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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 June 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
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(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
August 8, 2003 Common Stock 26,162,854
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 F-1
June 30, 2003 (unaudited) and December 31, 2002
Consolidated statements of operations F-3
(unaudited) for the three and six months ended
June 30, 2003 and 2002
Consolidated statements of cash flows F-4
(unaudited) for the six months ended
June 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 22
Item 6. Exhibits and reports on Form 8-K 23
SIGNATURES 24
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2003
------------ --------
Assets
Current assets:
Cash and cash equivalents $ 224,579 $ 91,235
Accounts receivable 236,149 139,639
Other receivable 14,662 75,718
Advance to vendor 8,719 8,732
Inventories 55,062 55,142
Prepaid expenses 7,605 112,524
----------- -----------
Total current assets 546,776 482,990
Furniture and equipment, net 89,602 71,620
License rights, net of accumulated amortization 88,104 56,085
Deposits 15,000 10,000
----------- -----------
Total assets $ 739,482 $ 620,695
=========== ===========
Liabilities and Capital Deficit
Current liabilities:
Note payable to International Paper $ 187,743 $ 187,743
Notes payable to individual lenders 100,000 100,000
License fee payable to Warner Brothers 270,053 147,115
Accounts payables 1,039,313 1,281,430
Accrued liabilities 409,615 491,949
----------- -----------
Total current liabilities 2,006,724 2,208,237
Dividends payable 266,666 424,319
----------- -----------
Total liabilities 2,273,390 2,632,556
----------- -----------
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 10KSB.
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 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, 130,515 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 67,323 shares issued and
outstanding 624,115 595,265
Series H convertible, 7% cumulative and redeemable preferred stock,
stated value $10.00 per share, 175,500 shares issued and outstanding 939,686 939,686
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 26,162,854 shares issued and outstanding 25,730 26,160
Additional paid-in capital 20,266,463 20,695,767
Accumulated deficit (25,629,016) (27,507,581)
Translation adjustment (241) (513)
----------- -----------
Total capital deficit (1,533,908) (2,011,861)
----------- -----------
Total liabilities and capital deficit $ 739,482 $ 620,695
=========== ===========
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 10KSB.
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2003 2002 2003
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue - unit sales $ 236,664 $ 133,142 $ 236,664 $ 226,060
Revenue - net kit sales 186,023 - 407,868 2,737
Revenue - gross kit sales 73,492 221,328 99,868 523,103
----------- ----------- ----------- -----------
Total revenue 496,179 354,470 744,400 751,900
Cost of sales (72,004) (42,173) (76,487) (122,535)
----------- ----------- ----------- -----------
Gross margin 424,175 312,297 667,913 629,365
Selling expense 7,228 319,455 17,514 680,530
Product development - 1,160 - 1,654
General and administrative expenses 1,508,944 518,661 2,216,511 1,291,131
----------- ----------- ----------- -----------
Loss from operations (1,091,997) (526,979) (1,566,112) 1,343,950
Other income (expense):
Interest expense, net (10,559) (2,035) (21,664) (4,079)
----------- ----------- ----------- -----------
Loss before income taxes (1,102,556) (529,014) (1,587,776) (1,348,029)
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net loss (1,102,556) (529,014) (1,587,776) (1,348,029)
Dividends accrued for Series B preferred stock (2,444) (2,411) (4,861) (4,795)
Dividends accrued for Series D preferred stock (6,905) - (17,107) -
Dividends accrued for Series G preferred stock (15,151) (13,607) (31,472) (27,406)
Dividends accrued for Series H preferred stock (16,627) (30,628) (263,998) (60,920)
Dividends accrued for Series I preferred stock (295,001) (5,984) (295,001) (11,902)
Dividends accrued for Series J preferred stock - (34,302) - (58,302)
Deemed dividend on Series J preferred stock - (92,491) - (367,211)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $(1,438,684) $ (708,437) $(2,200,215) $(1,878,565)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 17,452,542 26,032,085 16,498,111 25,938,434
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.08) $ (0.03) $ (0.13) $ (0.07)
=========== =========== =========== ===========
Comprehensive loss and its components
consist of the following:
Net loss $(1,102,556) $ (529,014) $(1,587,776) $(1,348,029)
Foreign currency translation adjustment (472) (3,319) - (272)
----------- ----------- ----------- -----------
Comprehensive loss $(1,102,028) $ (532,333) $(1,587,776) $(1,348,301)
=========== =========== =========== ===========
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 10KSB.
