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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 September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 0-20549
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)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15 (d)
of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such
reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes [X] No[ ]
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
11/11/03 Common Stock 27,647,542
BRAVO! FOODS INTERNATIONAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated balance sheets as of F-1
September 30, 2003 (unaudited) and December 31, 2002
Consolidated statements of operations F-3
(unaudited) for the three and nine months ended
September 30, 2003 and 2002
Consolidated statements of cash flows F-4
(unaudited) for the nine months ended
September 30, 2003 and 2002
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds 20
Item 6. Exhibits and reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 22
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2002 2003
------------ -------------
Assets
Current assets:
Cash and cash equivalents $ 224,579 $ 101,571
Accounts receivable 236,149 103,514
Other receivable 14,662 107,762
Advance to vendor 8,719 -
Inventories 55,062 55,106
Prepaid expenses 7,605 113,812
---------- ----------
Total current assets 546,776 481,765
Furniture and equipment, net 89,602 78,298
License rights, net of accumulated amortization 88,104 40,074
Deposits 15,000 10,736
---------- ----------
Total assets $ 739,482 $ 610,873
========== ==========
Liabilities and Capital Deficit
Current liabilities:
Notes payable to International Paper $ 187,743 $ 187,743
Notes payable to individual lenders 100,000 100,000
Note payable to Mid-Am Capital LLC - 150,000
Notes payable to Warner Bros. 270,053 147,115
Accounts payables 1,039,313 1,591,535
Accrued liabilities 409,615 585,890
---------- ----------
Total current liabilities 2,006,724 2,762,283
Dividends payable 266,666 492,948
---------- ----------
Total liabilities 2,273,390 3,255,231
---------- ----------
The financial statements should be read in conjunction with the notes
herein and the Notes to Consolidated Financial Statements appearing in
the most recent Form 10 KSB
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2002 2003
------------ -------------
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, 130,315 shares issued and outstanding 1,205,444 1,205,444
Series G convertible, 8% cumulative and redeemable preferred stock,
stated value $10.00 per share, 70,208 and 58,810 shares issued and
outstanding 624,115 510,135
Series H convertible, 7% cumulative and redeemable preferred stock,
stated value $10.00 per share, 175,500 and 165,500 shares
issued and outstanding 939,686 839,686
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, 100,000 and 200,000 shares issued and
outstanding 854,279 1,854,279
Common stock, par value $0.001 per share, 50,000,000 shares authorized,
25,732,854 and 27,647,542 shares issued and outstanding 25,730 27,645
Additional paid-in capital 20,266,463 20,897,487
Accumulated deficit (25,629,016) (28,158,281)
Translation adjustment (241) (385)
------------ ------------
Total capital deficit (1,533,908) (2,644,358)
------------ ------------
Total liabilities and capital deficit $ 739,482 $ 610,873
============ ============
The financial statements should be read in conjunction with the notes
herein and the Notes to Consolidated Financial Statements appearing in
the most recent Form 10 KSB
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue - unit sales $ - $ 110,584 $ - $ 336,644
Revenue - net kit sales - - - 2,737
Revenue - gross kit sales 308,729 223,953 1,053,129 747,056
----------- ----------- ----------- -----------
Total Revenue 308,729 334,537 1,053,129 1,086,437
Cost of sales (56,516) (53,473) (133,003) (176,008)
----------- ----------- ----------- -----------
Gross margin 252,213 281,064 920,126 910,429
Selling expense 28,503 357,384 46,017 1,037,914
Product development - 6,134 - 7,788
General and administrative expense 882,555 478,121 3,099,066 1,769,252
----------- ----------- ----------- -----------
Loss from operations (658,845) (560,575) (2,224,957) (1,904,525)
Other expense:
Interest expense, net 922 (3,421) (20,742) (7,500)
----------- ----------- ----------- -----------
Loss before income taxes (657,923) (563,996) (2,245,699) (1,912,025)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net loss (657,923) (563,996) (2,245,699) (1,912,025)
Dividends accrued for Series B preferred stock (2,471) (2,437) (7,332) (7,232)
Dividends accrued for Series D preferred stock (1,393) - (18,500) -
Dividends accrued for Series G preferred stock (14,205) (7,192) (45,677) (34,598)
Dividends accrued for Series H preferred stock (16,810) (30,697) (280,808) (91,617)
Dividends accrued for Series I preferred stock (1,476) (6,049) (296,477) (17,951)
Dividends accrued for Series J preferred stock (305,721) (40,329) (305,721) (98,631)
Deemed dividends on Series J preferred stock - - - (367,211)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $ (999,999) $ (650,700) $(3,200,214) $(2,529,265)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 21,365,343 27,382,453 18,150,932 26,425,063
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.05) $ (0.02) $ (0.18) $ (0.10)
=========== =========== =========== ===========
Comprehensive loss and its components
consist of the following:
Net loss $ (657,923) $ (563,996) $(2,245,699) $(1,912,025)
Foreign currency translation adjustment - 128 (472) (144)
----------- ----------- ----------- -----------
Comprehensive loss $ (657,923) $ (563,868) $(2,246,171) $(1,912,169)
=========== =========== =========== ===========
The financial statements should be read in conjunction with the notes
herein and the Notes to Consolidated Financial Statements appearing in
the most recent Form 10 KSB
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
2002 2003
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(2,245,699) $(1,912,025)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 457,436 74,843
Stock issuance for compensation 516,204 28,000
Loss on disposal of fixed assets - 15,853
Increase (decrease) from changes in:
Accounts receivable (31,601) 132,635
Other receivable (1,004) (93,100)
Advance to vendors 3,200 8,719
Inventories 604 (44)
Prepaid expenses (22,175) (101,943)
Accounts payable and accrued expenses 389,216 728,498
License rights (282,721) -
----------- -----------
Net cash used in operating activities (1,216,540) (1,118,564)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (1,797) (31,362)
----------- -----------
Net cash used in investing activities (1,797) (31,362)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Preferred Series H 700,000 -
Proceeds from issuance of Preferred Series I 287,988 -
Proceeds from issuance of Preferred Series J 1,000,000 1,000,000
Proceeds from exercise of stock options 330,000 -
Borrowings 150,000
Payment of note payable, bank loan and incense fee payable (345,076) (122,938)
----------- -----------
Net cash provided by financing activities 1,972,912 1,027,062
----------- -----------
Effect of exchange rate changes on cash - (144)
----------- -----------
Net decrease in cash and cash equivalents 754,575 (123,008)
Cash and cash equivalents, beginning of period 232,040 224,579
----------- -----------
Cash and cash equivalents, end of period $ 986,615 $ 101,571
=========== ===========
The financial statements should be read in conjunction with the notes
herein and the Notes to Consolidated Financial Statements appearing in
the most recent Form 10 KSB
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
Chinese subsidiary China Premium Food (Shanghai) Co., Ltd. (the "Company").
