 61,481
Additional paid-in capital 26,257,299 27,253,377
Accumulated deficit (33,737,029) (35,069,337)
Translation adjustment - (8,216)
------------ ------------
Total capital deficit (3,029,694) (3,370,453)
------------ ------------
Total liabilities and capital deficit $ 1,093,847 $ 1,441,859
============ ============
See accompanying notes.
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2004 2005
----------- -----------
(unaudited) (unaudited)
Revenue - unit sales $ 367,458 $ 864,420
Revenue - gross kit sales 70,748 33,350
----------- -----------
Total revenue 438,206 897,770
Cost of sales (330,121) (677,663)
----------- -----------
Gross margin 108,085 220,107
Selling expenses 253,038 623,452
Product development 3,645 63,591
General and administrative expense 700,966 653,247
----------- -----------
Loss from operations (849,564) (1,120,183)
Other income (expense)
Interest expense, net 31,685 117,065
Loss before income taxes (881,249) (1,237,248)
Provision for income taxes - -
Net loss (881,249) (1,237,248)
Dividends accrued for Series B preferred stock (2,411) (2,384)
Dividends accrued for Series G preferred stock (10,864) -
Dividends accrued for Series H preferred stock (28,883) (28,566)
Dividends accrued for Series I preferred stock (5,984) (5,918)
Dividends accrued for Series J preferred stock (39,890) (39,452)
Dividends accrued for Series K preferred stock (5,436) (18,740)
----------- -----------
Net loss applicable to common shareholders $ (974,717) $(1,332,308)
=========== ===========
Weighted average number of common shares
outstanding 31,001,544 59,618,018
=========== ===========
Basic and diluted loss per share $ (0.03) $ (0.02)
=========== ===========
Comprehensive loss and its components
consist of the following:
Net loss $ (881,249) $(1,237,248)
Foreign currency translation adjustment - (8,216)
----------- -----------
Comprehensive loss $ (881,249) $(1,245,464)
=========== ===========
See accompanying notes.
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2004 2005
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (881,249) $(1,237,248)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 59,100 100,726
Stock issuance for compensation, finders'
fee and due diligence fees 90,000 57,500
Increase (decrease) from changes in:
Accounts receivable 5,877 16,844
Inventories (10,000) 6,981
Prepaid expenses (242,762) (188,703)
Accounts payable and accrued expenses 409,736 412,704
Deferred product development costs (202,952) (268,564)
----------- -----------
Net cash used in operating activities (772,250) (1,099,760)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (1,133) (11,625)
----------- -----------
Net cash used in investing activities (1,133) (11,625)
----------- -----------
Cash flows from financing activities:
Proceeds of Series K preferred stock 800,000 -
Convertible notes payable - 1,150,000
Registration costs for financing - (26,728)
----------- -----------
Net cash provided by financing activities 800,000 1,123,272
----------- -----------
Effect of changes in exchange rates on cash - (8,216)
----------- -----------
Net (decrease) in cash and cash equivalents 26,617 3,671
Cash and cash equivalents, beginning of period 58,859 113,888
----------- -----------
Cash and cash equivalents, end of period $ 85,476 $ 117,559
=========== ===========
See accompanying notes.
F-4
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -Interim Periods
The accompanying unaudited consolidated financial statements include
the accounts of Bravo! Foods International, Corp. and its wholly owned
subsidiary Bravo! Brands (UK) Ltd. (the "Company"). The Company is engaged
in the sale of flavored milk products and flavor ingredients in the United
States, Mexico and nine countries in the Middle East, and is establishing
infrastructures to conduct business in Canada and the United Kingdom.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10QSB
and Article 10 of Regulation S-X. All significant inter-company accounts
and transactions have been eliminated in consolidation. The consolidated
financial statements are presented in U.S. dollars. Accordingly, the
accompanying financial statements do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the period
ended March 31, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report for the year ended December 31,
2004 .
As shown in the accompanying consolidated financial statements, the
Company has suffered operating losses and negative cash flow from
operations since inception and has an accumulated deficit of $35,069,337, a
capital deficit of $3,370,453, negative working capital of $2,772,471 and
is delinquent on certain of its debts at March 31, 2005. Further, the
Company's auditors stated in their report on the Company's Consolidated
Financial Statements for the year ended December 31, 2004, that these
conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management plans to increase gross profit margins in
its U.S. business, grow its international business, obtain additional
financing and is in the process of repositioning its products with the
continued launch of four product lines and the initiation of an additional
two new lines. While there is no assurance that funding will be available
or that the Company will be able to improve its profit margins, the Company
is continuing to actively seek equity and/or debt financing and has raised
$2,300,000 in the three months ending March 31, 2005, with half invested in
January 2005 and the balance anticipated in the second quarter. No
assurances can be given that the Company will be successful in carrying out
its plans. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Revenue Recognition
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of finished product to wholesale
buyers. Commencing with the first quarter 2004, the Company no longer uses
the sale of "kits" as a revenue event in the United States. Rather,
F-5
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the Company takes title to its branded flavored milks when they are shipped
by the Company's third party processors and recognize as revenue the gross
wholesale price charged to the Company's wholesale customers. Expenses for
slotting fees and certain promotions are treated as a reduction of reported
revenue. The Company determines gross margin by deducting from the reported
wholesale price the cost charged by the Company's third party processors to
produce the branded milk products. The sale of "kits" will remain as the
revenue model for the Company's international business, with the exception
of the United Kingdom and Canada, where the domestic business model will be
implemented.
The Company recognizes revenue for its international business at the
gross amount of its invoices for the sale of flavor ingredients and
production rights (collectively referred to as "kits") at the time of
shipment of flavor ingredients to processor dairies with whom the Company
has production contracts for extended shelf life and aseptic long life
milk. This recognition is based upon the Company's role as the principal in
these transactions, its discretion in establishing kit prices (including
the price of flavor ingredients and production right fees), its development
and refinement of flavors and flavor modifications, its discretion in
supplier selection and its credit risk to pay for ingredients if processors
do not pay ingredient suppliers. The revenue generated by the production
contracts under this model is allocated for the processors' purchase of
flavor ingredients and fees charged by the Company to the processors for
production rights. The Company formulates the price of production rights to
cover its royalties under intellectual property licenses, which varies by
licensor as a percentage of the total cost of a kit sold to the processor
dairy under the production agreement. The Company recognizes revenue on the
gross amount of "kit" invoices to the dairy processors and simultaneously
records as cost of goods sold the cost of flavor ingredients paid by the
processor dairies to ingredients suppliers. The recognition of revenue
generated from the sale of production rights associated with the flavor
ingredients is complete upon shipment of the ingredients to the processor,
given the short utilization cycle of the ingredients shipped. The criteria
to meet this guideline are: 1) persuasive evidence that an arrangement
exists, 2) delivery has occurred or services have been rendered, 3) the
price to the buyer is fixed or determinable and 4) collectibility is
reasonably assured.