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
---------------------------
2002 2003
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(1,587,776) $(1,348,029)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 283,070 49,515
Stock issuance for compensation 516,204 28,000
Loss on disposal of fixed assets - 15,853
Increase (decrease) from changes in:
Accounts Receivable (165,830) 96,510
Other receivable (41) (61,056)
Advance to vendors 3,200 (13)
Inventories 604 (80)
Prepaid expenses (11,564) (99,919)
Accounts payable and accrued expenses 93,858 324,452
License rights (282,720) -
----------- -----------
Net cash used in operating activities (1,150,995) (994,767)
----------- -----------
Cash flows from investing activities:
Purchase of equipment - (15,367)
----------- -----------
Net cash used in investing activities - (15,367)
----------- -----------
Cash flows from financing activities:
Proceeds of Series H preferred stock 700,000 -
Proceeds of Series I preferred stock 287,988 -
Proceeds of Series J preferred stock - 1,000,000
Proceeds from exercise of stock options 330,000 -
Payment of note payable, bank loan and license fee payable (352,768) (122,938)
----------- -----------
Net cash provided by financing activities 965,220 877,062
----------- -----------
Effect of changes in exchange rates on cash - (272)
----------- -----------
Net decrease in cash and cash equivalents (185,775) (133,344)
Cash and cash equivalents, beginning of period 232,040 224,579
----------- -----------
Cash and cash equivalents, end of period $ 46,265 $ 91,235
----------- -----------
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 10KSB.
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 Foods (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
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 fair
presentation have been included. Operating results for the three or six
month period ended June 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 $27,507,581, a capital deficit
of $2,011,861, negative working capital of $1,725,247 and is delinquent on
certain of its debts at June 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. and China
operations 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 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.
F-5
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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)
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 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.
Six Months
Ended June 30,
---------------------------
2002 2003
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Net loss: as reported $(2,200,215) $(1,878,565)
Add: total stock based employee compensation
expense determined under fair value method for
all awards - (4,500)
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Pro forma net loss $(2,200,215) $(1,878,565)
=========== ===========
Loss per share:
As reported $ (0.13) $ (0.07)
Pro forma $ (0.13) $ (0.07)
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 to be filed in the third quarter of 2003. In January
2003, the Company recorded $28,000 of compensation expense based upon a
signing bonus for this grant.
F-6
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 expire on each of December 30, 2008
and December 30, 2009, respectively.
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.
("Mid-Am") for the aggregate purchase price of $500,000. Each preferred
share is convertible to 50 shares of the Company's common stock at a per
common share conversion price of
F-7
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$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 (see page 23 for explanation). 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.
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 adopted
the position that it will indemnify its officers and directors to the full
extent permitted under Section 145 of the Delaware General Corporation Law.
There was no impact on our 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.
F-8
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
6 Months ended United Total
June 30, 2003 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue - unit sales $226,060 $ - $ - $ - $ 226,060
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 372,578 28,187 93,770 28,568 523,103
-------- -------- -------- -------- ---------
Total revenue 601,375 28,187 93,770 28,568 751,900
Cost of goods sold (74,471) (10,402) (29,910) (7,752) (122,535)
-------- -------- -------- -------- ---------
Gross margin $526,904 $ 17,785 $ 63,860 $ 20,816 $ 629,365
======== ======== ======== ======== =========
Furniture and equipment, net $ 63,768 $ - $ - $ 7,852 $ 71,620
======== ======== ======== ======== =========
6 Months ended United Total
June 30, 2002 States Canada Mexico China Company
------ ------ ------ ----- -------
Revenue - net kit sales $407,868 $ - $ - $ - $ 407,868
Revenue - gross kit sales 236,644 46,372 44,700 8,816 336,532
-------- -------- -------- -------- ---------
Total revenue 644,512 46,372 44,700 8,816 744,400
Cost of goods sold (69,966) 46,372 44,700 (6,521) (76,487)
-------- -------- -------- -------- ---------
Gross margin $574,546 $ 46,372 $ 44,700 $ 2,295 $ 667,913
======== ======== ======== ======== =========
Furniture and equipment, net $ 71,563 $ - $ - $ 30,214 $ 101,777
======== ======== ======== ======== =========
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 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 obtaining license rights from
Warner Brothers, Inc., granting production and marketing rights to processor
dairies to produce Looney Tunes(TM) 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 Looney Tunes(TM) 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 1,348,029 for the
six months ended June 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 June 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. and China operations in 2003 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.
