Filed Pursuant to Rule 424(b)(3)
Registration No. 333-130535
BRAVO! BRANDS INC.
58,004,688 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders up to
58,004,688 shares of our common stock, including the following:
o 40,500,000 shares of our common stock;
o up to 15,492,188 shares issuable upon the exercise of common stock
purchase warrants at $0.80.
o up to 1,012,500 shares issuable upon the exercise of common stock
purchase warrants at $0.50; and
o up to 1,000,000 shares issuable upon the exercise of common stock
purchase warrants at $0.05
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price or
in negotiated transactions. The selling stockholders may be deemed underwriters
of the shares of common stock, which they are offering. We will pay the expenses
of registering these shares.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and is listed on the Over-The-Counter Bulletin Board under
the symbol "BRVO". The last reported sales price per share of our common stock
as reported by the Over-The-Counter Bulletin Board on October 30, 2006, was
$0.47.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is November 7, 2006.
1
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
BRAVO! BRANDS INC.
We are involved in the development and marketing of our Slammers(R)
trademarked brand, the obtaining of license rights from third party holders of
intellectual property rights to other trademarked brands, logos and characters,
and the granting of production and marketing rights to processor dairies to
produce branded flavored milk and generating revenue through the sale of "kits"
to these dairies outside of the United States and through wholesale sales within
the United States. 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 dairies for the production, promotion and sales rights for
the branded flavored milk. In the United States, we also generate revenue from
the unit sales of finished branded flavored milks to retail consumer outlets.
Our new product introduction and growth expansion continue to be expensive
and we reported a net loss of $79,528,653 for the year ended December 31, 2005
and a net loss of $11,517,620 for the year ended December 31, 2004. In addition,
we had a net loss of $15,203,188 for the six months ended June 30, 2006. We have
suffered operating losses and negative cash flows from operations since
inception and, at December 31, 2005, we had an accumulated deficit, a capital
deficit, are delinquent on certain debts and have negative working capital.
These conditions give rise to substantial doubt about our ability to continue as
a going concern.
Our principal offices are located at 11300 US Highway 1, North Palm Beach,
Florida 33408, and our telephone number is (561) 625-1411. We are a Delaware
corporation.
The Offering
Common stock offered by Up to 58,004,688 shares, which would represent
selling stockholders 29.1% of our outstanding shares of common stock
assuming the exercise of warrants being
registered herewith including:
O 40,500,000 shares of common stock;
O up to 15,492,188 shares issuable upon the
exercise of common stock purchase warrants at
$0.80;
O up to 1,012,500 shares issuable upon the
exercise of common stock purchase warrants at
$0.50; and
O up to 1,000,000 shares issuable upon the
exercise of common stock purchase warrants at
$0.05.
Common stock to be outstanding Up to 212,522,689 shares
after the offering
Use of Proceeds We will not receive any proceeds from the sale
of the common stock
Over-The-Counter Bulletin BRVO
Board Symbol
The above information regarding common stock to be outstanding after the
offering is based on 200,386,286 shares of common stock outstanding as of
October 30, 2006 and assumes the subsequent exercise of warrants by our selling
stockholders.
2
To obtain funding for our ongoing operations, we entered into the
following financing transaction:
On November 28, 2005, we closed a funding transaction with 13 accredited
institutional investors, for the issuance and sale of 40,500,000 shares of our
common stock for a purchase price of $20,250,000. We also issued five-year
warrants for the purchase of an additional 15,187,500 shares of common stock at
an exercise price of $0.80 per share to these investors. In connection with this
financing, we issued a five-year common stock purchase warrant to purchase of
1,012,500 shares of common stock at an exercise price of $0.50 and 304,688
shares at an exercise price of $0.80 to SG Cowen & Co., LLC, for its services as
a Placement Agent in connection with this funding transaction. The securities
are restricted and have been issued pursuant to an exemption to the registration
requirements of Section 5 of the Securities Act of 1933 for "transactions of the
issuer not involving any public offering" provided in Section 4(2) of the Act
and pursuant to a Regulation D offering.
The shares of common stock and the shares of common stock underlying the
warrants carry registration rights that obligate us to file a registration
statement within 45 days from closing and have the registration statement
declared effective within 120 days from closing.
In connection with an intellectual property licenses, we entered into the
following:
On June 20, 2005, we issued a one year warrant for the purchase of
1,000,000 shares of common stock at an exercise price of $0.05 per share to
Marvel Enterprises, Inc., pursuant to an April 14, 2005 Services Agreement for
marketing, promotional and creative services to be performed by Marvel
Enterprises, Inc. in connection with an intellectual property license between
our company and Marvel Enterprises, Inc.
This prospectus relates to the resale of the shares of common stock and
the shares of common stock issued or to be issued upon exercise of common stock
purchase warrants in connection with the November 28, 2005 private placement and
the shares of common stock issuable upon exercise of common stock purchase
warrants issued in connection with the April 14, 2005 Services Agreement.
3
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Relating to Our Business:
We Have a History Of Losses Which May Continue, Requiring Us To Seek Additional
Sources of Capital Which May Not Be Available, Requiring Us To Curtail Or Cease
Operations.
Our new product introduction and growth expansion continue to be
expensive, and we reported a net loss of $79,528,653 for the year ended December
31, 2005 and a net loss of $11,517,620 for the year ended December 31, 2004. In
addition, we had a net loss of $15,203,188 for the six months ended June 30,
2006. We cannot assure you that we can achieve or sustain profitability on a
quarterly or annual basis in the future. If revenues grow more slowly than we
anticipate, or if operating expenses exceed our expectations or cannot be
adjusted accordingly, we will continue to incur losses. We will continue to
incur losses until we are able to establish significant sales. Our possible
success is dependent upon the successful development and marketing of our
services and products, as to which there is no assurance. Any future success
that we might enjoy will depend upon many factors, including factors out of our
control or which cannot be predicted at this time. These factors may include
changes in or increased levels of competition, including the entry of additional
competitors and increased success by existing competitors, changes in general
economic conditions, increases in operating costs, including costs of supplies,
personnel, marketing and promotions, reduced margins caused by competitive
pressures and other factors. These conditions may have a materially adverse
effect upon us or may force us to reduce or curtail operations. In addition, we
will require additional funds to sustain and expand our sales and marketing
activities, particularly if a well-financed competitor emerges. While we closed
on $20,250,000 in new equity financing in November 2005, after the payment of
approximately $1.5 million in fees and expenses, we have allocated approximately
$1.7 million of the net proceeds for the payment of a finders fee in connection
with our execution of a Master Distribution Agreement with Coca-Cola Enterprises
Inc. and approximately $5.4 million for the redemption of approximately 30.3
million warrants, and have allocated approximately $11.7 million for general
working expenses. In addition, in August 2006, we completed a $30.0 million
convertible note financing that is expected to fulfill our liquidity
requirements through the end of 2006. However, $15.0 million of this financing
is held in escrow, and there can be no assurance that the investors will release
these amounts. We have entered into an Amendment Agreement with the holders of
the convertible notes to amend the convertible notes in certain respects as
consideration for the holders' release of our default resulting from our delay
in the filing of the our quarterly report for the period ended June 30, 2006.
There can be no assurance that these financings will be adequate for the
development and marketing of our services and products at a level that provides
sufficient profitability for sustained growth. If the present funds prove
sufficient and we are unable to generate adequate funds from operations or
external sources, we would be required to curtail or cease operations.
If We Are Unable to Achieve and Sustain Profitability, Our Business Operations
Will be Harmed and If We Obtain Additional Financing Our Then Existing
Shareholders May Suffer Substantial Dilution.
Additional capital may be required to effectively support the operations
and to otherwise implement our overall business strategy. However, there can be
no assurance that financing will be available when needed on terms that are
acceptable to us. The inability to obtain additional capital will restrict our
ability to grow and may reduce our ability to continue to conduct business
operations. If we are unable to obtain additional financing, we will likely be
required to curtail our marketing and development plans and possibly cease our
operations. Any additional equity financing may involve substantial dilution to
our then existing shareholders.
4
Our Independent Auditors Have Expressed Substantial Doubt About Our Ability to
Continue As a Going Concern, Which May Hinder Our Ability to Obtain Future
Financing.
In their report dated February 9, 2006, except for Note 13 as to which the
date is September 8, 2006, our independent auditors stated that our financial
statements for the year ended December 31, 2005 were prepared assuming that we
would continue as a going concern. Our ability to continue as a going concern is
an issue raised as a result of a net loss for the year ended December 31, 2005
in the amount of $79,528,653 as well as a significant working capital deficiency
as of that date. We continue to experience net operating losses. Our ability to
continue as a going concern is subject to our ability to generate a profit
and/or obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, increasing sales or
obtaining loans and grants from various financial institutions where possible.
Our continued net operating losses increase the difficulty in meeting such
goals, and there can be no assurances that such methods will prove successful.
Since we depend upon key personnel having significant business contacts in the
US and internationally, the loss of one or more of our management team may have
a negative effect on our business.
The unexpected loss of the services of any member of the management team could
have a material adverse effect on our ability to conduct and grow both our US
and international business. We are and will be dependent on our current
management teams for the foreseeable future
o to obtain needed additional financing
o to develop and maintain critical business contacts for the
production of our branded milk products
o to develop and maintain third party licensor and brand development
contacts for the formulation of new brand development and branded
food products
We face intense competition in our US market that could negatively impact our
results of operations
Since we are smaller than our competitors in the US market and since we
have limited resources and sell our branded products at premium prices, we have
had difficulty in developing and maintaining our market share in the consumer
milk market. This difficulty could adversely affect our ability to achieve our
business goals to develop and increase the awareness of our branded products in
an effort to increase sales, while maintaining a premium price structure.
The ability of our competition to sell dairy and other food products at
prices below prices charged by us for our products may represent an obstacle to
our ability to secure a market share at revenue levels sufficient to achieve
profitability.
In our foreign business, we grant the rights to produce and sell branded
milk products to processor dairies under production agreements. Our role in
these agreements, in addition to granting the rights to produce the branded
milks as part of the sale of flavor ingredient packages to dairies, is limited
to marketing and promotion assistance and control over packaging and advertising
design issues. Such processors dairies have significant control over sales and
distribution of the branded milk products. A reduction in sales effort or
discontinuance of sales of our products by our co-producers could lead to
reduced sales.
Risks Relating to Convertible Preferred and Convertible Debenture Financing
Arrangement:
There Are a Large Number of Shares Underlying Our Convertible Debentures and
Warrants That May be Available for Future Sale and the Sale of These Shares May
Depress the Market Price of Our Common Stock.
As of October 30, 2006, we had 200,386,286 shares of common stock issued and
outstanding and convertible debentures outstanding that may be converted into an
estimated 7,500,000 shares of common stock at below market prices, convertible
prefered outstanding that may be converted into an estimated 31,400,000 shares
of common stock at below market prices outstanding warrants to purchase an
estimated 40,100,000 shares of common stock and options to purchase
approximately 8,600,000 shares of common stock. All of the shares, including all
of the shares issuable upon conversion of the debentures and upon exercise of
our warrants, may be sold pursuant to a currently effective registration
statement or pursuant to Rule 144. The sale of these shares may adversely affect
the market price of our common stock.
5
The Issuance of Shares Upon Conversion of the Convertible Debentures and
Exercise of Outstanding Warrants May Cause Immediate and Substantial Dilution to
Our Existing Stockholders.
The issuance of shares upon conversion of the convertible debentures and
exercise of warrants may result in substantial dilution to the interests of
other stockholders since the selling stockholders may ultimately convert and
sell the full amount issuable on conversion. Although the debenture holders may
not convert their convertible debentures and/or exercise their warrants if such
conversion or exercise would cause them to own more than 9.99% of our
outstanding common stock, this restriction does not prevent the selling
stockholders from converting and/or exercising some of their holdings, selling
these shares and then converting the rest of their holdings. In this way, the
debenture holders could sell more than this limit while never holding more than
this limit.
If We Are Required for any Reason to Repay Our Outstanding Convertible
Debentures, We Would Be Required to Deplete Our Working Capital, If Available,
Or Raise Additional Funds. Our Failure to Repay the Convertible Debentures, If
Required, Could Result in Legal Action Against Us, Which Could Require the Sale
of Substantial Assets.
In November 2003, April 2004, June 2004, October 2004, December 2004,
January 2005, April 2005, and July 2006, we entered into financing arrangements
for the sale of $35,750,000 principal amount of convertible debentures.
Currently, the remaining unpaid principal of the issued notes is $30,350,000,
with approximately $131,312 in accrued interest.
Any event of default could require the early repayment of the convertible
debentures, including a default interest rate if the default is not cured with
the specified grace period. We anticipate that the majority of the convertible
debentures, together with accrued interest, will be converted into shares of our
common stock, in accordance with the terms of the convertible debentures. If we
are required to repay the convertible debentures, we would be required to use
our working capital or raise additional funds. If we were unable to repay the
debentures when required, the debenture holders could commence legal action
against us to recover the amounts due. Any such action may require us to obtain
additional financing or curtail operations.
Risks Relating to Our Common Stock:
If We Fail to Remain Current on Our Reporting Requirements, We Could be Removed
From the OTC Bulletin Board Which Would Limit the Ability of Broker-Dealers to
Sell Our Securities and the Ability of Stockholders to Sell Their Securities in
the Secondary Market.
Companies trading on the OTC Bulletin Board, such as us, must be reporting
issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and
must be current in their reports under Section 13, in order to maintain price
quotation privileges on the OTC Bulletin Board. If we fail to remain current on
our reporting requirements, we could be removed from the OTC Bulletin Board. As
a result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary market.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
6
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
7
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. In the event
that we receive proceeds from the exercise of the Class A, Class B Warrants and
other warrants, we will use these funds for working capital.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"BRVO".
For the periods indicated, the following table sets forth the high and low
bid prices per share of common stock. These prices represent inter-dealer
quotations without retail markup, markdown, or commission and may not
necessarily represent actual transactions.
High Low
---- ---
2004
First Quarter .17 .06
Second Quarter .34 .14
Third Quarter .27 .13
Fourth Quarter .22 .09
2005
First Quarter .18 .10
Second Quarter 1.21 .14
Third Quarter 1.43 .51
Fourth Quarter .80 .47
2006
First Quarter .74 .54
Second Quarter .81 .50
HOLDERS
Equity holders at October 30, 2006
Common stock 200,386,286 shares 7,200 holders (approximate)
Series B preferred stock 107,440 shares 1 holder
Series H preferred stock 64,500 shares 1 holder
Series J preferred stock 200,000 shares 1 holder
Series K preferred stock 95,000 shares 1 holder
8
Dividends
We have not paid dividends on our common stock and do not anticipate
paying dividends. Management intends to retain future earnings, if any, to
finance working capital, to expand our operations and to pursue our acquisition
strategy.
The holders of common stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by our board of directors
out of the assets and funds legally available therefor. The availability of
funds is dependent upon dividends or distribution of profits from our
subsidiaries and may be subject to regulatory control and approval by the
appropriate government authorities on either a regional or national level.
We have dividends in arrearage for our convertible preferred stock in the
amount of $1,240,682 and $928,379 as of the years ended December 31, 2005 and
2004, respectively.
Securities authorized for issuance under equity compensation plans
The equity compensation reported in this section has been and will be
issued pursuant to individual compensation contracts and arrangements with
employees, directors, consultants, advisors, vendors, suppliers, lenders and
service providers. The equity is reported on an aggregate basis as of December
31, 2005. Our security holders have not approved the compensation contracts and
arrangements underlying the equity reported.
Number of securities Weighted average
to be issued upon price of outstanding Number of securities remaining
Compensation Plan exercise of options, options, warrants and for future issuance under
Category warrants and rights rights equity compensation plans
---------------------- -------------------- --------------------- ------------------------------
Directors (former) 325,000 $ 0.71 0 individual plans
Employees (former) 650,000 $ 0.87 60,000 individual plans
Directors/Management & 2005 Stock Option
Employees 8,872,745 $0.245 1,475,000 Incentive Plan(1)
Consultants 510,714 $ 0.30 0 individual plans
---------- ------ ---------
Total 10,358,459 $ 0.77 1,535,000
========== ====== =========
On April 6, 2005, our Directors voted to adopt a Stock Option Incentive Plan for
the grant of option to directors, employees and consultants for the purchase of
up to 10,397,745 shares of our common stock. On May 12, 2005, the Board of
Directors accepted and adopted the determination of the Compensation Committee
to grant options to purchase 8,922,745 shares of common stock to our employees,
directors and certain consultants. The ten-year options vest over a period of
eighteen months and have exercise prices varying from $0.20 per share to $0.30
per share, with a weighted average exercise price of $0.24 per share.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the information in this Form SB-2 contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors," "Business" and elsewhere in this prospectus. See "Risk Factors."
OVERVIEW
Our business model includes the development and marketing of our Company
owned Slammers(R) and Bravo!(TM) trademarked brands, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the production of our branded
flavored milk drinks through third party processors. In the United States and
the United Kingdom, we generate revenue from the unit sales of finished branded
flavored milk drinks to retail consumer outlets. We generate revenue in our
Middle East business through the sale of "kits" to these dairies. The price of
the "kits" consists of an invoiced price for a fixed amount of flavor
ingredients per kit used to produce the flavored milk and a fee charged to the
dairy processors for the production, promotion and sales rights for the branded
flavored milk.
Our business in the United Kingdom started at the end of the second
quarter of 2005. Our UK business has not been profitable owing to the
difficulties encountered in initial market penetration with new products
introduced in the last half of 2005 through the first half of 2006. In the
current period we had a negative gross margin for our UK operations. We are
examining other distribution alternatives in the UK and, while we are making
this determination, we have curtailed our production of inventory necessary to
maintain a normal supply pipeline.
Our new product introduction and growth expansion continues to be expensive, and
we reported a loss from operations of $9,563,041 for the period ended June 30,
2006. We had a net loss during this period of $15,203,188, largely as a result
of a penalty interest expense of $4.6 million associated with our failure to
have declared effective a registration statement for the common stock underlying
our November 2005 financing in a timely manner. That registration statement
currently is pending, and we are working to restate and file the necessary
financial statements required to have that registration statement declared
effective.
RESTATEMENT DISCLOSURE
We have restated our annual report on Form 10-KSB for the year ended
December 31, 2005 and our quarterly reports on Form 10-QSB for the quarterly
periods ended March 31, 2006 and June 30, 2006. We have also restated the
quarterly and year-to-date results for June 30, 2005 in the accompanying
financial presentations for comparative purposes.
10
CORPORATE GOVERNANCE
The Board of Directors
Our board has positions for seven directors that are elected as Class A or
Class B directors at alternate annual meetings of our shareholders. Six of the
seven current directors of our board are independent. Our chairman and chief
executive officer are separate. The board meets regularly either in person or by
telephonic conference at least four times a year, and all directors have access
to the information necessary to enable them to discharge their duties. The
board, as a whole, and the audit committee in particular, review our financial
condition and performance on an estimated vs. actual basis and financial
projections as a regular agenda item at scheduled periodic board meetings, based
upon separate reports submitted by our Chief Executive Officer and Chief
Accounting Officer. Our shareholders elect directors after nomination by the
board, or the board appoints directors when a vacancy arises prior to an
election. This year we have adopted a nomination procedure based upon a rotating
nomination committee made up of those members of the director Class not up for
election. The board presently is examining whether this procedure, as well as
the make up of the audit and compensation committees, should be the subject of
an amendment to the by-laws.
Audit Committee
Our audit committee is composed of three independent directors and
functions to assist the board in overseeing our accounting and reporting
practices. Our financial information is recorded in house by our Chief
Accounting Officer's office, from which we prepare financial reports. Lazar
Levine & Felix LLP, independent registered public accountants and auditors,
audit or review these financial reports. Our Chief Accounting Officer reviews
the preliminary financial and non-financial information prepared in house with
our securities counsel and the reports of the auditors. The committee reviews
the preparation of our audited and unaudited periodic financial reporting and
internal control reports prepared by our Chief Accounting Officer. The committee
reviews significant changes in accounting policies and addresses issues and
recommendations presented by our internal accountants as well as our auditors.
Compensation Committee
Our compensation committee is composed of three independent directors and
reviews the compensation structure and policies concerning executive
compensation. The committee develops proposals and recommendations for executive
compensation and presents those recommendations to the full board for
consideration. The committee periodically reviews the performance of our other
members of management and the recommendations of the chief executive officer
with respect to the compensation of those individuals. Given the size of our
company, the board periodically reviews all such employment contracts. The board
must approve all compensation packages that involve the issuance of our stock or
stock options. Currently, there is one vacancy on the compensation committee.
Nominating Committee
The nominating committee was established in the second quarter 2002 and
consists of those members of the director Class not up for election. The
committee is charged with determining those individuals who will be presented to
the shareholders for election at the next scheduled annual meeting. The full
board fills any mid term vacancies by appointment.
11
CRITICAL ACCOUNTING POLICIES
Estimates
This discussion and analysis of our consolidated financial condition and
results of operations are based on our consolidated financial statements, which
have been prepared in accordance with accounting principles for interim reports
that are generally accepted in the United States of America. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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. Among the more significant estimates included in our financial
statements are the following:
o Estimating future bad debts on accounts receivable that
are carried at net realizable values.
o Estimating our reserve for unsalable and obsolete
inventories that are carried at lower of cost or market.
o Estimating the fair value of our financial instruments
that are required to be carried at fair value.
o Estimating the recoverability of our long-lived assets.
We use all available information and appropriate techniques to develop our
estimates. However, actual results could differ from our estimates.
Revenue Recognition and Accounts Receivable
Our revenues are derived from the sale of branded milk products to
customers in the United States of America, Great Britain and the Middle East.
Geographically, our revenues are dispersed 98% and 2% between the United States
of America and internationally, respectively. We currently have one customer in
the United States that provided 74% and 0% of our revenue during the six months
ended June 30, 2006 and 2005, respectively.
Revenues are recognized pursuant to formal revenue arrangements with our
customers, at contracted prices, when our product is delivered to their premises
and collectibility is reasonably assured. We extend merchantability warranties
to our customers on our products but otherwise do not afford our customers with
rights of return. Warranty costs have historically been insignificant.
Our revenue arrangements often provide for industry-standard slotting fees
where we make cash payments to the respective customer to obtain rights to place
our products on their retail shelves for stipulated period of time. We also
engage in other promotional discount programs in order to enhance our sales
activities. We believe our participation in these arrangements is essential to
ensuring continued volume and revenue growth in the competitive marketplace.
These payments, discounts and allowances are recorded as reductions to our
reported revenue. Unamortized slotting fees are recorded in prepaid expenses.
Our accounts receivable are exposed to credit risk. During the normal
course of business, we extend unsecured credit to our customers with normal and
traditional trade terms. Typically credit terms require payments to be made by
the thirtieth day following the sale. We regularly evaluate and monitor the
creditworthiness of each customer. We provide an allowance for doubtful accounts
based on our continuing evaluation of our customers' credit risk and our overall
collection history. As of June 30, 2006 and December 31, 2005, the allowance of
doubtful accounts aggregated $365,000 and $350,000, respectively.
In addition, our accounts receivable are concentrated with one customer
who represents 39% of our accounts receivable balances at June 30, 2006.
Approximately, 6% of our accounts receivable at June 30, 2006 are due from
international customers.
Inventories
Our inventories, which consists primarily of finished goods, are stated at
the lower of cost on the first in, first-out method or market. Further, our
inventories are perishable. Accordingly, we estimate and record lower-of-cost or
market and unsalable-inventory reserves based upon a combination of our
historical experience and on a specific identification basis.
Impairment of Long-Lived Assets
Our long-lived assets consist of furniture and equipment and intangible
assets. We evaluate the carrying value and recoverability of our long-lived
assets when circumstances warrant such evaluation by applying the provisions of
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets ("FAS 144"). FAS 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value.
12
Financial Instruments
We generally do not use derivative financial instruments to hedge
exposures to cash-flow, market or foreign-currency risks. However, we frequently
enter into certain other financial instruments and contracts, such as debt
financing arrangements, redeemable preferred stock arrangements, and
freestanding warrants with features that are either (i) not afforded equity
classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. As required by
FAS 133, these instruments are required to be carried as derivative liabilities,
at fair value, in our financial statements.
We estimate fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as freestanding warrants, we generally use the
Black Scholes option valuation technique because it embodies all of the
requisite assumptions (including trading volatility, estimated terms and risk
free rates) necessary to fair value these instruments. For complex derivative
instruments, such as embedded conversion options, we generally use the Flexible
Monte Carlo valuation technique because it embodies all of the requisite
assumptions (including credit risk, interest-rate risk and exercise/conversion
behaviors) that are necessary to fair value these more complex instruments. For
forward contracts that contingently require net-cash settlement as the principal
means of settlement, we project and discount future cash flows applying
probability-weightage to multiple possible outcomes. Estimating fair values of
derivative financial instruments requires the development of significant and
subjective estimates that may, and are likely to, change over the duration of
the instrument with related changes in internal and external market factors. In
addition, option-based techniques are highly volatile and sensitive to changes
in our trading market price which has a high-historical volatility. Since
derivative financial instruments are initially and subsequently carried at fair
values, our income will reflect the volatility in these estimate and assumption
changes.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Consolidated Revenues
We had revenue for the six months ended June 30, 2006 of $7,266,441, with
product costs of $6,200,097, and shipping costs of $744,636, resulting in a
gross margin of $321,708. Our reported revenues for the six months ended June
30, 2006 increased by $3,920,053, or 117%, compared to revenues of $3,346,388
for the comparable period in 2005. This increase is the result of an increase in
market penetration and distribution, owing to the continued implementation of
our Master Distribution Agreement with Coca-Cola Enterprises in the first half
of 2006. Revenues and gross margin are net of slotting fees and promotional
discounts for the six months ended June 30, 2006 in the amount of $294,332
compared to $187,295 for the comparable period in the prior year.
Geographically, our revenues are dispersed 98% and 2% between the United
States of America and internationally, respectively. We plan to take measures to
increase our international revenues as a percentage of our total revenues. In
addition, we currently have one customer in the United States that provided 74%
and 0% of our revenue during the six months ended June 30, 2006 and 2005,
respectively. The loss of this customer or curtailment in business with this
customer could have a material adverse affect on our business.
13
Consolidated Product Costs
We incurred product costs and shipping costs of $6,200,097 and $744,636,
respectively, for the six months ended June 30, 2006. Product costs in this
period increased by $3,841,970, a 163% increase compared to $2,358,127 for the
same period in 2005. Shipping costs in this period increased $313,800, a 73%
increase compared to $430,836 for the same period in 2005. The increase in
product costs reflects an increase in revenues and the concomitant increase in
reported product costs and shipping costs associated with that increase.
Consolidated Operating Expenses
We incurred selling expenses of $6,210,909 for the six months ended June
30, 2006. Our selling expenses for this period increased by $4,690,329, a 308%
increase compared to our selling expenses of $1,520,580 for the same period in
2005. The increase in selling expenses in the current period was due to the
hiring of additional sales staff and promotional charges associated with
increased revenues and our development of four new product lines.
We incurred general and administrative expense for the six months ended
June 30, 2006 of $3,396,521. Our general and administrative expense for this
period increased by $801,443, a 31% increase compared to $2,595,078 for the same
period in 2005. As a percentage of total revenue, our general and administrative
expense decreased from 77.5% in the period ended June 30, 2005, to 47% for the
current period in 2006. We anticipate a continued effort to reduce this expense
as a percentage of revenues through revenue growth, cost cutting efforts and the
refinement of business operations. The increase in general and administrative
expense for the current period is the result of the hiring of additional staff
and other costs associated with the management and implementation of our
relationship with Coca-Cola Enterprises under the Master Distribution Agreement.
We incurred product development expense for the six months ended June 30,
2006 of $277,319 representing a 28.5% increase over product development expense
for the comparable period of the prior year. This increase resulted from the
reformulation of existing products and the development of new products under our
license agreement with General Mills.
Interest Expense
We incurred interest expense for the six months ended June 30, 2006 of
$431,261. Our interest expense decreased by $1,060,629, a 71% decrease compared
to $1,491,890 for the same period in 2005. The decrease was due to conversions
of debt to common stock in late 2005 that eliminated the accrual of interest
associated with that debt.
Legal Settlement
In June 2005, we issued Marvel Enterprises a warrant to purchase 1,000,000
shares of our common stock in connection with the grant of a trademark license
by Marvel to the Company. The warrant contained an expiration date of June 16,
2006. In connection with the issuance of the warrant, we executed a registration
rights agreement with Marvel that required us to use our reasonable best efforts
to cause the effectiveness of a registration statement, under the Securities Act
of 1933, for the resale by Marvel of the shares purchasable under the warrant.
In December 2005, the Company filed a registration statement under From SB-2
that included the common stock underlying the Marvel warrant. As of March 31,
2006, however, the Registration Statement had not been declared effective. In
the second quarter of 2006, Marvel filed a complaint against the Company,
alleging that Marvel had been damaged by our failure to cause a registration
statement to become effective. On June 7, 2006, we settled the lawsuit, without
the necessity of filing an answer to the complaint, by delivering to Marvel an
amendment to the Warrant extending its term through June 16, 2007, and Marvel
dismissed its complaint.
Gain (loss) on Debt Extinguishment
We reported a gain on debt extinguishments for the six months ended June
30, 2005 of $7,164, resulting from the modification of the terms of certain
notes.
Derivative Expense
Derivative expense arises from changes in the fair value of our derivative
financial instruments and, in rare instances, day-one losses when the fair value
of embedded and freestanding derivative financial instruments issued or included
in financing transactions exceed the proceeds or other basis. Derivative
financial instruments include freestanding warrants, compound embedded
derivative features that have been bifurcated from debt and preferred stock
financings. In addition, our derivative financial instruments arise from the
reclassification of other non-financing derivative and other contracts from
stockholders' equity because share settlement is not within our control while
certain variable share price indexed financing instruments are outstanding.
14
Our derivative expense amounted to $98,011 for the six months ended June
30, 2006, compared to $75,839,650 for the corresponding period of the prior
year.
Changes in the fair value of compound derivatives indexed to our common
stock are significantly affected by changes in our trading stock price and the
credit risk associated with our financial instruments. The fair value of warrant
derivatives is significantly affected by changes in our trading stock prices.
The fair value of derivative financial instruments that are settled solely with
cash fluctuate with changes in management's weighted probability estimates
following the financing inception and are generally attributable to the
increasing probability of default events on debt and preferred stock financings.
The fair value of the warrants declined principally due to the decline in our
common stock trading price. Since these instruments are measured at fair value,
future changes in assumptions, arising from both internal factors and general
market conditions, may cause further variation in the fair value of these
instruments. Future changes in these underlying internal and external market
conditions will have a continuing effect on derivative expense associated with
our derivative financial instruments.
In addition, we entered into a $30 million debt and warrant financing in
July 2006 that will require the bifurcation of derivative financial instruments.
We have not calculated the amounts of these derivatives, but their effects on
our earnings, arising from fair value changes, will be consistent with the
derivatives that we carry as of June 30, 2006.