The Company follows the final consensus reached by the Emerging
Issues Task Force (EITF) 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent". In certain circumstances in its U.S. business, the
Company is required to pay slotting fees, give promotional discounts or
make marketing allowances in order to secure wholesale customers. These
payments, discounts and allowances reduce the Company's reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff
Accounting Bulletin No. 104. Pursuant to EITF 99-19, international sales of
kits made directly to customers by the Company are reflected in the
statements of operations on a gross basis, whereby the total amount billed
to the customer is recognized as revenue.
Stock-based Compensation
The Company has adopted the intrinsic value method of accounting for
employee stock options as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-
F-6
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
based Compensation" (SFAS No. 123) and discloses the pro forma effect on
net loss and loss per share as if the fair value based method had been
applied. For equity instruments, including stock options issued to non-
employees, the fair value of the equity instruments or the fair value of
the consideration received, whichever is more readily determinable, is used
to determine the value of services or goods received and the corresponding
charge to operations.
The Company did not issue stock options or other equity to its employees
and management during the three months ending March 31, 2005.
Note 2 - Transactions in Capital Deficit
On January 18, 2005, we converted $35,931 of our April 2004
Convertible Promissory Note into 500,000 shares of common stock pursuant to
a January 14, 2005 notice of conversion from Longview Fund LP, at a fixed
conversion price of $0.10. The conversion included $14,068 of accrued and
unpaid interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to our SB-2 registration statement, declared
effective on August 3, 2004.
On January 19, 2005, we converted $64,068 of our April 2004
Convertible Promissory Note into 641,387 shares of common stock pursuant to
a January 19, 2005 notice of conversion from Longview Fund LP, at a fixed
conversion price of $0.10. The conversion included $70 of accrued and
unpaid interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to our SB-2 registration statement, declared
effective on August 3, 2004.
On January 31, 2005, we closed a funding transaction with Longview
Fund, LP, Longview Equity Fund, LP, Longview International Equity Fund, LP,
Alpha Capital Aktiengesellschaft and Whalehaven Funds Limited, five
institutional accredited investors, for the issuance and sale to the
Subscribers of up to $2,300,000 of principal amount of promissory notes
convertible into shares of our common stock, and Warrants to purchase
shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. One Million One Hundred
Fifty Thousand Dollars ($1,150,000) of the purchase price was paid on the
initial closing date, and One Million One Hundred Fifty Thousand Dollars
($1,150,000) of the purchase price will be payable within five (5) business
days after the actual effectiveness of an SB-2 Registration Statement as
defined in the Subscription Agreement. The initial closing notes were at
prime plus 4% interest in the aggregate amount of $1,150,000, plus five-
year Warrants for the purchase of, in the aggregate, 9,200,000 shares of
common stock, at the lesser of (i) $0.16, or (ii) 101% of the closing bid
price of the Common Stock as reported by Bloomberg L.P. for the OTC
Bulletin Board for the trading day preceding the Closing Date. The notes
are convertible into shares of our common stock at $0.125 per common share.
Conversions are limited to a maximum ownership of 9.99% of the underlying
common stock at any one time. The notes have a maturity date two years from
closing and are payable in twelve equal monthly installments, commencing
June 1, 2005. The installment payments consist of principal equal to 1/20th
of the initial principal amount which, subject to certain conditions
F-7
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
concerning trading volume and price, can be paid in cash at 103% of the
monthly installment, or common stock or a combination of both. The notes
have an acceleration provision upon the change in a majority of the present
Board of Directors except as the result of the death of one or more
directors, or a change in the present CEO. In connection with this
transaction, we issued restricted common stock in the aggregate amount of
460,000 shares plus the aggregate cash amount of $57,500 for due diligence
fees to the investors in this transaction.
On February 14, 2005, we converted $41,666 of our June 2004
Convertible Promissory Note into 430,327 shares of restricted common stock
pursuant to a February 9, 2005 notice of conversion from Longview Fund LP,
at a fixed conversion price of $0.15. The conversion included $22,882 of
accrued and unpaid interest on the converted amount. We issued the
Convertible Promissory Note and the underlying common stock upon conversion
to an accredited investor, pursuant to a Regulation D offering. The
underlying common stock is registered pursuant to a Form SB-2 registration
statement declared effective April 18, 2005.
On February 16, 2005, we converted $25,000 of our November 2003
Convertible Promissory Note into 549,340 shares of common stock pursuant to
a February 15, 2005 notice of conversion from Gamma Opportunity Capital
Partners LP, at a fixed conversion price of $0.05. The conversion included
$2,467 of accrued and unpaid interest on the converted amount. We issued
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 3, 2004.
On March 23, 2005, we converted $50,000 of our November 2003
Convertible Promissory Note into 1,106,740 shares of common stock pursuant
to a March 22, 2005 notice of conversion from Gamma Opportunity Capital
Partners LP, at a fixed conversion price of $0.05. The conversion included
$5,337 of accrued and unpaid interest on the converted amount. We issued
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 3, 2004.
Note 3 - Business Segment and Geographic Information
The Company operates principally in the single serve flavored milk industry
segment, under two distinct business models. In the United States, the
Company is responsible for the sale of finished Slammers(R) flavored milk
(referred to as "unit sales") to retail outlets. For these unit sales, the
Company recognizes as revenue the invoiced wholesale prices that the
Company charges to the retail outlets that purchase the Slammers(R)
flavored milks. In countries other than the United States, the Company's
revenue is generated by the sale of kits to dairy processors. Each kit
consists of flavor ingredients for the Company's Slammers(R) flavored milks
and production rights to manufacture and sell the milks. In line with the
Company's revenue recognition policies, the Company recognizes the full
invoiced kit price as revenue and credits the processor dairies. The
Company currently sells kits to SADAFCO, a third party dairy processor
located in Saudi Arabia, for distribution to nine Middle Eastern countries,
and Neolac, a third party dairy processor located in Mexico.
F-8
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 - Subsequent Events
On April 14, 2005 and April 18, 2005, we issued 750,000 and 250,000
shares, respectively, of our common stock to Geoffrey Eiten, for services
rendered for strategic business planning. These shares were part of
1,500,000 shares of the Company's common stock registered under a Form S-8
registration statement filed December 23, 2004.
On April 21, 2005, we closed a funding transaction with Alpha Capital
Aktiengesellschaft for the issuance of a convertible 10% note in the
aggregate amount of $300,000. The promissory note is convertible into
shares of common stock of the Company at $0.20 per common share.