The Company is engaged in the sale of flavored milk products and flavor
ingredients in the United States, Canada and Mexico and the co-production,
marketing and distribution of branded dairy and snack food products in the
People's Republic of China.
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 Regulation S-X, where required. The Company's independent auditors,
however, have not reviewed these financial statements. All significant
inter-company accounts and transactions have been eliminated in
consolidation. 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 fair presentation have been included. Operating
results for the three or nine month period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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, 2002.
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 $28,158,281, a
capital deficit of $2,644,358, negative working capital of $2,280,518 and
is delinquent on certain of its debts at September 30, 2003. Further, the
Company's auditors stated in their report on the Company's Consolidated
Financial Statements for the year ended December 31, 2002, that these
conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management plans to improve gross profit margins in its
U.S. business and obtain additional financing. 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. 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 sells flavor ingredients and production rights
(collectively referred to as "kits") to processor dairies in the U.S.,
China, Canada and Mexico and also sells flavored milk products in the U.S.
Revenue is recognized when the goods are shipped, and title and the risk
and reward of ownership have been passed to the customer and possible
return of goods can be reasonably estimated. The criteria to meet this
guideline are: 1) persuasive evidence of 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". Pursuant to EITF 99-19, sales of kits made
directly to customers by the Company are reflected in the statement of
operations on a gross basis, whereby the total amount billed to the
customer is recognized as revenue. Sales of kits made
F-5
through intermediaries, in which the Company's role is similar to that of
an agent, are reflected on a net basis, which represents the amount earned
by the Company in the transaction.
In May 2002, the Company entered into a program with two processor
dairies pursuant to which the Company sells flavored milk products to
retail stores (referred to as "unit sales"). The Company benefits from the
difference between the prices charged by processor dairies to produce the
product for the Company and the price paid by retail stores to purchase the
product. The Company bears the responsibility for paying food brokers fees,
transportation and delivery expenses. The Company recognizes revenue on the
net basis and recognizes the aforementioned expenses as selling expenses.
Expenses for samples, slotting fees and certain promotions are treated as a
reduction of reported 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-based Compensation" (SFAS No.
123). The fair value of such 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 following table illustrates the effect on net loss and loss per
share as if the Company had applied the fair value recognition provision of
SFAS No. 123 to stock-based employee compensation.
Nine Months
Ended September 30,
---------------------------
2002 2003
---- ----
Net loss: applicable to common shareholders $(3,200,214) $(2,529,265)
Add: total stock based employee compensation expense
determined under fair value method for all awards - (4,500)
----------- -----------
Pro forma net loss $(3,200,214) $(2,533,765)
=========== ===========
Loss per share:
As reported $ (0.18) $ (0.10)
Pro forma $ (0.18) $ (0.10)
Note 2 - Capital Deficit
On January 2, 2003, the Company issued 100,000 shares of common stock
to an employee. This common stock will be issued under a Form S-8
registration statement. In January 2003, the Company recorded $28,000 of
compensation expense based upon a signing bonus for this grant.
On January 2, 2003 the Company granted options for 100,000 shares of
common stock to Mr. Toulan pursuant to an employment contract. These
options vested immediately, expire on December 30, 2007 and have an
exercise price of $0.40 per share.
Further, the Company granted options for 200,000 shares of common
stock to Mr. Toulan pursuant to an employment contract. These options have
an exercise price of $0.40 per share. Options for 100,000 shares vest on
each of December 31, 2003 and 2004, and 100,000 expire on each of December
30, 2008 and December 30, 2009, respectively.
F-6
On February 4, 2003, the Company issued 30,000 shares of common stock
to Keshet, LP, upon the conversion of 480 shares of Series G Convertible
Preferred stock.
On February 21, 2002, the Company issued 50,000 shares of non-voting
Series J 8% Convertible Preferred stock, having a stated value of $10.00
per Preferred J share, and common stock warrants to Mid-Am Capital, L.L.C.
("Mid-AM") for the aggregate purchase price of $500,000. Each preferred
share is convertible to 40 shares of the Company's common stock at a per
common share conversion price of $0.25, representing 2,000,000 shares of
common stock underlying the preferred. The issued warrants entitle the
holder to purchase 33.33 shares of common stock for each share of Series J
Convertible Preferred stock issued at an exercise price of $0.30 per common
stock share, representing 1,666,667 shares of common stock underlying the
warrants. The warrants are exercisable for a five-year period. The February
21, 2003 closing market trading price was $0.23 per share. This private
offering was made to Mid-Am, an accredited investor, pursuant to Rule 506
of Regulation D and Section 4(2) of the Securities Act of 1933. In
accordance with EITF 00-27, the Company recorded a deemed dividend of
$274,720 related to a beneficial conversion feature.
On April 14, 2003, the Company issued 50,000 shares of common stock
to Keshet, LP, upon the conversion of 596 shares of Series G Convertible
Preferred, at a conversion price of $0.148. The conversion included accrued
and unpaid dividends on the preferred converted.
On April 22, 2003, the Company issued 50,000 shares of common stock
to The Keshet Fund, LP, upon the conversion of 595 shares of Series G
Convertible Preferred, at a conversion price of $0.148. The conversion
included accrued and unpaid dividends on the preferred converted.