10
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
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 it's 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
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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 under this model
is allocated as follows: 95% of the revenue is for the processors' purchase
of flavor ingredients; the balance of 5% represents fees charged by the
Company to the processors for production rights. The price of production
rights is based upon the Company's cost of the Warner Bros. Looney Tunes(tm)
intellectual property licenses, which in the U.S. is 5% 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 good sold the cost of flavor
ingredients paid by the processor
11
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
Looney Tunes(tm) 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 Looney Tunes(tm) 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 of 2003, the Company consolidated its out sourced
processing with Jasper Products, which is currently 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.
International Sales and U.S. Sales to Parmalat
----------------------------------------------
The Company sells "kits" to processors 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 the Looney
Tunes(tm) 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 Looney
Tunes(TM) 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 example) and the balance (5% in the U.S.) 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 Warner
Bros. Looney Tunes(TM) intellectual property licenses, which currently amount
to 5% 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.
12
RESULTS OF OPERATIONS
Financial Condition at June 30, 2003
------------------------------------
As of June 30, 2003, we had an accumulated deficit of $27,507,581 and
cash on hand of $91,235 and reported total shareholders' deficit of
$2,011,861
For this same period of time, we had revenue of $751,900 and general
and administrative expenses of $1,291,131.
After net interest expenses of $4,079, cost of goods sold of $122,535,
product development of $1,654 and selling expenses of $680,530 incurred in
the operations of the Company and its Chinese subsidiary, we had a net loss
of $1,348,029.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
-------------------------------------------------------------------------
Consolidated Revenue
We had revenues for the six months ended June 30, 2003 of $751,900,
with cost of sales of $122,535, resulting in a gross margin of $629,365. Of
the $751,900, $601,375 was from sales in the U.S. operation, $93,770 from
sales in Mexico, $28,187from sales in Canada and $28,568 from sales in
China. Our revenue for the six months ended June 30, 2003 increased by
$7,500 a 1% increase compared to revenue of $744,440 for the same period in
2002.
Consolidated Cost of Sales
We incurred cost of goods sold of $122,535 for the six months ended
June 30, 2003, $74,471 of which was incurred in our U.S. operation,
$29,910 in Mexico, $10,402 in Canada and $7,752 in China. Our cost of goods
sold in 2003 increased by $46,048, a 60% increase compared to $76,487 for
the same period in 2002. The increase in cost of goods sold reflects
additional costs associated with the full implementation of the kit sales
model in 2002 and the unit sale model in 2003.
In Mexico, Canada, China and the United States, the Company's revenue
is generated in part by the sale of kits to dairy processors. Each kit
consists of flavor ingredients for the Company's Slammers Looney Tunes(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
and Slim Slammers Looney Tunes(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 milk 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.
13
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 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
Looney Tunes(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 six months ended June 30, 2003 from kit sales in the
United States decreased from $644,512 for the same period in 2002 to
approximately $375,315 in 2003. In the period ended June 30, 2002, the
Company recognized $407,868 in kit sales through Quality Chek'd. and $236,644
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 $372,578 from
Jasper Products and Shamrock Farms. The decrease in kit sales in 2003 is the
result of a "pipeline effect" of initial kit orders precipitated by the
transition from Quality Chek'd member dairy processors to the Jasper Products
and Shamrock Farms processors.
In addition to kit sales, in the six months ended June 30, the
Company had revenues of approximately $226,000 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 June 30, 2002 reflected
the above mentioned "pipeline effect" and 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 $43,137 from $644,512 for the six months
ended June 30, 2002 to $601,375 for the same period in 2003. The 6.7%
decrease in sales in the United States for the six months ended June 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 June 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 approximately $ 74,000,
attributable to United States sales in the period ended June 30, 2003, an
increase of $4,000 from $70,000 for the same period in 2002. The slight
increase in cost of goods sold against less revenue is the result of the
full implementation of the direct recognition of revenue by the Company,
with associated costs of goods sold, as opposed to the net revenue
recognized through Quality Chek'd for the six months ended June 30, 2002.