Conversions are limited to a maximum ownership of 9.99% of the Company's
common stock at any one time. The note has an October 31, 2005 maturity and
is payable in five equal monthly installments, commencing June 1, 2005. The
installment payments consist of principal (equal to 1/5th of the initial
principal amount) plus accrued interest. Installments can be paid in cash
or common stock valued at the average closing price of the Company's common
stock during the five trading days immediately preceding the relevant
installment due date. The Company has repriced Class B Warrants issued on
June 30, 2004 from $2.00 per share to $0.125 per share, and issued
restricted common stock in the aggregate amount of 93,750 shares for
finder's fees to a third-party to facilitate this transaction. The Company
has the right to prepay the promissory note by paying to the holder cash
equal to 120% of the principal to be prepaid plus accrued interest. The
notes have an acceleration provision upon the change in a majority of the
present Board of Directors except as the result of the death of one or more
directors, or a change in the present CEO of the Company. The common stock
underlying the note and the finder's fee common stock have "piggy back"
registration rights. We issued the convertible note and finder's fee common
stock to accredited investors, pursuant to a Regulation D offering.
On April 22, 2005, we converted $15,000 of our December 2004
Convertible Promissory Note into 154,930 shares of common stock pursuant to
an April 19, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $493 of
accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
On April 23, 2005, we converted $20,000 of our December 2004
Convertible Promissory Note into 200,000 shares of common stock pursuant to
an April 22, 2005 notice of conversion from Ellis International Ltd. Inc.,
at a fixed conversion price of $0.10 per share. The conversion
F-9
did not include interest on the converted amount. We issued the underlying
common stock upon conversion pursuant to a Form SB-2 registration
statement, declared effective on April 18, 2005.
On April 29, 2005, we converted $15,000 of our December 2004
Convertible Promissory Note into 155,137 shares of common stock pursuant to
an April 27, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $514
of accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
On April 29, 2005, we converted $20,000 of our December 2004
Convertible Promissory Note into 300,000 shares of common stock pursuant to
an April 28, 2005 notice of conversion from Ellis International Ltd. Inc.,
at a fixed conversion price of $0.10 per share. The conversion did not
include interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to a Form SB-2 registration statement,
declared effective on April 18, 2005.
On April 29, 2005, we converted $10,000 of our December 2004
Convertible Promissory Note into 103,479 shares of common stock pursuant to
an April 29, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $347
of accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's prospects and strategies and the Company's expectations about
growth contained in this report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the present expectations or beliefs
concerning future events. The Company cautions that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Company's actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the uncertainty as to the Company's
future profitability; the uncertainty as to whether the Company's new
business model can be implemented successfully; the accuracy of the
Company's performance projections; and the Company's ability to obtain
financing on acceptable terms to finance the Company's operations until
profitability.
OVERVIEW
The Company's business model includes the development and marketing
of a Company owned Slammers(R) trademarked brand, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the granting of production and
marketing rights to processor dairies to produce branded flavored milk. The
Company generates revenue in its international (non-US) business through
the sale of "kits" to these dairies. The price of the "kits" consists of an
invoiced price for a fixed amount of flavor ingredients per kit used to
produce the flavored milk and a fee charged to the dairy processors for the
production, promotion and sales rights for the branded flavored milk. In
the United States, the Company generates revenue from the unit sales of
finished branded flavored milks to retail consumer outlets.
The Company's new product introduction and growth expansion continues
to be expensive, and the Company reported a net loss of $1,237,248 for the
three-month period ended March 31 2005. As shown in the accompanying
financial statements, the Company has suffered operating losses and
negative cash flows from operations since inception and at March 31, 2005
has an accumulated deficit of $35,069,337, a capital deficit of $3,370,453,
negative working capital of $2,772,471. These conditions give rise to
substantial doubt about the Company's ability to continue as a going
concern. As discussed herein, the Company plans to work toward
profitability in the Company's U.S. and international business and obtain
additional financing. While there is no assurance that funding will be
available or that the Company will be able to improve the Company's
operating results, the Company is continuing to seek equity and/or debt
financing. No assurances can be given, however, that management will be
successful in carrying out the Company's plans.
11
CORPORATE GOVERNANCE
The Board of Directors
The Company's board has positions for seven directors that are
elected as Class A or Class B directors at alternate annual meetings of the
Company's shareholders. Six of the seven current directors of the Company's
board are independent. The Company's chairman and chief executive officer
are separate. The board meets regularly, at least four times a year, and
all directors have access to the information necessary to enable them to
discharge their duties. The board, as a whole, and the audit committee in
particular, reviews the Company's financial condition and performance on an
estimated vs. actual basis and financial projections as a regular agenda
item at scheduled periodic board meetings, based upon separate reports
submitted by the Company's chief executive officer and chief financial
officer. Directors are elected by the Company's shareholders after
nomination by the board or are appointed by the board when a vacancy arises
prior to an election. The Company has adopted a nomination procedure based
upon a rotating nomination committee made up of those members of the
director Class not up for election. The board presently is examining
whether this procedure, as well as the make up of the audit and
compensation committees, should be the subject of an amendment to the by-
laws.
Audit Committee
The Company's audit committee is composed of three independent
directors and functions to assist the board in overseeing the Company's
accounting and reporting practices. The Company's financial information is
booked in house by the Company's CFO's office, from which the Company
prepares financial reports. These financial reports are audited or reviewed
by Lazar Levine & Felix LLP, independent registered certified accountants
and auditors. The Company's chief financial officer reviews the preliminary
financial and non-financial information prepared in house with the
Company's securities counsel and the auditors. The committee reviews the
preparation of the Company's audited and unaudited periodic financial
reporting and internal control reports prepared by the Company's chief
financial officer. The committee reviews significant changes in accounting
policies and addresses issues and recommendations presented by the
Company's internal and external certified accountants as well as the
Company's auditors. Currently, there is one vacancy on the audit committee.
Compensation Committee
The Company's compensation committee is composed of three independent
directors who review the compensation structure and policies concerning
executive compensation. The committee develops proposals and
recommendations for executive compensation and presents those
recommendations to the full board for consideration. The committee
periodically reviews the performance of the Company's other members of
management and the recommendations of the chief executive officer with
respect to the compensation of those individuals. Given the size of the
Company, all such employment contracts are periodically reviewed by the
board. The board must approve all compensation packages that involve the
issuance of the Company's stock or stock options.
12
Nominating Committee
The nominating committee was established in the second quarter 2002
and consists of those members of the director Class not up for election.
The committee is charged with determining those individuals who will be
presented to the shareholders for election at the next scheduled annual
meeting. The full board fills any mid term vacancies by appointment.
CRITICAL ACCOUNTING POLICIES
Estimates
This discussion and analysis of the Company's consolidated financial
condition and results of operations are based on the Company's consolidated
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 the Company to make
estimates and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates the Company's estimates, including those related to reserves for
bad debts and valuation allowance for deferred tax assets. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
result of which forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions. The Company's use of estimates,
however, is quite limited as the Company has adequate time to process and
record actual results from operations.