On May 22, 2003, the Company issued 100,000 shares of common stock to
Keshet, LP, upon the conversion of 607 shares of Series G Convertible
Preferred, at a conversion price of $0.076. The conversion included accrued
and unpaid dividends on the preferred converted.
On May 22, 2003, the Company issued 100,000 shares of common stock to
The Keshet Fund, LP, upon the conversion of 607 shares of Series G
Convertible Preferred, at a conversion price of $0. 076. The conversion
included accrued and unpaid dividends on the preferred converted.
On May 29, 2003, the Company issued 50,000 shares of non-voting
Series J 8% Convertible Preferred stock, having a stated value of $10.00
per Preferred J share, and common stock warrants to Mid-Am Capital, L.L.C.
for the aggregate purchase price of $500,000. Each preferred share is
convertible to 50 shares of the Company's common stock at a conversion
price of $0.20, representing 2,500,000 shares of common stock underlying
the preferred. The issued warrants entitle the holder to purchase 40 shares
of common stock for each share of Series J Convertible Preferred stock
issued at an exercise price of $0.25 per common stock share, representing
2,000,000 shares of common stock underlying the warrants. The warrants are
exercisable for a five-year period. The May 22, 2003 closing market trading
price was $0.12 per share. In addition, the following adjustments were made
to prior issued warrants for the purpose of facilitating future fund
raising by the Company arising out of the exercise of the warrants by
Holder. The purchase price, as defined in the Warrants No. 1 and 2, has
been reduced to $0.25, subject to further adjustment as described in the
warrants. The warrant stock provided for in Warrant No.1 has been increased
by 1,500,000 shares. The warrant stock provided for in Warrant No. 2 has
been increased by 333,333 shares. The expiration date, as defined in the
respective warrants, remains as stated. The trading price call option
trigger set forth in Section 9 (b) of the warrants has been reduced from
$1.75 to $0.75 per share. This private offering was made to Mid-Am, an
accredited investor, pursuant to Rule 506 of Regulation D and Section 4(2)
of the Securities Act of 1933. The value of the warrants, $92,491, was
determined using the Black-Scholes model.
F-7
On August 12, 2003, the Company issued 1,200,000 shares of common
stock based upon Series G notices of conversion received in June and July
2003. The issuance of common was delayed in order to determine the accuracy
of the conversion variables contained in the respective notices of
conversion.
The Company issued 200,000 shares of common stock to Keshet, LP, upon
the conversion of 1,209 shares of Series G Convertible Preferred, at a
conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 200,000 shares of common stock to The Keshet Fund,
LP, upon the conversion of 1,209 shares of Series G Convertible Preferred,
at a conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 150,000 shares of common stock to The Keshet Fund,
LP, upon the conversion of 773 shares of Series G Convertible Preferred, at
a conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 250,000 shares of common stock to Keshet, LP, upon
the conversion of 1,289 shares of Series G Convertible Preferred, at a
conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 200,000 shares of common stock to Talbiya B.
Investments, Ltd., upon the conversion of 1,031 shares of Series G
Convertible Preferred, at a conversion price of $0.0653. The conversion
included accrued and unpaid dividends on the preferred converted.
The Company issued 200,000 shares of common stock to Nesher. Ltd.,
upon the conversion of 1,031 shares of Series G Convertible Preferred, at a
conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
On September 15, 2003, the Company issued 213,750 shares of common
stock to Michael Willms, upon the conversion of 7,500 shares of Series H
Convertible Preferred, at the fixed conversion price of $0.40. The
conversion included accrued and unpaid dividends on the preferred
converted.
On September 29, 2003, the Company issued 70,938 shares of common
stock to The Dennis H. Willms Irrevocable Trust, Michael Willms, Trustee,
upon the conversion of 2,500 shares of Series H Convertible Preferred, at
the fixed conversion price of $0.40. The conversion included accrued and
unpaid dividends on the preferred converted.
Note 3 - Adoption of New Accounting Standards
In November 2002, the FASB issued Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
expands on the accounting guidance of Statements No. 5, 57, and 107 and
incorporates without change the provisions of FASB Interpretation No. 34,
which is being superseded. FIN No. 45 will affect leasing transactions
involving residual guarantees, vendor and manufacturer guarantees, and tax
and environmental indemnities. All such guarantees will need to be
disclosed in the notes to the financial statements starting with the period
ending after December 15, 2002. For guarantees issued after December 31,
2002, the fair value of the obligation must be reported on the balance
sheet. Existing guarantees will be grandfathered and will not be recognized
on the balance sheet. The Company's Certificate of Incorporation provides
that the Company "shall be empowered to indemnify" to the full extent of
its power to do so, all directors and officers, pursuant to the applicable
provisions of the Delaware General Corporation Law. The Company has
determined that it will indemnify its officers and
F-8
directors to the full extent permitted under Section 145 of the Delaware
General Corporation Law. There was no impact on the financial position and
results of operations due to the application of FIN No. 45.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN No. 46 explains how to identify variable interest entities and how an
enterprise assesses its interest in a variable entity to decide whether to
consolidate that entity. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. FIN No. 46 is effective immediately for variable interest
entities after January 31, 2003, and to variable interest entities in which
an enterprise obtained an interest after that date. FIN No. 46 applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The adoption of FIN No. 46 did
not have a material effect on the Company's financial position and results
of operations.
Note 4 - Business Segment and Geographic Information
The Company operates principally in one industry segment. The following
sales information was based on customer location rather than subsidiary
location. The allocation of the cost of equipment, the current year
investment in new equipment and depreciation expense have been made on the
basis of the primary purpose for which the equipment was acquired. The
following furniture and equipment information was based on where the
furniture and equipment was used.