Liquidated Damages
During the three and six months ended June 30, 2006, we recorded liquidated
damages expense of $3,872,388 and $4,558,275; none in the comparable periods of
2005. However, we recorded $303,750 of liquidated damages during the fourth
fiscal quarter of our year ended December 31, 2005. We have entered into
registration rights agreements with certain investors that require us to file a
registration statement covering underlying indexed shares, become effective on
the registration statement, maintain effectiveness, and, in some instances,
maintain the listing of the underlying shares. Certain of these registration
rights agreements require our payment of cash penalties to the investors in the
event we do not achieve the requirements. We record estimated liquidated damages
penalties as liabilities and charges to our income when the cash penalties are
probable and estimable. We will evaluate our estimate of liquidated damages in
future periods and adjust our estimates for changes, if any, in the facts and
circumstances underlying their classification.
Net Loss
We had a net loss for the six months ended June 30, 2006 of $15,203,188
compared with a net loss of $81,098,366 for the same period in 2005. The
magnitude of both the 2006 and 2005 net loss is the result of our recording
changes in derivative expense on the consolidated statement of operations.
Loss Applicable to Common Shareholders
Loss applicable to common shareholders represents net loss less preferred
stock dividends and accretion of our redeemable preferred stock to redemption
value using the effective method. Diluted loss per common share reflects the
assumed conversion of all dilutive securities, such as convertible preferred
stock, convertible debt, warrants, and employee stock options.
Loss per Common Share
Our basic loss per common share for the six months ended June 30, 2006 was
$(0.08), compared with a basic loss per common share for the same period in 2005
of $(1.24). Because the Company experienced net losses for all periods
presented, all potential common share conversions existing in our financial
instruments would have an antidilutive impact on earnings per share; therefore,
diluted loss per common share equals basic loss per common share for all periods
presented.
15
The weighted average common shares outstanding increased from 66,035,224
for the six months ended June 30, 2005 to 186,843,409 for the same period in
2006. The increase is attributed primarily to conversions of our convertible
debt and preferred instruments into common shares. Potential common stock
conversions excluded from the computation of diluted earnings per share amounted
to 61,178,096 and 104,564,021 for the six month periods ending June 30, 2006 and
June 30, 2005, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) differs from net income (loss) for the six months
ended June 30, 2006 and 2005 by $21,439 and ($5,327), respectively, which
represents the effects of foreign currency translation on the financial
statements of our subsidiaries denominated in foreign currencies. Our foreign
operations are currently not significant. Increases in our foreign operations
will likely increase the effects of foreign currency translation adjustments on
our financial statements.
Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30,
2005
Consolidated Revenues
The Company had revenues for the three months ended June 30, 2006 of
$3,705,226, with product costs of $3,253,637 and shipping costs of $351,185,
resulting in a gross margin of $100,404, or 2.7 % of sales. Our revenues for the
three months ended June 30, 2006 increased by $1,256,608, a 51% increase
compared to revenues of $2,448,618 for the three months ended June 30, 2005. The
increase in revenue in the United States for the three months ended June 30,
2006 is the result of the increased distribution of our product through
Coca-Cola Enterprises.
Consolidated Product Costs
The Company incurred product costs of $3,253,637 and shipping costs of
$351,185 for the three months ended June 30, 2006. Product costs for this period
increased by $1,573,173, a 93.6% increase compared to $1,680,464 for the three
months ended June 30, 2005. The increase in product costs and shipping costs in
the United States for the three months ended June 30, 2006 is the result of
increased revenues.
Consolidated Operating Expenses
The Company incurred selling expenses for the three months ended June 30,
2006 of $3,367,811. Selling expenses increased for the three months ended June
30, 2006 by $2,332,262, a 225% increase compared to the selling expenses of
$1,035,549 for the three months ended June 30, 2005. The increase in selling
expenses is the result of increased sales.
The Company incurred general and administrative expenses for the three
months ended June 30, 2006 of $1,628,317. General and administrative expenses
for the three months ended June 30, 2006 decreased by $208,507, an 11.3%
decrease compared to $1,836,824 for the same period in 2005. The decrease in
general and administrative expenses for the current period is the result of the
recognition of warrant costs recognized in 2005 for warrants granted to an
investor relations firm.
Interest Expense
The Company incurred interest expense for the three months ended June 30,
2006 of $397,254. Interest expense for the three months ended June 30, 2006
decreased by $200,475, a 33.5% decrease compared to $597,729, for the same
period in 2005. This decrease was the result of conversions of debt to common
stock in late 2005 that eliminated the accrual of interest associated with that
debt.
16
Liquidated Damages
During the three months ended June 30, 2006, we recorded liquidated damages
expense of $3,872,388; none in the comparable period of 2005. However, we
recorded $303,750 of liquidated damages during the fourth fiscal quarter of our
year ended December 31, 2005. We have entered into registration rights
agreements with certain investors that require us to file a registration
statement covering underlying indexed shares, become effective on the
registration statement, maintain effectiveness, and, in some instances, maintain
the listing of the underlying shares. Certain of these registration rights
agreements require our payment of cash penalties to the investors in the event
we do not achieve the requirements. We record estimated liquidated damages
penalties as liabilities and charges to our income when the cash penalties are
probable and estimable. We will evaluate our estimate of liquidated damages in
future periods and adjust our estimates for changes, if any, in the facts and
circumstances underlying their classification.
Net Loss
We had had a net loss for the three months ended June 30, 2005 of
$14,926,521, compared with a net loss of $80,445,296 for the same period in
2005. The magnitude of the 2006 and 2005 loss is the result of our recording
changes in the fair value in our derivatives.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Consolidated Revenues
We reported revenues for the year ended December 31, 2005 of $11,948,921, an
increase of $8,604,222, or 257%, compared to revenues of $3,344,699 in 2004.
This increase is the result of the acquisition of a significant new customer
("Coca Cola Enterprises" or "CCE") during the third fiscal quarter with sales
generation commencing in the fourth fiscal quarter. Our revenues to CCE for the
year ended December 31, 2005 comprise 34% of our total revenue. CCE will
continue to be a significant customer in the foreseeable future. Since we
commenced revenue generation with CCE in the fourth fiscal quarter, in future
periods we expect that our revenues from sales to CCE will increase as a
percentage of our total revenues.
Our revenues and gross margin are net of industry-standard slotting fees and
promotional discounts for the year ended December 31, 2005 in the amount of
$487,221 compared to $204,755 in 2004. We record these programs as reductions in
our revenues and we may enter into similar programs in future periods to
increase our market penetration.
Geographically, during the 2005 fiscal year, our revenues are dispersed 98% and
2% between the United States of America and internationally, respectively. While
our current international revenues have not been significant, we are taking
measures to further penetrate international markets and increase our
international revenues as a percentage of our total revenues.
Consolidated Product and Shipping Costs
We incurred product costs and shipping costs of $8,938,692 and $1,505,035,
respectively, for the year ended December 31, 2005. Product costs in 2005
increased by $6,563,887, a 276% increase compared to $2,374,805 in 2004.
Shipping costs in 2005 increased $1,006,722, or 202%, compared to $498,313 in
2004. The increase in product costs reflects an increase in revenues and the
concomitant increase in reported product and shipping costs associated with that
increase. Our overall gross margin for 2005 of 12.6% decreased slightly from our
14.0% gross margin in 2004 due to slightly higher production costs that were not
offset with reciprocal pricing increases due to competitive constraint.
17
Consolidated Operating Expenses
Selling Expense:
We incurred selling expense of $7,464,876 during the year ended December 31,
2005. We expense these costs, consisting largely of advertising and promotion,
as they are incurred. Our selling expense for this period increased by
$6,164,203, a 474% increase compared to our selling expenses of $1,300,673 for
the same period in 2004. The increase in selling expense in the current period
was due to higher advertising expenses as we penetrate new markets and, to a
lesser degree, the hiring of additional sales staff. In addition, in connection
with the acquisition of our new customer, CCE during 2005, we entered into a
commitment to spend an aggregate of $5,000,000 for advertising and promotion of
our products during the years ended 2005 and 2006. Thereafter, we have agreed to
spend an aggregate annual amount of 3% of our total CCE revenue for advertising
programs. Generally, since our revenue producing activities with CCE did not
commence until November of 2005, we did not incur a significant amount of
expense under this commitment. Accordingly, our selling expenses can be expected
to increase during 2006 and 2007 as we fulfill our obligations under these
important arrangements and we continue to address additional markets.
Product Development Expense:
We incurred product development expense for the years ended December 31, 2005 of
$636,342, representing a 209% increase over product development expense in 2004.
Additional expenditures were incurred in 2005 due to the launching of our
Slammers Starburst line of Fruit & Cream Smoothies, and to package redesign
costs associated with several of our product lines including Slim Slammers, Pro
Slammers and Breakfast Blenders.
General and Administrative Expense:
Our general and administrative expense for the year ended December 31, 2005 was
$7,263,284, an increase of $4,586,223 compared to $2,677,061 in 2004. The
increase is the result of additional payroll, increased occupancy costs, office
overhead costs and travel necessary to support the increase in revenues. As a
percentage of total revenue, our general and administrative expense decreased
from 80% in 2004, to 61% for 2005. We anticipate a continued effort to reduce
these expenses as a percentage of sales through revenue growth, certain cost
cutting efforts and the refinement of business operations. Non-Recurring
Finders' Fee:
We recorded a $3,000,000 one time, non-recurring finder's fee in connection with
our execution of the Master Distribution Agreement with CCE in 2005. We do not
currently anticipate incurring similar costs during 2006 or in the foreseeable
future since our business opportunity with CCE is expected to be further
developed over that period.
Consolidated Other Income (Expense)
Derivative Expense
Our derivative expense amounted to $60,823,574 for the year ended December 31
2005, compared to $6,309,933 in 2004. Derivative expense (and in some instances
income) arises from changes in the fair value of our derivative financial
instruments and, in rare instances, day-one losses when the fair value of
embedded and freestanding derivative financial instruments issued or included in
financing transactions exceed the proceeds or other basis. Derivative financial
instruments include freestanding warrants, compound embedded derivative features
that have been bifurcated from debt and preferred stock financings. In addition,
our derivative financial instruments arise from the reclassification of other
non-financing derivative and other contracts from stockholders' equity because
share settlement is not within our control while certain variable share price
indexed financing instruments are outstanding.
Our derivative loss during each of the years ended December 31, 2005 and 2004 is
significant to our consolidated financial statements. The magnitude of the
derivative loss during the year ended December 31, 2005 when compared with the
loss for the year ended December 31, 2004 reflects the following:
(a) During the year ended December 31, 2005, and specifically commencing in the
second quarter, the trading price of our common stock reached significantly high
levels relative to its trend. The trading price of our common stock
significantly affects the fair value of our derivative financial instruments. To
illustrate, our trading stock price at the end of the first quarter of 2005 was
$0.15 and then increased to $0.93 by the end of the second quarter. Our trading
stock price then declined to $0.61 and $0.59 at the end of the third and fourth
quarters, respectively. However, the higher stock price had the effect of
significantly increasing the fair value of our derivative liabilities and,
accordingly, we were required to adjust the derivatives to these higher values
with charges to our income. Also, due to the higher stock price commencing in
the second quarter, we experienced significant exercise and conversion activity
related to our derivative warrants and, to a lesser degree, with respect to the
embedded conversion options. Accordingly, our year end derivative liability
balances reflect, among other elements of our valuation assumptions, the higher
intrinsic values of the arrangements caused by the significant changes in our
stock price, which are offset by a smaller number of common shares indexed to
outstanding warrants due to the extraordinary level of exercise activity.
18
(b) During the year ended December 31, 2005, we entered into a $2,300,000 debt
and warrant financing arrangement, more fully discussed in Note 6(b). In
connection with our accounting for this financing we encountered the unusual
circumstance of a day-one loss related to the recognition of derivative
instruments arising from the arrangement. That means that the fair value of the
bifurcated compound derivative and warrants exceeded the proceeds that we
received from the arrangement and we were required to record a loss to record
the derivative financial instruments at fair value. The loss that we recorded
amounted to $8,663,869. We did not enter into any other financing arrangements
during the periods reported that reflected day-one losses.
Because our derivative financial instruments are carried at, and periodically
adjusted to, fair value, our income is likely to experience continuing
volatility as assumptions underlying our fair value techniques (including
internal factors and external market indicators) change. However, we are
currently evaluating contracts underlying the origination of these derivative
financial instruments to determine whether they may be modified with the
investor. There can be no assurance that we can reach an agreement to modify
these arrangements and, if we are able to execute such modifications, we would
be required to consider whether such modification(s) is significant. In
instances where modifications are considered significant, we may be required to
extinguish the original financial instrument and reestablish it at fair value.
These extinguishments, if any, would likely be accompanied with extinguishment
gains or losses that we would be required to reflect in our income.
Finally, we entered into a $30.0 million debt and warrant financing in July 2006
(see "Material Events" below) that will likely require the bifurcation of
additional derivative financial instruments. We have not yet calculated the
amounts of these derivatives, but their effects on our income, arising from fair
value changes, will be afforded the same accounting treatment as those that we
currently carry.
Liquidated Damages
During the year ended December 31, 2005, we recorded liquidated damages expense
of $303,750 (none in 2004). We have entered into registration rights agreements
with certain investors that require us to file a registration statement covering
underlying indexed shares, become effective on the registration statement,
maintain effectiveness and, in some instances, maintain the listing of the
underlying shares. Certain of these registration rights agreements require our
payment of cash penalties to the investors in the event we do not achieve the
requirements. We record estimated liquidated damages as liabilities and charges
to our income when the cash penalties are probable and estimable. We will
evaluate our estimate of liquidated damages in future periods and adjust our
estimates for changes, if any, in the facts and circumstances underlying their
calculation, pursuant to Financial Accounting Standard No. 5, Accounting for
Contingencies.
Interest Expense
We incurred interest expense for the year ended December 31, 2005 of $1,667,294.
Our interest expense increased by $231,889, a 16% increase compared to
$1,435,405 in 2004. The increase was due to the effects of application of the
effective interest method where an effective interest amount, as calculated at
the inception of the debt is applied to the carrying value at the end of each
period. Under this method, periodic interest charges increases over the debt
term as the debt carrying value increases.
Other expense
Other expense consists of debt extinguishment losses and (gains). These amounts
arose from certain modifications that we made to our debt arrangements that
required our re-measurement of the carrying value to fair value because the
modification was significant. We may modify other debt arrangements as discussed
under the discussion related to our derivative financial instruments. Each
modification will require a determination whether an extinguishment occurred
and, if so, an extinguishment gain or loss may require recognition.
19
Subsequent to our year ended December 31, 2005, we began to incur penalties
related to a financing arrangement that required us to, among other things,
become effective on a registration statement. We have not become effective on
the registration statement. As of June 30, 2006, we incurred in excess of $2.1
million of penalties under this arrangement, and we paid these amounts beginning
in the third fiscal quarter of our year ending December 31, 2006. Our other
expense in future periods will reflect charges related to these penalties, and
such penalties will continue until the events that give rise to the penalties
are cured. In the event that we cure the default events that give rise to the
penalties, certain default provisions will continue, such as maintaining
effectiveness, that could give rise to additional penalties.
Consolidated Net Loss
We had a net loss for the year ended December 31 2005 of $79,528,653 compared
with a net loss of $11,517,620 in 2004. There were a number of factors that gave
rise to our losses in 2005 and 2004. First, we are currently expending funds in
developing our administrative and operating infrastructure and our sales
channels and, as a result, our current revenue volume has not been sufficient to
offset our operating expenses resulting in an operating loss during the years
ended December 31, 2005 and 2004. We anticipate that our operating expenses as a
percentage of our sales will decrease in future periods as our revenues increase
and our costs level. In addition, we incurred a one-time $3,000,000 fee during
the year ended December 31, 2005 related to the acquisition of our customer,
CCE. We do not currently anticipate incurring similar costs in the foreseeable
future. Finally, the overall magnitude of both the 2005 and 2004 net loss can be
attributable largely to the fair value adjustments related to our derivative
financial instruments of $60,823,574 and $6,309,933 in 2005 and 2004,
respectively. See the discussion above, about our derivative income (expense)
for additional information. Our earnings will continue to be affected by the
fair value adjustments of our derivative financial instruments until they are
disposed of through contractual modifications, conversions and exercises of our
share indexed instruments, or expiration.
Consolidated Loss Applicable to Common Shareholders
Loss applicable to common shareholders represents net loss as adjusted for
preferred stock dividends and accretion of our redeemable preferred stock and
our equity classified preferred stock to redemption values using the effective
method. Many of our preferred stock series have cumulative dividend features and
we will continue to reflect preferred stock dividends in our loss applicable to
common shareholders until the preferred stock is converted, if ever. In
addition, many of our redeemable preferred stock series were initially
discounted due to the allocation of financing proceeds to detachable warrants
and embedded derivative financial instruments. We use the effective method to
amortize these discounts. The use of the effective method to accrete our
discounted redeemable preferred stock to redemption values causes accretion to
increase over the redemption period as the carrying values increase.
Accordingly, accretions will increase in future periods until the preferred is
fully accreted to redemption values or converted.
Consolidated Loss per Common Share
The Company's basic loss per common share for the year ended December 31, 2005
was $(0.60) compared with a basic loss per common share for the same period in
2004 of $(0.31). Because the Company experienced net losses in 2005 and 2004,
all potential common share conversions existing in our financial instruments
would have an antidilutive impact on earnings per share; therefore, diluted loss
per common share equals basic loss per common share for both years.
The weighted average common shares outstanding increased from 40,229,738 for the
year ended December 31, 2004 to 135,032,836 for the year ended December 31,
2005. The increase is attributed primarily to conversions of our convertible
debt and preferred instruments into common shares. Potential common stock
conversions excluded from the computation of diluted earnings per share amounted
to 108,059,082 and 126,767,057 for the years ending December 31 2005 and 2004,
respectively.
Consolidated Comprehensive Loss
Comprehensive loss differs from net loss for the year ended December 2005 and
2004 by ($30,759) and ($689), respectively, which represents the effects of
foreign currency translation on the financial statements of our subsidiaries
denominated in foreign currencies. Our foreign operations are currently not
significant. Increases in our foreign operations will likely increase the
effects of foreign currency translation adjustments on our financial statements.
20
LIQUIDITY AND CAPITAL RESOURCES
Management's Plans:
As reflected in the accompanying consolidated financial statements, we
have incurred operating losses and negative cash flow from operations and have
negative working capital of $51,012,013 as of June 30, 2006. This negative
figure is largely the effect of our recording of $36,425,561 for derivative
liabilities. In addition, we are delinquent on certain of our debt agreements at
June 30, 2006, and, we have experienced delays in filing our financial
statements and registration statements due to errors in our historical
accounting that currently are being corrected. Our inability to make these
filings is resulting in our recognition of penalties payable to the investors.
These penalties will continue until we can complete our filings and register the
common shares into which the investors' financial instruments are convertible.
Finally, our revenues are significantly concentrated with one major customer.
The loss of this customer or curtailment in business with this customer could
have a material adverse affect on our business. These conditions raise
substantial doubt about our ability to continue as a going concern.
We have been dependent upon third party financings as we execute on our
business model and plans. While our liquid reserves have been substantially
depleted as of June 30, 2006, we completed a $30.0 million convertible note
financing in July 2006 that is expected to fulfill our liquidity requirements
through the end of 2006. However, $15.0 million of this financing is held in
escrow, and we are in default on this instrument due to the delay in filing our
quarterly financial report for the quarterly period ended June 30, 2006. We have
entered into an Amendment Agreement with the holders of the Notes to amend the
Notes in certain respects as consideration for the holders' release of the
Company's default resulting from its delay in the filing of this quarterly
report.
We plan to increase our revenues, improve our gross margins, augment our
international business and, if necessary, obtain additional financing.
Ultimately, our ability to continue is dependent upon the achievement of
profitable operations. There is no assurance that further funding will be
available at acceptable terms, if at all, or that we will be able to achieve
profitability.
The accompanying financial statements do not reflect any adjustments that
may result from the outcome of this uncertainty.
Information about our cash flows
As of June 30, 2006, we reported that net cash used in operating
activities was $7,385,239, net cash provided by financing activities was
$3,211,672 and net cash used in investing activities was $736,514 during the six
months ended June 30, 2006. We had a negative working capital of $51,012,013 as
of June 30, 2006. This negative figure is largely the effect of our recording of
$36,425,561 for derivative liabilities.
Compared to $2,502,512 of net cash used in operating activities in the six
months ended June 30, 2005, our current period net cash used in operating
activities increased by $4,882,727 to $7,385,239. This increase was the result
of our utilization of cash rather than equity to pay service providers in this
current period.
Changes in accounts receivable during the six months ended June 30, 2006
resulted in a cash increase of $1,941,060, compared to a cash increase in
receivables of $26,778 for the same period in 2005, having a net result of an
increase of $1,914,282. Cash utilized for inventory increased during this period
by $2,490,676, compared to cash used of $54,981 for the same period in 2005.
This increase was the result of our building inventory in connection with the
continued implementation of our Master Distribution Agreement with Coca-Cola
Enterprises. The changes in accounts payable and accrued liabilities in the six
months ended June 30, 2006 contributed to a cash increase of $5,590,386, whereas
the changes in accounts payable and accrued liabilities for the period ended
June 30, 2005 amounted to an increase of $893,461. Cash flows generated through
our operating activities was inadequate to cover all of our cash disbursement
needs in the period ended June 30, and we had to rely on prior equity and new
convertible debt financing to cover operating expenses.
21
Cash used in the period ended June 30, 2006 in our investing activities
was $736,514 for license and trademark costs, furniture, computer equipment and
our purchase of eight vans in the U.S., compared to $128,135 for the same period
in 2005.
Net cash provided by our financing activities for the six months ended
June 30, 2006 was $3,211,672. Net cash provided by financing activities for the
same period in 2005 was $2,900,870, for a net increase of $310,802.
Going forward, our primary requirements for cash consist of the following:
o the continued development of our business model in the United
States and on an international basis;
o promotional and logistic production support for the capacity
demands presented by our Master Distribution Agreement with
Coca-Cola Enterprises;
o general overhead expenses for personnel to support the new
business activities;
o development, launch and marketing costs for our line of new
branded flavored milk products; and
o the payment of guaranteed license royalties.
We estimate that our need for financing to meet cash requirements for
operations will continue through the third or fourth quarter of 2006, when we
expect that cash supplied by operating activities will approach the anticipated
cash requirements for operating expenses. We anticipated the need for additional
financing in 2006 to reduce our liabilities, assist in marketing and to improve
stockholders' equity status, and we secured $30 million in senior convertible
note financing in July 2006. We have received half of the proceeds from this
financing in the third quarter, with the balance held in escrow pending a
shareholder vote to increase our authorized shares to cover the escrowed
balance. No assurances can be given that we will be able to obtain the approval
of our shareholders to increase our authorized shares, or that operating cash
flows will be sufficient to fund our operations.
We currently have monthly working capital needs of approximately $550,000.
We will continue to incur significant selling and other expenses in 2006 in
order to derive more revenue in retail markets, through the introduction and
ongoing support of our new products and the implementation of the Master
Distribution Agreement with Coca-Cola Enterprises. Certain of these expenses,
such as slotting fees and freight charges, will be reduced as a function of unit
sales costs as we expand our sales markets and increase our revenues within
established markets. Freight charges will be reduced as we are able to ship more
full truckloads of product given the reduced per unit cost associated with full
truckloads versus less than full truckloads. Similarly, slotting fees, which are
paid to warehouses or chain stores as initial set up or shelf space fees, are
essentially one-time charges per new customer. We believe that along with the
increase in our unit sales volume, the average unit selling expenses and
associated costs will decrease, resulting in gross margins sufficient to
mitigate cash needs. In addition, we are actively seeking additional financing
to support our operational needs and to develop an expanded promotional program
for our products.
External Sources of Liquidity
On May 12, 2006, we obtained financing in the amount $2,500,000 and issued
promissory notes in that aggregate principal amount to two accredited investors.
One of these investors has exercised rights of participation and has reinvested
$1,000,000 of this note in the July 27, 2006 financing described below. The
remaining $1,500,000 principal of the notes has been paid in full with the part
of the July 27, 2006 financing proceeds.
22
On July 27, 2006, we entered into definitive agreements to sell $30
million senior convertible notes (the "Notes")that are due in 2010 to several
institutional and accredited investors in a private placement exempt from
registration under the Securities Act of 1933. The notes initially carry a 9%
coupon, payable quarterly, and are convertible into shares of common stock at
$0.70 per share. In 2007, the coupon may decline to LIBOR upon the Company
achieving certain financial milestones. The Notes will begin to amortize in
equal, bi-monthly payments beginning in mid-2007. We issued warrants to purchase
12,857,143 shares of common stock at $0.73 per share that expire in July 2011 to
the investors in the private placement. Under the terms of the financing, we
sold $30 million notes, of which $15.0 million of the notes are being held in
escrow. The release of the funds will be subject to stockholder approval of the
increase of our authorized shares from 300,000,000 to 500,000,000 and the
effectiveness of a registration statement converting the common stock underlying
the Notes, Additional Notes and associated warrants. We will utilize this
financing for, among other things, our working capital needs. We have filed a
proxy statement seeking such shareholder approval at a Special Meeting of
Shareholders.
As a result of our failure to file our June 30, 2006 Form 10QSB timely, an
event of default has occurred under the terms of the Notes and the interest rate
on the Notes, payable quarterly, was increased from 9% to 14% per annum.
Pursuant to the terms of the Notes, upon the occurrence of an event of default,
holders of the Notes may, upon written notice to the Company, each require the
Company to redeem all or any portion of their Notes, at a default redemption
price calculated pursuant to the terms of the Notes. We have entered into an
Amendment Agreement with the holders of the Notes to amend the Notes in certain
respects as consideration for the holders' release of the Company's default
resulting from its delay in the filing of this quarterly report. See Item 3 of
Part II of this report, entitled "Default on Senior Securities", for a
description of the terms of the Amendment Agreement.
EFFECTS OF INFLATION
We believe that inflation has not had any material effect on our net sales and
results of operations.
Information about our cash flows
For the year ended December 31, 2005, we reported that net cash used in
operating activities was $9,301,078, net cash provided by financing activities
was $18,209,600 and net cash used in investing activities was $4,043,665. We had
negative working capital of $39,287,983 as of December 31, 2005.
Compared to $3,629,863 of net cash used in operating activities in the year
ended December 31, 2004, our current year net cash used in operating activities
increased by $5,671,215 to $9,301,078. Changes in accounts receivable
contributed to an increase in cash used by operating activities of $3,356,477,
as compared to contributing to an increase of $77,217 for 2004 for a difference
of $3,279,260. Cash used by operating activities increased as a result of
changes in inventory during 2005 by $379,489, compared to cash provided of
$43,339 for the same period in 2004. This was the result of our building
inventory during 2005 in connection with the continued implementation of our
Master Distribution Agreement with Coca-Cola Enterprises. The changes in
accounts payable and accrued liabilities for the year ended December 31, 2005
contributed to a reduction in cash used by operating activities of $7,294,548,
whereas such changes in 2004 contributed to a decrease in cash used by operating
activities of $542,282. Cash flows generated by our operating activities were
inadequate to cover our cash disbursement needs for the year ended December 31,
2005, and we had to rely on private placement financing, prior equity and new
convertible debt financing to cover operating expenses.
Cash used in the year ended December 31, 2005 in our invest6ing
activities was $4,043,665 for license and trademark costs and equipment
purchases, compared to $531,263 for the same period in 2004.
Net cash provided by our financing activities for the year ended
December 31, 2005 was 418,209,600. Net cash provided by financing activities for
the same period in 2004 was $4,216,844, for a net increase of $13,992,756. The
increase is attributed to private placement financings amounting to $20,690,000.
23
BUSINESS
Our company
Our company is a Delaware corporation, which was formed on April 27, 1996.
We formerly owned the majority interest in two Sino-American joint ventures in
China, known as Green Food Peregrine Children's Food Co. Ltd. and Hangzhou
Meilijian Dairy Products Co., Ltd. These two joint ventures processed milk
products for local consumption in the areas of Shanghai and Hangzhou, China,
respectively. We closed Green Food Peregrine in December 1999 and sold our
interest in Hangzhou Meilijian Dairy in December 2000.
In December 1999, we obtained Chinese government approval for the
registration of a new wholly owned subsidiary in the Wai Gao Qiao "free trade
zone" in Shanghai, China. We formed this import-export company to import, export
and distribute food products on a wholesale level in China. In addition, China
Premium (Shanghai) was our legal presence in China with respect to contractual
arrangements for the development, marketing and distribution of branded food
products. We ceased all activities of this Chinese subsidiary in April 2004,
owing to low sales volume and insufficient financial or logistic resources to
market our products profitably in mainland China.
In December 1999, we formed Bravo! Foods, Inc., a wholly owned Delaware
subsidiary, which we utilized to advance the promotion and distribution of
branded Looney Tunes(TM) products in the United States, through production
agreements with local dairy processors. At the end of 2001, we assumed this
business, and our U.S. subsidiary ceased functioning as an operating company at
that time.
On February 1, 2000, we changed our name from China Peregrine Food
Corporation to China Premium Food Corporation. On March 16, 2001 we changed our
name to Bravo! Foods International Corp. On October 24, 2006 we changed our name
to Bravo! Brands Inc., pursuant to a resolution of our Board of Directors and
the affirmative vote of our shareholders at a special meeting of our
shareholders called for that purpose, in accordance with Delaware General
Corporation Law.
In January 2005, we formed Bravo! Brands (UK) Ltd., a United Kingdom
registered company that is wholly owned by Bravo! Brands International Ltd. We
will utilize Bravo! Brands (UK) Ltd. to advance the production, promotion and
distribution of licensed branded products in the United Kingdom through
production and sales agent agreements with local entities. Currently, we are
evaluating our distribution and product mix in the UK in order to develop and
implement a more effective business plan going forward. During this period of
re-evaluation, we have ceased production of our products in the United Kingdom.
In March 2005, we formed Bravo! Brands International Ltd., a Delaware
subsidiary that may hold license rights for our branded products on an
international basis. We may utilize Bravo! Brands International Ltd. to hold and
exploit certain license rights for branded products developed by us in
international markets through local second-tier subsidiaries such as Bravo!
Brands (UK) Ltd.
The Business
Our business involves the development and marketing of our own Slammers(R)
and Bravo!(TM) trademarked brands, the obtaining of license rights from third
party holders of intellectual property rights to other trademarked brands, logos
and characters and, in certain international markets, the granting of production
and marketing rights to processor dairies to produce branded flavored milk
utilizing our intellectual property. In addition, we anticipate the commencement
of exporting our products to Mexico and Canada in the fourth quarter 2006 and
first quarter 2007, respectively.
In the United States and the UK, we generate revenue from the sales of
finished branded flavored milks to retail consumer outlets or distributors for
resale to retail consumer outlets. Currently, we use a single third-party
processor in the United Sates and another in the UK to produce all of our single
serve milk based beverages. We anticipate the expanded production of our
products with the addition of HP Hood, LLC as a second processor in the United
States, with production commencing in the fourth quarter 2006. We recognize
revenue in the United States at the gross amount of our invoices for the sale of
finished product to wholesale buyers or distributors. We take title to our
branded flavored milks when they are shipped by our third party processors and
recognize as revenue the gross wholesale price charged to our wholesale
customers or distributors. Our gross margin is determined by the reported
wholesale price less (i) the cost charged by our third party processor, to
produce our branded milk products and (ii) shipping costs.