Revenue recognition
United States
-------------
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of finished product to wholesale
buyers. The Company takes title to its branded flavored milks when they are
shipped by the Company's third party processors and recognize as revenue
the gross wholesale price charged to the Company's wholesale customers. The
Company's gross margin is determined by the reported wholesale price less
the cost charged by Jasper Products, the Company's third party processor,
to produce the branded milk products.
Prior to 2004, the Company reported revenue in the United States from
its sale of "kits" to third party processors and from the differential
between the cost of producing its finished product and the wholesale price
of its finished product. Commencing in the first quarter 2004, the Company
reports revenue from its sale of finished product on the wholesale level.
The Company reports the cost of producing the product charged by a third
party processor as the cost of goods sold. This change in revenue
recognition has resulted in materially higher reported revenue for the
Company, with a corresponding material increase in reported costs of goods
sold.
13
In certain circumstances in its U.S. business, the Company is
required to pay slotting fees, give promotional discounts or make marketing
allowances in order to secure wholesale customers. These payments,
discounts and allowances reduce the Company's reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff
Accounting Bulletin No. 104.
International Sales
-------------------
The Company recognizes revenue in its international (non US) business
at the gross amount of its invoices for the sale of kits at the time of
shipment of flavor ingredients to processor dairies with whom the Company
has production contracts for extended shelf life and aseptic long life
milk. The Company bases this recognition on its role as the principal in
these transactions, its discretion in establishing kit prices (including
the price of flavor ingredients and production right fees), its development
and refinement of flavors and flavor modifications, its discretion in
supplier selection and its credit risk to pay for ingredients if processors
do not pay ingredient suppliers. The revenue generated by the production
contracts under this model consists of the cost of the processors' purchase
of flavor ingredients and fees charged by the Company to the processors for
production rights. The Company formulates the price of production rights to
cover the Company's intellectual property licenses, which varies by
licensor as a percentage of the total cost of a kit sold to the processor
dairy under the production agreement. The Company recognizes revenue on the
gross amount of "kit" invoices to the dairy processors and simultaneously
records as cost of goods sold the cost of flavor ingredients paid by the
processor dairies to ingredients supplier. The recognition of revenue
generated from the sale of production rights associated with the flavor
ingredients is complete upon shipment of the ingredients to the processor,
given the short utilization cycle of the ingredients shipped.
Pursuant to EITF 99-19, international sales of kits made directly to
customers by the Company are reflected in the statements of operations on a
gross basis, whereby the total amount billed to the customer is recognized
as revenue.
RESULTS OF OPERATIONS
Financial Condition at March 31, 2005
-------------------------------------
As of March 31, 2005, we had an accumulated deficit of $35,069,337,
cash on hand of $117,559 and reported total capital deficit of $3,370,453.
For this same period of time, we had revenue of $897,770 and general
and administrative expense of $653,247.
After interest expenses of $117,065, cost of goods sold of $677,663,
product development costs of $63,591 and selling expenses of $623,452
incurred in the operations of the Company, we had a net loss of $1,237,248.
14
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
-------------------------------------------------------------------------------
Consolidated Revenue
We had revenues for the three months ended March 31, 2005 of
$897,770, with cost of sales of $677,663, resulting in a gross margin of
$220,107. This revenue and resultant gross margin is net of slotting fees,
promotional discounts and marketing allowances for this period in the
amount of $94,545. Of the reported $897,770, U.S. sales accounted for
$864,420 with an additional $33,350 from international kit sales in the
Middle East. We did not have revenue in this period in Canada or Mexico.
Our reported revenue for the three months ended March 31, 2005 increased by
$459,564, a 104.87% increase compared to revenue of $438,206 for the same
period in 2004. This increase is the result of the Company's phase out of
its Looney Tunes(TM) flavored milk products in the first quarter of 2004
and the development of four new branded product lines in the United States,
including the launch of our Slammers(R) line of Marvel Comics Super
Heroes(TM) branded flavored milks which did not occur until the second
quarter 2004. We also began to ship kits to our third-party Middle East
dairy processor during the second quarter 2004. In addition, we launched
our Mars Starburst line in the first quarter 2005, and achieved market
penetration in 20,000 grocery and C stores for this line by March 31,
2005.
Consolidated Cost of Sales
We incurred cost of goods sold of $677,663 for the three months ended
March 31, 2005, $675,050 of which was incurred in our U.S. business, and
$2,613 in connection with our international sales in the Middle East. Cost
of goods sold in this period increased by $347,542, a 105.28% increase
compared to $330,121 for the same period in 2004. The increase in cost of
goods sold reflects an increase in sales and the concomitant increase in
reported cost of goods sold associated with that increase.
In countries except the United States, our revenue is generated by
the sale of kits to dairy processors. Each kit consists of flavor
ingredients for flavored milks and production rights to manufacture and
sell the milks. In line with our revenue recognition policies, we recognize
the full invoiced kit price as revenue, less the cost of production charged
by the processor, which we record as cost of goods sold.
In the United States, we are responsible for the sale of finished
Slammers(R) flavored milk (referred to as "unit sales") to retail outlets.
For these unit sales, we recognize as revenue the invoiced wholesale prices
that we charge to the retail outlets that purchase the Slammers(R) flavored
milks. We report as cost of goods sold the price charged to it by Jasper
Products, a third party processor under contract with the Company, for
producing the finished Slammers(R) products.
Segmented Revenues and Costs of Sales
The following table presents revenue by source and type against costs
of goods sold, as well as combined gross revenues and gross margins. In
countries other than the United States, revenues for the period ended March
31, 2005 were generated by kit sales to third party
15
processors. The Company's revenue from the sale of finished product to
retail outlets is recorded as "unit sales" on the following table.
Three Months Ended Total
March 31, 2005 United States Canada Mexico Middle East Company
------------------ ------------- ------ ------ ----------- -------
Revenue - unit sales $ 864,420 $ - $ - $ - $ 864,420
Revenue - gross kit sales - - - 33,350 33,350
--------- --- ------- ------- ---------
Total revenue 864,420 - - 33,350 897,770
Cost of goods sold (675,050) - - (2,613) (677,663)
--------- --- ------- ------- ---------
Gross margin $ 189,370 $ - $ - $30,737 $ 220,107
========= === ======= ======= =========
Three Months Ended Total
March 31, 2004 United States Canada Mexico Middle East Company
------------------ ------------- ------ ------ ----------- -------
Revenue - unit sales $ 367,458 $ - $ - $ - $ 367,458
Revenue - gross kit sales 44,380 - 26,368 - 70,748
--------- --- ------- ------- ---------
Total revenue 411,838 - 26,368 - 438,206
Cost of goods sold (322,343) - (7,778) - (330,121)
--------- --- ------- ------- ---------
Gross margin $ 89,495 $ - $18,590 $ - $ 108,085
========= === ======= ======= =========
United States
-------------
Revenues for the period ended March 31, 2005 from unit sales in the
United States increased from $367,458 for the same period in 2004 to
$864,420 in 2005, a 135% increase. The increase is the result of the
introduction of the Company's new product lines during this period.