Geographic Area Information:
9 Months ended United Total
September 30, 2003 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue - unit sales $ 336,644 $ - $ - $ - $ 336,644
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 556,490 43,745 111,463 35,358 747,056
--------- -------- --------- -------- ----------
Total revenue 895,871 43,745 111,463 35,358 1,086,437
Cost of goods sold (111,869) (10,402) (35,610) (18,127) (176,008)
--------- -------- --------- -------- ----------
Gross margin $ 784,002 $ 33,343 $ 75,853 $ 17,231 $ 910,429
========= ======== ========= ======== ==========
Furniture and equipment, net $ 71,376 $ - $ - $ 6,922 $ 78,298
========= ======== ========= ======== ==========
9 Months ended United Total
September 30, 2002 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue - net kit sales $ 425,618 $ - $ - $ - $ 425,618
Revenue - gross kit sales 474,001 47,150 84,925 21,435 627,511
--------- -------- --------- -------- ----------
Total revenue 899,619 47,150 84,925 21,435 1,053,129
Cost of goods sold (124,073) - - (8,930) (133,003)
--------- -------- --------- -------- ----------
Gross margin $ 775,546 $ 47,150 $ 84,925 $ 12,505 $ 920,126
========= ======== ========= ======== ==========
Furniture and equipment, net $ 71,563 $ - $ - $ 30,214 $ 101,777
========= ======== ========= ======== ==========
F-9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS ON FINANCIAL CONDITION AND
OPERATION RESULTS - NINE MONTHS ENDED SEPTEMBER 30, 2003
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(TM) trademarked brand, the obtaining 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
and generating revenue primarily 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 diaries for the production, promotion and sales rights
for the branded flavored milk. In the United States, the Company also
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 1,912,025 for the
nine months ended September 30, 2003. As shown in the accompanying
financial statements, the Company has suffered operating losses and
negative cash flows from operations since inception and at September 30,
2003 has an accumulated deficit, a capital deficit, is delinquent on
certain debts and has negative working capital. 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. 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 the Company will be successful in
carrying out the Company's plans.
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
10
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
Pre 2002
--------
Prior to 2002, the Company recognized revenue on a net basis, when it
received net kit revenues from Quality Chek'd., a national dairy
cooperative that coordinated and implemented the kit sales to its member
dairy processors. The Company did not record cost of sales under this model
because it benefited only by the net amount received, and the Company did
not have the unilateral discretion to determine the sales price of kits.
This practice existed from the third quarter of 2000 until its phase out
during the third quarter of 2002.
United States - Production Agreements with Jasper Products and Shamrock Farms
-----------------------------------------------------------------------------
Commencing in the first quarter 2002, the Company recognized revenue
in the United States at the gross amount of its invoices for the sale of
kits at the shipment of flavor ingredients to Jasper Products and Shamrock
Farms, two processor dairies with whom the Company has production contracts
for extended shelf life and aseptic long life milk. Revenue 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 is allocated
as follows: 90% to 95% of the revenue is for the processors' purchase of
flavor ingredients; the balance of 5% to 10% represents fees charged by the
Company to the processors for production rights. The Company recognizes
revenue on the gross amount of "kit" invoices to the dairy processors and
simultaneously records as cost of good sold the cost of flavor ingredients
paid by the processor dairies to the 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.
The processor dairies charge the Company with the cost of producing
the branded flavored milk. The Company is responsible for freight charges
from processor dairies to retail destinations, promotion costs and product
returns of product owing to defects and out of date products. In addition,
the Company pays the fee charged by food brokers retained by the Company to
generate sales of the branded flavored milk products to retail outlets. In
return, the Company is entitled to keep the difference between the cost
charged by processor dairies and the wholesale price determined by the
Company and charged to retail outlets. The Company treats this second
earning event as "product sales revenue" when the revenue is realized or
realizable and accrue any estimated expenses which are related to the
Company's revenue at the end of each reporting period. Because the Company
benefits only from the price difference and does not own the inventory, it
recognizes the revenue generated through this model at net.
In the second quarter 2003, the Company consolidated its out-sourced
dairy processing with Jasper Products, which currently is the sole
processor for the Company in the United States. This consolidation will
result in greater efficiencies in the cost of processing and freight
charges.
11
International Sales and U.S. Sales to Parmalat
----------------------------------------------
The Company and its subsidiary sell "kits" to processor dairies in
Mexico, Canada, China and to Parmalat in the United States. The kits
include the cost of flavor ingredients and rights to produce, market,
distribute and sell branded flavored milk to retailers. As a matter of
convenience, processors purchase the flavor ingredients for the kits
directly from a designated ingredients supplier and are invoiced by the
Company for the full price of the "kits" with a credit for the cost of
flavor ingredients purchased by the processors. The Company is directly
responsible for the administration of these sales, including the collection
of receivables. Dairy processors are responsible for production, marketing,
distribution and sales of the branded flavored milk to retailers. The
normal production cycle for processors' utilization of purchased flavor
ingredients has ranged from 6 weeks in Mexico, 4 weeks for Parmalat (U.S.)
and 3 weeks for Canada. This type of sale was initiated at the end of 2001
with Mexico; Parmalat and Canada were added in the third quarter of 2002.
The Company recognizes revenue at the gross amount of kit invoices
after shipment of flavor ingredients 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 the Company's credit risk to pay for
ingredients if processors do not pay ingredient suppliers. The Company
attributes the majority of the kit price to the sale of flavor ingredients
(95% in the U.S. for Looney Tunes(TM), for example) and the balance to the
Company's grant of production rights to processor dairies. The price of
production rights is formulated to cover the Company's costs of the third
party intellectual property licenses, which currently amount to 5% to 10%
of the total cost of kits sold to the processors under the production
agreements for the U.S., 7% for Mexico, 5% for Canada and 3% for China. The
Company's recognition of revenue generated from the sale of production
rights associated with the flavor ingredients is upon shipment of the
ingredients to the processor, given the short utilization cycle of the
ingredients shipped.
RESULTS OF OPERATIONS
Financial Condition at September 30, 2003
-----------------------------------------
As of September 30, 2003, we had an accumulated deficit of
$28,158,281 and cash on hand of $101,571 and reported total capital deficit
of $2,644,358.
For this same period of time, we had revenue of $1,086,437 and
general and administrative expenses of $1,769,252.