24
Internationally, we generate revenue primarily through our sale to
processors of flavor ingredients utilized for our products, which are developed
and refined by us, and the grant of production rights to processors to produce
our flavored milks. The consideration paid to us under these production
contracts consists of fees charged for our grant of production rights for our
branded flavored milks plus a charge for flavor ingredients.
All of our third party licensing agreements recognize that we will use
third party production agreements for the processing of flavored milk products
and that the milk products will be produced and may be sold directly by those
processors. Our responsibilities under our third party production agreements are
to design and provide approved packaging artwork, to help determine the best
tasting flavors for the particular market and to assist in the administration,
promotion and expansion of the respective branded milk programs. Ingredients for
the flavored milks are formulated to our specifications and supplied on an
exclusive basis by either Givaudan Flavors Group or Mastertaste, both of which
are flavor development and production companies. In the United States, we are
the vendor of record for our direct wholesale business and assume the
responsibility for sales and marketing of our flavored milks.
Master Distribution Agreement - Coca-Cola Enterprises
On August 31, 2005, we entered into a ten-year Master Distribution
Agreement with Coca-Cola Enterprises Inc that we believe will significantly
expand the distribution and sales of our products. The agreement provides for
the distribution of our products in Coca-Cola Enterprises in the United States,
all U.S. possessions, Canada, Belgium, continental France, Great Britain,
Luxembourg, Monaco and the Netherlands, as well as any other geographic
territory to which, during the term of the agreement, Coca-Cola Enterprises
obtains the license to distribute beverages of The Coca-Cola Company. The
appointment of Coca-Cola Enterprises as the exclusive distributor for our
products was effective August 30, 2005, has an effective distribution date of
October 31, 2005 and an expiration date of August 15, 2015. Coca-Cola
Enterprises has the option to renew the Master Agreement for two subsequent
periods of ten additional years. Attendant to the execution of the agreements we
issued three-year warrants to Coca-Cola Enterprises for the right to purchase 30
million shares of our common stock at an exercise price of $0.36 per share.
Under the terms of the agreement, Coca-Cola Enterprises is obligated to
use all commercially reasonable efforts to solicit, procure and obtain orders
for our products and merchandise and actively promote the sale of such products
in the Territory, as defined in the agreement. The agreement establishes a
comprehensive process for the phased transition from our existing system of
distributors to Coca-Cola Enterprises, dependent upon distribution territory,
product and sales channels. Under the agreement, Coca-Cola Enterprises
implemented its distribution on a ramp-up basis, commencing , October 31, 2005.
Coca-Cola Enterprises' distribution in other Territory areas will be dependent
upon, among other things, third-party licensing considerations and compliance
with the regulatory requirements for the products in foreign countries.
We have agreed to provide the following:
o strategic direction of our products;
o maintain sales force education and support;
o actively market and advertise our products and design and develop
point of sale materials and advertising. We are also responsible for
handling:
o consumer inquiries;
o product development; and
o the manufacture and adequate supply of our products for distribution
by Coca-Cola Enterprises.
The terms of the agreement require our company to maintain the
intellectual property rights necessary for our company to produce, market and/or
distribute and for Coca-Cola Enterprises to sell our products in the Territory.
We are obligated to spend a fixed dollar amount through 2006 on national and
local advertising, including actively marketing the Slammers trademark, based on
a plan as mutually agreed each year. Beginning in 2007, the Company shall
allocate an amount per year for such activities in each country in the defined
Territory equal or greater than an agreed upon percentage of our total revenue
in such country.
25
Under the agreement, Coca-Cola Enterprises has the right of first refusal
to distribute any new products developed by our company, and the agreement
establishes a process for the potential expansion of Coca-Cola Enterprises'
distribution of the Company's products to new territories. Either party may
terminate the agreement for a material breach, insolvency or bankruptcy.
Coca-Cola Enterprises may terminate (i) for change of control by our company,
(ii) upon a material governmental regulatory enforcement action or threatened
governmental action having a material adverse consumer or sales impact on our
products and (iii) upon twelve months notice after August 15, 2006.
Third Party Intellectual Property Licenses
Marvel Enterprises, Inc. (Super Heroes(R) and Marvel Heroes(R))
On February 4, 2005, we entered into a two-year license agreement for the
utilization of Marvel Heroes characters on our flavored milks in the United
Kingdom and Ireland. We agreed to a royalty rate of 4% of net wholesale sales in
the territory against the prepayment of a guaranteed minimum royalty amount. We
have adopted the unit sales model currently used in the United States. We have
outsourced the infrastructure required for the production, promotion, marketing,
distribution and sale of our products through a production agreement with
Waterfront Corporation in the UK and through an exclusive sales agency agreement
with Drinks Brokers, Ltd. a UK registered company responsible for the launch and
growth of several major beverage brands in the licensed territory. Currently, we
are evaluating our distribution and product mix in the UK in order to develop
and implement a more effective business plan going forward. During this period
of re-evaluation, we have ceased production of our Marvel co-branded products in
the United Kingdom.
In March 2005, we entered into a new one-year license agreement with
Marvel Enterprises, Inc. to use its Super Heroes(R) properties to promote our
branded milk products in the United States, Canada and Mexico. Under the terms
of the license agreement, we agreed to a royalty rate of 5% of net wholesale
sales in the United States, 4% for school lunch channels and 2.5% for school hot
lunch programs. We also agreed to a 11% royalty on the amount invoiced to dairy
processors for production in Canada and Mexico. We have not renewed this license
agreement owing to the failure of our Marvel co-branded products to achieve
expected market penetration.
On February 4, 2005, we entered into an eighteen month license agreement
for the utilization of Marvel Heroes characters on our flavored milks in the
Middle East in conjunction with our execution of third party production
agreements for the manufacture and sale of our products in Saudi Arabia and
Oman. We agreed to a 11% royalty on the amount invoiced to third party dairy
processors for "kits" in the territory against the prepayment of a guaranteed
minimum royalty amount. We have not renewed this license agreement owing to the
failure of our Marvel co-branded products to achieve expected market
penetration.
Chattanooga Bakery, Inc.( Moon Pie(R) )
In October 2003, we commenced a two-year license agreement with MD
Enterprises, Inc. on behalf of Chattanooga Bakery. Under the terms of the
license agreement, we have the exclusive right to manufacture, distribute,
market and sell Moon Pie(R) flavored milk products in the United States. We
agreed to a variable royalty rate of 3% to 2% of net wholesale sales, depending
upon volume. This license has been extended verbally.
Masterfoods USA (Starburst(R), Milky Way(R), 3 Musketeers(R))
On September 21, 2004, we entered into a licensing agreement with
Masterfoods USA, a division of Mars, Incorporated, for the use of Masterfood's
Milky Way(R), Starburst(R) and 3 Musketeers(R) trademarks in connection with the
manufacture, marketing and sale of single serve flavored milk drinks in the
United States, its Possessions and Territories, and US Military installations
worldwide. The license limits the relationship of the parties to separate
independent entities. The initial term of the license agreement expires December
31, 2007. We have agreed to pay a royalty based upon the total net sales value
of the licensed products sold and advance payments of certain agreed upon
guaranteed royalties. Ownership of the licensed marks and the specific milk
flavors to be utilized with the marks remains with Masterfoods. We have a right
of first refusal for other milk beverage products utilizing the Masterfoods
marks within the licensed territory. This license has amended to include
additional Masterfoods brands and to extend the term to December 31,2012.
26
In March 2006, we signed two new seven year licensing agreements for
Canada and Mexico with Masterfoods, effective January 1, 2006. The licensing
agreement for Canada covers single servings of the Mars(R) Brand flavored milk
drink, Starburst(R) brand flavored milk drink and the 3 Musketeers(R) brand
flavored milk. In Mexico the licensing agreement is for single serve Milky
Way(R) brand flavored milk, Starburst(R) brand flavored milk Drink and the 3
Musketeers(R) Brand Flavored Milk. These licensing agreements cover most trade
channels including grocery, food service, Club Stores as well as schools with
children over the age of 13, colleges and universities, vending machines,
amusement parks and movie theaters.
Diabetes Research Institute
In June 2005, we extended our licensing agreement with Diabetes Research
Institute to June 30, 2007. We agreed to a variable royalty rate of 0.25% of net
sales. We use this intellectual property, which consists of a logo plus design
on the labels of our Slim Slammers(TM) product line.
In House Intellectual Property
In addition to our third-party licenses, we have developed and sell
flavored milks bearing trademarks developed by us, including "Slammers(R)" "Pro
Slammers(TM)", "Slim Slammers(R)" and "Breakfast Blenders(TM)"..
Production Contracts/Administration
Our operations in the United States, the Middle East, Mexico and Canada
are run directly by Bravo! Brands Inc. Our United Kingdom business is managed
through our wholly owned subsidiary Bravo! Brands International Ltd., which is a
UK registered company.
United States
Since 2003, our milk products have been produced by Jasper Products,
located in Joplin, Missouri. In addition to the production of our products,
Jasper has provided the infra-structure necessary for our invoicing, shipping
and collection activities. We anticipate that we will assume direct
responsibility for these activities in house in the fourth quarter 2006. We will
expand production of our products with the addition of HP Hood, LLC as a second
processor, with production commencing in the fourth quarter 2006
United Kingdom
In February 2005, we executed an exclusive sales agency agreement with
Drinks Brokers, Ltd., a division of Tactical Sales Resources Limited for sales
of our product lines in the United Kingdom. Pursuant to terms of the agreement,
Bravo! appointed Drinks Brokers as its Sales Agent in the United Kingdom for the
marketing, promotion, distribution and sale of Bravo!'s Slammers(R) Marvel
Heroes line of flavored milk, as well as other product lines that Bravo! may
introduce to the UK in the near future.
Drinks Brokers utilizes its established networks to manage all matters
relating to the sale and effective distribution of Bravo!'s products within the
United Kingdom, including the solicitation of sales from customers in applicable
market segments, marketing, advertising and promotion of Bravo!'s products,
distribution, and merchandising.
Our products are processed in the United Kingdom by Waterfront Corporation
Limited, on a third party co-pack basis. We generate revenue in the United
Kingdom from the unit sales of finished branded flavored milks to retail
consumer outlets. Currently, we use a single third-party processor in the United
Kingdom to produce all of our single serve milk based beverages. We recognize
revenue in the United Kingdom at the gross amount of our invoices for the sale
of finished product to wholesale buyers. We take title to our branded flavored
milks when they are shipped by our third party processor and recognize as
revenue the gross wholesale price charged to our wholesale customers. Our gross
margin is determined by the reported wholesale price less the cost charged by
Waterfront Corporation Limited.
27
Middle East
In September 2005, we entered into a third party production agreement with
Oman National Dairy Products Co. Ltd., a Middle East dairy processor,
headquartered in Ruwi, Oman. Oman Dairy produces Slammers (R) branded flavored
milks, including the Marvel line, for distribution in Oman and Saudi Arabia. We
generate revenue in the Middle East by the sale of flavor ingredients and
production rights for our branded products. We are not responsible for
production, marketing, promotion or distribution of the product in the Middle
East.
Products
In September of 2000, we commenced our United States business using third
party dairy processors for the production and sale of fresh branded flavored
milk in single serve plastic bottles. Our flavored milk products had a limited
shelf life of, generally, 21 days.
In early 2002, we developed branded extended shelf life and aseptic,
bacteria free, long life flavored milk products. The extended shelf life product
was sold in 11.5oz single serve plastic bottles and had to be refrigerated. The
shelf life of this product is 90 days. In addition, we developed a line of
aseptic packaged milks that do not require refrigeration and have a shelf life
of 8 months. This product was packaged in an 11.2oz Tetra Pak Prisma(TM) sterile
paper container. Both of these products were introduced to the public in the
second and third quarters of 2002.
Commencing in May 2002, we developed a new branded fortified flavored milk
product under the "Slammers(R) Fortified Reduced Fat Milk" brand name. We use
our Slammers(R) brand in conjunction with our licensed third party trademarks.
Slammers(R) is made from reduced fat milk and is fortified with essential
vitamins. The introduction of this new product and the phase out of our
"regular" branded milks occurred in the fourth quarter of 2002. Our Slammers(R)
flavored milks were sold in the United States in single serve extended shelf
life plastic bottles, as well as the long life aseptic Tetra Pak Prisma(TM)
package.
In November 2002, we introduced Slim Slammers(R) Fortified Milk, a low
calorie version of our Slammers (R)Fortified Reduced Fat Milk. Slim Slammers(R)
Fortified Milk has no added sugar and is sweetened with sucralose, a natural
sweetener made from sugar. Slim Slammers(R) Fortified Milk is made from 1
percent fat milk, is fortified with 11 essential vitamins and is available in
the same flavors as our Slammers(R) brand. We reintroduced this product in the
United States with a new package and formulation during 2004.
In 2004, we announced our product development and brand strategy for seven
new, separate and distinct single serve product lines: Ultimate Slammers(TM),
Slim Slammers(R), Moon Pie Slammers(R), Pro-Slammers(TM), Starburst(R)
Slammers(R), 3 Musketeers(R) Slammers(R) and Milky Way(R) Slammers(R). These
product lines are all fortified and positioned to appeal directly to profiled
demographic segments, including teens and pre teens for Ultimate Slammers(TM),
Starburst(R) Slammers(R) and Milky Way(R) Slammers(R), teens and sports
enthusiasts for Pro-Slammers(TM), young to old for Moon Pie(R) Slammers(R) and
health conscious adults for Slim Slammers(R) and 3 Musketeers(R) Slammers(R).
We launched four brands in 2004, beginning with Ultimate Slammers(R) in
April and achieved national distribution of Ultimate Slammers(R) through both
retail grocers and convenience stores by mid- summer. Roughly 10,000 retail
supermarket stores carried this brand nationwide in 2004. This was followed by
our June launch of Slim Slammers(R) and Moon Pie (R)Slammers(R) and the July
release of our Pro-Slammers(TM) line.
In January 2005, we launched our Slammers(R) Starburst line of Fruit &
Cream Smoothies utilizing a "shelf stable" re-sealable plastic bottle for milk
products that does not require refrigeration. Until that launch, all single
serve flavored milk in plastic bottles required refrigeration for storage,
distribution and shelf placement. The tactical advantage of distributing milk
products ambient enables us to side-step a major entry barrier in our immediate
consumption strategy. Refrigerated milk is relegated to dairy
direct-store-delivery systems that are controlled by either regional dairy
processors or larger national dairy holding companies. Shelf stable re-sealable
plastic bottles allow us to use a more traditional distribution network that
accommodates the non-refrigerated beverages. Also, milk products packaged in
shelf stable re-sealable plastic bottles have significantly longer shelf life
for storage, allowing us to ship in full truckloads resulting in decreased
freight costs. We currently are converting all of our products to "shelf stable"
re-sealable plastic bottles.
28
In the first quarter 2005, we launched our Slammers(R) MilkyWay and 3
Musketeers lines utilizing a "shelf stable" re-sealable plastic bottle for milk
products that does not require refrigeration, under the Masterfoods License.
During this period, we also introduced Breakfasts Blenders(TM), which is a meal
replacement milk beverage developed for the "on the go" consumer.
Industry Trends
The flavored milk industry has grown from approximately $750 million in
1995 to $2.5 billion in 2004. The single serve portion of this category is
difficult to measure, since approximately 2/3 of the sales in the single serve
milk industry are sold in immediate consumption channels or other channels that
do not report scan-data. For example, Wal-Mart has become the largest retailer
in the USA for milk, selling an estimated 15% of total milk sales. Wal-Mart does
not report sales for the industry data resources embodied in A.C. Neilson or IRI
analyses. Similarly, most convenience stores and "up-and-down-the-street"
retailers in the immediate consumption sales channels do not report either, and
neither do vending and schools.
We have analyzed the industry using reports available from milk and
beverage industry sources. These include the total, segmented and rate of growth
sales that are reported, the immediate consumption sales rates for all
consumables compared to retail grocery buying patterns and opinions of experts
in the milk industry as to the relative size of reported versus non-reported
sales. Based upon these reports and analysis, we believe the current size of the
single serve flavored milk industry (packaging 16 oz. or smaller) is
approximately $1.5 billion domestically. The industry grew at annual rates of
between 5 and 15 percent during the last five years but was virtually flat in
the last two years while it digested the remarkable 10-year growth rates. We
believe that this space is positioned for growth now and will continue to be in
the immediate consumption channels such as vending, convenience stores and food
service market segments.
Market Analysis
The flavored milk business is a relatively new category in the dairy
field. The flavored "refreshment" segment is both the fastest growing and most
profitable category in the industry and is receiving the most attention in the
industry today. Pioneered by Nestle with the NesQuik line and Dean Foods with
its Chug brand, this "good for you" segment is in demand both in the U.S. and
internationally.
The International Dairy Foods Association reports that, although flavored
milk currently amounts to only 5 to 6 percent of milk sales, it represents over
59% of the growth in milk sales. With the total milk category exceeding $9.3
billion in 2004, the flavored milk segment was approximately $2.5 billion in
2004, with single serve flavored milk growing to approximately $1.5 billion for
the same period. Statistically, as the flavored segment grows, the entire
category grows as well. In the past ten years, selling more flavored milks has
resulted in more sales of white milk as well.
In addition, the International Dairy Foods Association and Dairy
Management Inc. have reported on studies suggesting that dairy products may help
in weight loss efforts when coupled with a reduced calorie diet, based on data
associating adequate calcium intake with lower body weight and reduced body fat.
We continue to develop a niche in the single serve flavored milk business by
utilizing strong, national branding as part of the promotion of our Slammers(R),
Pro Slammers(TM) and Slim Slammers(R) products. This niche has as its focus the
increased demand for single serve, healthy and refreshing drinks.
Market Segment Strategy
The Bravo! product model addresses a very clear and concise target market.
We know from experience that the largest retailers of milk products are
demanding new and more diverse refreshment drinks, specifically in the dairy
area, in response to consumer interest and demand. To that end, we have and will
continue to differentiate our products from those of our competitors through
innovative product formulations and packaging designs, such as those implemented
in our Slammers(R) and Pro Slammers(TM) fortified milk product lines and our
Slim Slammers(R) low calorie, no sugar added products.
29
Our Slammers(R) milk products have had promising results penetrating this
arena as consumers continue to look for healthy alternatives to carbonated
beverages. The positioning of our products as a healthy, fun and great tasting
alternative refreshment drink at competitive prices to more traditional
beverages creates value for the producer and the retailer alike. This "profit
orientation" for the trade puts old-fashioned milk products in a whole new
light. The consumer is happy, the retailer is happy and the producer is able to
take advantage of the value added by the brand and the resulting overall
increase in milk sales.
We currently are implementing a very important "first-to-market" strategy
that we feel will dramatically reposition our brands and company. Until now, all
single served flavored milk in plastic bottles required refrigeration for
storage, distribution, and shelf placement. Our strategic partner, Jasper
Products, became America's first processor with FDA approval to offer a "shelf
stable" re-sealable plastic bottle for ambient milk products that do not require
refrigeration.
The tactical advantage of distributing our milk products at ambient
temperatures enables us to side-step a major entry barrier in our immediate
consumption strategy. Most beverages are distributed ambient either through
beverage distribution channels or warehouse "candy and tobacco" distributors.
Refrigerated milk was relegated to dairy direct-store-delivery systems that are
controlled by either regional dairy processors or larger national dairy holding
companies such as Dean Foods or H.P. Hood. We avoid the roadblock of being
reliant upon our competition for chilled distribution since we are now in the
unique position to use the more traditional distribution network that
accommodates non-refrigerated beverages. We currently are converting all of our
products into ambient "shelf stable" re-sealable plastic bottles.
We have been and continue to pursue a strategic goal of placing
Slammers(R) milks in elementary, middle and high schools through ala carte lunch
programs and vending facilities in school cafeterias, and we are promoting our
Slim Slammers(R) milks as low calorie, non-sugar added alternatives to
traditional soft drinks. Penetration of this market segment has been limited by
logistic and economic concerns of school administrators in the push to remove
traditional carbonated soft drinks from schools in favor of milk and milk based
products.
Competition
Nestle pioneered the single serve plastic re-sealable bottle which has
become the standard for this industry, and they currently enjoy a dominant
market share. Dean Foods owns a number of regional single serve brands that are
sold in this format, and they also have an exclusive license to produce Hershey
brand flavored milk nationwide. Our analysis indicates that the Nestle's Nesquik
brand accounts for approximately 30-35 percent of the U.S. single serve milk
category, while Hershey's market share is approximately half that, at around
15%. The other competition comes from private label and regional dairy brands.
Our Slammers(R) milks are the only other single serve brand distributed
nationally in America in plastic re-sealable containers.
Our resources for promotions have been limited, and we run significantly less
promotional activities in comparison to our competitors. Where we are in direct
competition with Nestle and Hershey, however, we have been able to maintain
competitive sales levels.
Employees
We have thirty three full time employees, twenty one of which work at our
North Palm Beach corporate offices.
30
Description of Property
Neither our company nor our subsidiaries currently own any real property.
As of February 1, 1999, we moved our corporate offices from West Palm Beach to
11300 US Highway 1, Suite 202, North Palm Beach, Florida, pursuant to a lease
with HCF Realty, Inc., having an initial term of five years. The current
aggregate monthly rent amounts to approximately $7,468, which includes an
expansion of our office space from 2,485 square feet to 3,490 square feet. The
term of this lease has been extended for six years to October 30, 2010.
We have executed a lease for an expansion of our office space in North
Palm Beach, Florida to include an additional 2,190 square feet at $18.50 per
square foot.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and significant employees/advisors are as of
October 11, 2006, as follows. Our directors serve for staggered terms of two
years or until their successors are elected. On March 6, 2003, the Board voted
to reduce the board positions by one to nine.
Year
Name of Officer and Age Position with the Company Appointed
-------------------------- ------------------------------------ ---------
Bravo! Brands Inc.
Stanley A. Hirschman 59 Chairman and Director 2000
Roy G. Warren 50 Director, Chief Executive Officer 1997/1999
Jeffrey J. Kaplan 57 Chief Financial Officer 2005
Tommy E. Kee 57 Chief Accounting Officer 2003
Roy D. Toulan, Jr. 60 Vice President, Corporate Secretary,
General Counsel 2003
Michael Edwards 46 Chief Revenue Officer 2000
Benjamin Patipa 49 Chief Operating Officer 2002
Arthur W. Blanding 77 Director 1999
Robert Cummings 63 Director 1997
John McCormack 47 Director 1997
Phillip Pearce 78 Director 1997
The experience and background of the Company's executive officers follow:
Mr. Stanley A. Hirschman - Chairman and Director since September 2000
Mr. Hirschman is president of CPointe Associates, Inc., an executive
management and consulting firm specializing in solutions for emerging companies
with technology-based products. CPointe was formed in 1996. In addition, he is a
director of Energy & Engine Technology, 5 G Wireless Communications, Bronco
Energy Fund and GoldSpring, Inc. Prior to establishing CPointe Associates, Mr.
Hirschman was vice president of operations of Software, Etc., Inc., a retail
software chain, from 1989 until 1996. Mr. Hirschman has also held senior
management positions with retailers T.J. Maxx, Gap Stores and Banana Republic.
Mr. Hirschman currently serves on the Audit Committee of the Company's board of
directors.
Mr. Roy G. Warren - Chief Executive Officer since May 1999; Director since 1997
Mr. Warren serves as our Chief Executive Officer and as a director. As
Chief Executive Officer, Mr. Warren continues to develop strategy for our growth
and external financial matters.
For 15 years from 1981 through 1996, Mr. Warren was in the securities
brokerage industry. During those years, Mr. Warren acted as executive officer,
principal, securities broker and partner with brokerage firms in Florida, most
notably Kemper Financial Companies, Alex Brown & Sons and Laffer Warren &
Company. Mr. Warren currently serves on the Executive Committee of the Company's
board of directors.
Mr. Warren also serves as a director of our wholly owned U.K. subsidiary,
Bravo! Brands (UK) Ltd.
Mr. Tommy E. Kee -Chief Financial Officer 2003 - 2005; Chief Accounting Officer
since 2005
Tommy Kee joined our company in March 2003 as Chief Financial Officer. Mr.
Kee currently serves as our Chief Accounting Officer for our company. He
graduated with an MBA from the University of Memphis and a BS degree in
accounting from the University of Tennessee. Before joining us, he served for
several years as CFO for Allied Interstate, Inc. in the West Palm Beach area.
Prior to that, Mr. Kee served as CFO and Treasurer for Hearx Ltd. a West Palm
Beach, Florida public company. He also served 18 years as International
Controller and Financial Director with the Holiday Inns Inc. organization in
Memphis and Orlando. Mr. Kee handles all financial management and reporting for
our company and works closely with our external auditors and general counsel for
financial reporting and SEC compliance.
32
Mr. Jeffrey Kaplan - Chief Financial Officer since 2005
Mr. Kaplan joined Bravo! in October 2005 as Chief Financial Officer. Mr.
Kaplan served as Executive Vice President and Chief Financial Officer of BIB
Holdings, Ltd. and then its private company spin-off, Elk Canyon Ltd., designers
of jeanswear and loungewear, from October 2003 to September 2005. He served as
Executive Vice President of Business Affairs of Viewpoint Corporation, a
graphics software company, from November 2001 to September 2003 and its
Executive Vice President and Chief Financial Officer from February 2001 to
October 2001. Mr. Kaplan served as Executive Vice President and Chief Financial
Officer of Rare Medium Group Inc., an IT professional services company, from
October 1999 to February 2001. Mr. Kaplan received his Bachelor of Arts degree
in political science from Brown University in 1970 and his Masters of Business
Administration in finance from New York University in 1972.
Mr. Roy D. Toulan, Jr. - Vice President, Corporate Secretary, General Counsel
since 2003
Roy Toulan began with the original founders as outside corporate counsel
in 1997 and has been responsible for all of our corporate and business legal
work, including securities matters. Mr. Toulan became Corporate Counsel in
October 2002, when he left his private legal practice in Boston, and Vice
President in January 2003. He received his law degree from Catholic University
in Washington D.C., and for the first 15 years of his career practiced corporate
and securities litigation with large law firms in New York and Boston. Before
joining our company full time, he spent the last 18 years of his private
practice in Boston, Massachusetts, engaged in general corporate and securities
law helping companies with corporate structure and funding, both domestically
and internationally. Mr. Toulan also serves as a director of our wholly owned
U.K. subsidiary, Bravo! Brands (UK) Ltd.
Mr. Michael Edwards - Vice President Sales since 2003
Mr. Edwards has been with our company in a sales and marketing capacity
since 2000. Prior to that time, he worked for 5 years in beverage marketing
research for Message Factors, Inc., a Memphis, Tennessee marketing research
firm. Mr. Edwards has a BS degree from Florida State University in Management
and Marketing and spent 13 years in the banking industry, leaving CitiBank to
join Message Factors in 1995.
Dr. Benjamin Patipa - Director of School/Vending 2002 - 2004; Vice President,
Chief Operating Officer since 2004
Dr. Patipa is a pediatrician with over fifteen years of experience in
directing operations, marketing, sales and facilitating growth in both public
and private companies. In 1987, Dr. Patipa founded and served as the chairman
and CEO of Weight For Me, Inc., a company that developed a proprietary program
which pioneered the delivery of weight control and nutrition services to the
over 12 million obese children and adolescents in America. Weight For Me earned
national and international recognition as the premier program for the control of
obesity in children and adolescents. Dr. Patipa also served at HEARx Ltd. as a
member of the Executive Operating Committee and Sonus USA, Inc., where he lead
the company's franchise licensing and buying group business in the Southeast
United States. Most recently, Dr. Patipa served as Senior Vice President and
Operational Head of eHDL/HealthNet Data Link, Inc., a national electronic
healthcare information company.
Mr. Arthur W. Blanding - Director Since November 1999
Mr. Blanding is president of The Omega Company, an international dairy
industry consulting company. Mr. Blanding has over 50 years experience in
management of dairy processing, sales and strategic planning consulting. He
graduated from Michigan State University in 1956, with a degree in food science,
and in 1964 from Oregon State University with a degree in Food Microbiology and
attended Harvard Business School.
33
As President of The Omega Company for the past 20 years, Mr. Blanding has
completed over 200 projects successfully, both in the U.S. and abroad. Clients
of The Omega Company include Abbott International, Cumberland Farms, Dairy Gold,
Farm Fresh, Inc., Haagen Dazs, Labatt, Ross Laboratories and Stop & Shop
Company, among others. Mr. Blanding was a consultant for the design and
construction of the dairy processing facility built in Shanghai by Green Food
Peregrine. The Omega Company is a party to a consulting contract with the
Company concerning technical and production issues.
Mr. Robert J. Cummings - Director Since 1997
Mr. Cummings' work experience includes ten years in purchasing at Ford
Motor Company. In 1975, he founded and currently operates J & J Production
Service, Inc., a manufacturing representative business, which is currently
responsible for over $300 million in annual sales.
Mr. Phillip Pearce - Director Since 1997
Mr. Pearce is a "retired" member of the securities industry. Mr. Pearce
served as Chairman of the NASD during which time he was instrumental in the
founding of NASDAQ. Additionally, Mr. Pearce was a former Director of E.F.
Hutton and has served as Governor of the New York Stock Exchange. Since his
retirement in 1988, Mr. Pearce has remained active in the securities industry as
a corporate financial consultant. Mr. Pearce serves on the compensation
committee of our board of directors. Mr. Pearce also serves on our audit
committee.
Based upon a review of the appropriate Forms 3, 4 and 5 and any amendments
to such forms filed pursuant to Section 16(a), we report the following: during
2005, our directors and executive officers did not file Form 4s for options that
were authorized pursuant to an incentive stock option compensation plan until
issued.
34
EXECUTIVE COMPENSATION
Compensation of directors
We compensated Directors for their travel expenses to and from board of
directors' meetings in 2002, 2003, 2004 and, in 2005, an additional $1,000 per
personal attendance and $500 for a telephonic attendance. In 2004, there were
three in person meetings and four telephonic board meetings. In 2005, there were
three in person meetings and four telephonic board meetings. Directors received
options for 35,000 shares of common stock for each year as a director through
2001. Each member of the executive committee has received options for an
additional 40,000 shares of common stock for their services from 1998 through
2001. Directors received additional options for 25,000 shares for 2002 and 2003.
Mr. Hirschman, our Chairman, received total compensation of $48,000 for the year
ended December 31, 2005 for his services as Chairman of both our Board of
Directors and Audit Committee. On January 13, 2004, the Directors unanimously
voted to convert the options to common stock on a one for one basis. The common
shares so converted were issued pursuant to a Form S-8 registration statement
filed December 23, 2004.
On January 13, 2004, the Board of Directors adopted a plan to convert on a
one for one basis the options granted to our present employees and the directors
currently serving on the Board into a like number of our restricted shares of
common stock at the discounted value of $0.05 per share. The conversion of the
options to common stock for any individual director or employee was conditioned
upon a "lockup" agreement by such director or employee, pursuant to which the
recipients of such common stock could not sell, transfer, pledge or hypothecate
such common stock for a six-month period.