In the period ended March 31, 2005, our gross margin for U.S. sales
of $189,370, increased by $99,875, or by 111.6%, from $89,495 for the same
period in 2004. The increase in gross margin was the result of the
increased sales and greater efficiencies in the production of our products.
Foreign Sales
-------------
Revenues for the period ended March 31, 2005 from kit sales in
foreign countries increased from $26,368 for the same period in 2004 to
$33,350, a 26.47 % increase. The increase is the result of sales in the
Middle East during this period.
We recorded $2,613 in costs of kit sales in foreign countries for the
period ended March 31, 2005, a decrease of $5,165 or 66.4% from $7,778 for
the same period in 2004. As a percentage of sales, the costs of goods sold
decreased to 7.84% for the period ended March 31, 2005, from 29.5% for the
same period in 2004.
16
For the period ended March 31, 2005, our gross profit of $30,737 for
kit sales in foreign countries increased by $12,147, or 65.34%, from
$18,590 for the same period in 2004. The increase in gross profit was
consistent with the increase in sales volume and the decease in cost of
goods sold for this period.
Consolidated Operating Expenses
We incurred selling expenses of $623,452 for the period ended March
31, 2005, of which $535,307 was incurred in our United States operations.
Our selling expense for this period increased by $370,414, a 146.38%
increase compared to our selling expense of $253,038 for the same period in
2004. The increase in selling expenses in the current period was due to
increased freight and promotional charges associated with increased sales
and our development of four new product lines, utilizing newly licensed and
directly owned branded trademarks.
We incurred general and administrative expenses for the period ended
March 31, 2005 of $653,247, most of which we incurred in our United States
business operations and a small portion for the enlargement of our
international business into the United Kingdom. Our general and
administrative expenses for this period decreased by $47,719, a 6.81%
decrease compared to $700,966 for the same period in 2004. The decrease in
general and administrative expenses for the current period is the result of
greater efficiencies in the running of our business activities.
As a percentage of total revenue, the Company's general and
administrative expenses decreased from 160% in the period ended March 31,
2004, to 72.8% for the current period in 2005. We anticipate a continued
effort to reduce these expenses as a percentage of sales through revenue
growth, cost cutting efforts and the refinement of business operations.
Interest Expense
We incurred interest expense for the period ended March 31, 2005 of
$117,065. Our interest expense increased by $85,380, a 269.47% increase
compared to $31,685 for the same period in 2004. The increase was due to
additional loans in 2005 and utilizing debt to finance the Company's
operations during this period's transition in licensors of intellectual
property utilized by the Company and the development and launch of new
product lines.
Loss Per Share
We accrued dividends payable of $95,060 for various series of
preferred stock during the period ended March 31, 2005. The accrued
dividends increased for this period by $1,592, or 1.7%, from $93,468 for
the same period in 2004. The net loss before accrued dividends for the
current period increased $355,999, from $881,249 for the period ended March
31, 2004 to $1,237,248 for the current period, and the increase in accrued
dividends was offset by the increase in the weighted average number of
common shares outstanding, resulting in a decrease in the Company's current
period loss per share from $0.03 for the same period in 2004, to a loss per
share of $0.02 for the current period.
17
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we reported that net cash used in operating
activities was $1,099,760, net cash provided by financing activities was
$1,123,272 and net cash used in investing activities was $11,625. We had a
negative working capital of $2,772,471 as of March 31, 2005.
Compared to $772,250 of net cash used in operating activities in the
period ended March 31, 2004, our current period net cash used in operating
activities increased by $327,510 to $1,099,760. This increase was the
result of our utilization of cash rather than equity to pay service
providers in this current period, and changes in deferred product
development costs, prepaid expenses, accounts payable and accrued expenses.
Included in the net loss in this current period were depreciation and
amortization and stock compensation for a finder fee aggregating $158,226,
compared to $149,100 for the same period in 2004.
Changes in accounts receivable in this current period in 2005
resulted in a cash increase of $16,844, compared to a cash increase in
receivables of $5,877 for the same period in 2004, having a net result of a
increase of $10,967. The changes in accounts payable and accrued
liabilities in the period ended of March 31, 2004 contributed to a cash
increase of $409,736, whereas the changes in accounts payable and accrued
liabilities for the current period in 2005 amounted to an increase of
$412,704. We have adopted and will keep implementing cost-cutting measures
to lower our costs and expenses and to pay our accounts payable and accrued
liabilities by using cash and equity instruments. Cash flow generated
through our operating activities was inadequate to cover all of our cash
disbursement needs in the period ended March 31, 2005, and we had to rely
on equity and debt financing to cover expenses.
Cash used in the period ended March 31, 2005 in our investing
activities for equipment was $11,625 for software, computer equipment and
leasehold improvements in the U.S., compared to $1,133 for the same period
in 2004.
Net cash provided by our financing activities for the period ended
March 31, 2005 was $1,123,272. Net cash provided by financing activities
for the same period in 2004 was $800,000, for a net increase of $323,272.
The increase was due to investors' commitments for $2,300,000, with
aggregate convertible notes for $1,150,000 in the three months ending March
31, 2005, and the balance anticipated in the second quarter, and associated
costs.
The Company used the proceeds of the current period financing for
working capital purposes to support the launch of a new product line under
a license from Masterfoods USA..
Going forward, our primary requirements for cash consist of the
following:
* the continued development of our business model in the United
States and on an international basis;
* general overhead expenses for personnel to support the new
business activities;
* development, launch and marketing costs for our line of new
branded flavored milk products, and
* the payment of guaranteed license royalties.
18
We estimate that our need for financing to meet cash needs for
operations will continue through the fourth quarter of 2005, when we expect
that cash supplied by operating activities will approach the anticipated
cash requirements for operation expenses. We anticipate the need for
additional financing in 2005 to reduce our liabilities, assist in marketing
and to improve shareholders' equity status. No assurances can be given that
we will be able to obtain additional financing, or that operating cash
flows will be sufficient to fund our operations.
We currently have monthly working capital needs of approximately
$220,000. We will continue to incur significant selling and other expenses
in 2005 in order to derive more revenue in retail markets, through the
introduction and ongoing support of our new products. Certain of these
expenses, such as slotting fees and freight charges, will be reduced as a
function of unit sales costs as we expand our sales markets and increase
our sales within established markets. Freight charges will be reduced as we
are able to ship more full truckloads of product given the reduced per unit
cost associated with full truckloads versus less than full truckloads.
Similarly, slotting fees, which are paid to warehouses or chain stores as
initial set up or shelf space fees, are essentially one-time charges per
new customer. We believe that along with the increase in our unit sales
volume, the average unit selling expense and associated costs will
decrease, resulting in gross margins sufficient to mitigate cash needs. In
addition, we are actively seeking additional financing to support our
operational needs and to develop an expanded promotional program for our
products.