In the period ended June 30, 2003, the Company's gross margin for
U.S. sales of approximately $526,000, decreased by $48,000, or by 8.3%,
from $574,000 for the same period in 2002. The decrease in gross margin was
the result of the phasing out of sales through Quality Chek'd and impact of
contra revenue on the reported gross sales numbers.
14
Mexico and Canada
-----------------
Revenues from Mexico and Canada are for kit sales only. Revenues for
the period ended June 30, 2003 from kit sales in Mexico increased 109% from
approximately $44,700 for the same period in 2002 to approximately $94,000
in 2003. The increase was the result of greater market penetration and
brand awareness in Mexico. Canadian sales decreased 39.2% from approximately
$46,000 for the six months ended June 30, 2002 to approximately $28,000 for
the period ended June 30, 2003. The decrease in reported kit sales to
Canada is the result of an accounting adjustment for a $15,558 marketing
allowance required to be booked as contra-revenue.
For the period ended June 30, 2003, the Company had gross profit of
approximately $64,000 for sales in Mexico and $18,000 for sales in Canada.
China
-----
Revenues from China are for kit sales only. Revenues for the period
ended June 30, 2003 from kit sales in China increased from approximately
$9,000 for the six months ended June 30, 2002 to approximately $28,000 for
the period ended June 30, 2003. The increase was the result of the greater
market penetration and brand awareness in China. The Company did not have
sales in its China operation for the period ended March 31, 2003. The lack of
sales was the result of the set up of a new processing plant by our third
party dairy processor in Beijing. The advent of SARS in Beijing contributed
to the delayed commencement of production at this new processing facility.
Consolidated Operating Expenses
-------------------------------
The Company incurred selling expenses of $680,530 for the period
ended June 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 approximately $663,000, a 3785% increase compared to selling
expense of approximately $17,000 for the same period in 2002. The increase
in selling expenses in the current period was due mainly to 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 $663,000, approximately $229,000 was incurred for
freight and delivery expense, approximately $59,000 was related to food
brokerage fees, approximately $53,000 was related to marketing,
approximately $51,000 for sample expenses, $192,000 for reclamation of
product approaching sell by dates, $54,000 for promotions and $16,000 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 2.35% of total revenue for the
period ended June 30, 2002, when the Company reorganized a significant
portion of its revenues on a net basis, to approximately 90.5% of total
revenue for the current period in 2003. The high reclamation costs have
resulted from the rapid expansion of sales and distribution into new markets
for the Company's Slammers milk products. In those markets where sales have
not met initial estimates, the Company reclaims
15
product for disposition as the product approaches "sell by" dates. As
markets mature, the Company believes that reclamation costs will
significantly decrease.
The Company incurred general and administrative expenses for the
period ended June 30, 2003 of approximately $1,291,000, consisting of
$1,218,000 in its North America operations and $73,000 in its China
operations. The Company's general and administrative expenses for this
period decreased by approximately $925,000, a 41.7% decrease compared to
approximately $2,216,000 for the same period in 2002, consisting of
$2,171,000 in our U.S. operation and $45,000 in our China operation. 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 297% in the period ended June 30,
2002, to 171% 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 refinement of business operations to continue.
Interest Expense
The Company incurred net interest expense for the period ended June
30, 2003 of approximately $4,000 related to its U.S. operations. Interest
expense decreased by approximately $17,000, an 81% decrease, compared to
approximately $21,700 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 approximately $530,000,
including deemed dividends, to various series of preferred stock during the
six months ended June 30, 2002. The Company's accrued dividends decreased
for this period by approximately $82,000 from approximately $612,000 for the
six months ended June 30, 2002. This 13.3% decrease was due to decreased
financing activities and the conversion of a portion of the preferred stock.
The Company's loss per share was $0.07 for the six months ended June 30, 2003
compared to a $0.13 loss per share of 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 approximately
$239,747,from $1,587,776 for the six months ended June 30, 2002 to $1,348,029
for the same period in 2003.