On April 6, 2005, our Directors voted to adopt a Stock Option Incentive
Plan for the grant of options to directors, employees and consultants for the
purchase of up to 10,397,745 shares of our common stock. On May 12, 2005, the
Board of Directors accepted and adopted the determination of the Compensation
Committee to grant 3,572,744 of the authorized options to our directors.
35
Compensation of executive officers
The following table sets forth the compensation paid during the last three
fiscal years to our Chief Executive Officer and the other executive officers of
our company:
Summary Compensation
Long-Term Compensation
Annual Compensation ----------------------------------
-------------------------------------------- Restricted
Base Stock Awards All Other
Name & Position Year Salary Bonus Other and Options Compensation (6)
------------------ ---- -------- ------------------- ----------- --------------- ----------------
Roy G. Warren 2003 $220,000 2005 Ten Year $300,000 salary
President & CEO Options for $16,272
Director 2004 220,000 $137,750 (1) 2,500,000 (insurance)
$8,462 bonus (3) common valued
2005 240,000 156,538 bonus (4) $42,000 (5) at $300,000;
vested over 18
months
Roy D. Toulan, Jr. 2003 $180,000 $28,000 (2) $5,841 2005 Ten Year $190,000 salary
Vice President Life & Options for $10,178
Secretary 2004 180,000 15,000(1) disability 600,000 common (insurance)
Corporate Counsel 6,923 (bonus (3) insurance valued at
2005 182,231 7,308 bonus (3) $38,552 (5) $72,000; vested
over 18 months
Michael Edwards 2005 $162,923 $6,923 bonus (3) $34,161 (5) 2005 Ten Year $180,000 salary
Chief Revenue Options for $13,407
Officer 600,000 common (insurance)
valued at
$72,000; vested
over 18 months
Benjamin Patipa 2005 $142,615 $6,923 bonus (3) $32,107 (3) 2005 Ten Year $180,000 salary
Chief Operating 11,000 bonus (4) Options for $13,336
Officer 600,000 common (insurance)
valued at
$72,000; vested
over 18 months
Tommy E. Kee 2003 $120,000 2005 Ten Year $160,000 salary
Chief Accounting; Options for $14,874
Officer 2004 120,000 $15,000(1) 600,000 common (insurance)
4,615 bonus (3) valued at
2005 140,923 6,154 bonus (3) $31,415 (3) $72,000; vested
10,000 bonus (4) over 18 months
(1) The reported values of options converted in 2004 are pursuant to a January
13, 2004 vote of Directors authorizing conversion, and are valued $0.05
per share.
(2) 100,000 shares of common stock in 2003 as a signing bonus, valued at
$28,000.
(3) Year end bonus
(4) Special performance based bonus
(5) SEP/IRA Bonus, 2005
(6) Amount paid for termination of employment owing to change of control,
based on base salary for 2006
Option Grants
On April 6, 2005, our Directors voted to adopt a Stock Option Incentive
Plan for the grant of options to directors, employees and consultants for the
purchase of up to 10,397,745 shares of our common stock. On May 12, 2005, the
Board of Directors accepted and adopted the determination of the Compensation
Committee to grant 3,572,744 of the authorized options to our directors and
4,900,000 to our senior management.
36
Aggregated Options Exercised in Last Fiscal Year
And Fiscal Year-End Option Values
None.
Compensation Plans
Senior Management
On April 6, 2005, our Directors voted to adopt a Stock Option Incentive
Plan for the grant of options to directors, employees and consultants for the
purchase of up to 10,397,745 shares of our common stock. On May 12, 2005, the
Board of Directors accepted and adopted the determination of the Compensation
Committee to grant 4,900,000 of the authorized option to our senior management.
Employment contracts
Roy G. Warren Chief Executive Officer
On September 14, 2005, the Compensation Committee of the Board of
Directors recommended a new compensation package for Mr. Warren in recognition
of his work to expand our business and in light of the then recent execution of
a ten-year Master distribution Agreement with Coca-Cola Enterprises Inc. The
basic compensation package adopted by the Company for Mr. Warren provides, as
follows:
o Annual base salary of $300,000 paid in accordance with
established Company payment procedures.
o Quarterly bonus of one-quarter of one percent (.0025) of
top-line net sales revenue.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o A "Special Circumstances" bonus of $500,000 to be awarded upon
the signing of a Master Distribution Agreement with CCE. Bonus
to be paid in the following manner:
One-half paid as a cash award or, at the awardees option, in
Company stock. One-half paid in Company stock, with the
issuance of such being in the form of S-8 or other method as
determined by counsel.
o Effective October 1, 2005, and for a period of not less than
24 months
Roy D. Toulan, Jr., Vice President, General Counsel and Corporate
Secretary
A new compensation package became effective for Mr. Toulan on January 1,
2006. The basic compensation package adopted by the Company for Mr. Toulan
provides, as follows:
o Annual base salary of $190,000 paid in accordance with
established Company payment procedures.
o Quarterly bonus at discretion of management based upon meeting
performance goals.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o Effective January 1, 2006, and for a period of not less than
24 months
Jeffrey J. Kaplan, Chief Financial Officer
Mr. Kaplan's employment contract provides, as follows:
o Annual base salary of $180,000 in year one paid in accordance
with established Company payment procedures; $200,000 in year
two and $220,000 in year three.
o Quarterly bonus at discretion of management based upon meeting
performance goals.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o Options for 200,000 common shares at market on November 1,
2005 as signing bonus
o Effective November 1, 2005, and for a period of not less than
36 months
37
Benjamin Patipa, Chief Operating Officer
A new compensation package became effective for Dr. Patipa on January 1,
2006. The basic compensation package adopted by the Company for Dr. Patipa
provides, as follows:
o Annual base salary of $180,000 paid in accordance with
established Company payment procedures.
o Quarterly bonus at discretion of management based upon meeting
performance goals.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o Effective January 1, 2006, and for a period of not less than
24 months
Michael Edwards, Chief Revenue Officer
A new compensation package became effective for Mr. Edwards on January 1,
2006. The basic compensation package adopted by the Company for Mr. Edwards
provides, as follows:
o Annual base salary of $180,000 paid in accordance with
established Company payment procedures.
o Quarterly bonus at discretion of management based upon meeting
performance goals.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o Effective January 1, 2006, and for a period of not less than
24 months
Tommy E. Kee, Chief Accounting Officer
A new compensation package became effective for Mr. Kee on January 1,
2006. The basic compensation package adopted by the Company for Mr. Kee
provides, as follows:
o Annual base salary of $160,000 paid in accordance with
established Company payment procedures.
o Quarterly bonus at discretion of management based upon meeting
performance goals.
o Company benefits as customarily awarded to executive members
of management.
o Participation in Employee and Director Stock Option programs.
o Effective January 1, 2006, and for a period of not less than
24 months
Securities authorized for issuance under equity compensation plans
The equity compensation reported in this section has been a issued pursuant to
individual compensation contracts and arrangements with employees, directors,
consultants, advisors, vendors, suppliers, lenders and service providers. The
equity is reported on an aggregate basis as of December 31, 2005. Our security
holders have not approved the compensation contracts and arrangements underlying
the equity reported.
Number of securities Weighted average
to be issued upon price of outstanding Number of securities remaining
Compensation Plan exercise of options, options, warrants and for future issuance under
Category warrants and rights rights equity compensation plans
---------------------- -------------------- -------------------- ------------------------------
Directors (former) 325,000 $ 0.71 0 individual plans
Employees (former) 650,000 $ 0.87 60,000 individual plans
Directors/Management & 2005 Stock Option
Employees 8,872,745 $0.245 1,475,000 Incentive Plan(1)
Consultants 510,714 $ 0.30 0 individual plans
---------- ------ ---------
Total 10,358,459 $ 0.77 1,535,000
========== ====== =========
38
On April 6, 2005, our Directors voted to adopt a Stock Option Incentive Plan for
the grant of option to directors, employees and consultants for the purchase of
up to 10,397,745 shares of our common stock. On May 12, 2005, the Board of
Directors accepted and adopted the determination of the Compensation Committee
to grant 8,922,745 of the authorized option to our employees, directors and
certain consultants. The ten-year options vest over a period of eighteen months
and have exercise prices varying from $0.20 per share to $0.30 per share, with a
weighted average exercise price of $0.24 per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our company's common
stock as of October 30, 2006, as to
o each person known to beneficially own more than 5% of the Company's
common stock
o each of our directors
o each executive officer
o all directors and officers as a group
The following conditions apply to all of the following tables:
o except as otherwise noted, the named beneficial owners have direct
ownership of the stock and have sole voting and investment power
with respect to the shares shown
o the class listed as "common" includes the shares of common stock
underlying the Company's issued convertible preferred stock, options
and warrants
Beneficial Owners
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner (1) Beneficial Ownership Class (2)
-------- -------------------------- --------------------- ----------
Common Coca-Cola Enterprises Inc. 30,000,000 14.97%
2500 Windy Ridge Parkway
Atlanta, GA 30339
Common Mid-Am Capital, L.L.C. (3) 19,970,723 9.97%
Northpointe Tower 10220
North Ambassador Drive
Kansas City, MO 64190
Common Lombard Odier Darier 16,500,000 8.23%
Hentsch & Cie (4)
Rue de la Corraterie 11
1204 Geneva
Common Magnetar Capital Master 13,750,000 6.86%
Fund, Ltd (4)
1603 Orrington Avenue
13th Floor
Evanston, IL 60201
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of October 30, 2006 are deemed
outstanding for computing the percentage of the person holding such option
or warrant but are not deemed outstanding for computing the percentage of
any other person.
39
(2) Percentage calculated from base of 200,386,286 shares of common stock
issued and outstanding.
(3) This owner is contractually limited to a beneficial ownership of our
equity not to exceed 9.99%. Equity listed consists of convertible
preferred, convertible debentures and/or warrants.
(4) Equity listed consists of common stock and warrants to purchase common
stock
Management Owners
Title of Name and Address of Amount and Nature
Class Management Owner of Ownership (1) Percent of Class (2)
-------- ------------------------- ----------------- --------------------
Common Roy G. Warren 5,810,765(3) 2.89%
11300 US Highway No.1
N. Palm Beach, FL
Common Robert Cummings 1,130,038(4) Less than 1%
2829 N.E. 44th Street
Lighthouse Point, FL
Common John McCormack 1,312,538(4) Less than 1%
8750 South Grant
Burridge, IL 60521
Common Mr. Arthur W. 947,297(5) Less than 1%
Blanding
Janesville, WI 53545
Common Phillip Pearce 962,297(6) Less than 1%
6624 Glenleaf Court
Charlotte, NC 28270
Common Stanley Hirschman 1,040,652(7) Less than 1%
2600 Rutgers Court
Plano, Texas 75093
Common Roy D. Toulan, Jr. 1,615,121(8) Less than 1%
VP, General Counsel
6 Wheelers Pt. Rd
Gloucester, MA 01930
Common Tommy Kee 1,042,385(8) Less than 1%
Chief Accounting Officer
11300 US Highway 1
N. Palm Beach, FL 33408
Common Benjamin Patipa 1,358,700(8) Less than 1%
Chief Operating Officer
6139 Indian Forest Circle
Lake Worth, FL 33463
Common Michael Edwards 2,000,000(8) Less than 1%
Vice President Sales
4140 S.E. Old St. Lucie
Blvd. Stuart, FL 34996
Common Executive officers and 17,219,793 8.59%
directors as a group
40
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of October 30, 2005 are deemed
outstanding for computing the percentage of the person holding such option
or warrant but are not deemed outstanding for computing the percentage of
any other person.
(2) Percentage calculated from base of 200,386,286 shares of common stock
issued and outstanding.
(3) Includes options to purchase 2,500,00 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
(4) Includes options to purchase 565,038 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
(5) Includes options to purchase 494,408 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
(6) Includes options to purchase 706,297 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
(7) Includes options to purchase 670,982 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
(8) Includes options to purchase 600,000 shares of our common stock pursuant
to a 2005 Incentive Stock Option Plan adopted by the Board of Directors on
May 12, 2005.
There currently are no arrangements that may result in a change of
ownership or control.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
John Mc McCormack has been a director of the Company since 1997 and was
our Chief Operating Officer from December 200 to March 2003. Since December
2005, Mr. McCormack has been employed by Coca-Cola Enterprises Inc. as a
Regional Sales Manager for the supermarket channel, in Wisconsin, Minnesota and
Northern Illinois.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We are authorized to issue up to 300,000,000 shares of Common Stock, par
value $.001. As of October 30, 2006, there were 200,386,286 shares of common
stock outstanding. Holders of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
41
We have engaged American Stock Transfer & Trust Company located at 59
Maiden Lane, Plaza Level, New York, NY 10038, as independent transfer agent or
registrar.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Delaware law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our rights and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in our Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. If the shares of common
stock are sold through underwriters or broker-dealers, the selling stockholders
will be responsible for underwriting discounts or commissions or a gent's
commissions. These sales may be at fixed prices, at prevailing market prices at
the time of the sale, at varying prices determined at the time of sale, or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
o through the writing of options, whether such options are listed on an
options exchange or otherwise;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o short sales (subsequent to the effectiveness of this prospectus);
42
o broker-dealers may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by a broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
In connection with sales of the shares of common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker-dealers,
which may in turn engage in short sales of the shares of common stock in the
course of hedging in positions they assume. The selling stockholders may also
sell shares of common stock short and deliver shares of common stock covered by
this prospectus to close out short positions and to return borrowed shares in
connection with such short sales. The selling stockholders may also loan or
pledge shares of common stock to broker-dealers that in turn may sell such
shares.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus. The
selling stockholders also may transfer and donate the shares of common stock in
other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares of common stock may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with such
sales. In such event, any commission paid, or any discounts or concessions
allowed to, such broker-dealers or agents and any profit on the resale of the
shares of common stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. At the time a particular
offering of the shares of common stock is made, a prospectus supplement, if
required, will be distributed which will set forth the aggregate amount of
shares of common stock being offered and the terms of the offering, including
the name or names of any broker-dealers or agents, any discounts, commissions
and other terms constituting compensation from the selling stockholders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.
43
Under the securities laws of some states, the shares of common stock may
be sold in such states only through registered or licensed brokers or dealers.
In addition, in some states the shares of common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of
the shares of common stock registered pursuant to the shelf registration
statement, of which this prospectus forms a part.
We are required to pay all fees and expenses incident to the registration
of the shares of common stock, including $10,000 of fees and disbursements of
counsel to the selling stockholders. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
If we are notified by any selling stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
common stock, if required, we will file a supplement to this prospectus. If the
selling stockholders use this prospectus for any sale of the shares of common
stock, they will be subject to the prospectus delivery requirements of the
Securities Act.
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
stockholders, which may limit the timing of purchases and sales of any of the
shares of common stock by the selling stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect the
marketability of the shares of common stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
common stock.
Once sold under the registration statement, of which this prospectus forms
a part, the shares of common stock will be freely tradable in the hands of
persons other than our affiliates.
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
stockholders.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
44
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
45
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming the selling stockholders
sell all the shares registered below, none of the selling stockholders will
continue to own any shares of our common stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
Total Shares
of Common Total Percentage
Stock Percentage Percentage of
outstanding of Common Beneficial of Common Common
and issuable Stock, Shares of Ownership Stock Beneficial Stock
Upon Assuming Common Stock Included in Owned Ownership Owned
exercise of Full Included in Prospectus Before After the After
Name(2) Warrants Conversion* Prospectus (1) ** Offering Offering(2) Offering(2)
---------------------------------------------------------------------------------------------------------------------------
Lombard Odier 16,500,000 8.25% Up to 16,500,000 16,500,000 8.25% -- --
Darier Hentsch & shares of common
Cie (4) stock
---------------------------------------------------------------------------------------------------------------------------
Magnetar Capital 13,750,000 6.86% Up to 13,750,000 13,750,000 6.86% -- --
Master Fund, Ltd shares of common
(5) stock
---------------------------------------------------------------------------------------------------------------------------
Kings Road 7,562,500 3.77% Up to 7,562,500 7,562,500 3.77% -- --
Investments Ltd. shares of common
(6) stock
---------------------------------------------------------------------------------------------------------------------------
Radcliffe SPC, Ltd 7,562,500 3.77% Up to 7,562,500 7,562,500 3.77% -- --
for and on behalf shares of common
of the Class A stock
Convertible
Crossover
Segregated
Portfolio (7)
---------------------------------------------------------------------------------------------------------------------------
Lagunitas Partners 1,727,435 *** Up to 1,727,435 1,727,435 *** -- --
LP (8) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
Gruber & McBaine 472,566 *** Up to 472,566 472,566 *** -- --
International (9) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
Jon D and Linda W 550,000 *** Up to 550,000 550,000 *** -- --
Gruber Trust (10) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
JMG Triton 1,100,000 *** Up to 1,100,000 1,100,000 *** -- --
Offshore Fund, shares of common
Ltd. (11) stock
---------------------------------------------------------------------------------------------------------------------------
JMG Capital 1,100,000 *** Up to 1,100,000 1,100,000 *** -- --
Partners, LP (12) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
Capital Ventures 1,650,000 *** Up to 1,650,000 1,650,000 *** -- --
International (13) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
UBS O'Connor LLC 1,650,000 *** Up to 1,650,000 1,650,000 *** -- --
FBO O'Connor PIPES shares of common
Corporate stock
Strategies Master
Limited (14)
---------------------------------------------------------------------------------------------------------------------------
Whalehaven Capital 1,375,000 *** Up to 1,375,000 1,375,000 *** -- --
Fund Limited(15) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
Alpha Capital 687,500 *** Up to 687,500 687,500 *** -- --
Aktiengesellschaft shares of common
(16) stock
---------------------------------------------------------------------------------------------------------------------------
Marvel 1,000,000 *** Up to 1,000,000 1,000,000 *** -- --
Enterprises, shares of common
Inc.(17) stock
---------------------------------------------------------------------------------------------------------------------------
SG Cowen & Co., 1,317,188 *** Up to 1,317,188 1,317,188 *** -- --
LLC (18) shares of common
stock
---------------------------------------------------------------------------------------------------------------------------
* Based upon 200,386,286 shares of common stock issued and outstanding on
October 30, 2006.
46
** The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days.
*** Less than one percent.
(1) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon the exercise of the related warrants by reason of any stock split,
stock dividend or similar transaction involving the common stock, in accordance
with Rule 416 under the Securities Act of 1933.
(2) Lombard Odier Darier Hentsch Fund Manager, by the joint action of Messrs.
Hanspeter Blaser, Assistant Vice President, and Janik Bard Assistant Manager,
has the voting and dispositive power over the securities herein held for resale
by Lombard Odier Darier Hentsch & Cie.
Magnetar Financial LLC is the investment advisor of Magnetar Capital Master
Fund, Ltd ("Magnetar Master Fund") and consequently has voting control and
investment discretion over securities held by Magnetar Master Fund. Magnetar
Financial LLC disclaims beneficial ownership of the securities held by Magnetar
Master Fund. Alec Litowitz is the manager of Magnetar Capital Partners LLC,
which is the sole member of Magnetar Financial LLC. As a result, Mr. Litowitz
may be considered the beneficial owner of any shares deemed to be beneficially
owned by Magnetar Financial LLC. Mr. Litowitz disclaims beneficial ownership of
these shares.
Kings Road Investments Ltd. ("Kings Road") is a wholly-owned subsidiary of
Polygon Global Opportunities Master Fund ("Master Fund"). Polygon Investment
Partners LLP and Polygon Investment Partners LP (the "Investment Managers"),
Polygon Investments Ltd. (the "Manager"), the Master Fund, Alexander Jackson,
Reade Griffith and Paddy Dear share voting and dispositive power of the
securities held by Kings Road. The Investment Managers, the Manager, Alexander
Jackson, Reade Griffith and Paddy Dear disclaim beneficial ownership of the
securities held by Kings Road.
47
Radcliffe SPC, Ltd. for and on behalf of the Class A Convertible Crossover
Segregated Portfolio. Pursuant to an investment management agreement, RG Capital
Management, L.P. ("RG Capital") serves as the investment manager of Radcliffe
SPC. Ltd's Class A Convertible Crossover Segregated Portfolio. RGC Management
Company, LLC ("Management") is the general partner of RG Capital. Steve
Katznelson and Gerald Stahlecker serve as the managing members of Management.
Each of RG Capital. Management and Messrs. Katznelson and Stahlecker disclaims
beneficial ownership of the securities owned by Radcliffe SPC, Ltd. for and on
behalf of the Class A Convertible Crossover Segregated Portfolio
Lagunitas Partners. Gruber & McBaine Cap Mgmt is the general partner for
Lagunitas Partners LP and the Investment advisor for Gruber & MCBaine
International having full power to vote and invest on their behalf. Gruber &
McBaine Cap Mgmt mangers Jon D Gruber & J Patterson McBaine oversee the voting
activity
Gruber & McBaine International. Gruber & McBaine Cap Mgmt is the general partner
for Lagunitas Partners LP and the Investment advisor for Gruber & MCBaine
International having full power to vote and invest on their behalf. Gruber &
McBaine Cap Mgmt mangers Jon D Gruber & J Patterson McBaine oversee the voting
activity.
Jon D and Linda W Gruber Trust. The Jon D and Linda W Gruber Trust is a private
investment trust. Jon Gruber and Linda Gruber are the Trustees and have full
power to vote and invest on behalf of the Trust
JMG Triton Offshore Fund, Ltd. (the "Fund") is an international business company
organized under the laws of the British Virgin Islands. The Fund's investment
manager is Pacific Assets Management LLC, a Delaware limited liability company
(the "Manager") that has voting and dispositive power over the Fund's
investments, including the Registrable Securities. The equity interests of the
Manager are owned by Pacific Capital Management, Inc., a California corporation
("Pacific") and Asset Alliance Holding Corp., a Delaware corporation. The equity
interests of Pacific are owned by Messrs. Roger Richter, Jonathan M. Glaser and
Daniel A. David. Messrs. Glaser and Richter have sole investment discretion over
the Fund's portfolio holdings.
JMG Capital Partners, L.P. ("JMG Partners") is a California limited partnership.
Its general partner is JMG Capital Management, LLC (the "Manager"), a Delaware
limited liability company and an investment adviser that has voting and
dispositive power over JMG Partners' investments, including the Registrable
Securities. The equity interests of the Manager are owned by JMG Capital
Management, Inc., ("JMG Capital") a California corporation, and Asset Alliance
Holding Corp., a Delaware corporation. Jonathan M. Glaser is the Executive
Officer and Director of JMG Capital and has sole investment discretion over JMG
Partners' portfolio holdings.
Capital Ventures International. Heights Capital Management, Inc., the authorized
agent of Capital Ventures International ("CVI"), has discretionary authority to
vote and dispose of the shares held by CVI and may be deemed to be the
beneficial owners of these shares. CVI is affiliated with one or more registered
broker-dealers. CVI purchased the shares being registered hereunder in the
ordinary course of business and at the time of purchase, had no agreements or
understandings, directly or indirectly, with any other person to distribute such
shares.
The selling security holder (O'Connor PIPES Corporate Strategies Master Limited)
of this security is a fund which cedes investment control to UBS O'Connor LLC
(the Investment Manager). The Investment Manager makes all of the investment /
voting decisions. UBS O'Connor LLC is a wholly owned subsidiary of UBS AG which
is listed on the NYSE.
UBS O'Connor LLC is a wholly owned subsidiary of UBS AG which is listed and
traded on the NYSE. The Investment Manager (UBS O'Connor LLC) makes all of the
investment / voting decisions
48
Alpha Capital Aktiengesellschaft is a private investment fund that is owned by
all its investors and managed by Mr. Konrad Ackerman. Mr. Konrad Ackerman may be
deemed the control person of the shares owned by such entity, with final voting
power and investment control over such shares.
Whalehaven Funds Limited is a professional hedge fund incorporated in Bermuda.
The control persons are Evan Schemenauer, Arthur Jones, and Jennifer Kelly,
directors.
Marvel Entertainment, Inc. (formerly known as Marvel Enterprises, Inc.) is a
publicly-traded, NYSE-listed corporation and is owned by its stockholders.
Day-to-day investment decisions are made by Marvel Entertainment's senior
management
SG Cowen & Co., LLC. William Buchanan is the Head of Equity Capital Markets and
a Managing Director at SG Cowen & Co., LLC and is responsible for investment
decisions at SG Cowen. SG Cowen is a registered broker-dealer. SG Cowen received
these shares in consideration for providing investment banking services provided
to our company.
(3) Assumes that all securities registered will be sold.
(4) Total shares being registered includes 12,000,000 shares of common stock
currently outstanding and 4,500,000 shares of common stock issuable upon
exercise of common stock purchase warrants exercisable at $0.80 per share.
(5) Total shares being registered includes 10,000,000 shares of common stock
currently outstanding and 3,750,000 shares of common stock issuable upon
exercise of common stock purchase warrants exercisable at $0.80 per share.
(6) Total shares being registered includes 5,500,000 shares of common stock
currently outstanding and 2,062,500 shares of common stock issuable upon
exercise of common stock purchase warrants exercisable at $0.80 per share.
(7) Total shares being registered includes 5,500,000 shares of common stock
currently outstanding and 2,062,500 shares of common stock issuable upon
exercise of common stock purchase warrants exercisable at $0.80 per share.
(8) Total shares being registered includes 1,253,316 shares of common stock
currently outstanding and 471,119 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(9) Total shares being registered includes 343,684 shares of common stock
currently outstanding and 128,882 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(10) Total shares being registered includes 400,000 shares of common stock
currently outstanding and 150,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(11) Total shares being registered includes 800,000 shares of common stock
currently outstanding and 300,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(12) Total shares being registered includes 800,000 shares of common stock
currently outstanding and 300,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(13) Total shares being registered includes 1,200,000 shares of common stock
currently outstanding and 450,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(14) Total shares being registered includes 1,200,000 shares of common stock
currently outstanding and 450,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(15) Total shares being registered includes 1,000,000 shares of common stock
currently outstanding and 375,000 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
(16) Total shares being registered includes 500,000 shares of common stock
currently outstanding and 187,500 shares of common stock issuable upon exercise
of common stock purchase warrants exercisable at $0.80 per share.
49
(17) Total shares being registered includes 1,000,000 shares of common stock
issuable upon exercise of common stock purchase warrants exercisable at $0.05
per share.
(18) Total shares being registered includes 1,012,500 shares of common stock
issuable upon exercise of common stock purchase warrants exercisable at $0.50
per share and 304,688 shares of common stock issuable upon exercise of common
stock purchase warrants exercisable at $0.80 per share.
Terms of Financing
To obtain funding for our ongoing operations, we entered into the
following financing transaction:
On November 28, 2005, we closed a funding transaction with 13 accredited
institutional investors, for the issuance and sale of 40,500,000 shares of our
common stock for a purchase price of $20,250,000. In addition, we also issued
five-year warrants for the purchase of an additional 15,187,500 shares of common
stock at an exercise price of $0.80 per share. The securities are restricted and
have been issued pursuant to an exemption to the registration requirements of
Section 5 of the Securities Act of 1933 for "transactions of the issuer not
involving any public offering" provided in Section 4(2) of the Act and pursuant
to a Regulation D offering. In connection with this financing, we issued common
stock purchase warrants to purchase 1,012,500 shares of common stock at an
exercise price of $.50 per share and 304,688 shares of common stock at an
exercise price of $.80 per share to SG Cowen & Co., LLC, who acted as placement
agent for this financing.
The shares of common stock and the shares of common stock underlying the
warrants carry registration rights that obligate us to file a registration
statement within 45 days from closing and have the registration statement
declared effective within 120 days from closing.
Terms of Services Agreement
In June 2005, we entered into a Services Agreement with Marvel
Enterprises, Inc. pursuant to which Marvel Enterprises, Inc. agreed to provide
introductions to retailers and advise on creative design in consideration for a
common stock purchase warrant to purchase 1,000,000 shares of common stock at
$0.05 per share.
This prospectus relates to the resale of the shares of common stock and
the shares of common stock issuable upon exercise of warrants in connection with
this private placement and the shares of common stock issuable to Marvel
Enterprises, Inc. upon exercise of its common stock purchase warrants.
This prospectus relates to the resale of the shares of common stock issued
in connection with this finaincing and the shares of common stock issuable upon
exercise of the common stock purchase warrants.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Lazar Levine & Felix LLP , Certified Public Accountants, have audited, as
set forth in their report thereon appearing elsewhere herein, our financial
statements at December 31, 2005 and 2004 and for the year then ended that
appears in the prospectus.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of Bravo! Brands Inc., filed as part of
the registration statement, and it does not contain all information in the
registration statement, as certain portions have been omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. 50
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at 100 F Street N.E., Washington D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of the SEC at
100 F. Street N.E., Washington, D.C. 20549 at prescribed rates. Because we file
documents electronically with the SEC, you may also obtain this information by
visiting the SEC's Internet website at http://www.sec.gov.
51
INDEX TO FINANCIAL STATEMENTS
BRAVO! BRANDS INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2006
Consolidated Balance Sheets F-1
Consolidated Statements of Operations and Comprehensive Loss F-3
Consolidated Statements of Cash Flow F-4
Notes to Consolidated Financial Statements F-5
For the Years Ended December 31, 2004 and December 31, 2003
Report of Independent Registered Public Accounting Firm F-42
Consolidated Balance Sheets F-43
Consolidated Statements of Operations and Comprehensive Loss F-45
Consolidated Statements of Cash Flow F-46
Consolidated Statement of Stockholders' Capital Deficit F-48
Notes to Consolidated Financial Statements F-49
52
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2006 2005
----------- ------------
(Unaudited)
(Restated)
Assets
Current assets:
Cash and cash equivalents $ 59,344 $ 4,947,986
Accounts receivable, net of allowances for doubtful accounts
of $365,000 and $350,000 at 2006 and 2005, respectively 1,192,840 3,148,841
Inventories 2,881,821 391,145
Prepaid expenses 1,216,870 973,299
----------- -----------
Total current assets 5,350,875 9,461,271
Furniture and equipment, net 521,123 288,058
Intangible assets, net 17,234,423 18,593,560
Other assets 217,999 15,231
----------- -----------
Total assets $23,324,420 $28,358,120
=========== ===========
Liabilities, Redeemable Preferred Stock and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 7,784,012 $ 5,987,219
Accrued liabilities 8,479,906 4,872,277
Current maturities of notes payable 2,700,195 937,743
Convertible debt 973,214 1,012,780
Derivative liabilities 36,425,561 35,939,235
----------- -----------
Total current liabilities 56,362,888 48,749,254
Notes payable, less current maturities 95,783 --
----------- -----------
Total liabilities 56,458,671 48,749,254
----------- -----------
F-1
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2006 2005
------------- -------------
(Unaudited)
(Restated)
Commitments and contingencies (Note 9) -- --
Redeemable preferred stock:
Series F convertible, par value $0.001 per share, 200,000 shares designated,
Convertible Preferred Stock, stated value $10.00 per share, 5,248 shares
issued and outstanding 52,480 52,480
Series H convertible, par value $0.001 per share, 350,000 shares designated,
7% Cumulative Convertible Preferred Stock, stated value $10.00 per share,
63,500 and 64,500 shares issued and outstanding 457,867 388,305
Series J, par value $0.001 per share, 500,000 shares designated, 8% Cumulative
Convertible Preferred Stock, stated value $10.00 per share, 200,000 shares
issued and outstanding 1,166,325 871,043
Series K, par value $0.001 per share, 500,000 shares designated, 8% Cumulative
Convertible Preferred Stock, stated value $10.00 per share, 95,000 shares
issued and outstanding 814,873 792,672
------------- -------------
Total redeemable preferred stock 2,491,545 2,104,500
------------- -------------
Stockholders' equity (deficit):
Preferred stock, 5,000,000 shares authorized
Series B Preferred, par value $0.001 per share, 1,260,000 shares designated,
9% Convertible Preferred Stock, stated value $1.00 per share, 107,440 shares
issued and outstanding 107,440 107,440
Common stock, par value $0.001 per share, 300,000,000 shares authorized,
191,253,248 and 184,253,753 shares issued and outstanding 191,253 184,254
Additional paid-in capital 98,972,077 96,507,932
Common stock subscription receivable (10,000) (10,000)
Accumulated deficit (134,877,246) (119,254,501)
Cumulative translation adjustment (9,320) (30,759)
------------- -------------
Total stockholders' equity (deficit) (35,625,796) (22,495,634)
------------- -------------
Total liabilities, Redeemable Preferred Stock and Stockholders'
Equity (Deficit) $ 23,324,420 $ 28,358,120
============= =============
See accompanying notes.