We are continuing to explore new points of sale for our branded
flavored milk. Presently, we are aggressively pursuing the school and
vending market through trade/industry shows and individual direct contacts.
The implementation of such a school base program, if viable, could have an
impact on the level of our revenue during 2005. Similarly, we expect that
the greater control over sales resulting from our refined business model
and the anticipated expansion into bodega stores as well as national
chains, such as 7-Eleven, will have a positive impact on revenues.
New Product Lines
-----------------
In the third quarter 2003, we commenced an analysis of the Looney
Tunes(TM) brand performance within the context of the possible renewal of
our Warner Bros. licenses for United States, Mexico, China and Canada. In
the fourth quarter 2003, we concluded that, as a function of the sales of
flavored milks, the Looney Tunes(TM) brand has not supported the guaranteed
royalty structure required by Warner Bros. for its licenses. In the fourth
quarter 2003, we decided not to renew our license agreements with Warner
Bros., and began to develop new products in anticipation of the
consummation of other license relationships with Marvel Comics and MoonPie
for co-branded flavored milk, as well as a new single Slammers(R) brand. We
have developed new aseptic products in anticipation of these licenses and
our own singular brand. We launched four brands in 2004, beginning with
Ultimate Slammers in April and achieved national distribution of Ultimate
Slammers through both retail grocers and convenience stores by mid- summer.
Roughly 10,000 retail supermarket stores carried this brand nationwide in
2004. This was followed by the June launch of Slim Slammers(R) and Moon Pie
Slammers(R) and the July release of the Pro-Slammers(TM).
19
Coincident with the Marvel license, we executed a production
agreement with Saudia Dairy & Foodstuff Company (SADAFCO), one of the
largest Middle East dairy processors, headquartered in Jeddah, Saudi
Arabia. SADAFCO processes our Slammers (R) branded flavored milks,
including the Marvel line, for distribution in nine Middle East countries.
SADAFCO has the capacity to process our branded milk products for
distribution throughout the European Community. AsheTrade, our
international agent, facilitated our international business in 2004 with
offices in Miami, Florida and Jeddah, Saudi Arabia.
On September 21, 2004, we entered into a licensing agreement with
Masterfoods USA, a division of Mars, Incorporated, for the use of
Masterfood's Milky Way(R) Starburst(R) and 3 Musketeers(R) trademarks in
connection with the manufacture, marketing and sale of single serve
flavored milk drinks in the United States, our possessions and Territories,
and US Military installations worldwide. The license limits the
relationship of the parties to separate independent entities. The initial
term of the license agreement expires December 31, 2007. We have agreed to
pay a royalty based upon the total net sales value of the licensed products
sold and advance payments of certain agreed upon guaranteed royalties.
Ownership of the licensed marks and the specific milk flavors to be
utilized with the marks remains with Masterfoods. We have been granted a
right of first refusal for other milk beverage products utilizing the
Masterfoods marks within the license territory.
External Sources of Liquidity
-----------------------------
Individual Loans
----------------
On November 6 and 7, 2001, respectively, we received the proceeds of
two loans aggregating $100,000 from two offshore lenders. The two
promissory notes, one for $34,000 and the other for $66,000, were payable
February 1, 2002 and bear interest at the annual rate of 8%. These loans
are secured by a general security interest in all our assets. On February
1, 2002, the parties agreed to extend the maturity dates until the
completion of the anticipated Series H financing. On September 18, 2002,
the respective promissory note maturity dates were extended by agreement of
the parties to December 31, 2002. On September 18, 2002, we agreed to
extend the expiration dates of warrants issued in connection with our
Series D and F preferred until September 17, 2005 and to reduce the
exercise price of certain of those warrants to $1.00, in partial
consideration for the maturity date extension. The holders of these notes
have agreed to extend the maturity dates, and the notes are now payable on
a demand basis.
On August 27, 2003, we received the proceeds of a loan from Mid-Am
Capital, L.L.C., in the amount of $150,000. The note was payable November
25, 2003 and bears interest at the annual rate of 10%. This loan was
secured by a general security interest in all our assets. On April 2, 2004,
this note was paid and cancelled.
On January 28, 2004, we converted accounts payable in the amount of
$1,128,386 by the issuance of a 10% short term promissory note to Jasper
Products, LLC, dated January 1, 2004, in the principal amount of $1,128,386
for amounts owed to Jasper in connection with Jasper's processing and sale
of our products. As of March 31, 2004, we paid $200,000 in principal and
20
was credited an additional $11,350. On April 20, 2004, we paid an
additional $200,000. On May 7, 2004, we paid $717,036 in full payment of
the note's principal and accrued interest.
On May 6, 2004, we issued a secured promissory note to Mid- Am
Capital LLC in the principal amount of $750,000. The note provides for 8%
interest. The note's original maturity date of September 4, 2004 has been
extended to January 31, 2005. We issued warrants to purchase 3,000,000
shares of our common stock to Mid-Am in connection with this promissory
note. The warrants are exercisable for one year from issue at an exercise
price of $0.25 per share. We used the proceeds of this promissory note to
pay the promissory note issued to Jasper Products in January 2004.
Convertible Debentures
----------------------
To obtain funding for our ongoing operations, we entered into the
following financing transactions in 2004.
April 2004
----------
In April 2004, we entered into a Subscription Agreement with two
accredited investors for the sale of (i) $500,000 in convertible debentures
and (ii) warrants to buy 3,000,000 shares of our common stock at $0.15 per
share. In connection with this financing, we paid a fee, which included an
aggregate of convertible debentures in the amount of $50,000.
The debentures issued in connection with the April 2004 financing
bear interest at 10%. The principal on the notes is due in equal monthly
installments commencing on November 1, 2004 until October 1, 2005. On
October 1, 2005, all principal and interest shall become due. In the event
that our common stock has a closing price in excess of $.20 for the five
days preceding the monthly payment, then, within our discretion, the
monthly payment may be deferred. The notes are convertible into our common
stock at $0.10 per share. Based on this conversion price, the $550,000
convertible debentures, excluding interest, were convertible into 5,500,000
shares of our common stock.
The note holders have contractually agreed to restrict their ability
to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 9.99% of the
then issued and outstanding shares of common stock.