After net interest expenses of $7,500, cost of goods sold of
$176,008, product development of $7,788 and selling expenses of $1,037,914
incurred in the operations of the Company and its Chinese subsidiary, we
had a net loss of $1,912,025.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
------------------------------------------------------------------
September 30, 2002
------------------
Consolidated Revenue
We had revenues for the nine months ended September 30, 2003 of
$1,086,437, with cost of sales of $176,008, resulting in a gross margin of
$910,429. Of the $1,086,437, $895,871 was from sales in the U.S. operation,
$111,463 from sales in Mexico, $43,745 from sales in Canada and $35,358
from sales in
12
China. Revenue for the nine months ended September 30, 2003 increased by
$33,308, a 3.16% increase compared to revenue of $1,053,129 for the same
period in 2002.
Consolidated Cost of Sales
We incurred cost of goods sold of $176,008 for the nine months ended
September 30, 2003, $111,869 of which was incurred in the U.S. operation,
$35,610 in Mexico, $10,402 in Canada and $18,127 in China. Cost of goods
sold in 2003 increased by $43,005, a 32.3% increase compared to $133,003
for the same period in 2002. The increase in cost of goods sold reflects
the full implementation of the unit sale model in 2003.
In Mexico, Canada, and China, and in part 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(TM)
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 with the cost of the raw flavor ingredients, which the Company
records as cost of goods sold. In addition to kit sales revenue, in the
United States the Company is responsible for the sale of finished Slammers
(TM) flavored milk (referred to as "unit sales") to retail outlets. For
these unit sales, the Company also recognizes as revenue the difference
between the prices charged by the processor dairies to produce the milk and
the price that the Company charges to the retail outlets that purchase the
milks directly from the processor dairies. Since the Company benefits from
only the difference between two prices, it does not record any costs of
goods sold against this revenue event.
Segmented revenues and costs of sales
The table set forth on page F-9 of this report presents revenue by
source and type against costs of goods sold, as well as combined gross
revenues and gross margins. Revenues from Canada are generated by kit sales
to Farmers Dairy, a Halifax dairy processor. Revenues from Mexico are
generated from kit sales to Neolac, a dairy processor in central Mexico. In
the United States, revenues are generated by kit sales to Parmalat, which
is responsible for marketing and sales, and kit sales to independent dairy
processors that produce extended shelf life and aseptic long life Slammers
(TM) product. Revenues from these sales are recorded under "US Kit Sales"
in the table. The Company's sale of ESL and aseptic product generates
revenue recorded as "US Unit Sales."
United States (Jasper, Shamrock and Parmalat Sales)
---------------------------------------------------
Revenues for the nine months ended September 30, 2003 from kit sales
in the United States decreased from $899,619 for the same period in 2002 to
approximately $556,490 in 2003. In the period ended September 30, 2002, the
Company recognized $425,618 in net kit sales through Quality Chek'd. and
$474,001 from sales to two independent dairy processors. In the same period
in 2003, the Company had $2,737 in kit sales through Quality Chek'd. and
$556,490 from Jasper Products and Shamrock Farms, independent dairy
processors. The increase in kit sales in 2003 from 2002 is the result of
the full transition from Quality Chek'd. member dairy processors to Jasper
Products and Shamrock Farms.
In addition to kit sales, in the nine months ended September 30,
2003, the Company had revenues of $336,644 from selling finished product
unit sales to retail outlets. The Company did not have unit sales for the
same period in 2002.
Revenues from kit sales in the periods ended September 30, 2002
reflected the implementation of a business plan under which the Company
took control of all sales on a kit level. Total United States sales
decreased by $3,748 from $899,619 for the nine months ended September 30,
2002 to $895,871 for the same period in 2003. The 0.41% decrease in sales
in the United States for the nine months ended
13
September 30, 2003 is the result of two factors. First, the payment of
"slotting fees" to retail stores that were not required in the period ended
September 30, 2002. Slotting fees are a reduction to revenue and
accordingly reduce the gross sales figures. Second, insufficient resources
exist for the Company to promote sales effectively against increased
competition in the single serve flavored milk market segment.
The Company incurred cost of sales of $ 111,869, attributable to United
States sales in the period ended September 30, 2003, an decrease of $12,204
from $124,073 for the same period in 2002. The decrease in cost of goods is
the result of less revenue than recognized for the nine months ended
September 30, 2002.
In the period ended September 30, 2003, the Company's gross margin
for U.S. sales of $784,002, increased by $8,456, or by 1.1%, from $775,546
for the same period in 2002. The increase in gross margin was primarily the
result of the phasing out of sales through Quality Chek'd.
Mexico and Canada
-----------------
Revenues from Mexico and Canada are for kit sales only. Revenues for
the period ended September 30, 2003 from kit sales in Mexico increased
31.2% from $84,925 for the same period in 2002 to $111,463 in 2003. The
increase was the result of greater market penetration and brand awareness
in Mexico. Canadian sales decreased 7.2% from $47,150 for the nine months
ended September 30, 2002 to $43,745 for the period ended September 30,
2003. The decrease in reported kit sales to Canada is the result of
insufficient promotion in the Canadian market..
For the period ended September 30, 2003, the Company's had gross
profit of $75,853 for sales in Mexico and $33,343 for sales in Canada.
China
-----
Revenues from China are for kit sales only. Revenues for the period
ended September 30, 2003 from kit sales in China increased from
$21,435 for the nine months ended September 30, 2002 to $35,358 for the
period ended September 30, 2003. The increase was the result of the set up
of a new processing plant by third party dairy processor in Harbin PRC, and
the accompanying re-launch of the Company's products.
Consolidated Operating Expenses
-------------------------------
The Company incurred selling expenses of $1,037,914 for the period
ended September 30, 2003, all of which were incurred in the Company's North
America Bravo! operations. The Company's selling expense for this period
increased by $991,897, a 2155.5% increase compared to selling expense of
$46,017 for the same period in 2002. The increase in selling expenses is
the result of the change in the Company's sales policies in the reporting
of certain expenses as selling expenses rather than as general and
administrative expenses, and the fact that the Company adopted the refined
business plan in the U.S. for the Company's North America Bravo!
operations, which recognizes revenue for unit sales as well as the selling
expenses associated with that revenue.