F-2
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(Restated) (Restated)
Revenues $ 3,705,226 $ 2,448,618 $ 7,266,441 $ 3,346,388
Product costs (3,253,637) (1,680,464) (6,200,097) (2,358,127)
Shipping costs (351,185) (292,386) (744,636) (430,836)
------------ ------------- ------------ ------------
Gross margin 100,404 475,768 321,708 557,425
Operating expenses:
Selling expense 3,367,811 1,035,549 6,210,909 1,520,580
General and administrative expense 1,628,317 1,836,824 3,396,521 2,595,078
Product development 161,356 146,733 277,319 215,757
------------ ------------- ------------ ------------
Loss from operations (5,057,080) (2,543,338) (9,563,041) (3,773,990)
Other income (expense)
Derivative expense, net (5,047,199) (77,311,393) (98,011) (75,839,650)
Interest income (expense), net (397,254) (597,729) (431,261) (1,491,890)
Liquidated damages (3,872,388) -- (4,558,275) --
Legal settlement (552,600) -- (552,600) --
Other income (expense) -- 7,164 -- 7,164
------------ ------------- ------------ ------------
Income (loss) before income taxes (14,926,521) (80,445,296) (15,203,188) (81,098,366)
Provision for income taxes -- -- -- --
------------ ------------- ------------ ------------
Net loss (14,926,521) (80,445,296) (15,203,188) (81,098,366)
Preferred stock dividends and accretion (282,477) (593,595) (541,260) (864,710)
------------ ------------- ------------ ------------
Loss applicable to common stockholders $(15,208,998) $ (81,038,891) $(15,744,448) $(81,963,076)
============ ============= ============ ============
Loss per common share:
Basic loss per common share $ (0.08) $ (1.12) $ (0.08) $ (1.24)
============ ============= ============ ============
Diluted loss per common share $ (0.08) $ (1.12) $ (0.08) $ (1.24)
============ ============= ============ ============
Weighted average common shares outstanding 189,388,123 72,381,911 186,843,409 66,035,224
============ ============= ============ ============
Comprehensive income (loss):
Net income (loss) $(14,926,521) $ (80,445,296) $(15,203,188) $(81,098,366)
Foreign currency translation 22,129 2,696 21,439 (5,327)
------------ ------------- ------------ ------------
Comprehensive income (loss) $(14,904,392) $ (80,442,600) $(15,181,749) $(81,103,693)
============ ============= ============ ============
See accompanying notes.
F-3
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30
---------------------------
2006 2005
------------ ------------
(Unaudited) (Unaudited)
(Restated)
Cash Flow from Operating Activities:
Net loss $(15,203,188) $(81,098,366)
Adjustments to net loss
Depreciation and amortization 1,638,941 188,185
Stock issuance for due diligence and finders' fees -- 123,450
Allowance for doubtful accounts 14,941 --
Legal settlement for Marvel warrants 552,600 --
Stock issuance for consulting expense 347,566 352,954
Derivative expense, net 98,011 75,839,650
Amortization of debt discount 149,454 1,261,814
Stock compensation expense 222,957 551,810
Gain/Loss on disposal of fixed assets 1,998 --
Changes in operating assets & liabilities:
Accounts receivable 1,941,060 26,778
Inventories (2,490,676) (54,981)
Prepaid expenses and other assets (249,289) (587,267)
Accounts payable and accrued expenses 5,590,386 893,461
------------ ------------
Net cash used in operating activities (7,385,239) (2,502,512)
------------ ------------
Cash Flows from Investing Activities
Licenses and trademark costs (450,176) (84,166)
Purchases of equipment (286,338) (43,969)
------------ ------------
Net cash used in investing activities (736,514) (128,135)
------------ ------------
Cash Flows provided by financing activities:
Proceeds from exercise of warrants 500,000 1,038,509
Proceeds from convertible notes payable 2,669,323 1,950,000
Proceeds from sale of stock and warrants 100,000 --
Payments for redemption of warrants -- (25,000)
Payment of dividends (22,514) --
Payment of notes payable (17,994) --
Registration costs for financing (17,143) (62,639)
------------ ------------
Net cash provided by financing activities 3,211,672 2,900,870
------------ ------------
Effect of changes in exchange rates on cash 21,439 (6,406)
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,888,642) 263,817
Cash and cash equivalent, beginning of period 4,947,986 113,888
------------ ------------
Cash and cash equivalent, ending of period $ 59,344 $ 377,705
============ ============
See accompanying notes.
F-4
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -Nature of Business, Basis of Presentation and Liquidity and Management's
Plans
Nature of Business:
We are engaged in the sale of flavored milk products and flavor ingredients in
the United States, the United Kingdom and the Middle East, and we are
establishing an infrastructure to conduct business in Canada.
Basis of Presentation:
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, Item 310(b) of
Regulation S-B and Article 10 (01)(c) of Regulation S-X. Accordingly, the
accompanying financial statements do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included in the accompanying financial statements. Operating results
for the six-month period ending June 30, 2006 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2006.
As more fully described in Note 10, we have restated our balance sheet as of
June 30, 2006 and our statements of operations and cash flows for the three and
six months ended June 30, 2006 for errors related to the accounting for
liquidated damages arising from certain of our financing transactions and
certain other matters more fully described in Notes 3 and 10.
Liquidity and Management's Plans:
As reflected in the accompanying consolidated financial statements, we have
incurred operating losses and negative cash flow from operations and have
working capital deficiency of $51,012,013 as of June 30, 2006. In addition, we
are delinquent on certain of our debt agreements at June 30, 2006, and we have
experienced delays in filing our financial statements and registration
statements due to errors in our historical accounting that have been corrected
(See Note 10). Our inability to make these filings is resulting in our
recognition of penalties to the investors, and these penalties will continue
until we can complete our filings and register the common shares into which the
investors' financial instruments are convertible. Finally, our revenues are
significantly concentrated with one major customer. The loss of this customer or
curtailment in business with this customer could have a material adverse affect
on our business. These conditions raise substantial doubt about our ability to
continue as a going concern.
We have been dependent upon third party financings as we execute our business
model and plans. While our liquid reserves have been substantially depleted as
of June 30, 2006, we completed a $30.0 million convertible note financing in
July 2006 that is expected to fulfill our liquidity requirements through the end
of 2006. However, $15.0 million of this financing is held in escrow, and we are
in default on this instrument due to the delay in filing our quarterly financial
report for the quarterly period ended June 30, 2006. As a result, an event of
default has occurred under the terms of the Notes, and the interest rate on the
Notes, payable quarterly, was increased from 9% to 14% per annum. Pursuant to
the terms of the Notes, upon the occurrence of an event of default, holders of
the Notes may, upon written notice to the Company, each require the Company to
redeem all or any portion of their Notes at a default redemption price
calculated pursuant to the terms of the Notes. Subsequent to June 30, 2006, we
have entered into an Amendment Agreement with the holders of the Notes to amend
the Notes in certain respects as consideration for the holders' release of the
Company's default resulting from its delay in the filing of this quarterly
report. See Item 3 of Part II of this report, entitled "Default on Senior
Securities", for a description of the terms of the Amendment Agreement.
F-5
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We plan to increase our sales, improve our gross profit margins, augment our
international business and, if necessary, obtain additional financing.
Ultimately, our ability to continue is dependent upon the achievement of
profitable operations. There is no assurance that further funding will be
available at acceptable terms, if at all, or that we will be able to achieve
profitability.
The accompanying financial statements do not reflect any adjustments that may
result from the outcome of this uncertainty.
Note 2. - Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities 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. Among the more significant estimates included in
our financial statements are the following:
o Estimating future bad debts on accounts receivable that are carried at net
realizable values.
o Estimating our reserve for unsalable and obsolete inventories that are
carried at lower of cost or market.
o Estimating the fair value of our financial instruments that are required
to be carried at fair value.
o Estimating the recoverability of our long-lived assets.
We use all available information and appropriate techniques to develop our
estimates. However, actual results could differ from our estimates.
Business Segment and Geographic Information
We operate in one dominant industry segment that we have defined as the single
serve flavored milk industry. While our international business is expected to
grow in the future, it currently contributes less than 10% of our revenues, and
we have no physical assets outside of the United States.
Revenue Recognition
Our revenues are derived from the sale of branded milk products to customers in
the United States of America, Great Britain and the Middle East. Geographically,
our revenues are dispersed 98% and 2% between the United States of America and
internationally, respectively. We currently have one customer in the United
States that provided 74% and 0% of our revenue during the six months ended June
30, 2006 and 2005, respectively.
F-6
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenues are recognized pursuant to formal revenue arrangements with our
customers, at contracted prices, when our product is delivered to their premises
and collectibility is reasonably assured. We extend merchantability warranties
to our customers on our products, but otherwise do not afford our customers with
rights of return. Warranty costs have historically been insignificant.
Our revenue arrangements often provide for industry-standard slotting fees where
we make cash payments to the respective customer to obtain rights to place our
products on their retail shelves for a stipulated period of time. We also engage
in other promotional discount programs in order to enhance our sales activities.
We believe our participation in these arrangements is essential to ensuring
continued volume and revenue growth in the competitive marketplace. These
payments, discounts and allowances are recorded as reductions to our reported
revenue. Unamortized slotting fees are recorded in prepaid expenses.
Principles of Consolidation
Our consolidated financial statements include the accounts of Bravo! Foods
International Corp. (the "Company"), and its wholly-owned subsidiary Bravo!
Brands (UK) Ltd. All material intercompany balances and transactions have been
eliminated.
Shipping and Handling Costs
Shipping and handling costs incurred to deliver products to our customers are
included as a component of cost of sales. These costs amounted to approximately
$351,000 and $292,000 for the three months ended June 30, 2006 and 2005,
respectively; $745,000 and $431,000 for the six months ended June 30, 2006 and
2005, respectively.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a remaining maturity of
three months or less to be cash equivalents.
Accounts Receivable
Our accounts receivable are exposed to credit risk. During the normal course of
business, we extend unsecured credit to our customers with normal and
traditional trade terms. Typically credit terms require payments to be made by
the thirtieth day following the sale. We regularly evaluate and monitor the
creditworthiness of each customer. We provide an allowance for doubtful accounts
based on our continuing evaluation of our customers' credit risk and our overall
collection history. As of June 30, 2006 and December 31, 2005, the allowance of
doubtful accounts aggregated approximately $365,000 and $350,000, respectively.
In addition, our accounts receivable are concentrated with one customer who
represents 39% and 0% of our gross accounts receivable balances at June 30, 2006
and December 31, 2005, respectively. Approximately, 6% of our gross accounts
receivable at June 30, 2006 are due from international customers.
F-7
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories
Inventories, which consist primarily of finished goods, is stated at the lower
of cost on the first in, first-out method or market. Our inventories at June 30,
2006 have substantially increased from levels at December 31, 2006 because we
are building inventories to support our contractual arrangement with a
significant customer. Further, our inventories are perishable. Accordingly, we
estimate and record lower-of-cost or market and unsalable-inventory reserves
based upon a combination of our historical experience and on a specific
identification basis. During the six months ended June 30, 2006, we did not
provide for unsaleable inventories.
In November 2004, the FASB issued Financial Accounting Standard No. 151,
Inventory Costs, an amendment of ARB No. 43 Chapter 4 (FAS 151), which clarifies
that inventory costs that are "abnormal" are required to be charged to expense
as incurred as opposed to being capitalized into inventory as a product cost.
FAS 151 provides examples of "abnormal" costs to include costs of idle
facilities, excess freight and handling costs and spoilage. FAS 151 became
effective for our fiscal year beginning January 1, 2006. The adoption of FAS No.
151 did not have a material effect on our consolidated financial statements.
FIXED ASSETS
Furniture and equipment are stated at cost. Depreciation is computed using the
straight-line method over a period of seven years for furniture and five years
for equipment. Maintenance, repairs and minor renewals are charged directly to
expenses as incurred. Additions and betterments to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts, and any resulting gain or
loss is included in the statement of operations.
Intangible Assets
Our intangible assets as of June 30, 2006 and December 31, 2005 consist of our
distribution agreement with Coca-Cola Enterprises ("CCE"), our manufacturing
agreement with Jasper Products, Inc. and licenses and trademark costs, with
estimated lives of ten years, five years and one-to-five years, respectively.
The following table illustrates information about our intangible assets:
June 30, 2006 December 31, 2005
------------- -----------------
Distribution agreement $15,960,531 $15,960,531
Manufacturing agreement 2,700,000 2,700,000
Licenses and trademarks 448,096 1,325,958
Less accumulated amortization (1,874,204) (1,382,929)
----------- -----------
$17,234,423 $18,593,560
=========== ===========
Amortization expense amounted to $848,501 and $1,549,289 for the three and six
months ended June 30, 2006 and $62,362 and $326,963 for the three and six months
ended June 30, 2005.
Estimated future amortization of our intangible assets is as follows as of June
30, 2006:
Six months ended December 31, 2006 $1,136,382
==========
Year ended:
December 31, 2007 $2,367,947
==========
December 31, 2008 $2,356,342
==========
December 31, 2009 $2,355,844
==========
December 31, 2010 $2,203,289
==========
December 31, 2011 $1,767,591
==========
F-8
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Impairment of Long-Lived Assets
We evaluate the carrying value and recoverability of our long-lived assets when
circumstances warrant such evaluation by applying the provisions of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FAS 144"). FAS 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value.
Financial Instruments
Financial instruments, as defined in Financial Accounting Standard No. 107
Disclosures about Fair Value of Financial Instruments (FAS 107), consist of
cash, evidence of ownership in an entity and contracts that both (i) impose on
one entity a contractual obligation to deliver cash or another financial
instrument to a second entity, or to exchange other financial instruments on
potentially unfavorable terms with the second entity, and (ii) conveys to that
second entity a contractual right (a) to receive cash or another financial
instrument from the first entity, or (b) to exchange other financial instruments
on potentially favorable terms with the first entity. Accordingly, our financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, notes payable, derivative financial instruments,
convertible debt and redeemable preferred stock that we have concluded is more
akin to debt than equity.
We carry cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities at historical costs; their respective estimated fair values
approximate carrying values due to their current nature. We also carry notes
payable, convertible debt and redeemable preferred stock at historical cost;
however, fair values of debt instruments and redeemable preferred stock are
estimated for disclosure purposes (below) based upon the present value of the
estimated cash flows at market interest rates applicable to similar instruments.
As of June 30, 2006, estimated fair values and respective carrying values of our
notes payable, convertible debt and redeemable preferred stock are as follows:
Instrument Fair Value Carrying Value
---------------------------------- ---------- --------------
$2,500,000 Note Payable $2,458,000 $1,640,906
========== ==========
$200,000 Convertible Note Payable 202,000 200,000
========== ==========
$15,000 Convertible Note Payable 14,200 5,214
========== ==========
$600,000 Convertible Notes Payable 668,000 600,000
========== ==========
$168,000 Convertible Notes Payable 168,000 168,000
========== ==========
Series F Preferred Stock 49,000 52,480
========== ==========
Series H Preferred Stock 557,000 457,867
========== ==========
Series J Preferred Stock 1,781,000 1,166,325
========== ==========
Series K Preferred Stock 927,000 814,873
========== ==========
F-9
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of December 31, 2005, estimated fair values and respective carrying values of
our convertible debt and redeemable preferred stock were as
follows:
Instrument Fair Value Carrying Value
---------------------------------- ---------- --------------
$200,000 Convertible Note Payable $ 190,000 $187,934
========== ========
$15,000 Convertible Note Payable 13,300 1,620
========== ========
$600,000 Convertible Notes Payable 668,000 600,000
========== ========
$6,250 Convertible Note Payable 6,375 5,188
========== ========
$25,000 Convertible Note Payable 25,500 30,278
========== ========
$187,760 Convertible Note Payable 187,760 187,760
========== ========
Series F Preferred Stock 46,000 52,480
========== ========
Series H Preferred Stock 525,000 388,305
========== ========
Series J Preferred Stock 1,731,000 871,043
========== ========
Series K Preferred Stock 881,000 792,672
========== ========
Derivative financial instruments, as defined in Financial Accounting Standard
No. 133, Accounting for Derivative Financial Instruments and Hedging Activities
(FAS 133), consist of financial instruments or other contracts that contain a
notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
We generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as debt financing
arrangements, redeemable preferred stock arrangements, and freestanding warrants
with features that are either (i) not afforded equity classification, (ii)
embody risks not clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by FAS 133, these instruments
are required to be carried as derivative liabilities, at fair value, in our
financial statements.
The following table summarizes the components of derivative liabilities as of
June 30, 2006 and December 31, 2005:
Note 2006 2005
---- ------------ ------------
Compound derivative financial instruments that have been
bifurcated from the following financing arrangements:
$2,500,000 Note Financing 4(a) $ (303,881) $ --
$400,000 Convertible Note Financing 5(a) (1,666,200) (1,311,000)
$2,300,000 Convertible Note Financing 5(b) (4,810) (4,867)
$600,000 Convertible Note Financing 5(c) (625,400) (153,700)
$693,000 Convertible Note Financing 5(e) -- (42,878)
$660,000 Convertible Note Financing 5(f) -- (159,250)
$1,080,000 Convertible Note Financing 5(g) (634,410) (564,735)
Series H Preferred Stock Financing 6(a) (502,451) (381,377)
Series J Preferred Stock Financing 6(b) (6,104,000) (5,628,000)
Series K Preferred Stock Financing 6(c) (272,250) (206,200)
Series F Preferred Stock Financing 6(d) (31,819) (25,632)
Freestanding derivative contracts arising from financing and
other business arrangements:
Warrants issued with $2,500,000 Note Financing 4(a) (739,230) --
Warrants issued with $693,000 Convertible Notes 5(e) -- (924,120)
Warrants issued with Series H Preferred Stock 6(a) (840,269) (1,264,109)
Warrants issued with Series F Preferred Stock 6(d) (21,138) (563,096)
Warrants issued with Series D Preferred Stock 6(d) (406,419) (400,214)
Other warrants 8(b) (24,273,284) (24,310,057)
------------ ------------
Total derivative liabilities $(36,425,561) $(35,939,235)
============ ============
F-10
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
See the notes referenced in the table for details of the origination and
accounting for these derivative financial instruments. We estimate fair values
of derivative financial instruments using various techniques (and combinations
thereof) that are considered to be consistent with the objective measuring fair
values. In selecting the appropriate technique, we consider, among other
factors, the nature of the instrument, the market risks that it embodies and the
expected means of settlement. For less complex derivative instruments, such as
free-standing warrants, we generally use the Black-Scholes-Merton option
valuation technique because it embodies all of the requisite assumptions
(including trading volatility, estimated terms and risk free rates) necessary to
fair value these instruments. For complex derivative instruments, such as
embedded conversion options, we generally use the Flexible Monte Carlo valuation
technique because it embodies all of the requisite assumptions (including credit
risk, interest-rate risk and exercise/conversion behaviors) that are necessary
to fair value these more complex instruments. For forward contracts that
contingently require net-cash settlement as the principal means of settlement,
we project and discount future cash flows applying probability-weightage to
multiple possible outcomes. Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates
that may, and are likely to, change over the duration of the instrument with
related changes in internal and external market factors. In addition,
option-based techniques are highly volatile and sensitive to changes in our
trading market price which has a high-historical volatility. Since derivative
financial instruments are initially and subsequently carried at fair values, our
income will reflect the volatility in these estimate and assumption changes.
The following table summarizes the effects on our income (loss) associated with
changes in the fair values of our derivative financial instruments by type of
financing for the three and six months ended June 30, 2006 and 2005.
Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2006 2005 2006 2005
-------------- -------------- -------------- --------------
Derivative income (expense):
Convertible note and warrant financings $ (988,406) $(52,662,081) $(1,039,310) $(52,079,406)
Preferred stock and warrant financings (1,429,847) (20,981,136) (132,898) (20,196,343)
Other warrants and derivative contracts (2,628,946) (3,668,176) 1,074,197 (3,563,901)
----------- ------------ ----------- ------------
$(5,047,199) $(77,311,393) $ (98,011) $(75,839,650)
=========== ============ =========== ============
Additional information related to individual financings can be found in notes 5,
6 and 8.
F-11
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Our derivative liabilities as of June 30, 2006 and December 31, 2005, and our
derivative losses during the three and six months ended June 30, 2006 and 2005
is significant to our consolidated financial statements. The magnitude of the
derivative loss for the three and six months ended June 30, 2005 when compared
with the losses for the same periods ended June 30, 2006 reflects the following:
(a) During the six months ended June 30, 2005, and specifically commencing in
the second quarter, the trading price of our common stock reached significantly
high levels relative to its trend. The trading price of our common stock
significantly affects the fair value of our derivative financial instruments. To
illustrate, our trading stock price at the end of the first quarter of 2005 was
$0.15 and then increased to $0.93 by the end of the second quarter. Our trading
stock price then declined to $0.61 and $0.59 at the end of the third and fourth
quarters, respectively. However, the higher stock price had the effect of
significantly increasing the fair value of our derivative liabilities and,
accordingly, we were required to adjust the derivatives to these higher values
with charges to our income. Also, due to the higher stock price commencing in
the second quarter, we experienced significant exercise and conversion activity
related to our derivative warrants and, to a lesser degree, with respect to the
embedded conversion options. Accordingly, our year end derivative liability
balances reflect, among other elements of our valuation assumptions, the higher
intrinsic values of the arrangements caused by the significant changes in our
stock price, which are offset by a smaller number of common shares indexed to
outstanding warrants due to the extraordinary level of exercise activity.
(b) During the year ended December 31, 2005, we entered into a $2,300,000 debt
and warrant financing arrangement, more fully discussed in Note 5(b). In
connection with our accounting for this financing we encountered the unusual
circumstance of a day-one loss related to the recognition of derivative
instruments arising from the arrangement. That means that the fair value of the
bifurcated compound derivative and warrants exceeded the proceeds that we
received from the arrangement and we were required to record a loss to record
the derivative financial instruments at fair value. The loss that we recorded
amounted to $8,663,869. We did not enter into any other financing arrangements
during the periods reported that reflected day-one losses.
The following table summarizes the number of common shares indexed to the
derivative financial instruments as of June 30, 2006:
Conversion
Features Warrants Total
---------- ---------- ----------
Financing or other contractual arrangement:
$2,500,000 Note Financing -- 1,500,000 1,500,000
$400,000 Convertible Note Financing 4,000,000 -- 4,000,000
$2,300,000 Convertible Note Financing 120,000 -- 120,000
$600,000 Convertible Note Financing 4,000,000 -- 4,000,000
$1,080,000 Convertible Note Financing 1,680,000 1,680,000
Series D Convertible Preferred Stock -- 611,250 611,250
Series F Convertible Preferred Stock 220,969 38,259 259,228
Series H Convertible Preferred Stock (a) -- 4,387,500 4,387,500
Series J Convertible Preferred Stock 20,000,000 -- 20,000,000
Series K Convertible Preferred Stock (a) -- -- --
Other warrants and contracts (Note 8(b) -- 50,704,688 50,704,688
---------- ---------- ----------
30,020,969 57,241,697 87,262,666
========== ========== ==========
(a) As more fully described in Notes 6(a) and 6(c) these instruments were
afforded the conventional convertible exemption, which means we did not
have to bifurcate the embedded conversion feature. However, we were
required to bifurcate certain other embedded derivatives as discussed in
the notes. Although the conversion features did not require derivative
accounting, we are required to also consider the 1,256,127 and 8,000,000
common shares, respectively, into which these instruments are convertible
in determining whether we have sufficient authorized and unissued common
shares for all of our share-settled obligations.
F-12
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We have entered into registration rights agreements with certain investors that
require us to file a registration statement covering shares underlying a
financing arrangement, become effective on the registration statement, maintain
effectiveness and, in some instances, maintain the listing of the underlying
shares. Certain of these registration rights agreements require our payment of
liquidating damages to the investors in the event we do not achieve the
requirements. We record estimated liquidated damages as liabilities and charges
to our income when the liquidated damages are probable and estimable under
Financial Accounting Standard No. 5, Accounting for Contingencies. During the
three and six months ended June 30, 2006, we recorded liquidated damages expense
of $3,872,388 and $4,558,275.
Advertising and Promotion Costs
Advertising and promotion costs, which are included in selling expenses, are
expensed as incurred and aggregated $934,057 and $2,187,133 for the three months
ended June 30, 2006 and 2005, respectively; $351,441 and $511,554 for the six
months ended June 30, 2006 and 2005, respectively.
Share-based payments
Effective January 1, 2005, we adopted the fair value recognition provisions of
Financial Accounting Standards No. 123 Accounting for Stock-Based compensation.
Effective January 1, 2006 we adopted Financial Accounting Standards No. 123(R),
Share-Based Payments (FAS123R). Under the fair value method, we recognize
compensation expense for all share-based payments granted after January 1, 2005,
as well as all share-based payments granted prior to, but not yet vested, as of
January 1, 2005, in accordance with SFAS No. 123. Under the fair value
recognition provisions of FAS 123(R), we recognize share-based compensation
expense, net of an estimated forfeiture rate, over the requisite service period
of the award. Prior to the adoption of FAS 123 and FAS 123(R), the Company
accounted for share-based payments under Accounting Principles Board Opinion No.
25 Accounting for Stock Issued to Employees and the disclosure provisions of
SFAS No. 123. For further information regarding the adoption of SFAS No. 123(R),
see Note 7 to the consolidated financial statements.
Income Taxes
We account for income taxes using the liability method, which requires an entity
to recognize deferred tax liabilities and assets. Deferred income taxes are
recognized based on the differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. Further, the effects of
enacted tax laws or rate changes are included as part of deferred tax expense or
benefit in the period that covers the enactment date. A valuation allowance is
recognized if it is more likely than not that some portion, or all, of a
deferred tax asset will not be realized.
Income (Loss) Per Common Share
Our basic income (loss) per common share is computed by dividing income (loss)
applicable to common stockholders by the weighted average number of common share
outstanding during the reporting period. Diluted income (loss) per common share
is computed similar to basic income (loss) per common share except that diluted
income (loss) per common share includes dilutive common stock equivalents, using
the treasury stock method, and assumes that the convertible debt instruments
were converted into common stock upon issuance, if dilutive. For the three and
six months ended June 30, 2006 potential common shares arising from our stock
options, stock warrants, convertible debt and convertible preferred stock
amounting to 62,272,513 and 61,178,096 shares, respectively, were not included
in the computation of diluted earnings per share because their effect was
antidilutive. For the three and six months ended June 30, 2005 potential common
shares arising from our stock options, stock warrants, convertible debt and
convertible preferred stock amounting to 104,769,803 and 104,564,021 shares,
respectively, were not included in the computation of diluted earnings per share
because their effect was antidilutive.
F-13
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3. Accrued liabilities:
Accrued liabilities consist of the following as of June 30, 2006 and December
31, 2005:
2006 2005
---------- ----------
Liquidated damages due to late registration (a) $4,862,026 $ 303,750
Investor relations liability 1,402,000 1,545,565
Production processor liability 681,275 182,814
Accrued payroll and related 600,612 636,757
Accrued interest 447,235 376,198
Discontinued products (b) -- 1,710,734
Other 486,758 116,459
---------- ----------
$8,479,906 $4,872,277
========== ==========
(a) Certain of our financing arrangements provide for penalties in the event of
non-registration of securities underlying the financial instruments. Generally,
these penalties are calculated as a percentage of the financing proceeds,
usually between 1.0% and 3.0% each month. We record these liquidated damages
when they are probable and estimable pursuant to FAS 5.
(b) During our year ended December 31, 2005, we discontinued certain product
lines and, as a result, incurred certain penalties under purchase commitments
with our manufacturing vendors. We accrued these penalties upon our decision to
discontinue the products. These amounts were paid to the vendors prior to June
30, 2006.
Note 4. Notes Payable
Notes payable consist of the following as of June 30, 2006 and December 31,
2005:
2006 2005
---------- --------
$2,500,000 face value note payable, due November 12, 2006 (a) $1,640,906 $ --
$750,000 face value note payable, due September 3, 2004 (b) 750,000 750,000
$187,743 face value note payable, due December 31, 2005 (c) 187,743 187,743
Other notes payable 217,329 --
---------- --------
Total notes payable 2,795,978 937,743
Less current maturities 2,700,195 937,743
---------- --------
Long-term notes payable $ 95,783 $ --
========== ========
(a) $2,500,000 Note Payable, due November 12, 2006:
On May 12, 2006, we issued $2,500,000, six-month-term, 10% notes payable plus
detachable warrants to purchase 1,500,000 shares of our common stock with a
strike price of $0.80 for a period of five-years. Net proceeds from this
financing transaction amounted to $2,235,000. The holder has the option to
redeem the notes for cash in the event of defaults and certain other contingent
events, including events related to the common stock into which the instrument
is convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). We evaluated the terms and conditions of the notes and warrants
and determined that (i) the Default Put required bifurcation because it did not
meet the "clearly and closely related" criteria of FAS 133 and (ii) the warrants
did not meet all of the requisite conditions for equity classification under FAS
133. As a result, the net proceeds from the arrangement were first allocated to
the Default Put ($87,146) and the warrants ($901,665) based upon their fair
values, because these instruments are required to be initially and subsequently
carried at fair values. These instruments are carried in our balance sheet under
the classification, Derivative Liabilities.
F-14
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $2,500,000
Note Payable, due November 12, 2006.