June 2004
---------
In June 2004, we entered into a Subscription Agreement with Longview
Fund, LP, Alpha Capital Aktiengesellschaft, Whalehaven Funds Limited,
Stonestreet Limited Partnership and Mid-Am Capital L.L.C for the issuance
of convertible 10% notes in the aggregate amount of $1,300,000 and five-
year "A" warrants for the purchase of, in the aggregate, 5,200,000 shares
of common stock, at $0.25 per share, and five-year "B" warrants for the
purchase of, in the aggregate, 13,000,000 shares of common stock, at $2.00
per share. In connection with the October 2004 financing, we subsequently
amended the exercise price to $.15 for the "A" warrants issued to Longview
Fund, LP, Alpha Capital Aktiengesellschaft, Whalehaven Funds
21
Limited and Stonestreet Limited Partnership. The notes are convertible into
shares of our common stock at $0.15 per common share. The notes are payable
in twelve equal monthly installments, commencing January 1, 2005. The
installment payments consist of principal and a "premium" of 20% of the
principal paid per installment. We have the option to defer such payment
until the note's maturity date on December 1, 2005, if our common stock
trades above $0.20 for the five trading days prior to the due date of an
installment payment. In connection with this transaction, we issued
additional notes in the aggregate amount of $40,000 to Gem Funding, LLC,
Bi-Coastal Consulting Corp., Stonestreet Limited Partnership and Libra
Finance, S.A upon identical terms as the principal notes, as a finder's
fee, and paid $12,500 in legal fees. The common stock underlying all notes
and warrants carry registration rights.
The note holders have contractually agreed to restrict their ability
to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 9.99% of the
then issued and outstanding shares of common stock.
October 2004
------------
On October 29, 2004, we entered into Subscription Agreements with
Longview Fund, LP, Alpha Capital Aktiengesellschaft, Whalehaven Funds
Limited and Stonestreet Limited Partnership for the issuance of convertible
10% notes in the aggregate amount of $550,000 and five-year "C" warrants
for the purchase of, in the aggregate, 2,200,000 shares of common stock, at
$0.15 per share, and the repricing of five-year "A" warrants, issued June
30, 2004 for the purchase of, in the aggregate, 3,200,000 shares of common
stock, from $0.25 to $0.15 per share. The notes are convertible into shares
of common stock at $0.10 per common share. The notes are payable in twelve
equal monthly installments, commencing May 1, 2005. The installment
payments consist of principal and a "premium" of 20% of the principal paid
per installment. We have the option to defer such payment until the note's
maturity date on April 30, 2006, if our common stock trades above $0.15 for
the five trading days prior to the due date of an installment payment and
the underlying common stock is registered. In connection with this
transaction, we issued additional notes, without attached warrants, in the
aggregate amount of $27,500 to Gem Funding, LLC, Bi-Coastal Consulting
Corp., Stonestreet Limited Partnership and Libra Finance, S.A upon
identical terms as the principal notes, as a finder's fee, and paid $12,500
in legal fees. The common stock underlying all notes and warrants carry
registration rights.
The note holders have contractually agreed to restrict their ability
to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 9.99% of the
then issued and outstanding shares of common stock.
December 2004
-------------
In December 2004, we entered into Subscription Agreements with Momona
Capital Corp. and Ellis International Ltd. for the issuance of convertible
10% notes in the aggregate amount of $200,000 and five-year "C" warrants
for the purchase of, in the aggregate, 800,000 shares of common stock, at
$0.15 per share. The notes are convertible into shares of common stock at
$0.10 per common share. The notes are payable in twelve equal monthly
installments,
22
commencing May 1, 2005. The installment payments consist of principal and a
"premium" of 20% of the principal paid per installment. We have the option
to defer such payment until the note's maturity date on April 30, 2006, if
our common stock trades above $0.15 for the five trading days prior to the
due date of an installment payment and the underlying common stock is
registered. In connection with this transaction, we issued additional
notes, without attached warrants, in the aggregate amount of $10,000 to
Momona Capital Corp. and Ellis International Ltd. upon identical terms as
the principal notes, as a finders' fees. The common stock underlying all
notes and warrants carry registration rights.
The note holders have contractually agreed to restrict their ability
to convert or exercise their warrants and receive shares of our common
stock such that the number of shares of common stock held by them and their
affiliates after such conversion or exercise does not exceed 9.99% of the
then issued and outstanding shares of common stock.
January 2005
------------
On January 31, 2005, we closed a funding transaction with Longview
Fund, LP, Longview Equity Fund, LP, Longview International Equity Fund, LP,
Alpha Capital Aktiengesellschaft and Whalehaven Funds Limited, five
institutional accredited investors, for the issuance and sale to the
Subscribers of up to $2,300,000 of principal amount of promissory notes
convertible into shares of our common stock, and Warrants to purchase
shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. One Million One Hundred
Fifty Thousand Dollars ($1,150,000) of the purchase price was paid on the
initial closing date, and One Million One Hundred Fifty Thousand Dollars
($1,150,000) of the purchase price will be payable within five (5) business
days after the actual effectiveness of an SB-2 Registration Statement as
defined in the Subscription Agreement.
The initial closing notes were at prime plus 4% interest in the
aggregate amount of $1,150,000, plus five-year Warrants for the purchase
of, in the aggregate, 9,200,000 shares of common stock, at the lesser of
(i) $0.16, or (ii) 101% of the closing bid price of the Common Stock as
reported by Bloomberg L.P. for the OTC Bulletin Board for the trading day
preceding the Closing Date.
The notes are convertible into shares of our common stock at $0.125
per common share. Conversions are limited to a maximum ownership of 9.99%
of the underlying common stock at any one time. The notes have a maturity
date two yeas from closing and are payable in twelve equal monthly
installments, commencing June 1, 2005. The installment payments consist of
principal equal to 1/20th of the initial principal amount which, subject to
certain conditions concerning trading volume and price, can be paid in cash
at 103% of the monthly installment, or common stock or a combination of
both. The notes have an acceleration provision upon the change in a
majority of the present Board of Directors except as the result of the
death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 460,000 shares plus the aggregate cash amount of
$57,500 for due diligence fees to the investors in this transaction
23
EFFECTS OF INFLATION
We believe that inflation has not had any material effect on our net
sales and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and our principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of the
filing date of this report on Form 10-QSB (the Evaluation Date), have
concluded that our disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and
our consolidated subsidiary would be made known to them by others within
those entities, particularly during the period in which this report on Form
10-QSB was being prepared.
b) Changes in Internal Controls. There were no changes in our internal
controls or in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date, nor any
significant deficiencies or material weaknesses in such disclosure controls
and procedures requiring corrective actions. As a result, we took no
corrective actions.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On January 18, 2005, we converted $35,931 of our April 2004
Convertible Promissory Note into 500,000 shares of common stock pursuant to
a January 14, 2005 notice of conversion from Longview Fund LP, at a fixed
conversion price of $0.10. The conversion included $14,068 of accrued and
unpaid interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to our SB-2 registration statement, declared
effective on August 3, 2004.
On January 19, 2005, we converted $64,068 of our April 2004
Convertible Promissory Note into 641,387 shares of common stock pursuant to
a January 19, 2005 notice of conversion from Longview Fund LP, at a fixed
conversion price of $0.10. The conversion included $70 of accrued and
unpaid interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to our SB-2 registration statement, declared
effective on August 3, 2004.