Of the increase of $991,897, $397,620 was incurred for freight and
delivery expense, $110,630 was related to food brokerage fees, $77,394 was
related to marketing, $79,719 for sample expenses, $230,384 for reclamation
of product approaching sell by dates, $48,697 for promotions and $29,757
for advertising expense due to the continued ramp-up of the national United
States sales program. As a percentage of total revenue, the Company's
selling expense increased from approximately 4.4% of total revenue for the
period ended September 30, 2002, when the Company recognized a significant
portion of its revenues on a net basis, to approximately 95.5% of total
revenue for the current period in 2003. The
14
high reclamation costs have resulted from the rapid expansion of sales and
distribution into new markets for the Company's Slammers(TM) milk products.
In those markets where sales have not met initial estimates, the Company
reclaims product for disposition as the product approaches "sell by" dates.
As markets mature and product positioning is improved, the Company believes
that reclamation costs will significantly decrease.
The Company incurred general and administrative expenses for the
period ended September 30, 2003 of $1,769,252, consisting of $1,672,238 in
its North America operations and $97,014 in its China operations. The
Company's general and administrative expenses for this period decreased by
$1,329,814, a 42.9% decrease compared to $3,099,066 for the same period in
2002. The decrease for the current period in 2003 is the result mainly of
cost reductions in salaries and overhead expenses, in addition to the lack
of non-cash items added to the 2002 expenses as required by accounting
rules.
As a percentage of total revenue, the Company's general and
administrative expenses decreased from 2942% in the period ended September
30, 2002, to 162.8% for the current period in 2003, as a result of the
Company's cost cutting measures and the absence of non-cash items. The
Company anticipates a reduction of these expenses through cost cutting
efforts and the continuation of the refinement of its business operations.
Interest Expense
The Company incurred net interest expense for the period ended
September 30, 2003 of $7,500, related to its U.S. operations. Interest
expense decreased by $13,242, an 63.84% decrease, compared to $20,742 for
the same period in 2002, almost all of which was incurred in the U.S. The
decrease was due to the fact that the Company paid a $250,000 loan in 2002.
Loss Per Share
The Company accrued dividends payable of $617,240, including deemed
dividends, to various series of preferred stock during the nine months
ended September 30, 2003. The Company's accrued dividends decreased for
this period by $337,275 from $954,515 for the nine months ended September
30, 2002. This 35.3% decrease was due to decreased financing activities and
the conversion of a portion of the preferred stock. The Company's loss per
share was $0.10 for the nine months ended September 30, 2003 compared to a
$0.18 loss per share for the same period in 2002. This decrease in the
loss per share was the result of the increase in the weighted average
number of shares outstanding for the comparable periods, combined with the
decrease in net loss before accrued dividends of $333,674, from $2,245,699
for the nine months ended September 30, 2002 to $1,912,025 for the same
period in 2003.
Three Months Ended September 30, 2003 Compared to the Three Months Ended
------------------------------------------------------------------------
September 30, 2002
------------------
Revenue
The Company had revenues for the three months ended September 30,
2003 of $334,537, with cost of sales of $53,473, resulting in a gross
profit of $281,064, or 84% of sales. Of the $334,537, $310,054 was from
sales in the Company's U.S. operation, $6,790 from sales in China and
$17,693 from sales in Mexico. Revenue for the three months ended September
30, 2003 increased by $25,808, an 8.35% increase compared to revenue of
$308,729 for the three months ended September 30, 2002. The increase in
revenue in the United States for the three months ended September 30, 2003
is the result of the implementation of the company's new unit sale business
model in 2003.
15
Cost of Goods Sold
The Company incurred cost of goods sold of $53,473 for the three
months ended September 30, 2003, most of which was incurred in the U.S.
operation in the third quarter. Cost of goods sold for this period
decreased by $3,043, a 5.3% decrease compared to $56,516 for the three
months ended September 30, 2002.
Operating Expense
The Company incurred selling expenses for the three months ended
September 30, 2003 of $357,384 mostly incurred in the U.S. operation.
Selling expenses increased for the three months ended September 30, 2003 by
$328.881, a 1,154% increase compared to the selling expense of $28,503 for
the three months ended September 30, 2002. The increase in selling expenses
is the result of the change in the Company's sales policies in the
reporting of certain expenses as selling expenses rather than as general
and administrative expenses.
The Company incurred general and administrative expenses for the
three months ended September 30, 2003 of $478,121, consisting of $454,077
in the U.S. operation and 24,044 in China. General and administrative
expenses for the three months ended September 30, 2003 decreased by
$404,434, a 45.8% decrease compared to $822,555 for the same period in
2002. This decrease was due to the change in the Company's sales policies
that resulted in the reporting of certain expenses as selling expenses
rather than as general and administrative expenses, the significant cutting
of expenses in China through a reduction in staff and office space, and the
overall reduction of administrative expenses.
Interest Expense
The Company incurred interest expense for the three months ended
September 30, 2003 of $3,421, all of which was incurred in the U.S.
operation. Interest expense for the three months ended September 30, 2003
increased by $4,343, an 471% increase compared to a net positive $922 for
the same period in 2002.
Net Loss/Operating Income
The Company had a net loss in its operations for the three months
ended September 30, 2003 of $563,996 compared with a net loss of $657,923
for the same period in 2002. The net loss decrease amounted to $93,927 or
14.27% compared to the same period in 2002. The decrease in net loss
resulted from significant efforts to reduce general and administrative
expenses in the U.S. and China operations, combined with reduced non-cash
general and administrative items in the three months ended September 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company reported that net cash used in
operating activities was $1,118,564, net cash provided by financing
activities was $1,027,062 and net cash used in investing activities was
$31,362. The Company had a negative working capital of approximately
$2,280,500 as of September 30, 2003.
Compared to approximately $1,216,540 of net cash used in operating
activities in the period ended September 30, 2002, the Company's current
year net cash used in operating activities decreased by approximately
$97,976 to $1,118,564. This decrease was the result of continuing efforts
of the Company
16
to reduce expenses through the refinement of its business plan and the
reduction of salaries at the senior management level and general office
expenditures.