Three months Three months Six months Six months
ended June ended June Ended June ended June
30, 2006 30, 2005 30, 2006 30, 2005
------------ ------------ ---------- ----------
Derivative income (expense):
Default Put ($216,735) -- ($216,735) --
========== === ========== ===
Warrant derivative $ 162,435 -- $ 162,435 --
========== === ========== ===
We estimated the fair value of the put on the inception date using a cash flow
technique that involves probability weighting multiple outcomes. We estimated
the warrant value using the Black Scholes-Merton technique. Significant
assumptions included in our valuation models are as follows:
Inception June 30, 2006
----------- --------------
Trading value of common stock $ 0.75 $ 0.61
Warrant strike price $ 0.80 $ 0.80
Volatility 133.00% 133.00%
Risk free rate 5.08% 5.04%
Expected term Stated term Remaining term
Discount rate used for cash flows 13.75% 14.00%
The fair value of the Default Put increased, resulting in a charge to income,
due to changes in management's weighted probability estimates following the
financing inception and which generally are attributable to the increasing
probability of default events. The fair value of the warrants declined
principally due to the decline in our common stock trading price. Since these
instruments are measured at fair value, future changes in assumptions, arising
from both internal factors and general market conditions, may cause further
variation in the fair value of these instruments. Changes in fair values of
derivative financial instruments are reflected as charges and credits to income.
The above allocations resulted in a discount to the carrying value of the notes
amounting to approximately $1,254,000. This discount, along with related
deferred finance costs and future interest payments, are being amortized through
periodic charges to interest expense using the effective method. Interest
expense during the six months ended June 30, 2006 amounted to approximately
$165,000. Interest expense during the third and fourth quarters of 2006 are
currently estimated to be $637,000 and $577,000 respectively.
F-15
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) On May 9, 2004 we received the proceeds of a $750,000 loan from Mid-Am
Capital, payable September 3, 2004, with an interest rate of 8%. This loan is
secured by a general security interest in all of our assets. Mid-Am has agreed
to extend the note on a demand basis.
(c) In 1999, we issued a promissory note to assume existing debt owed by our
then Chinese joint venture subsidiary to a supplier, International Paper. The
face value of that unsecured note was $282,637 at an annual interest rate of
10.5%. The note originally required 23 monthly payments of $7,250 and a balloon
payment of $159,862 due on July 15, 2000. During 2000, we negotiated an
extension of this note to July 1, 2001. International Paper imposed a charge of
$57,000 to renegotiate the note, which amount represents interest due through
the extension date. The balance due on this note is $187,743 at June 30, 2006
and December 31, 2005, all of which is delinquent. Although International Paper
has not pursued collection of the note, it is possible that they could do so in
the future and, if they do, such collection effort may have a significant
adverse impact on the liquidity of the Company.
Note 5. Convertible Debt
Convertible debt carrying values consist of the following as of June 30, 2006
and December 31, 2005:
2006 2005
-------- ----------
$200,000 Convertible Note Payable, due November 2006 (a) $200,000 $ 187,934
$15,000 Convertible Note Payable, due May 2007 (b) 5,214 1,620
$600,000 Convertible Note Payable, due December 2006 (c) 600,000 600,000
$6,250 Convertible Note Payable, due April 30, 2006 (e) -- 5,188
$25,000 Convertible Note Payable, due October 1, 2006 (f) -- 30,278
$168,000 Convertible Note Payable, due December 1, 2006 (g) 168,000 187,760
-------- ----------
$973,214 $1,012,780
======== ==========
(a) $400,000 Convertible Note Financing
On November 20, 2003, we issued $400,000 of 8.0% convertible notes payable, due
November 20, 2005 plus warrants to purchase 14,000,000 shares of our common
stock with a strike prices ranging from $0.05 to $1.00 for a period of three
years. $200,000 face value of the convertible notes were outstanding on June 30,
2006 and December 31, 2005 following the modification of the underlying note
agreement, extending the maturity date of the remaining balance to November 20,
2006. The convertible notes are convertible into a variable number of our common
shares based upon a variable conversion price of the lower of $0.05 or 75% of
the closing market price near the conversion date. The holder has the option to
redeem the convertible notes payable for cash at 130% of the face value in the
event of defaults and certain other contingent events, including events related
to the common stock into which the instrument is convertible, registration and
listing (and maintenance thereof) of our common stock and filing of reports with
the Securities and Exchange Commission (the "Default Put"). In addition, we
extended registration rights to the holder that required registration and
continuing effectiveness thereof; we would be required to pay monthly
liquidating damages of 2.0% for defaults under this provision.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
variable conversion feature; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because, as noted above, share settlement
and maintenance of an effective registration statement are not within our
control. Therefore, the warrants are also required to be carried as a derivative
liability, at fair value.
F-16
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $1,666,200 and $1,311,000 as of
June 30, 2006 and December 31, 2005, respectively. These amounts are included in
Derivative Liabilities on our balance sheet. Warrants related to the financing
were fully converted prior to December 31, 2005.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $400,000
convertible note financing.
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($408,000) ($2,980,800) ($355,200) ($2,942,400)
========== =========== ========== ===========
Warrant derivative $ -- ($6,016,700) $ -- ($5,733,700)
========== =========== ========== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound derivatives.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes to zero. This discount, along
with related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $15,000 and $53,000, respectively.
As noted in the introductory paragraph of this section, the holders extended the
notes one additional year to November 2006. This modification was accounted for
as an extinguishment because the present value of the amended debt was
significantly different than the present value immediately preceding the
modification. As a result of the extinguishment, the existing debt carrying
value was adjusted to fair value using projected cash flows at market rates for
similar instruments. This extinguishment resulted in our recognition of a gain
on extinguishment of $22,733 in the fourth fiscal quarter of our year ended
December 31, 2005.
F-17
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) $2,300,000 Convertible Note Financing:
On January 28, 2005, May 23, 2005 and August 18, 2005, we issued $1,150,000,
$500,000 and $650,000, respectively of 8.0% convertible notes payable, due
January 28, 2007, May 23, 2007 and August 18, 2007, respectively, plus warrants
to purchase 9,200,000, 4,000,000 and 5,200,000 shares, respectively, of our
common stock with a strike price of $0.129 for a period of five years. $15,000
face value of the convertible notes was outstanding on June 30, 2006 and
December 31, 2005, resulting from conversions of all other notes associated with
this financing to common stock. The remaining portion of the May 23, 2005
convertible notes are convertible into a fixed number of our common shares based
upon a conversion price of $0.125 with anti-dilution protection for sales of
securities below the fixed conversion price. We have the option to redeem the
convertible notes for cash at 120% of the face value. The holder has the option
to redeem the convertible notes payable for cash at 120% of the face value in
the event of defaults and certain other contingent events, including events
related to the common stock into which the instrument is convertible,
registration and listing (and maintenance thereof) of our common stock and
filing of reports with the Securities and Exchange Commission (the "Default
Put").
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $4,810 and $4,867 as of June 30,
2006 and December 31, 2005, respectively. Further, our valuation model resulted
in warrant derivative balances associated arising from the convertible note
financing of $10,406,200 and $10,164,188 as of June 30, 2006 and December 31,
2005, respectively. These amounts are included in Derivative Liabilities on our
balance sheet.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $2,300,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($590) ($8,284,283) $58 ($8,160,456)
====== =========== === ===========
Warrant derivative $ -- ($8,189,280) $-- ($8,360,400)
====== =========== === ===========
F-18
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $33,183 and $97,319, respectively.
(c) $600,000 Convertible Note Financing:
On June 29, 2004, we issued $600,000 of 10.0% convertible notes payable, due
December 31, 2005, plus warrants to purchase 2,000,000 and 5,000,000 shares of
our common stock with strike prices of $0.25 and $1.00, respectively, for a
periods of five and two years, respectively. Net proceeds from this financing
arrangement amounted to $500,000. As of June 30, 2006, this debt is past due
and, accordingly, the outstanding carrying value of $600,000 includes $68,000 of
capitalized interest following the maturity date. The convertible notes are
convertible into a fixed number of our common shares based upon a conversion
price of $0.15 with anti-dilution protection for sales of securities below the
fixed conversion price. We have the option to redeem the convertible notes for
cash at 120% of the face value. The holder has the option to redeem the
convertible notes payable for cash at 130% of the face value in the event of
defaults and certain other contingent events, including events related to the
common stock into which the instrument is convertible, registration and listing
(and maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the "Default Put"). In addition, we extended
registration rights to the holder that required registration and continuing
effectiveness thereof; we are required to pay monthly liquidating damages of
2.0% for defaults under this provision. The maturity dates for these notes have
been extended to December 31, 2006.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $625,400 and $153,700 as of June
30, 2006 and December 31, 2005, respectively. These amounts are included in
Derivative Liabilities on our balance sheet.
F-19
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of December 31, 2005, all warrants related to the financing had been
converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $600,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($339,200) ($1,582,667) ($471,700) ($1,582,167)
========== =========== ========== ===========
Warrant derivative $ -- ($5,631,800) $ -- ($5,478,300)
========== =========== ========== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $-0- and $233,407, respectively.
(d) $240,000 Convertible Note Financing:
On December 22, 2004, we issued $240,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 800,000 at $0.15 for five years. Net
proceeds from this financing arrangement amounted to $196,500 As of December 31,
2005, this debt had been fully converted. The convertible notes were convertible
into a fixed number of our common shares based upon a conversion price of $0.10
with anti-dilution protection for sales of securities below the fixed conversion
price. We had the option to redeem the convertible notes for cash at 120% of the
face value. The holder has the option to redeem the convertible notes payable
for cash at 130% of the face value in the event of defaults and certain other
contingent events, including events related to the common stock into which the
instrument is convertible, registration and listing (and maintenance thereof) of
our common stock and filing of reports with the Securities and Exchange
Commission (the "Default Put"). In addition, we extended registration rights to
the holder that required registration and continuing effectiveness thereof; we
are required to pay monthly liquidating damages of 2.0% for defaults under this
provision.
F-20
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. These amounts are included in Derivative
Liabilities on our balance sheet. We estimated the fair value of the warrants on
the inceptions dates, and subsequently, using the Black-Scholes-Merton Valuation
technique, because that technique embodies all of the assumptions (including,
volatility, expected terms, and risk free rates) that are necessary to fair
value freestanding warrants. As of December 31, 2005 all warrant liabilities
related to the financing had been fully converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $240,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative -- -- -- --
=== ========= === =========
Warrant derivative -- ($226,440) $-- ($210,200)
=== ========= === =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound derivative.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $-0- and $90,306, respectively.
(e) $693,000 Convertible Note Financing:
On October 29, 2004, we issued $693,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 2,200,000 at $0.15 for five years. Net
proceeds from this financing arrangement amounted to $550,000. As of December
31, 2005, this debt had face value $6,250 outstanding which amount had been
fully converted by June 30, 2006. The convertible notes were convertible into a
fixed number of our common shares based upon a conversion price of $0.10 with
anti-dilution protection for sales of securities below the fixed conversion
price. We had the option to redeem the convertible notes for cash at 120% of the
face value. The holder has the option to redeem the convertible notes payable
for cash at 130% of the face value in the event of defaults and certain other
contingent events, including events related to the common stock into which the
instrument is convertible, registration and listing (and maintenance thereof) of
our common stock and filing of reports with the Securities and Exchange
Commission (the "Default Put"). In addition, we extended registration rights to
the holder that required registration and continuing effectiveness thereof; we
are required to pay monthly liquidating damages of 2.0% for defaults under this
provision. The maturity dates for these notes were extended to October 1, 2006.
F-21
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances of $-0-
and $42,878 as of June 30, 2006 and December 31, 2005, respectively. Our value
model resulted in warrant derivative balances associated arising from the
convertible note financing of $0 and $924,120 as of June 30, 2006 and December
31, 2005, respectively. These amounts are included in Derivative Liabilities on
our balance sheet.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $693,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($6,365) ($2,336,319) ($6,143) ($2,213,579)
======== =========== ======== ===========
Warrant derivative $ -- ($1,280,610) $ -- ($1,246,000)
======== =========== ======== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound instruments.
F-22
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $3,711 and $241,052, respectively.
(f) $660,000 Convertible Note Financing:
On April 2, 2004, we issued $660,000 of 10.0% convertible notes payable, due
October 1, 2005, plus warrants to purchase 3,000,000 at $0.15 for five years.
Net proceeds from this financing arrangement amounted to $493,000. As of
December 31, 2005, this debt had face value $25,000 outstanding which amount had
been fully converted by June 30, 2006. The convertible notes were convertible
into a fixed number of our common shares based upon a conversion price of $0.10
with anti-dilution protection for sales of securities below the fixed conversion
price. We had the option to redeem the convertible notes for cash at 120% of the
face value. The holder has the option to redeem the convertible notes payable
for cash at 130% of the face value in the event of defaults and certain other
contingent events, including events related to the common stock into which the
instrument is convertible, registration and listing (and maintenance thereof) of
our common stock and filing of reports with the Securities and Exchange
Commission (the "Default Put"). In addition, we extended registration rights to
the holder that required registration and continuing effectiveness thereof; we
are required to pay monthly liquidating damages of 2.0% for defaults under this
provision.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection, and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances of $-0-
and $159,250 as of June 30, 2006 and December 31, 2005, respectively. These
amounts are included in Derivative Liabilities on our balance sheet. As of June
30, 2006, all warrants related to the financing had been fully converted.
F-23
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $660,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($22,750) ($3,139,950) ($9,750) ($3,002,235)
========= ============ ======== ===========
Warrant derivative $ -- $ -- $ -- $ 61,800
========= ============ ======== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $-0- and $78,776, respectively.
(g) $1,008,000 Convertible Note Financing:
On June 29, 2004, we issued $1,008,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 3,200,000 and 8,000,000 shares of our
common stock at $0.25 and $2.00, respectively, for a periods of five years. Net
proceeds from this financing arrangement amounted to $679,000. We had an
outstanding balance of $168,000 and $187,760 as of June 30, 2006 and December
31, 2005, respectively on this note. The convertible notes were convertible into
a fixed number of our common shares based upon a conversion price of $0.15 with
anti-dilution protection for sales of securities below the fixed conversion
price. We had the option to redeem the convertible notes for cash at 120% of the
face value. The holder has the option to redeem the convertible notes payable
for cash at 130% of the face value in the event of defaults and certain other
contingent events, including events related to the common stock into which the
instrument is convertible, registration and listing (and maintenance thereof) of
our common stock and filing of reports with the Securities and Exchange
Commission (the "Default Put"). In addition, we extended registration rights to
the holder that required registration and continuing effectiveness thereof; we
are required to pay monthly liquidating damages of 2.0% for defaults under this
provision. The maturity dates for these notes have been extended to December 31,
2006.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
F-24
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. These amounts are
included in Derivative Liabilities on our balance sheet. As of December 31,
2005, all warrants related to the financing had been fully converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $1,008,000
convertible note financing:
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($84,602) ($2,832,614) ($69,675) ($2,810,435)
======== =========== ======== ===========
Warrant derivative -- (7,341,300) -- (7,140,800)
======== =========== ======== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the six months ended June 30, 2006 and 2005 amounted to
approximately $0 and $432,759, respectively.
(h) $360,000 Convertible Note Financing:
On April 21, 2005, we issued $360,000, six-month-term, 10% convertible notes
payable, due October 31, 2005. Net proceeds for this financing transaction
amounted to $277,488. The notes were convertible into shares of common stock at
a fixed conversion rate of $0.20, with anti-dilution protection for sales of
securities below the fixed conversion price. The holder converted the notes on
September 30, 2005. We had the option to redeem the notes payable for cash at
120% of the face value. The holder has the option to redeem the convertible
notes payable for cash at 130% of the face value in the event of defaults and
certain other contingent events, including events related to the common stock
into which the instrument is convertible, registration and listing (and
maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the "Default Put").
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection afforded the holder and it did not otherwise meet
the conditions for equity classification. Therefore, we were required to
bifurcate the embedded conversion feature and carry it as a derivative
liability. We also concluded that the Default Put required bifurcation because,
while puts on debt instruments are generally considered clearly and closely
related to the host, the Default Put is indexed to certain events, noted above,
that are not associated debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that was carried as a
component of derivative liabilities through the date of conversion.
F-25
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We allocated the initial proceeds from the financing first to the compound
derivative instrument in the amount of $113,925 and the balance to the debt host
instrument. We estimated the fair value of the compound derivative on the
inception dates, and subsequently, using the Monte Carlo Valuation technique,
because that technique embodies all of the assumptions (including credit risk,
interest risk, stock price volatility and conversion estimates) that are
necessary to fair value complex derivative instruments.
The following table illustrates fair value adjustments that we have recorded
related to the compound derivative arising from the $360,000 convertible notes
payable.
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative -- ($1,464,750) -- ($1,464,750)
=== =========== === ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. Since the instrument was converted on September 30, 2005,
there will be no future charges or credits to derivative income (expense)
associated with this instrument.
The above allocations resulted in a discount to the carrying value of the notes
amounting to approximately $173,925. This discount, along with related deferred
finance costs and future interest payments, are being amortized through periodic
charges to interest expense using the effective method. Interest expense during
the six months ended June 30, 2005 amounted to approximately $52,000.
Derivative warrant fair values are calculated using the Black-Scholes-Merton
Valuation technique. Significant assumptions as of June 30, 2006, corresponding
to each of the above financings (by paragraph reference) are as follows:
5(a) 5(b) 5(c) 5(d) 5(e) 5(f)
----------- ----- ------ ------ ------ -----
Trading market price $ 0.61 $0.61 $0.61 $0.61 $0.61 $0.61
Strike price $.05--$1.00 $.129 $ .10 $ .15 $ .15 $ .15
Volatility 148% 132% 136% 136% 136% 142%
Risk-free rate 3.25% 3.83% 3.30% 3.57% 3.39% 3.45%
Remaining term/life (years) .42 4.13 3.0 3.5 3.33 2.75
Our stock prices have been highly volatile. Future fair value changes are
significantly influenced by our trading common stock prices. As previously
discussed herein, changes in fair value of derivative financial instruments are
reflected in earnings.
F-26
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Preferred Stock
Our articles of incorporation authorize the issuance of 5,000,000 shares of
preferred stock. We have designated this authorized preferred stock, as follows:
(a) Series H Preferred Stock:
We have designated 350,000 shares of our preferred stock as Series H Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series H Preferred Stock has cumulative dividend rights at 7.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a fixed conversion price of $0.40 per
common share. The Series H Preferred Stock is mandatorily redeemable for common
stock on the fifth anniversary of its issuance. We have the option to redeem the
Series H Preferred Stock for cash at 135% of the stated value. The holder has
the option to redeem the Series H Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
listing of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put").
Based upon our evaluation of the terms and conditions of the Series H Preferred
Stock, we concluded that it was more akin to a debt instrument than an equity
instrument, which means that our accounting conclusions are based upon those
related to a traditional debt security, and that it should afforded the
conventional convertible exemption regarding the embedded conversion feature
because the conversion price is fixed. Therefore, we are not required to
bifurcate the embedded conversion feature and carry it as a liability. However,
we concluded that the Default Put required bifurcation because, while puts on
debt-type instruments are generally considered clearly and closely related to
the host, the Default Put is indexed to certain events, noted above, that are
not associated with debt-type instruments. In addition, due to the default and
contingent redemption features of the Series H Preferred Stock, we classified
this instrument as redeemable preferred stock, outside of stockholders' equity.
Between December 2001 and March 2002, we issued 175,500 shares of Series H
Preferred Stock for cash of $1,755,000, plus warrants to purchase an aggregate
of 4,387,500 shares of common stock at $0.50 for five years. As of June 30, 2006
and December 31, 2005, 63,500 and 64,500 shares of preferred stock remain
outstanding; all of the warrants remain outstanding. We allocated $1,596,228 of
the proceeds from the Series H Preferred financings to the warrants at their
fair values because the warrants did not meet all of the conditions necessary
for equity classification and, accordingly, are carried as derivative
liabilities, at fair value. We also allocated $134,228 to the Default Puts
which, as described above are carried as derivative liabilities, at fair value..
Finally, we recorded derivative expense of $9,666 because one of the financings
did not result in sufficient proceeds to record the derivative financial
instruments at fair values on the inception date.
We estimated the fair value of the derivative warrants on the inception dates,
and subsequently, using the Black-Scholes-Merton valuation technique. As a
result of applying this technique, our valuation of the derivative warrants
amounted to $840,269 and $1,264,109 as of June 30, 2006 and December 31, 2005,
respectively. We estimated the fair value of the Default Puts on the inception
dates, and subsequently, using a cash flow technique that involves
probability-weighting multiple outcomes at net present values. Significant
assumptions underlying the probability-weighted outcomes included both our
history of similar default events, all available information about our business
plans that could give rise to or risk defaults and the imminence of impending or
current defaults. As a result of these subjective estimates, our valuation model
resulted in Default Put balances associated with the Series H Preferred Stock of
$502,451 and $381,377 as of June 30, 2006 and December 31, 2005, respectively.
These amounts are included in Derivative Liabilities on our balance sheet. The
following table illustrates fair value adjustments that we have recorded related
to the Default Puts on the Series H Preferred Stock.
F-27
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Default Put ($106,089) ($ 2,064) ($121,074) ($ 4,127)
--------- ----------- --------- -----------
Derivative Warrants $ 95,936 ($2,775,061) $423,839 ($2,708,401)
======== =========== ========= ===========
Derivative income (expense) related to the Default Put includes changes to the
fair value arising from changes in our estimates about the probability of
default events and amortization of the time-value element embedded in our
calculations. Higher derivative expense in the three and six months ended June
30, 2006, when compared to the same periods of 2005, reflected the increased
probability that the Default Put would become exercisable because we would not
timely file certain reports with the Securities and Exchange Commission. In
fact, we ultimately did not file our Quarterly Report on Form 10-QSB. While the
Default Put became exercisable at that time, the holders of the Series H
Preferred Stock did not exercise their right prior to curing the event. There
can be no assurances that the holders of the Series H Preferred Stock would not
exercise their rights should further defaults arise.
The discounts to the Series H Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
paid-in capital using the effective method. The following table illustrates the
components of preferred stock dividends and accretions for the three and six
months ended June 30, 2006 and 2005:
Three months Three months Six months Six months
ended ended Ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Cumulative dividends at 7% $11,115 $ 28,088 $ 22,225 $ 56,175
Accretions 40,388 413,269 79,562 502,617
------ -------- -------- --------
$51,503 $441,357 $101,787 $558,792
======= ======== ======== ========
As of June 30, 2006, $386,100 of cumulative dividends are in arrears on Series H
Preferred Stock.
(b) Series J Preferred Stock:
We have designated 500,000 shares of our preferred stock as Series J Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series J Preferred Stock has cumulative dividend rights at 8.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a conversion price of $0.20 per common
share. The Series J Preferred Stock is mandatorily redeemable for common stock
on the fifth anniversary of its issuance. We have the option to redeem the
Series J Preferred Stock for cash at 135% of the stated value. The holder has
the option to redeem the Series J Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
registration and listing (and maintenance thereof) of our common stock and
filing of reports with the Securities and Exchange Commission (the "Default
Put").
F-28
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Based upon our evaluation of the terms and conditions of the Series J Preferred
Stock, we concluded that its features were more akin to a debt instrument than
an equity instrument, which means that our accounting conclusions are generally
based upon standards related to a traditional debt security. Our evaluation
concluded that the embedded conversion feature was not afforded the exemption as
a conventional convertible instrument, since it did not meet the conditions for
equity classification. Therefore, we are required to bifurcate the embedded
conversion feature and carry it as a liability. We also concluded that the
Default Put required bifurcation because, while puts on debt-type instruments
are generally considered clearly and closely related to the host, the Default
Put is indexed to certain events, noted above, that are not associated debt-type
instruments. We combined all embedded features that required bifurcation into
one compound instrument that is carried as a component of derivative
liabilities. In addition, due to the default and contingent redemption features
of the Series J Preferred Stock, we classified this instrument as redeemable
preferred stock, outside of stockholders' equity.
In September 2002, February 2003 and May 2003 we issued 100,000 shares, 50,000
shares and 50,000 shares, respectively, of Series J Preferred Stock for cash of
$2,000,000. We also issued warrants for an aggregate of 14,000,000 shares of our
common stock in connection with the financing arrangement. The warrants have
terms of five years and an exercise price of $0.25. We initially allocated
proceeds of $658,000 and $1,190,867 from the financing arrangements to the
compound derivative discussed above and to the warrants, respectively. Since
these instruments did not meet the criteria for classification, they are
required to be carried as derivative liabilities, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with the Series J Preferred Stock of $6,014,000 and $5,628,000 as of
June 30, 2006 and December 31, 2005, respectively. These amounts are included in
Derivative Liabilities on our balance sheet.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the Series J
Preferred Stock.
Three months Three months Six months Six months
ended ended ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Compound derivative ($1,400,000) ($8,260,000) ($476,000) ($8,036,000)
----------- ----------- ---------- -----------
Warrant derivative ($ --) ($5,819,200) $ -- ($5,651,200)
=========== =========== ========== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
F-29
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The discounts to the Series J Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
paid-in capital using the effective method. The following table illustrates the
components of preferred stock dividends and accretions for the three and six
months ended June 30, 2006 and 2005:
Three months Three months Six months Six months
ended ended Ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Cumulative dividends at 8% $ 40,000 $ 40,000 $ 80,000 $ 80,000
Accretions 158,397 88,346 295,281 164,694
-------- -------- -------- --------
$198,397 $128,346 $375,281 $244,694
======== ======== ======== ========
As of June 30, 2006, $560,000 of cumulative dividends are in arrears on Series J
Preferred Stock.
(c) Series K Preferred Stock:
We have designated 500,000 shares of our preferred stock as Series K Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series K Preferred Stock has cumulative dividend rights at 8.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a fixed conversion price of $0.10 per
common share. The Series K Preferred Stock is mandatorily redeemable for common
stock on the fifth anniversary of its issuance. We have the option to redeem the
Series K Preferred Stock for cash at 120% of the stated value. The holder has
the option to redeem the Series K Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
listing of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put").
Based upon our evaluation of the terms and conditions of the Series K Preferred
Stock, we concluded that it was more akin to a debt instrument than an equity
instrument, which means that our accounting conclusions are based upon those
related to a traditional debt security, and that it should afforded the
conventional convertible exemption regarding the embedded conversion feature
because the conversion price is fixed. Therefore, we are not required to
bifurcate the embedded conversion feature and carry it as a liability. However,
we concluded that the Default Put required bifurcation because, while puts on
debt-type instruments are generally considered clearly and closely related to
the host, the Default Put is indexed to certain events, noted above, that are
not associated debt-type instruments.. In addition, due to the default and
contingent redemption features of the Series K Preferred Stock, we classified
this instrument as redeemable preferred stock, outside of stockholders' equity.
In March 2004, we issued 80,000 shares of Series K Preferred Stock for cash of
$800,000. In April 2004, we issued 15,000 shares of Series K Preferred Stock to
extinguish debt with a carrying value of $150,000. At the time of these
issuances, the trading market price of our common stock exceeded the fixed
conversion price and, as a result, we allocated $160,000 and $60,000 from the
March and April issuances, respectively, to stockholders' equity which amount
represented a beneficial conversion feature. In addition, we recorded a debt
extinguishment loss of $60,000 in connection with the April exchange of Series K
Preferred Stock for debt because we estimated that it had a fair value that
exceeded the carrying value of the extinguished debt by that amount. Finally, we
allocated approximately $59,000 and $11,000 to the Default Puts, representing
fair values, in connection with the March and April issuances, respectively.
F-30
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We estimated the fair value of the Default Puts on the inception dates, and
subsequently, using a cash flow technique that involves probability-weighting
multiple outcomes at net present values. Significant assumptions underlying the
probability-weighted outcomes included both our history of similar default
events, all available information about our business plans that could give rise
to or risk defaults, and the imminence of impending or current defaults. As a
result of these subjective estimates, our valuation model resulted in Default
Put balances associated with the Series K Preferred Stock of $272,250 and
$206,200 as of June 30, 2006 and December 31, 2005, respectively. These amounts
are included in Derivative Liabilities on our balance sheet. The following table
illustrates fair value adjustments that we have recorded related to the Default
Puts on the Series K Preferred Stock.
Three months Three months Six months Six months
ended ended Ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Derivative income (expense) ($62,912) ($1,256) ($66,050) ($2,513)
======== ======= ======== =======
Derivative income (expense) related to the Default Put includes changes to the
fair value arising from changes in our estimates about the probability of
default events and amortization of the time-value element embedded in our
calculations. Higher derivative expense in the three and six months ended June
30, 2006, when compared to the same periods of 2005, reflected the increased
probability that the Default Put would become exercisable because we would not
timely file certain reports with the Securities and Exchange Commission. In
fact, we ultimately did not file our Quarterly Report on Form 10-QSB. While the
Default Put became exercisable at that time, the holders of the Series K
Preferred Stock did not exercise their right prior to curing the event. There
can be no assurances that the holders of the Series K Preferred Stock would not
exercise their rights should further defaults arise.
The discounts to the Series K Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
paid-in capital using the effective method. The following table illustrates the
components of preferred stock dividends and accretions for the three and six
months ended June 30, 2006 and 2005:
Three months Three months Six months Six months
ended ended Ended ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Cumulative dividends at 8% $19,000 $19,000 $38,000 $38,000
Accretions 11,186 10,519 22,201 20,878
------- ------- ------- -------
$30,186 $29,519 $60,201 $58,878
======= ======= ======= =======
As of June 30, 2006, $171,000 of cumulative dividends are in arrears on Series K
Preferred Stock.
(d) Other Preferred Stock Designations and Financings:
Series A Preferred: We have designated 500,000 shares of our preferred stock as
Series A Convertible Preferred Stock. There were no Series A Preferred Stock
outstanding during the periods presented.
Series B Preferred: We have designated 1,260,000 shares of our preferred stock
as Series B Convertible Preferred Stock with a stated and liquidation value of
$1.00 per share. Series B Preferred has cumulative dividend rights of 9.0%,
ranks senior to common stock and has voting rights equal to the number of common
shares into which it may be converted. Series B Preferred is convertible into
common on a share for share basis. Based upon our evaluation of the terms and
conditions of the Series B Preferred Stock, we have concluded that it meets all
of the requirements for equity classification. We have 107,440 shares of Series
B Preferred outstanding as of June 30, 2006 and December 31, 2005.
F-31
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Series D Preferred: We have designated 165,000 shares of our preferred stock as
Series D Cumulative Convertible Preferred Stock with a stated and liquidation
value of $10 per share. Series D Preferred has cumulative dividend rights of
6.0%, ranks senior to common stock and is non-voting. There are no shares of
Series D Preferred Stock outstanding during any of the periods reported in this
quarterly report. However, we continue to have 611,250 warrants outstanding that
were issued in connection with the original Series D Preferred Stock Financing
arrangement.
Series F Preferred: We have designated 200,000 shares of our preferred stock as
Series F Convertible Preferred Stock with a stated and liquidation value of $10
per share. There were 5,248 shares of Series F Preferred Stock outstanding as of
June 30, 2006 and December 31, 2005. Series F Preferred is non-voting and
convertible into common stock at a variable conversion price equal to the lower
of $0.60 or 75% of the trading prices near the conversion date. In addition, the
holder has the option to redeem the convertible notes payable for cash at 125%
of the face value in the event of defaults and certain other contingent events,
including events related to the common stock into which the instrument is
convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). We concluded that the conversion feature was not afforded the
exemption as a conventional convertible instrument due to variable conversion
feature and it did not otherwise meet the conditions for equity classification.
Since equity classification is not available for the conversion feature, we were
required to bifurcate the embedded conversion feature and carry it as a
derivative liability, at fair value. We also concluded that the Default Put
required bifurcation because, while puts on debt-type instruments are generally
considered clearly and closely related to the host, the Default Put is indexed
to certain events, noted above, that are not associated debt-type instruments.