Three Months Ended June 30, 2003 Compared to the Three Months Ended June
30, 2002
-----------------
Revenue
The Company had revenues for the three months ended June 30, 2003 of
$354,470, with cost of sales of $42,173, resulting in a gross profit of
$312,297, or 88% of sales. Of the
16
$354,470, $292,000 was from sales in the Company's U.S. operation, $28,568
from sales in China, and $33,906 from sales in Mexico. The Company did not
report any sales for Canada in the three months ended June 30, 2003. Our
revenue for the three months ended June 30, 2003 decreased by $141,709, a
28.5% decrease compared to revenue of $496,179 for the three months ended
June 30, 2002. The decrease in revenue in the United States for the three
months ended June 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 June 30, 2003, and marketing allowances, which fees and allowances
reduce revenue and therefore reduce the gross sales figures; and second,
insufficient resources for the Company to promote sales effectively against
increased competition in the single serve flavored milk market segment.
Cost of Goods Sold
The Company incurred cost of goods sold of $42,173 for the three
months ended June 30, 2003, most of which was incurred in our U.S.
operation in the second quarter. Our cost of goods sold for this period
decreased by $29,831, a 41.4% decrease compared to $72,004 for the three
months ended June 30, 2002.
Operating Expense
The Company incurred selling expenses for the three months ended June
30, 2003 of $319,455 consisting of $323,105 in our U.S. operation and a
$3,650 credit adjustment in China. Selling expenses increased for the three
months ended June 30, 2003 by $312,227, a 4391% increase compared to the
selling expense of $7,228 for the three months ended June 30, 2002. The
increase in selling expenses is the result of the adoption of the refined
business plan in the U.S. for the Company's North America Bravo!
operations, including the costs associated with the sale of finished
product to retail establishments through brokers and distributors.
The Company incurred general and administrative expenses for the
three months ended June 30, 2003 of $518,661, consisting primarily of
$508,707 in our the U.S. operation. General and administrative expenses
for the three months ended June 30, 2003 decreased by $990,283, a 65.6%
decrease compared to $1,508,944 for the same period in 2002. This decrease
was due to the change in the Company's sales poloicies 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 June
30, 2003 of $2,035 consisting primarily of $2,000 in our U.S. operation.
Interest expense for the three months ended June 30, 2003 decreased by $8,524,
an 81% decrease compared to $10,559 for the same period in 2002.
Net Loss/Operating Income
The Company had a net loss in its U.S operations for the three months
ended June 30, 2003 of $529,014 compared with a net loss of $1,102,556 for
the same period in 2002. The net
17
loss decrease amounted to $573,542 or 52% compared to the same period in
2002. The decrease in net loss resulted from significant efforts to reduce
general and administrative expenses in our U.S. and China operations,
combined with reduced non-cash general and administrative items in the
three months ended June 30, 2003. For the three months ended June 30, 2003,
the Company's China operations had operating income of $15,431.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2003, the Company reported that net cash used in
operating activities was approximately $995,000, net cash provided by
financing activities was approximately $877,000 and net cash used in
investing activities was $15,000. The Company had a negative working
capital of approximately $1,725,000 as of June 30, 2003.
Compared to approximately $1,151,000 of net cash used in operating
activities in the period ended June 30, 2002, the Company's current year
net cash used in operating activities decreased by approximately $156,000
to $995,000. This decrease was the result of continuing efforts of the
Company 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 $97,000, compared to a cash
decrease in receivables of approximately $166,000 for the same period in
2002, having a net result of an increase of approximately $263,000. The
increase in accounts payable and accrued liabilities in the period ended
June 30, 2002 contributed to a cash increase of approximately $94,000,
whereas the changes in accounts payable and accrued liabilities for the
current period in 2003 amounted to an increase of approximately $324,000.
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
June 30, 2003, and the Company had to rely on equity financing to cover
expenses.
The Company's cash used in investing activities was approximately
$15,400 for computer equipment in the United States.