On January 31, 2005, we closed a funding transaction with Longview
Fund, LP, Longview Equity Fund, LP, Longview International Equity Fund, LP,
Alpha Capital Aktiengesellschaft and Whalehaven Funds Limited, five
institutional accredited investors, for the issuance and sale to the
Subscribers of up to $2,300,000 of principal amount of promissory notes
convertible into shares of our common stock, and Warrants to purchase
shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the
24
notes. One Million One Hundred Fifty Thousand Dollars ($1,150,000) of the
purchase price was paid on the initial closing date, and One Million One
Hundred Fifty Thousand Dollars ($1,150,000) of the purchase price will be
payable within five (5) business days after the actual effectiveness of an
SB-2 Registration Statement as defined in the Subscription Agreement. The
initial closing notes were at prime plus 4% interest in the aggregate
amount of $1,150,000, plus five-year Warrants for the purchase of, in the
aggregate, 9,200,000 shares of common stock, at the lesser of (i) $0.16, or
(ii) 101% of the closing bid price of the Common Stock as reported by
Bloomberg L.P. for the OTC Bulletin Board for the trading day preceding the
Closing Date. The notes are convertible into shares of our common stock at
$0.125 per common share. Conversions are limited to a maximum ownership of
9.99% of the underlying common stock at any one time. The notes have a
maturity date two years from closing and are payable in twelve equal
monthly installments, commencing June 1, 2005. The installment payments
consist of principal equal to 1/20th of the initial principal amount which,
subject to certain conditions concerning trading volume and price, can be
paid in cash at 103% of the monthly installment, or common stock or a
combination of both. The notes have an acceleration provision upon the
change in a majority of the present Board of Directors except as the result
of the death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 460,000 shares plus the aggregate cash amount of
$57,500 for due diligence fees to the investors in this transaction
On February 14, 2005, we converted $41,666 of our June 2004
Convertible Promissory Note into 430,327 shares of restricted common stock
pursuant to a February 9, 2005 notice of conversion from Longview Fund LP,
at a fixed conversion price of $0.15. The conversion included $22,882 of
accrued and unpaid interest on the converted amount. We issued the
Convertible Promissory Note and the underlying common stock upon conversion
to an accredited investor, pursuant to a Regulation D offering. The
underlying common stock is registered pursuant to a Form SB-2 registration
statement declared effective April 19, 2005.
On February 16, 2005, we converted $25,000 of our November 2003
Convertible Promissory Note into 549,340 shares of common stock pursuant to
a February 15, 2005 notice of conversion from Gamma Opportunity Capital
Partners LP, at a fixed conversion price of $0.05. The conversion included
$2,467 of accrued and unpaid interest on the converted amount. We issued
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 3, 2004.
On March 23, 2005, we converted $50,000 of our November 2003
Convertible Promissory Note into 1,106,740 shares of common stock pursuant
to a March 22, 2005 notice of conversion from Gamma Opportunity Capital
Partners LP, at a fixed conversion price of $0.05. The conversion included
$5,337 of accrued and unpaid interest on the converted amount. We issued
the underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on August 3, 2004.
Subsequent Events
On April 14, 2005, we issued 750,000 shares of our common stock to
Geoffrey Eiten, for services rendered for strategic business planning.
These shares were part of 1,500,000 shares of
25
the Company's common stock registered under a Form S-8 registration
statement filed December 23, 2004.
On April 18, 2005, we issued 250,000 shares of our common stock to
Geoffrey Eiten, for services rendered for strategic business planning.
These shares were part of 1,500,000 shares of the Company's common stock
registered under a Form S-8 registration statement filed December 23, 2004.
On April 21, 2005, we closed a funding transaction with Alpha Capital
Aktiengesellschaft for the issuance of convertible a 10% note in the
aggregate amount of $300,000. The promissory note is convertible into
shares of common stock of the Company at $0.20 per common share.
Conversions are limited to a maximum ownership of 9.99% of the Company's
common stock at any one time. The note has an October 31, 2005 maturity and
is payable in five equal monthly installments, commencing June 1, 2005. The
installment payments consist of principal (equal to 1/5th of the initial
principal amount) plus accrued interest. Installments can be paid in cash
or common stock valued at the average closing price of the Company's common
stock during the five trading days immediately preceding the relevant
installment due date. The Company has repriced Class B Warrants issued on
June 30, 2004 from $2.00 per share to $0.125 per share, and issued
restricted common stock in the aggregate amount of 93,750 shares for
finder's fees to a third party to facilitate this transaction. The Company
has the right to prepay the promissory note by paying to the holder cash
equal to 120% of the principal to be prepaid plus accrued interest. The
notes have an acceleration provision upon the change in a majority of the
present Board of Directors except as the result of the death of one or more
directors, or a change in the present CEO of the Company. The common stock
underlying the note and the finder's fee common stock have "piggy back"
registration rights. We issued the convertible note and finder's fee common
stock to accredited investors, pursuant to a Regulation D offering.
On April 22, 2005, we converted $15,000 of our December 2004
Convertible Promissory Note into 154,930 shares of common stock pursuant to
an April 19, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $493 of
accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
On April 23, 2005, we converted $20,000 of our December 2004
Convertible Promissory Note into 200,000 shares of common stock pursuant to
an April 22, 2005 notice of conversion from Ellis International Ltd. Inc.,
at a fixed conversion price of $0.10 per share. The conversion did not
include interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to a Form SB-2 registration statement,
declared effective on April 18, 2005.
On April 29, 2005, we converted $15,000 of our December 2004
Convertible Promissory Note into 155,137 shares of common stock pursuant to
an April 27, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $513.70
of accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
26
On April 29, 2005, we converted $20,000 of our December 2004
Convertible Promissory Note into 300,000 shares of common stock pursuant to
an April 28, 2005 notice of conversion from Ellis International Ltd. Inc.,
at a fixed conversion price of $0.10 per share. The conversion did not
include interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to a Form SB-2 registration statement,
declared effective on April 18, 2005.
On April 29, 2005, we converted $10,000 of our December 2004
Convertible Promissory Note into 103,479 shares of common stock pursuant to
an April 29, 2005 notice of conversion from Momona Capital Corp., at a
fixed conversion price of $0.10 per share. The conversion included $347.90
of accrued and unpaid interest on the converted amount. We issued the
underlying common stock upon conversion pursuant to a Form SB-2
registration statement, declared effective on April 18, 2005.
Item 6. Exhibits
Exhibits - Required by Item 601 of Regulation S-B:
No. 31: Rule 13a-14(a) / 15d-14(a) Certifications
No. 32: Section 1350 Certifications
27
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf of the
undersigned, duly authorized.
BRAVO! FOODS INTERNATIONAL CORP.
(Registrant)
Date: May 10, 2005
/s/Roy G. Warren
Roy G. Warren, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, Bravo! Foods
International Corp. has caused this amended report to be signed on its
behalf by the undersigned in the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/S/ Roy G. Warren Chief Executive Officer May 10, 2005
and Director
/S/ Tommy E. Kee Chief Financial Officer May 10, 2005
28