These two derivative features were combined into one compound derivative
instrument. In addition, due to the default and contingent redemption features
of the Series F Preferred Stock, we classified this instrument as redeemable
preferred stock, outside of stockholders' equity.
Series I Preferred: We have designated 200,000 shares of our preferred stock as
Series I Convertible Preferred Stock with a stated and liquidation value of
$10.00 per share. Series I Preferred has cumulative dividend rights at 8.0% of
the stated value, ranks senior to common stock and is non-voting. Series I
Preferred is convertible into a variable number of common shares at the lower
conversion price of $0.40 or 75% of the trading market price. There were no
Series I Preferred Stock outstanding as of June 30, 2006 and December 31, 2005.
However, we had 30,000 shares outstanding during the six months ended June 30,
2005. We accounted for Series I Preferred Stock while it was outstanding as an
instrument that was more akin to a debt instrument. We also bifurcated the
embedded conversion feature and freestanding warrants issued with the financing
and carried these amounts as derivative liabilities, at fair value. The table
below reflects derivative income and (expense) associated with changes in the
fair value of this derivative financial instrument.
The following table summarized derivative income (expense) related to compound
derivatives and freestanding warrant derivatives that arose in connection with
the preferred stock transactions discussed above.
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Series D Preferred:
Warrant derivative ($40,272) ($1,009,480) ($6,205) ($977,522)
Series F Preferred:
Compound derivative (11,490) (279,306) (6,187) (122,124)
Warrant derivative 54,708 (3,461,437) 112,573 (3,351,857)
Series I Preferred:
Compound derivative -- (73,520) -- (69,620)
Warrant derivative -- (309,292) -- (250,482)
-------- ----------- -------- -----------
$2,946 ($5,133,035) $100,181 ($4,771,605)
======== =========== ======== ===========
F-32
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7. - Share Based Payments
We have adopted certain incentive share-based plans that provide for the grant
of up to 10,397,745 stock options to our directors, officers and key employees.
As of June 30, 2006, there were 660,655 shares of common stock reserved for
issuance under our stock plans. Options granted under plans prior to May, 2005
are fully vested. Subsequent options granted are under plans which become
exercisable over two years in equal annual installments with the first third
exercisable on grant date, provided that the individual is continuously employed
by us. We did not grant options during the six months ended June 30, 2006.
On January 1, 2006, we adopted Financial Accounting Standard 123 (revised 2004),
Share-Based Payments ("FAS 123(R)") which is a revision of FAS No. 123, using
the modified prospective method. Under this method, compensation cost recognized
for the six months ended June 30, 2006 includes compensation cost for all
share-based payments modified or granted prior to but not yet vested as of,
January 1, 2006, based on the grant date fair value estimated in accordance with
the original provisions of FAS No. 123. Compensation cost is being recognized on
a straight-line basis over the requisite service period for the entire award in
accordance with the provisions of SFAS 123R.
As we had previously adopted the fair-value provisions of FAS No. 123, effective
January 1, 2005, the adoption of FAS 123(R) had a negligible impact on our
earnings. We recorded compensation costs of $111,365 and $222,957 for the second
quarter and first half of 2006, respectively, and $551,810 for the second
quarter and first half of 2005. We recognized no tax benefit for share-based
compensation arrangements due to the fact that we are in a cumulative loss
position and recognize no tax benefits in our Consolidated Statement of
Operations.
As required by FAS 123(R), we estimate forfeitures of employee stock options and
recognize compensation cost only for those awards expected to vest. Forfeiture
rates are determined for two groups of employees - directors / officers and key
employees based on historical experience. We adjust estimated forfeitures to
actual forfeiture experience as needed. The cumulative effect of adopting FAS
123(R) of $17,000, which represents estimated forfeitures for options
outstanding at the date of adoption, was not material and therefore has been
recorded as a reduction of our stock-based compensation costs in Selling and
General and Administrative expenses expense rather than displayed separately as
a cumulative change in accounting principle in the Consolidated Statement of
Operations. The adoption of SFAS No. 123(R) had no effect on cash flow from
operating activities or cash flow from financing activities for the six months
ended June 30, 2006.
F-33
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We estimate the fair value of each stock option on the date of grant using a
Black-Scholes-Merton (BSM) option-pricing formula, applying the following
assumptions and amortize that value to expense over the option's vesting period
using the straight-line attribution approach:
Second Six Months Second Six Months
Quarter ended Quarter ended
2006 * 2006 * 2005 2005
------- ---------- ------- ----------
Expected Term (in years) n/a n/a 6 6
Risk-free rate n/a n/a 5.01% 5.01%
Expected volatility n/a n/a 141% 141%
Expected dividends n/a n/a 0% 0%
* No options were granted for the six months ended June 30, 2006.
Expected Term: The expected term represents the period over which the
share-based awards are expected to be outstanding. It has been determined as the
midpoint between the vesting date and the end of the contractual term.
Risk-Free Interest Rate: We based the risk-free interest rate used in our
assumptions on the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equivalent to the stock option award's
expected term.
Expected Volatility: The volatility factor used in our assumptions is based on
the historical price of our stock over the most recent period commensurate with
the expected term of the stock option award.
Expected Dividend Yield: We do not intend to pay dividends on our common stock
for the foreseeable future. Accordingly, we use a dividend yield of zero in our
assumptions.
A summary of option activity under the stock incentive plans for the six months
ended June 30, 2006 is presented below:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Options Shares Price (in years) Value
------------------------------------------- ----------- --------- ----------- -----------
Outstanding at December 31, 2005 10,161,138 $0.30
Granted -- $0.00
Exercised -- $0.00
Forfeited (33,333) $0.30
Expired (390,715) $0.29
Outstanding at June 30, 2006 9,737,090 $0.30 8.51 $ 3,088,060
========= ===== ==== ===========
Vested or expected to vest at June 30, 2006 9,355,365 $0.30 8.50 $ 2,993,924
========= ===== ==== ===========
Exercisable at June 30, 2006 6,769,838 $0.31 8.37 $ 2,130,133
--------- ----- ---- -----------
No options were granted during the six months ended June 30, 2006. The
weighted-average fair value of options granted during the second quarter of 2005
was $0.15. There were no exercises of options during the six months ended June
30, 2006 and the same period in 2005.
F-34
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
At June 30, 2006, the Company had $422,826 of total unrecognized compensation
expense related to non-vested stock options, which is expected to be recognized
over a weighted-average period of one year.
In May 2005, we extended the contractual life of 770,000 fully vested options
held by two directors. As a result of that modification, we have recognized, on
a restated basis, additional compensation expense of $104,000 for the second
quarter of 2005
Note 8. - Other Stockholders' Equity
(a) Issuances of Common Stock
During the period ended June 30, 2006, we issued 995,725 shares of common stock
upon the conversion of certain of our convertible notes. These shares were
issued pursuant to registration statements declared effective by the Securities
and Exchange Commission in 2004 and 2005.
During the period ended June 30, 2006, we issued 3,500,000 shares of common
stock upon the exercise of warrants associated with certain of our convertible
notes. These shares were issued pursuant to registration statements declared
effective by the Securities and Exchange Commission in 2004 and 2005.
During the period ended June 30, 2006, we issued 807,692 shares of common stock
upon the cashless exercise of warrants associated with certain of our
convertible preferred stock. These shares were issued to an accredited investor
pursuant to Regulation D and Section 4(2) of the Securities Act of 1933
During the period ended June 30, 2006, we issued 196,078 shares of our common
stock in a private placement to an accredited investor, pursuant to Section 4(2)
of the Securities Act of 1933.
On May 12, 2006, we obtained financing in the amount $2,500,000 and issued a
promissory note in that principal amount to two accredited investors. We also
issued five year warrants for 1,500,000 of our common stock at an exercise price
of $0.80 per share in connection with this financing. The warrants and
underlying common stock were issued pursuant to Regulation D
F-35
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(b) Outstanding Warrants
As of June 30, 2006, we had the following outstanding warrants:
Warrants/
Expiration Options Exercise
Warrants Grant date date Granted Price
----------------------------------------- ---------- ---------- ---------- --------
Series D Preferred Stock Financing 3/9/1999 11/17/2008 17,500 0.100
Series D Preferred Stock Financing 4/23/1999 11/17/2008 8,750 0.100
Series D Preferred Stock Financing 2/1/2000 11/17/2008 130,000 0.100
Series D Preferred Stock Financing 2/1/2000 11/17/2008 455,000 0.100
Series F Preferred Stock Financing 10/13/2000 11/17/2008 38,259 0.100
Series H Preferred Stock Financing 12/5/2001 12/4/2006 2,637,500 0.500
Series H Preferred Stock Financing 1/30/2002 1/30/2007 375,000 0.500
Series H Preferred Stock Financing 2/15/2002 2/14/2007 125,000 0.500
Series H Preferred Stock Financing 3/18/2002 3/17/2007 1,250,000 0.500
January 2005 Convertible Debt Financing 11/20/2003 11/20/2008 2,000,000 0.050
Warrant to Licensor (also see (c), below) 6/20/2005 6/19/2007 1,000,000 0.050
Warrant to Consultant 4/8/2005 4/7/2007 1,000,000 0.250
Warrant to Distributor 8/30/2005 8/29/2008 30,000,000 0.360
November 2005 Common Stock Financing 11/28/2005 11/27/2010 15,667,188 0.800
November 2005 Common Stock Financing 11/28/2005 11/27/2010 1,012,500 0.500
May 2006 Debt Financing 5/12/2006 5/11/2011 1,500,000 0.800
Other Financings 12/27/2001 2/28/2007 25,000 0.400
----------
Total Warrants 57,241,697
==========
Certain conversion features in our debt and preferred stock are indexed to a
variable number of common shares based upon our trading stock price.
Accordingly, in the event of stock price declines, we may have insufficient
shares to share-settle all of our contracts that are convertible into or
exercisable for common stock. As a result, current accounting standards require
us to assume that we would not have sufficient authorized shares to settle these
other warrants and, therefore, reclassify other warrants and contracts that were
otherwise carried in stockholders' equity to derivative liabilities. Such
warrants and contracts that required reclassification were indexed to 48,679,688
and 47,679,688 shares of our common stock as of June 30, 2006 and December 31,
2005, respectively, We are not required to reclassify certain exempt contracts
and employee stock options, so those items are not included in this caption.
Derivative income (expense) associated with these other warrants are summarized
in the following table.
Three months Three months Six months Six months
ended ended Ended ended
Derivative income (expense) June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Warrant derivative ($2,628,946) ($3,668,176) $1,074,197 ($3,563,901)
=========== =========== ========== ===========
(c) Warrants issued in Settlement: During the quarterly period ended June 30,
2006 we settled a legal dispute with a licensor that resulted in the extension
of the term by one year on 1,000,000 warrants previously issued to the licensor.
We accounted for this extension as a reissuance and remeasurement of the
warrants, which resulted in a charge to our income of $552,600. We revalued the
warrants using the Black-Scholes-Merton valuation model.
F-36
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 9- Commitments and Contingencies
Lease of Office
We lease office space, used for our corporate offices in Florida, under an
operating lease that expires October 31, 2015. Future non-cancelable minimum
rental payments required under the operating lease as of June 30, 2006 are as
follows:
Amount
-------
Six months ending December 31, 2006 $46,433
Years ending December 31,
2007 92,868
2008 92,868
2009 92,868
2010 92,868
Rent expense for the three and six months ended June 30, 2006 amounted to
$31,855 and $69,761; and, rent expense for the three and six months ended June
30, 2005 amounted to $22,404 and $44,704.
Royalties:
We license trademarks and trade dress from certain Licensors for use on our
products. Royalty advances are payable against earned royalties on a negotiated
basis for these licensed intellectual property rights. The table below
identifies each Licensor to which our licenses require advance payments and, in
addition, reflects the term of the respective licenses as well as the advance
royalties remaining to be paid on such negotiated advance royalty payments, as
of June 30, 2006. We currently are in default of our guaranteed royalty payments
to Marvel Enterprises on our license for the United Kingdom by the aggregate
advance remaining listed below for Marvel (UK)
Aggregate Advance
Licensor: Term Remaining
--------------------------- --------- -----------------
Marvel (UK) Two years $ 120,960
Masterfoods Six years 2,430,000
Diabetes Research Institute One year 2,500
Employment Contacts
Our Chief Executive Officer, Mr. Warren, has a two-year employment contract,
expiring October 2007, that provides a base salary of $300,000, plus a bonus of
one quarter percent (0.25%) of net revenue and normal corporate benefits. This
contract has a minimum two-year term plus a severance package upon change of
control based on base salary.
Officers Toulan, Patipa, Edwards and Kee have employment contracts with base
salaries aggregating $710,000 annually, plus discretionary bonuses and normal
corporate benefits. These contracts have minimum two-year terms plus severance
packages upon change of control based on base salary.
F-37
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Our Chief Financial Officer, Mr. Kaplan, has an employment contract, expiring
November 2008, that provides a base salary of $180,000 for year one, $200,000
for year two and $220,000 for year three, plus discretionary bonuses and normal
corporate benefits. This contract has a minimum three-year term plus a severance
package upon change of control based on base salary
Marketing Commitments
Coca-Cola Enterprises ("CCE"). In August 2005, we executed a Master Distribution
Agreement with CCE. Pursuant to this agreement, we are contractually obligated
to spend an aggregate of $5,000,000 on marketing activities in 2005 and 2006 for
our products that are distributed by CCE. Beginning in 2007, we are further
obligated to spend an amount annually in each country within a defined territory
equal or greater than 3% of our total CCE revenues in such territory (on a
country by country basis). Such national and local advertising for our products
includes actively marketing the Slammers mark, based on a plan to be mutually
agreed each year. We are required to maintain our intellectual property rights
necessary for the production, marketing and distribution of our products by CCE.
During the period commencing at the inception of the CCE agreement through the
period ended June 30, 2006, we have spent $1.6 million on marketing activities
pursuant to our agreement with CCE.
Note 10. Restatement
Our statements of operations for the three and six months ended June 30, 2006,
our statement of cash flows for the six months ended June 30, 2006 and our
balance sheet as of June 30, 2006 have been restated to reflect our estimation
of liquidating damages related to certain registration rights agreements entered
into in connection with certain of our financing transactions applying Financial
Accounting Standard No. 5, Accounting for Contingencies. We previously reported
our liquidated damages expenses as they had been incurred.
The following tables reflect the significant elements of statements of
operations that were restated:
Three months ended Six months ended
June 30, 2006 June 30, 2006
------------------ ----------------
Net income (loss), as reported ($13,104,020) ($12,773,188)
Liquidated damages expense (1,822,501) (2,430,000)
------------ ------------
Net income (loss), as restated ($14,926,521) ($15,203,188)
============ ============
Three months ended Six months ended
June 30, 2006 June 30, 2006
------------------ ----------------
Loss applicable to common shareholders, as reported ($13,386,497) ($13,314,448)
Liquidated damages expense (1,822,501) (2,430,000)
------------ ------------
Loss applicable to common shareholders, as restated ($15,208,998) ($15,744,448)
============ ============
Three months ended Six months ended
June 30, 2006 June 30, 2006
------------------ ----------------
Income (loss) per common share, basic and ($0.07) ($0.07)
diluted as reported
Liquidated damages expense (0.01) (0.01)
----- -----
Income (loss) per common share, as restated ($0.08) ($0.08)
====== ======
F-38
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three months ended Six months ended
June 30, 2006 June 30, 2006
------------------ ----------------
Comprehensive income (loss), as reported ($13,081,891) ($12,751,749)
============ ============
Comprehensive income (loss), as restated ($14,904,392) ($15,181,749)
============ ============
The following table reflects the significant elements of our balance sheet at
June 30, 2006 that were restated:
Redeemable Stockholders
Total Total Preferred Equity
Assets Liabilities Stock (Deficit)
----------- ------------ ----------- ------------
As reported $23,324,420 $(53,724,920) $(2,491,545) $(32,892,045)
Adjustments:
Accrued liabilities -- (2,733,751) -- (2,733,751)
----------- ------------ ----------- ------------
As restated $23,324,420 $(56,458,671) $(2,491,545) $(35,625,796)
=========== ============ =========== ============
Note 11- Subsequent Events
Subsequent to June 30, 2006, we issued 2,000,000 shares of common stock pursuant
to an exercise of a warrant associated with our November 2003 convertible note
financing. The common stock underlying these notes was registered pursuant to a
registration statement declared effective by the Securities and Exchange
Commission in 2004.
Subsequent to June 30, 2006, we issued 1,444,453 shares of common stock upon the
cashless exercise of warrants associated with certain of our convertible
preferred stock. These shares were issued to accredited investors pursuant to
Regulation D and Section 4(2) of the Securities Act of 1933.
Subsequent to June 30, 2006, we issued 168,937 shares of common stock pursuant
to a conversion of a convertible note. The shares of common stock underlying the
preferred were issued pursuant to a registration statement declared effective by
the Securities and Exchange Commission in 2004.
Subsequent to June 30, 2006, we issued 250,000 shares of common stock pursuant
to a conversion of our Series H preferred stock. The shares of common stock
underlying the preferred were issued pursuant to Regulation D.
Subsequent to June 30, 2006, we issued 83,121 shares of our common stock in a
private placement, pursuant to Section 4(2) of the Securities Act of 1933, which
is an accredited investor.
F-39
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 27, 2006, we entered into definitive agreements to sell $30 million
senior convertible notes that are due in 2010 to several institutional and
accredited investors in a private placement exempt from registration under the
Securities Act of 1933. The notes initially carry a 9% coupon, payable quarterly
and are convertible into shares of common stock at $0.70 per share. In 2007, the
coupon may decline to LIBOR upon the Company achieving certain financial
milestones. The notes will begin to amortize in equal, bi-monthly payments
beginning in mid-2007. We concurrently issued warrants to purchase 12,857,143
shares of common stock at $0.73 per share that expire in July 2011 to the
investors in the private placement. Under the terms of the financing, we will
sell $30 million notes, of which $15.0 million of the notes will be held in
escrow. The release of the escrowed funds will be subject to stockholder
approval. We intend to file a proxy statement seeking such shareholder approval
as soon as practical. As a result of our failure to file our June 30, 2006 Form
10QSB timely, an event of default has occurred under the terms of the Notes, and
the interest rate on the Notes, payable quarterly, was increased from 9% to 14%
per annum. Pursuant to the terms of the Notes, upon the occurrence of an event
of default, holders of the Notes may, upon written notice to the Company, each
require the Company to redeem all or any portion of their Notes, at a default
redemption price calculated pursuant to the terms of the Notes. We have entered
into an Amendment Agreement with the holders of the Notes to amend the Notes in
certain respects as consideration for the holders' release of the Company's
default resulting from its delay in the filing of this quarterly report. See
Item 3 of Part II of this report, entitled "Default on Senior Securities", for a
description of the terms of the Amendment Agreement.
F-40
BRAVO! BRANDS INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2005 and December 31, 2004
Report of Independent Registered Public Accounting Firm F-42
Consolidated Financial Statements
Consolidated Balance Sheets F-43
Consolidated Statements of Operations and Comprehensive Loss F-45
Consolidated Statements of Cash Flows F-46
Consolidated Statements of Stockholders' Deficit F-48
Notes to Consolidated Financial Statements F-49
F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bravo! Brands Inc.
North Palm Beach, Florida
We have audited the accompanying consolidated balance sheets of Bravo! Brands
Inc. (Formerly Bravo! Foods International Corp.)
as of December 31, 2005 and 2004 and the related consolidated statements of
operations and comprehensive loss, stockholders' deficit and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bravo! Brands Inc. as of
December 31, 2005 and 2004 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company incurred a net loss of $79,528,653 for the year ended December 31,
2005 and as of that date had a working capital deficiency of $39,287,983. The
Company is also delinquent in payment of certain debts. These conditions raise
substantial doubt about their ability to continue as a going concern.
Management's actions in regard to these matters are more fully described in Note
1. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
As more fully described in Note 13 to the consolidated financial statements, the
accompanying consolidated balance sheets as of December 31, 2005 and 2004, and
the related consolidated statements of operations and comprehensive loss,
stockholders' deficit and cash flows for the years then ended, have been
restated to reflect the proper accounting for certain transactions.
/s/ Lazar Levine & Felix LLP
New York, New York
February 9, 2006, except for Note 13
as to which the date is September 8, 2006
F-42
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
2005 2004
(Restated) (Restated)
----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 4,947,986 $ 113,888
Accounts receivable, net of allowance for doubtful
accounts of $350,000 and $90,396 for 2005 and
2004, respectively 3,148,841 51,968
Inventories 391,145 11,656
Prepaid expenses 973,299 387,866
----------- ----------
Total current assets 9,461,271 565,378
Fixed assets 288,058 111,206
Intangible assets, net 18,593,560 77,038
Other assets 15,231 342,186
----------- ----------
Total assets $28,358,120 $1,095,808
=========== ==========
See accompanying notes
F-43
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Current liabilities:
Accounts payable $ 5,987,219 $ 1,763,339
Accrued liabilities 4,872,277 444,986
Notes payable 937,743 1,184,858
Convertible notes payable 1,012,780 1,099,231
Derivative liabilities 35,939,235 10,835,629
------------- ------------
Current and total liabilities 48,749,254 15,328,043
------------- ------------
Commitments and contingencies (Note 11) -- --
Redeemable preferred stock:
Series F convertible, par value $0.001 per share, 200,000 shares
designated Convertible Preferred Stock, stated value $10.00 per share,
5,248 and 55,515 shares issued and outstanding 52,480 555,150
Series H convertible, par value $0.001 per share, 350,000 shares
designated, 7% Cumulative Convertible Preferred Stock, stated value
$10.00 per share, 64,500 and 165,500 shares issued and outstanding 388,305 840,215
Series I convertible, par value $0.001 per share, 200,000 shares
designated, 8% Cumulative Convertible Preferred Stock, stated value
$10.00 per share, 0 and 30,000 shares issued and outstanding -- 300,000
Series J, par value $0.001 per share, 500,000 shares designated, 8%
Cumulative Convertible Preferred Stock, stated value $10.00 per share,
200,000 shares issued and outstanding 871,043 485,825
Series K, par value $0.001 per share, 500,000 shares designated, 8%
Cumulative Convertible Preferred Stock, stated value $10.00 per share,
95,000 shares issued and outstanding 792,672 750,265
------------- ------------
Total redeemable preferred stock 2,104,500 2,931,455
------------- ------------
Stockholders' Deficit:
Preferred stock, 5,000,000 shares authorized
Series B convertible, par value $0.001 per share, 1,260,000 shares
designated, 9% Convertible Preferred Stock, stated value $1.00 per
share, 107,440 shares issued and outstanding 107,440 107,440
Common stock, par value $0.001 per share, 300,000,000 shares
authorized, 184,253,753 and 57,793,501 shares issued and outstanding 184,254,501 57,791
Additional paid-in capital 96,507,932 21,387,210
Common stock subscription receivable (10,000) --
Accumulated deficit (119,254,501) (38,716,131)
Translation adjustment (30,759) --
------------- ------------
Total stockholders' deficit (22,495,634) (17,163,690)
------------- ------------
Total liabilities, redeemable preferred stock and stockholders' deficit $ 28,358,120 $ 1,095,808
============= ============
See accompanying notes
F-44
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
Years ended December 31,
----------------------------
2005 2004
------------- ------------
(Restated) (Restated)
Revenues $ 11,948,921 $ 3,344,699
Product costs (8,938,692) (2,374,805)
Shipping costs (1,505,035) (498,313)
------------- ------------
Gross margin 1,505,194 471,581
Operating expenses:
Selling 7,464,876 1,300,673
General and administrative 7,263,284 2,677,061
Product development 636,342 206,129
Non-recurring finder's fee 3,000,000 --
------------- ------------
Loss from operations (16,859,308) (3,712,282)
Other income (expenses), net:
Derivative income (expense) (60,823,574) (6,309,933)
Interest (1,667,294) (1,435,405)
Other 125,273 (60,000)
Liquidated damages (303,750) --
------------- ------------
Loss before income taxes (79,528,653) (11,517,620)
Provision for income taxes -- --
------------- ------------
Net loss (79,528,653) (11,517,620)
Adjustments to net loss to arrive at loss applicable to common
stockholders:
Preferred stock dividends (336,300) (388,632)
Accretion of preferred stock (985,717) (599,388)
------------- ------------
Loss applicable to common stockholders $ (80,850,670) $(12,505,640)
============= ============
Basic and diluted loss per common share $ (0.60) $ (0.31)
============= ============
Weighted average number of common shares outstanding 135,032,836 40,229,738
============= ============
Comprehensive loss and its components consist of the following:
Net loss $ (79,528,653) $(11,517,620)
Foreign currency translation adjustment (30,759) (689)
------------- ------------
Comprehensive loss $ (79,559,412) $(11,518,309)
============= ============
See accompanying notes
F-45
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------
2005 2004
(Restated) (Restated)
------------ ------------
Cash flows from operating activities:
Net loss $(79,528,653) $(11,517,620)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,251,646 239,853
Stock issuances for compensation 346,438 675,632
Equity instruments to be issued for consulting expenses 1,472,261 --
Options issued for compensation 798,869 153,631
Bad debt expense 259,604 51,170
(Gain) loss on debt extinguishment (125,273) 60,000
Derivative expense 60,823,574 6,309,933
Amortization of debt discount 1,428,638 1,175,245
Loss on disposal of fixed assets -- 6,216
Increase (decrease) in cash from changes in:
Accounts receivable (3,356,477) (77,217)
Other receivable -- 6,331
Inventories (379,489) 43,339
Prepaid expenses and other assets (586,764) (214,094)
Accounts payable and accrued expenses 7,294,548 (542,282)
------------ ------------
Net cash used in operating activities (9,301,078) (3,629,863)
------------ ------------
Cash flows from investing activities:
Licenses and trademark costs (3,823,521) (452,311)
Purchase of equipment (220,144) (78,952)
------------ ------------
Net cash used in investing activities (4,043,665) (531,263)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 950,000
Exercise of warrants 3,208,509 --
Proceeds from convertible notes payable 2,850,000 3,427,500
Proceeds from sale of common stock and warrants 20,690,000 30,000
Payments for redemption of warrants (5,900,000) --
Payment of note payable (500,000) (150,000)
Registration costs of financing (2,138,909) (40,656)
------------ ------------
Net cash provided by financing activities 18,209,600 4,216,844
------------ ------------
Effect of changes in exchange rate on cash (30,759) (689)
------------ ------------
Net increase in cash and cash equivalents 4,834,098 55,029
Cash and cash equivalents, beginning of period 113,888 58,859
------------ ------------
Cash and cash equivalents, end of period $ 4,947,986 $ 113,888
============ ============
See accompanying notes
F-46
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
2005 2004
Supplemental Cash Flow Information (Restated) (Restated)
----------- ----------
Cash paid during the year for interest $ 10,741 $ 51,301
=========== ========
Cash paid for taxes $ -- $ --
=========== ========
Non-cash investing and financing activities:
Purchase of intangible assets with derivative warrants $15,960,531 $612,538
=========== ========
Conversion of notes payable and accrued interest $20,343,934 $531,494
=========== ========
Conversion of redeemable preferred stock and related dividends $ 2,644,326 $927,146
=========== ========
Exercise of derivative warrants $35,230,018 $ --
=========== ========
Beneficial Conversion Feature $ -- $220,000
=========== ========
See accompanying notes
F-47
BRAVO! BRANDS INC. AND SUBSIDIARY
CONSOLOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Preferred Stock Common Stock Additional
----------------- --------------------- Paid In Accumulated
Shares Amount Shares Amount Capital Deficit
------- -------- ----------- -------- ----------- -------------
Balance, January 1, 2004 (Restated) 107,440 $107,440 28,047,542 $ 28,045 $18,430,875 $ (26,556,046)
Issuance of common
stock for services -- -- 9,332,300 9,332 666,300 --
Conversion redeemable preferred
stock and dividends -- -- 15,897,701 15,898 1,553,713 (642,465)
Conversion notes payable -- -- 4,265,958 4,266 527,228 --
Private Placement
financing -- -- 250,000 250 29,750 --
Beneficial conversion
feature -- -- -- -- 220,000 --
Financing Costs -- -- -- -- (40,656) --
Net loss for 2004 -- -- -- -- -- (11,517,620)
Translation adjustment -- -- -- -- -- --
------- -------- ----------- -------- ----------- -------------
Balance, December 31, 2004
(Restated) 107,440 107,440 57,793,501 57,791 21,387,210 (38,716,131)
Conversion redeemable
preferred stock and dividends -- -- 9,245,352 9,247 2,659,079 (24,000)
Exercise of warrants 32,474,792 32,475 38,406,052 --
Conversion notes payable -- -- 41,248,858 41,249 20,302,685 --
Private placement
financing -- -- 40,950,000 40,950 20,649,050 --
Common stock subscribed
but not paid -- -- -- -- -- --
Stock issued for
compensation -- -- 2,541,250 2,542 343,896 --
Financing costs -- -- -- -- (2,138,909) --
Stock option expense -- -- -- -- 798,869 --
Redemption of warrants -- -- -- -- (5,900,000)
Accretion of preferred
stock -- -- -- -- -- (985,717)
Net loss for 2005 -- -- -- -- -- (79,528,653)
Translation adjustment -- -- -- -- --
------- -------- ----------- -------- ----------- -------------
Balance, December 31,
2005 (Restated) 107,440 $107,440 184,253,753 $184,254 $96,507,932 $(119,254,501)
======= ======== =========== ======== =========== =============
Accumulated
Common Stock Other
Subscription Comprehensive
Receivable Loss Total
------------ ------------- ------------
Balance, January 1, 2004 (Restated) $ -- 689 $ (7,988,997)
Issuance of common
stock for services -- -- 675,632
Conversion redeemable preferred
stock and dividends -- -- 927,146
Conversion notes payable -- -- 531,494
Private Placement
financing -- -- 30,000
Beneficial conversion
feature -- -- 220,000
Financing Costs -- -- (40,656)
Net loss for 2004 -- -- (11,517,620)
Translation adjustment -- (689) (689)
-------- -------- ------------
Balance, December 31, 2004 (Restated) -- -- (17,163,690)
Conversion redeemable
preferred stock and dividends -- -- 2,644,326
Exercise of warrants -- -- 38,438,527
Conversion notes payable -- -- 20,343,934
Private placement
financing -- -- 20,690,000
Common stock subscribed
but not paid (10,000) -- (10,000)
Stock issued for
compensation -- -- 346,438
Financing costs -- -- (2,138,909)
Stock option expense -- -- 798,869
Redemption of warrants -- -- (5,900,000)
Accretion of preferred
stock -- -- (985,717)
Net loss for 2005 -- -- (79,528,653)
Translation adjustment -- (30,759) (30,759)
-------- -------- ------------
Balance, December 31, 2005 (Restated) $(10,000) $(30,759) $(22,495,634)
======== ======== ============
See accompanying notes
F-48
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Note 1 -Nature of Business, Liquidity and Management's Plans and Significant
Accounting Policies
Nature of Business:
We are engaged in the sale of flavored milk products and flavor ingredients in
the United States, the United Kingdom, Central America and the Middle East, and
we are establishing an infrastructure to conduct business in Canada.