The Company's net cash provided by financing activities for the
period ended June 30, 2003 was approximately $877,000. New cash provided by
financing activities for the same period in 2002 was approximately
$965,000, for a net decrease of approximately $88,000. The decrease was due
to limiting financing activities to the issuance of Series J preferred
stock with total proceeds of approximately $1,000,000 in this current
period. The Company paid approximately $123,000 for Warner Bros.'
guaranteed royalty payments during the period ended June 30, 2003.
The remaining proceeds were used for working capital purposes.
Notwithstanding total cash proceeds of approximately $1,000,000, the
Company owed approximately $147,000 as of June 30, 2003 for Warner Bros.
license guaranteed royalty payments. The China license has
18
been extended for a 90-day period to October 29, 2003, while the Company
and Warner Bros. negotiate the terms of a one-year extension for this
license.
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 Warner Bros. under existing 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 fourth quarter of 2003, when cash supplied by
operating activities will enable us to meet the anticipated cash requirements
for operation expenses. The Company anticipates the need for additional
financing in 2003 to reduce the Company's liabilities and to improve its
shareholders' equity status. 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 truck-loads of
product given the reduced per unit cost associated with full truck loads.
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. Slotting fees and promotional discounts reduced the Company's
unit sales revenue for the period ended June 30, 2003 by approximately
$34,000 and the Company's Parmalat kit revenue by approximately $36,000. A
continued increase in sales to existing customers increases the Company's
gross margin on those sales. 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.
The Company is continuing to explore the sale for
Slammers flavored milk in new and expanded markets, including school
districts. Presently, the Company is aggressively pursuing this
market through trade/industry shows and individual direct contacts. The
implementation of such a school based program, if viable, could have an
impact on the level of the Company's revenue during 2003.
In June 2002, the Company executed an exclusive aseptic tetra-brik
production agreement with a division of Parmalat USA Corp. for Looney
Tunes(tm) flavored milk, as well as the Company's new Slammers Fortified
Reduced Fat Milk(TM). The Company launched this new aseptic tetra-brik
product in September 2002 and launched Slim Slammers, a low fat, no sugar
added version of this product in November 2002. The Company expects this
product to have a continued positive impact upon the Company's revenues in
2003:
19
DEBT STRUCTURE
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 guaranteed royalty payments due to Warner Bros.
as of June 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 has been extended for a 90-day period to October
29, 2003, while the Company and Warner Bros. negotiate the terms of a
one-year extension for this license.
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.
20
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 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 our 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.
21
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Period Ended 3-31-03
On January 2, 2003, the Company entered into an employment agreement
with Mr. Roy Toulan, who was appointed as the Company's vice-president and
general counsel. Pursuant to this employment agreement, the Company granted
Mr. Toulan 100,000 shares of common stock with the approval of the Board of
Directors. This common stock will be issued under a Form S-8 registration
statement to be filed in the third quarter of 2003. The Company recorded
$28,000 of stock compensation in January 2003 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.
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 vest on December 31, 2003, expire on December 30, 2008 and have an
exercise price of $0.40 per share.
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 vest on December 31, 2004, expire on December 30, 2009 and have an
exercise price of $0.40 per share.
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, at a conversion price of $0.1960. The conversion included
accrued and unpaid dividends on the preferred converted.
On February 21, 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.
("Mid-Am") for the aggregate purchase price of $500,000. Each preferred
share is convertible to 40 shares of the Company's common stock of 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.
Period Ended 6-30-03
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.
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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.
("Mid-Am") for the aggregate purchase price of $500,000. Each preferred
share is convertible to 50 shares of the Company's common stock of at a per
common share 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 $0.22 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 aforementioned
adjustments resulted in a total of 6,000,000 shares of common stock underlying
Warrant No. 1 and Warrant No. 2. Those warrants were valued using the
Black-Scholes model as of May 22, 2003. No adjustments resulted from that
valuation. 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.
Subsequent Events
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - Required by Item 601 of Regulation S-B:
(a) No. 31 Rule 13a-14(a) / 15d-14(a) Certifications
No. 32 Section 1350 Certifications
(b) Reports on Form 8-K:
Filed April 30, 2003; Item 5: Financing/Public Conference
Call/Management Changes
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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 (June 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: August 12, 2003
/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 August 12, 2003
and Director
/S/ Tommy E. Kee Chief Financial Officer August 12, 2003
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