Changes in accounts receivable in this current period in 2003
resulted in a cash increase of approximately $132,635, compared to a cash
decrease in receivables of approximately $31,601 for the same period in
2002, having a net result of an increase of $164,236. The increase in
accounts payable and accrued liabilities in the period ended September 30,
2002 contributed to a cash increase of $389,216, whereas the changes in
accounts payable and accrued liabilities for the current period in 2003
amounted to an increase in cash of $728,498. The Company has adopted and
will keep implementing cost cutting measures to lower the Company's costs
and expenses and to pay the Company's accounts payable and accrued
liabilities by using cash and equity instruments. The Company's cash flow
generated through operating activities was inadequate to cover all of the
Company's cash requirements in the period ended September 30, 2003, and the
Company had to rely on equity financing to cover expenses.
The Company's cash used in investing activities was approximately
$31,362 for computer equipment in the United States.
The Company's net cash provided by financing activities for the
period ended September 30, 2003 was approximately $1,027,000. New cash
provided by financing activities for the same period in 2002 was
approximately $1,973,000, for a net decrease of approximately $946,000. The
decrease was due to limiting financing activities to the issuance of Series
J preferred stock in this current period.
The financing proceeds were used for working capital purposes.
Notwithstanding total cash proceeds of approximately $1,027,000, the
Company owed approximately $147,000 as of September 30, 2003 for Warner
Bros. license guaranteed royalty payments. The Company will not seek
another license from Warner Bros. for China. This decision is based upon
the lack of sales in the Company's China markets and what the Company
perceives to be the licensor's continuing overall lack of brand support in
China. The Company and Warner Bros. dispute the contractual necessity of
the payment of the balance owed on the China license as a result of the
above circumstances.
Going forward, the Company's primary requirements for cash consist of
(1) the continued development of its business in the United States and on
an international basis; (2) general overhead expenses for personnel to
support the new business activities; and (3) payments of guaranteed royalty
payments to third parties for existing and future licensing agreements. The
Company estimates that the Company's need for financing to meet the
Company's cash needs for operations will continue to the second quarter of
2004, when cash supplied by operating activities may enable the Company to
meet its anticipated cash requirements for operation expenses. The Company
anticipates the need for additional financing in 2003 and 2004 to reduce
the Company's liabilities and to improve its shareholders' equity. No
assurances can be given that the Company will be able to obtain additional
financing or that operating cash flows will be sufficient to fund the
Company's operations.
The Company currently has monthly working capital needs of
approximately $225,000. The Company has incurred and continues to incur
significant selling and other expenses in order to increase retail sales.
Certain of these expenses, such as slotting fees and freight charges, will
be reduced as a function of unit sales costs as the Company expands its
sales markets and increases its sales within established markets. Freight
charges will be reduced as the Company is able to ship more full truckloads
of product given the reduced per unit cost associated with 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. The Company believes that, along with the increase in the
Company's unit sales volume, the average unit selling expense and
associated costs will decrease, resulting in gross margins sufficient to
mitigate the Company's cash needs. In addition, the Company is actively
seeking additional financing to support its operational needs and to
develop an expanded promotional program for the Company's products.
17
The Company is continuing to explore the sale of Slammers(TM)
flavored milk in new and expanded markets, as well as combining this brand
with the brands of third parties. In addition, the Company is developing
its own new line of "extreme" flavored milks with distinctive packaging
directed at a target market extending to twenty plus year old buyers. The
Company introduced its "Extreme Slammers" at the National Association of
Convenience Stores trade show in October 2003. "Extreme Slammers" utilizes
well known professional "extreme sports" figures as the focus of its
packaging and marketing.
Presently, the Company still is exploring and pursuing the school
market through trade/industry shows and individual direct contacts. The
implementation of such a school based program, however, still has not
proved to be a viable aspect of the Company's business model, owing to the
pricing of Slammers(TM) and the product positioning of Looney Tunes(TM)
milk in middle and high schools. Efforts are ongoing to reduce the cost of
the Slammers(TM) products for schools and to introduce "Extreme Slammers"
in middle and high schools.
Warner Bros. Licenses
The Company holds five licenses for Looney Tunes(TM) characters and
names from Warner Bros. Each license is structured to provide for the
payment of guaranteed royalty payments to Warner Bros. The Company accounts
for these guaranteed payments as debt and licensing rights as assets. The
following is a summary of expiration dates and guaranteed royalty payments
due to Warner Bros. as of September 30, 2003:
Amount Expiration
License Guaranty Balance Due Past Due Date
-----------------------------------------------------------------
U.S. License $500,000 $ - $ - 12/31/03
U.S. TAZ $250,000 $ - $ - N/A
China $400,000 $147,115 $147,115 06/30/03
Mexico $145,000 $ - $ - 05/31/04
Canada $ 32,720 $ - $ - 03/31/04
The China license had been extended to October 29, 2003 by agreement
of the parties and the Company will not seek another license from Warner
Bros. for China. This decision is based upon the lack of sales in the
Company's China markets and what the Company perceives to be the licensor's
continuing overall lack of brand support in China. The Company and Warner
Bros. dispute the contractual necessity of the payment of the balance owed
on the China license as a result of the above circumstances.
The history of the Company with Warner Bros. licenses, as a function
of sales of the flavored milks, has not supported the guaranteed royalty
structure required by Warner Bros. for its licenses. In the third quarter
2002, the Company decided to develop the Slammers(TM) brand, with the
prospect of creating its own independent brand, which could be combined
with other third party "promotional" type licensed properties. The Company
officially launched a dual branded Slammers(TM) and Looney Tunes(TM)
product in the first quarter 2003. In October 2003, the Company introduced
its own non-Looney Tunes(TM) "Extreme Slammers" product, and anticipates
the launch of a dual branded Slammers(TM) with a non-Warner Bros. third
party licensed property in the first quarter 2004. At present, the Company
is engaged in an analysis of whether it will seek to extend any of its
licenses with Warner Bros.
18
DEBT STRUCTURE
International Paper
-------------------
During the process of acquiring from American Flavors China, Inc. the
52% of equity interest in Hangzhou Meilijian, the Company issued an
unsecured promissory note to assume the American Flavors' debt owed to a
supplier, International Paper. The face value of that note was $282,637 at
an interest rate of 10.5% per annum, without collateral. The note has 23
monthly installment payments of $7,250 with a balloon payment of $159,862
at the maturity date of July 15, 2000. On July 6, 2000, International Paper
agreed to extend the note to July 1, 2001, and the principal amount was
adjusted due to different interest calculation. International Paper imposed
a charge of $57,000 to renegotiate the note owing the failure of Hangzhou
Meilijian to pay for certain packing material, worth more than $57,000 in
1999. The current outstanding balance is $187,743. The Company is
delinquent in its payments under this note.
Individual Loans
----------------
On November 6 and 7, 2001, respectively, the Company 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 the Company's
assets. On February 1, 2000, the parties agreed to extend the maturity
dates until the completion of the anticipated Series H financing. On June
18, 2002, the respective promissory note maturity dates were extended by
agreement of the parties to December 31, 2002. On June 18, 2002, the
Company agreed to extend the expiration dates of warrants issued in
connection with the Company's Series D and F preferred until June 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.
On August 27, 2003, the Company received the proceeds of a loan from
Mid-America Capital, L.L.C., in the amount of $150,000. The note is payable
November 25, 2003 and bears interest at the annual rate of 10%. This loan
is secured by a general security interest in all the Company's assets.
EFFECTS OF INFLATION
The Company believes that inflation has not had any material effect
on its net sales and results of operations.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
The Company's Shanghai subsidiary is located in China. It buys and
sells products in China using Chinese renminbi as the functional currency.
Based on Chinese government regulation, all foreign currencies under the
category of current account are allowed to freely exchange with hard
currencies. During the past two years, the China operations have not been
significant. There were no significant changes in exchange rates.
NEW ACCOUNTING ANNOUNCEMENTS NOT YET ADOPTED
In November 2002, the FASB issued Interpretation No. 45 ("FIN No.
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
expands on the accounting guidance of Statements No. 5, 57, and 107 and
incorporates without change the provisions of FASB Interpretation No. 34,
which is being superseded. FIN No. 45 will affect leasing transactions
involving residual guarantees, vendor and manufacturer guarantees, and tax
and environmental indemnities. All such guarantees will need to be
disclosed in the
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notes to the financial statements starting with the period ending after
December 15, 2002. For guarantees issued after December 31, 2002, the fair
value of the obligation must be reported on the balance sheet. Existing
guarantees will be grandfathered and will not be recognized on the balance
sheet. The Company's Certificate of Incorporation provides that the Company
"shall be empowered to indemnify" to the full extent of its power to do so,
all directors and officers, pursuant to the applicable provisions of the
Delaware General Corporation Law. The Company will indemnify its officers
and directors to the full extent permitted under Section 145 of the
Delaware General Corporation Law. The Company has determined that there has
been no impact due to the application of FIN No. 45 on its financial
position and results of operations.
In January 2003, FASB issued FASB Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN No. 46 explains how to identify variable interest entities and how an
enterprise assesses its interest in a variable entity to decide whether to
consolidate that entity. FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. FIN No. 46 is effective immediately for variable interest
entities after January 31, 2003, and to variable interest entities in which
an enterprise obtained an interest after that date. FIN No. 46 applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The adoption of FIN No. 46 is not
expected to have a material effect on the Company's financial position and
result of operations.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Quarter Ended September 30, 2003
On August 12, 2003, the Company issued 1,200,000 shares of common
stock upon the conversion of 6,542 shares of Series G Convertible
Preferred. The conversions were based upon notices of conversion received
in June and July 2003, and was delayed in order to determine the accuracy
of the conversion variables contained in the respective notices of
conversion. The conversion-based issuances of common were as follows:
The Company issued 200,000 shares of common stock to Keshet, LP, upon
the conversion of 1,209 shares of Series G Convertible Preferred, at a
conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 200,000 shares of common stock to The Keshet Fund,
LP, upon the conversion of 1,209 shares of Series G Convertible Preferred,
at a conversion price of $0.076. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 150,000 shares of common stock to The Keshet Fund,
LP, upon the conversion of 773 shares of Series G Convertible Preferred, at
a conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
The Company issued 250,000 shares of common stock to Keshet, LP, upon
the conversion of 1,289 shares of Series G Convertible Preferred, at a
conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
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The Company issued 200,000 shares of common stock to Talbiya B.
Investments, Ltd., upon the conversion of 1,031 shares of Series G
Convertible Preferred, at a conversion price of $0.0653. The conversion
included accrued and unpaid dividends on the preferred converted.
The Company issued 200,000 shares of common stock to Nesher. Ltd.,
upon the conversion of 1,031 shares of Series G Convertible Preferred, at a
conversion price of $0.0653. The conversion included accrued and unpaid
dividends on the preferred converted.
On September 15, 2003, the Company issued 213,750 shares of common
stock to Michael Willms, upon the conversion of 7,500 shares of Series H
Convertible Preferred, at the fixed conversion price of $0.40. The
conversion included accrued and unpaid dividends on the preferred
converted.
On September 29, 2003, the Company issued 70,938 shares of common
stock to The Dennis H. Willms Irrevocable Trust, Michael Willms, Trustee,
upon the conversion of 2,500 shares of Series H Convertible Preferred, at
the fixed conversion price of $0.40. The conversion included accrued and
unpaid dividends on the preferred converted.
Item 6. Exhibits and Reports on Form 8-K
None
CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and the Company's principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-
14(c) and 15d-14(c) as of a date within 90 days of the filing date of this
report on Form 10-QSB (September 30, 2003), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries would be made known to
them by others within those entities, particularly during the period in
which this quarterly report on Form 10-QSB was being prepared.
b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's 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, no corrective actions were taken.
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: November 13, 2003
/s/Roy G. Warren
--------------------------------------
Roy G. Warren, Chief Executive Officer
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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 November 13, 2003
and Director
/S/ Tommy E. Kee Chief Financial Officer November 13, 2003
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