Liquidity and Management's Plans:
As reflected in the accompanying consolidated financial statements, we have
incurred operating losses and negative cash flows from operations and have a
working capital deficiency of $39,287,983 as of December 31, 2005. In addition,
we are delinquent on certain of our debt agreements at December 31, 2005, and we
have experienced delays in filing our financial statements and registration
statements due to errors in our historical accounting that have been corrected
(See Note 13). Our inability to make these filings is resulting in our
recognition of penalties to the investors, and these penalties will continue
until we can complete our filings and register the common shares into which the
investors' financial instruments are convertible. Finally, our revenues are
significantly concentrated with one major customer. The loss of this customer or
curtailment in business with this customer could have a material adverse affect
on our business. These conditions raise substantial doubt about our ability to
continue as a going concern.
We have been dependent upon third party financings as we execute our business
model and plans. We completed a $30.0 million convertible note financing in
August 2006 that is expected to fulfill our liquidity requirements through the
end of 2006. However, $15.0 million of this financing is held in escrow, pending
approval by our shareholders of an increase in our authorized shares of common
stock. We were in default on this instrument due to the delay in filing our
quarterly financial report for the quarterly period ended June 30, 2006. As a
result, an event of default has occurred under the terms of the Notes and the
interest rate on the Notes, payable quarterly, was increased from 9% to 14% per
annum. Pursuant to the terms of the Notes, upon the occurrence of an event of
default, holders of the Notes may, upon written notice to the Company, each
require the Company to redeem all or any portion of their Notes, at a default
redemption price calculated pursuant to the terms of the Notes. During September
2006, we entered into an Amendment Agreement with the holders of the Notes to
amend the Notes in certain respects as consideration for the holders' release of
the Company's default resulting from its delay in the filing of our Form 10-QSB
for the quarter ended June 30, 2006.
We plan to increase our sales, improve our gross profit margins, augment our
international business and, if necessary, obtain additional financing.
Ultimately, our ability to continue is dependent upon the achievement of
profitable operations. There is no assurance that further funding will be
available at acceptable terms, if at all, or that we will be able to achieve
profitability.
The accompanying financial statements do not reflect any adjustments that may
result from the outcome of this uncertainty.
F-49
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities 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. The most significant estimates included in our
financial statements are the following:
o Estimating future bad debts on accounts receivable that are carried at net
realizable values.
o Estimating our reserve for unsalable and obsolete inventories that are
carried at lower of cost or market.
o Estimating the fair value of our financial instruments that are required to
be carried at fair value.
o Estimating the recoverability of our long-lived assets.
We use all available information and appropriate techniques to develop our
estimates. However, actual results could differ from our estimates.
Business Segment and Geographic Information
We operate in one dominant industry segment that we have defined as the single
serve flavored milk industry. While our international business is expected to
grow in the future, it currently contributes less than 10% of our revenues, and
we have no physical assets outside of the United States.
Revenue Recognition
Our revenues are derived from the sale of branded milk products to customers in
the United States of America, Great Britain and the Middle East. Geographically,
our revenues are dispersed 98% and 2% between the United States of America and
internationally, respectively. We currently have one customer in the United
States that provided 34% and 0% of our revenue during the years ended December
31, 2005 and 2004, respectively. Since we commenced business with this customer
during our fourth fiscal quarter of 2005, we expect that our revenue from this
customer will increase as a percentage of total sales in the near future.
Revenues are recognized pursuant to formal revenue arrangements with our
customers, at contracted prices, when our product is delivered to their premises
and collectibility is reasonably assured. We extend merchantability warranties
to our customers on our products but otherwise do not afford our customers with
rights of return. Warranty costs have historically been insignificant.
Our revenue arrangements often provide for industry-standard slotting fees where
we make cash payments to the respective customer to obtain rights to place our
products on their retail shelves for a stipulated period of time. We also engage
in other promotional discount programs in order to enhance our sales activities.
We believe our participation in these arrangements is essential to ensuring
continued volume and revenue growth in the competitive marketplace. These
payments, discounts and allowances are recorded as reductions to our reported
revenue. Unamortized slotting fees are recorded in prepaid expenses.
Principles of Consolidation
Our consolidated financial statements include the accounts of Bravo! Brands Inc.
(the "Company"), and its wholly-owned subsidiary Bravo! Brands (UK) Ltd. All
material intercompany balances and transactions have been eliminated. Cumulative
translation adjustments that we make to reflect the accounts of Bravo! Brands
(UK) Ltd. in United States Dollars are recorded as a component of other
comprehensive income (loss) and stockholder's equity. Foreign currency
transaction gains and losses are reported as a component of other income
(expense).
F-50
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Shipping and Handling Costs
Shipping and handling costs incurred to deliver products to our customers are
included as a component of cost of sales. These costs amounted to approximately
$1,505,035 and $498,313 for the years ended December 31, 2005 and 2004,
respectively.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with a remaining maturity of
three months or less to be cash equivalents.
Accounts Receivable
Our accounts receivable are exposed to credit risk. During the normal course of
business, we extend unsecured credit to our customers with normal and
traditional trade terms. Typically credit terms require payments to be made by
the thirtieth day following the sale. We regularly evaluate and monitor the
creditworthiness of each customer. We provide an allowance for doubtful accounts
based on our continuing evaluation of our customers' credit risk and our overall
collection history. As of December 31, 2005 and 2004, the allowance of doubtful
accounts aggregated $350,000 and $90,396, respectively.
In addition, our accounts receivable are concentrated with one customer that
represents 70% and 0% of our gross accounts receivable balances at December 31,
2005 and 2004, respectively. Approximately 2% of our gross accounts receivable
at December 31, 2005 are due from international customers.
Inventories
Inventories, which consist primarily of finished goods, are stated at the lower
of cost on the first in, first-out method or market. Further, our inventories
are perishable. Accordingly, we estimate and record lower-of-cost or market and
unsalable-inventory reserves based upon a combination of our historical
experience and on a specific identification basis. During the years ended
December 31, 2005 and 2004, we did not provide for unsaleable inventories.
In November 2004, the FASB issued Financial Accounting Standard No. 151,
Inventory Costs, an amendment of ARB No. 43 Chapter 4 (FAS 151), which clarifies
that inventory costs that are "abnormal" are required to be charged to expense
as incurred as opposed to being capitalized into inventory as a product cost.
FAS 151 provides examples of "abnormal" costs to include costs of idle
facilities, excess freight and handling costs and spoilage. FAS 151 will become
effective for our fiscal year beginning January 1, 2006. The adoption of FAS No.
151 is not expected to have a material effect on our consolidated financial
statements.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over a period of seven years for furniture and five years
for equipment. Maintenance, repairs and minor renewals are charged directly to
expenses as incurred. Additions and betterments to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts, and any resulting gain or
loss is included in the statement of operations.
F-51
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Our intangible assets, which we record at cost, consist of our distribution
agreement with Coca-Cola Enterprises ("CCE") that we entered into during the
third fiscal quarter of 2005, our manufacturing agreement with Jasper Products,
Inc. and licenses and trademark costs with estimated lives of ten years, five
years and one-to-five years, respectively.
Impairment of Long-Lived Assets
We evaluate the carrying value and recoverability of our long-lived assets when
circumstances warrant such evaluation by applying the provisions of Financial
Accounting Standard No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("FAS 144"). FAS 144 requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the
estimated undiscounted cash flows expected to result from the use and eventual
disposition of the assets. Whenever any such impairment exists, an impairment
loss will be recognized for the amount by which the carrying value exceeds the
fair value.
Financial Instruments
Financial instruments, as defined in Financial Accounting Standard No. 107
Disclosures about Fair Value of Financial Instruments (FAS 107), consist of
cash, evidence of ownership in an entity and contracts that both (i) impose on
one entity a contractual obligation to deliver cash or another financial
instrument to a second entity, or to exchange other financial instruments on
potentially unfavorable terms with the second entity, and (ii) conveys to that
second entity a contractual right (a) to receive cash or another financial
instrument from the first entity or (b) to exchange other financial instruments
on potentially favorable terms with the first entity. Accordingly, our financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities, notes payable, derivative financial instruments,
convertible debt and redeemable preferred stock that we have concluded is more
akin to debt than equity.
We carry cash and cash equivalents, accounts receivable, accounts payable, and
accrued liabilities at historical costs; their respective estimated fair values
approximate carrying values due to their current nature. We also carry notes
payable, convertible debt and redeemable preferred stock at historical cost;
however, fair values of debt instruments and redeemable preferred stock are
estimated for disclosure purposes (below) based upon the present value of the
estimated cash flows at market interest rates applicable to similar instruments.
As of December 31, 2005, estimated fair values and respective carrying values of
our notes payable, convertible debt and redeemable preferred stock are as
follows:
Instrument Note Fair Value Carrying Value
----------------------------------- ---- ---------- --------------
$750,000 Notes Payable 5(a) $ 750,000 $750,000
=========== ==============
$187,843 Notes Payable 5(b) 187,743 187,743
=========== ==============
Other Notes Payable 5(c) 0 0
=========== ==============
$200,000 Convertible Note Payable 6(a) 190,000 187,934
=========== ==============
$15,000 Convertible Note Payable 6(b) 13,300 1,620
=========== ==============
$600,000 Convertible Note Payable 6(c) 668,000 600,000
=========== ==============
$6,250 Convertible Note Payable 6(e) 6,375 5,188
=========== ==============
$25,000 Convertible Note Payable 6(f) 25,500 30,278
=========== ==============
$187,760 Convertible Note Payable 6(g) 187,760 187,760
=========== ==============
Series F Preferred Stock 7(d) 46,000 52,480
=========== ==============
Series H Preferred Stock 7(a) 525,000 388,305
=========== ==============
Series I Preferred Stock 7(d) 0 0
=========== ==============
Series J Preferred Stock 7(b) 1,731,000 871,043
=========== ==============
Series K Preferred Stock 7(c) 881,000 792,672
=========== ==============
As of December 31, 2004, estimated fair values and respective carrying values of
our notes payable, convertible debt and redeemable preferred stock are as
follows:
Instrument Fair Value Carrying Value
-------------------------------------- ----------- --------------
$750,000 face value note payable $750,000 $750,000
============ ==============
$187,743 face value note payable 187,743 187,743
============ ==============
$275,000 note payable, due 11.30.06 246,621 175,055
============ ==============
$600,000 convertible note payable, due 12.31.05 568,421 240,088
============ ==============
$1,008,000 convertible note payable, due 11.30.05 1,679,832 402,607
============ ==============
$577,500 convertible note payable, due 4.30.06 547,377 73,057
============ ==============
$375,000 convertible note payable, due 10.1.06 339,901 208,424
============ ==============
Other notes payable 247,115 247,115
============ ==============
Series F Preferred Stock 555,150 555,150
============ ==============
Series H Preferred Stock 1,459,846 840,215
============ ==============
Series J Preferred Stock 1,701,772 485,825
============ ==============
Series K Preferred Stock 729,429 750,265
============ ==============
F-52
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Derivative financial instruments, as defined in Financial Accounting Standard
No. 133, Accounting for Derivative Financial Instruments and Hedging Activities
(FAS 133), consist of financial instruments or other contracts that contain a
notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
We generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as debt financing
arrangements, redeemable preferred stock arrangements, and freestanding warrants
with features that are either (i) not afforded equity classification, (ii)
embody risks not clearly and closely related to host contracts, or (iii) may be
net-cash settled by the counterparty. As required by FAS 133, these instruments
are required to be carried as derivative liabilities, at fair value, in our
financial statements.
The following table summarizes the components of derivative liabilities as of
December 31, 2005 and 2004:
Note 2005 2004
---- ------------ ------------
Compound derivative financial instruments that have been
bifurcated from the following financing arrangements:
$ 400,000 Convertible Note Financing 6(a) $ (1,311,000) $ (201,000)
$2,300,000 Convertible Note Financing 6(b) (4,867) --
$ 600,000 Convertible Note Financing 6(c) (153,700) (27,833)
$ 693,000 Convertible Note Financing 6(e) (42,878) (794,750)
$ 660,000 Convertible Note Financing 6(f) (159,250) (440,648)
$1,008,000 Convertible Note Financing 6(g) -- (378,756)
$ 240,000 Convertible Note Financing 6(d) -- (258,400)
Series F Preferred Stock Financing 7(d) (25,632) (247,562)
Series H Preferred Stock Financing 7(a) (381,377) (156,927)
Series I Preferred Stock Financing 7(b) -- (10,400)
Series J Preferred Stock Financing 7(b) (5,628,000) (728,000)
Series K Preferred Stock Financing 7(c) (206,200) (73,644)
Freestanding derivative contracts arising from financing and
other business arrangements:
Warrants issued with $693,000 Convertible Notes 6(e) (924,120) (330,220)
Warrants issued with $400,000 Convertible Notes 6(a) -- (1,264,600)
Warrants issued with $600,000 Convertible Notes 6(c) -- (904,100)
Warrants issued with $660,000 Convertible Notes 6(f) -- (446,400)
Warrants issued with $1,008,000 Convertible Notes 6(g) (564,735) (1,446,560)
Warrants issued with $240,000 Convertible Notes 6(d) -- (121,040)
Warrants issued with Series H Preferred Stock 7(a) (1,264,109) (376,212)
Warrants issued with Series I Preferred Stock 7(i) -- (177,257)
Warrants issued with Series F Preferred Stock 7(d) (563,096) (648,004)
Warrants issued with Series D Preferred Stock 7(d) (400,214) (188,982)
Warrants issued with Series J Preferred Stock 7(b) -- (1,088,000)
Other warrants, including warrants issued with common stock
financing 9(b) (24,310,057) (526,334)
------------ ------------
Total derivative liabilities $(35,939,235) $(10,835,629)
============ ============
F-53
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
See the notes referenced in the table for details of the origination and
accounting for these derivative financial instruments. We estimate fair values
of derivative financial instruments using various techniques (and combinations
thereof) that are considered to be consistent with the objective measuring fair
values. In selecting the appropriate technique, we consider, among other
factors, the nature of the instrument, the market risks that it embodies and the
expected means of settlement. For less complex derivative instruments, such as
freestanding warrants, we generally use the Black-Scholes-Merton option
valuation technique because it embodies all of the requisite assumptions
(including trading volatility, estimated terms and risk free rates) necessary to
fair value these instruments. For complex derivative instruments, such as
embedded conversion options, we generally use the Flexible Monte Carlo valuation
technique because it embodies all of the requisite assumptions (including credit
risk, interest-rate risk and exercise/conversion behaviors) that are necessary
to fair value these more complex instruments. For forward contracts that
contingently require net-cash settlement as the principal means of settlement,
we project and discount future cash flows applying probability-weightage to
multiple possible outcomes. Estimating fair values of derivative financial
instruments requires the development of significant and subjective estimates
that may, and are likely to, change over the duration of the instrument with
related changes in internal factors and external market indicators. In addition,
option-based techniques are highly volatile and sensitive to changes in our
trading market price which has a high-historical volatility. Since derivative
financial instruments are initially and subsequently carried at fair values, our
income will reflect the volatility in these estimate and assumption changes.
The following table summarizes the effects on our income (loss) associated with
changes in the fair values of our derivative financial instruments by type of
financing for the years ended December 31, 2005 and 2004:
2005 2004
------------- -----------
Derivative income (expense):
Convertible note and warrant financings $(42,172,053) $(3,432,061)
Preferred stock and warrant financings (11,314,733) (2,561,043)
Other warrants and derivative contracts (7,336,788) (316,829)
------------- -----------
$(60,823,574) $(6,309,933)
============= ===========
Additional information related to individual financings can be found in notes 6,
7 & 9.
Our derivative liabilities as of December 31, 2005 and 2004, and our derivative
loss during each of the years ended December 31, 2005 and 2004 is significant to
our consolidated financial statements. The magnitude of the derivative loss
during the year ended December 31, 2005 when compared with the loss for the year
ended December 31, 2004 reflects the following:
(a) During the year ended December 31, 2005, and specifically commencing in the
second quarter, the trading price of our common stock reached significantly high
levels relative to its trend. The trading price of our common stock
significantly affects the fair value of our derivative financial instruments. To
illustrate, our trading stock price at the end of the first quarter of 2005 was
$0.15 and then increased to $0.93 by the end of the second quarter. Our trading
stock price then declined to $0.61 and $0.59 at the end of the third and fourth
quarters, respectively. However, the higher stock price had the effect of
significantly increasing the fair value of our derivative liabilities and,
accordingly, we were required to adjust the derivatives to these higher values
with charges to our income. Also, due to the higher stock price commencing in
the second quarter, we experienced significant exercise and conversion activity
related to our derivative warrants and, to a lesser degree, with respect to the
embedded conversion options. Accordingly, our year end derivative liability
balances reflect, among other elements of our valuation assumptions, the higher
intrinsic values of the arrangements caused by the significant changes in our
stock price, which are offset by a smaller number of common shares indexed to
outstanding warrants due to the extraordinary level of exercise activity.
F-54
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
(b) During the year ended December 31, 2005, we entered into a $2,300,000 debt
and warrant financing arrangement, more fully discussed in Note 6(b). In
connection with our accounting for this financing we encountered the unusual
circumstance of a day-one loss related to the recognition of derivative
instruments arising from the arrangement. That means that the fair value of the
bifurcated compound derivative and warrants exceeded the proceeds that we
received from the arrangement and we were required to record a loss to record
the derivative financial instruments at fair value. The loss that we recorded
amounted to $8,663,869. We did not enter into any other financing arrangements
during the periods reported that reflected day-one losses.
The following table summarizes the number of common shares indexed to the
derivative financial instruments as of December 31, 2005:
Conversion
Note Features Warrants Total
---- ----------- ---------- ----------
Financing or other contractual
arrangement:
$ 400,000 Convertible Note Financing 6(a) 4,320,000 -- 4,320,000
$2,300,000 Convertible Note Financing 6(b) 120,000 2,000,000 2,120,000
$ 600,000 Convertible Note Financing 6(c) 4,100,000 -- 4,100,000
$ 693,000 Convertible Note Financing 6(e) 65,104 1,700,000 1,765,104
$ 660,000 Convertible Note Financing 6(f) 250,000 1,500,000 1,750,000
$1,080,000 Convertible Note Financing 6(g) 1,924,540 -- 1,924,540
Series D Convertible Preferred Stock 7(d) -- 611,250 611,250
Series F Convertible Preferred Stock 7(d) 220,969 1,038,259 1,259,228
Series H Convertible Preferred Stock(a) 7(a) -- 4,387,500 4,387,500
Series J Convertible Preferred Stock 7(b) 20,000,000 -- 20,000,000
Series K Convertible Preferred Stock(a) 7(c) -- -- --
Other warrants and contracts 9(b) -- 49,504,688 49,504,688
----------- ---------- ----------
31,000,613 60,741,697 91,742,310
=========== ========== ==========
(b) As more fully described in Notes 7(a) and 7(c) these instruments were
afforded the conventional convertible exemption, which means we did
not have to bifurcate the embedded conversion feature. However, we
were required to bifurcate certain other embedded derivatives as
discussed in the notes. Although the conversion features did not
require derivative accounting, we are required to also consider the
953,443 and 9,500,000 common shares, respectively, into which these
instruments are indexed in determining whether we have sufficient
authorized and unissued common shares for all of our share-settled
obligations.
We have entered into registration rights agreements with certain investors that
require us to file a registration statement covering shares underlying a
financing arrangement, become effective on the registration statement, maintain
effectiveness and, in some instances, maintain the listing of the underlying
shares. Certain of these registration rights agreements require our payment of
liquidating damages to the investors in the event we do not achieve the
requirements. We record estimated liquidated damages as liabilities and charges
to our income when the liquidated damages are probable and estimable under
Financial Accounting Standard No. 5, Accounting for Contingencies. During the
years ended December 31 2005 and 2004, we recorded liquidated damages expense of
$303,750 and $0, respectively.
Advertising and Promotion Costs
Advertising and promotion costs, which are included in selling expenses, are
expensed as incurred and aggregated $2,515,062 and $656,614 for the years ended
December 31, 2005 and 2004, respectively.
F-55
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Share-Based Payments
Prior to 2005, we accounted for our stock options under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Effective January 1, 2005, the Company
adopted the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock Based Compensation ("FAS 123"). Under the modified
prospective method of adoption selected by the Company under the provisions of
FASB Statement No. 148, Accounting for Stock Based Compensation - Transition and
Disclosure, ("FAS 148") compensation costs recognized in 2005 were the same as
that which would have been recognized had the recognition provisions of FAS 123
been applied from the options' grant dates. This is because all outstanding
options at December 31, 2004 were fully vested on that date. Consistent with the
requirements of this method of adoption, results for prior years have not been
restated. We recognized no tax benefit for share-based compensation arrangements
due to the fact that we are in a cumulative loss position and recognize no tax
benefits in our Consolidated Statements of Operations. For further information
regarding the adoption of SFAS No. 123, see Note 8 to the consolidated financial
statements.
Income Taxes
We account for income taxes using the liability method, which requires an entity
to recognize deferred tax liabilities and assets. Deferred income taxes are
recognized based on the differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. Further, the effects of
enacted tax laws or rate changes are included as part of deferred tax expense or
benefit in the period that covers the enactment date. A valuation allowance is
recognized if it is more likely than not that some portion, or all, of a
deferred tax asset will not be realized.
Loss Per Common Share
Our basic loss per common share is computed by dividing loss applicable to
common stockholders by the weighted average number of common share outstanding
during the reporting period. Diluted loss per common share is computed similar
to basic loss per common share except that diluted loss per common share
includes dilutive common stock equivalents, using the treasury stock method, and
assumes that the convertible debt instruments were converted into common stock
upon issuance, if dilutive. For the years ended December 31, 2005 and 2004
potential common shares arising from our stock options, stock warrants,
convertible debt and convertible preferred stock amounting to 108,059,082 and
126,767,057 shares, respectively, were not included in the computation of
diluted loss per share because their effect was antidilutive.
Note 2 - Fixed Assets
Our fixed assets are comprised of the following as of December 31, 2005 and
2004:
2005 2004
--------- ---------
Office equipment $ 209,085 $ 151,577
Furniture and fixtures 189,068 150,871
Automobiles 29,295 --
Leasehold improvements 23,714 23,714
Purchased software 3,223 3,223
--------- ---------
454,385 329,385
Less: accumulated depreciation and amortization (166,327) (218,179)
--------- ---------
$ 288,058 $ 111,206
========= =========
F-56
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense of fixed assets aggregated $43,292 and
$30,153 for 2005 and 2004, respectively.
Note 3 - Intangible Assets
Our intangible assets consist of our distribution agreement with Coca-Cola
Enterprises ("CCE"), our manufacturing agreement with Jasper Products, Inc. and
licenses and trademark costs, with estimated lives of ten years, five years and
one-to-five years, respectively. The following table summarizes the components
of our intangible assets as of December 31, 2005 and 2004:
2005 2004
------------ ---------
Distribution agreement $ 15,960,531 $ --
Manufacturing agreement 2,700,000 --
Licenses and trademarks 1,370,958 365,431
Less accumulated amortization (1,437,929) (288,393)
------------ ---------
$ 18,593,560 $ 77,038
============ =========
Amortization expense amounted to $1,411,004 and $269,242 for the years ended
December 31, 2005 and 2004, respectively.
Estimated future amortization of our intangible assets for each of the next five
years is as follows as of December 31, 2005:
December 31, 2006 $2,685,671
==========
December 31, 2007 $2,367,947
==========
December 31, 2008 $2,356,342
==========
December 31, 2009 $2,355,844
==========
December 31, 2010 $2,203,289
==========
Note 4 -- Accrued Liabilities
Accrued liabilities consist of the following as of December 31, 2005 and
December 31, 2004:
2005 2004
---------- ----------
Investor relations liability $1,545,565 $ --
Production processor liability 182,814 --
Accrued payroll and related 636,757 15,000
Accrued interest 376,198 255,173
Discontinued products (a) 1,710,733 --
Liquidated damages due to late registration (b) 303,750 --
Other 116,460 174,813
---------- ----------
$4,872,277 $ 444,986
========== ==========
(a) During the year ended December 31, 2005, we discontinued certain
product lines and, as a result, incurred certain penalties under
purchase commitments with our manufacturing vendors. We accrued these
penalties upon our decision to discontinue the products.
(b) Certain of our financings provide for penalties in the event of
non-registration of securities underlying the financial instruments.
Generally, these penalties are calculated as a percentage of the
financing proceeds, usually between 1.0% and 3.0% monthly. We record
these liquidated damages when they are probable and estimable
pursuant to FAS 5.
F-57
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 -- Notes Payable
Notes payable consist of the following as of December 31, 2005 and 2004:
2005 2004
-------- ----------
$750,000 face value note payable, due September 3, 2004 (a) $750,000 $ 750,000
$187,743 face value note payable, due December 31, 2005 (b) 187,743 187,743
$100,000 face value note payable due February 1, 2002 (c) -- 100,000
Other 147,115
-------- ----------
Total notes payable 937,743 1,184,858
Less current maturities 937,743 1,184,858
-------- ----------
Long-term notes payable $ -- $ --
======== ==========
(a) On May 9, 2004 we received the proceeds of a $750,000 loan from Mid-Am
Capital, payable September 3, 2004, with an interest rate of 8%. This loan is
secured by a general security interest in all of our assets. Mid-Am has agreed
to extend the note on a demand basis.
(b) In 1999, we issued a promissory note to assume existing debt owed by our
then Chinese joint venture subsidiary to a supplier, International Paper. The
face value of that unsecured note was $282,637 at an annual interest rate of
10.5%. The note originally required 23 monthly payments of $7,250 and a balloon
payment of $159,862 due on July 15, 2000. During 2000, we negotiated an
extension of this note to July 1, 2001. International Paper imposed a charge of
$57,000 to renegotiate the note, which amount represents interest due through
the extension date. The balance due on this note is $187,743 at December 31,
2005, all of which is delinquent. Although International Paper has not pursued
collection of the note, it is possible that they could do so in the future and,
if they do, such collection effort may have a significant adverse impact on the
liquidity of the Company.
(c) On November 6 and 7, 2001 respectively, the Company received 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 on February 1, 2002 with
interest at an annual rate of 8%. These loans were secured by a general security
interest on all of the assets of the Company. These lenders had agreed to extend
the notes without default on a demand basis. Interest accrued and unpaid at
December 31, 2004 aggregated $25,380.
Note 6. Convertible Notes Payable
Convertible debt carrying values consist of the following as of December 31,
2005 and 2004:
2005 2004
---------- ----------
$200,000 Convertible Note Payable, due November 2006 (a) $ 187,934 $ 175,055
$15,000 Convertible Note Payable, due May 2007 (b) 1,620 --
$600,000 Convertible Note Payable, due December 2006 (c) 600,000 240,088
$6,250 Convertible Note Payable, due April 30, 2006 (e) 5,188 73,057
$25,000 Convertible Note Payable, due October 1, 2006 (f) 30,278 208,424
$187,760 Convertible Note Payable, due December 1, 2006 (g) 187,760 402,607
---------- ----------
$1,012,780 $1,099,231
========== ==========
F-58
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) $400,000 Convertible Note Financing
On November 20, 2003, we issued $400,000 of 8.0% convertible notes payable, due
November 20, 2005 plus warrants to purchase 14,000,000 shares of our common
stock with strike prices ranging from $0.05 to $1.00 for a period of three
years. The convertible notes had a face value outstanding of $200,000 and
$275,000 on December 31, 2005 and 2004, respectively following the modification
of the underlying note agreement, extending the maturity date of the remaining
balance to November 20, 2006. The convertible notes are convertible into a
variable number of our common shares based upon a variable conversion price of
the lower of $0.05 or 75% of the closing market price near the conversion date.
The holder has the option to redeem the convertible notes payable for cash at
130% of the face value in the event of defaults and certain other contingent
events, including events related to the common stock into which the instrument
is convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). In addition, we extended registration rights to the holder that
required registration and continuing effectiveness thereof; we would be required
to pay monthly liquidating damages of 2.0% for defaults under this provision.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to a
variable conversion feature, and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because, as noted above, share settlement
and maintenance of an effective registration statement are not within our
control. Therefore, the warrants are also required to be carried as a derivative
liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $1,311,000 and $201,000 as of
December 31, 2005 and 2004, respectively. This amount is included in Derivative
Liabilities on our balance sheet. Warrants related to the financing were fully
converted prior to December 31, 2005.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $400,000
convertible note financing.
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(1,110,000) $ 23,000
=========== ===========
Warrant derivative $(5,842,900) $(1,031,800)
=========== ===========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound derivatives.
F-59
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes to zero. This discount, along
with related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $88,000 and $204,000, respectively.
As noted in the introductory paragraph of this section, the holders extended the
notes one additional year to November 2006. This modification was accounted for
as an extinguishment because the present value of the amended debt was
significantly different than the present value immediately preceding the
modification. As a result of the extinguishment, the existing debt carrying
value was adjusted to fair value using projected cash flows at market rates for
similar instruments. This extinguishment resulted in our recognition of a gain
on extinguishment of $22,733 in the fourth fiscal quarter of our year ended
December 31, 2005.
(b) $2,300,000 Convertible Note Financing:
On January 28, 2005, May 23, 2005 and August 18, 2005, we issued $1,150,000,
$500,000 and $650,000, respectively of 8.0% convertible notes payable, due
January 28, 2007, May 23, 2007 and August 18, 2007, respectively, plus warrants
to purchase 9,200,000, 4,000,000 and 5,200,000, respectively, shares of our
common stock with a strike price of $0.129 for a period of five years. The
remaining portion of the Nay 23, 2005 convertible notes had a face value
outstanding of $15,000 on December 31, 2005, resulting from conversions of all
other notes associated with this financing to common stock. The remaining
portion of the May 23, 2005 convertible notes are convertible into a fixed
number of our common shares based upon a conversion price of $0.125 with
anti-dilution protection for sales of securities below the fixed conversion
price. We have the option to redeem the convertible notes for cash at 120% of
the face value. The holder has the option to redeem the convertible notes
payable for cash at 120% of the face value in the event of defaults and certain
other contingent events, including events related to the common stock into which
the instrument is convertible, registration and listing (and maintenance
thereof) of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put").
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated debt instruments. We combined all embedded features that required
bifurcation into one compound instrument that is carried as a component of
derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including volatility, expected terms, and risk free rates) that
are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $4,867 as of December 31, 2005.
F-60
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2005 2,000,000 warrants related to the financing remain
unconverted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $2,300,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $ (3,779,033) $--
============ ===
Warrant derivative $(17,141,306) $--
============ ===
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
In connection with our accounting for this financing arrangement we encountered
the unusual circumstance of a day-one loss related to the recognition of
derivative instruments arising from the arrangement. That means that the fair
value of the bifurcated compound derivative and warrants exceeded the proceeds
that we received from the arrangement and we were required to record a loss to
record the derivative financial instruments at fair value. The loss that we
recorded amounted to $8,663,869.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the year ended December 31, 2005 amounted to
approximately $462,000.
(c) $600,000 Convertible Note Financing:
On June 29, 2004, we issued $600,000 of 10.0% convertible notes payable, due
December 31, 2005, plus warrants to purchase 2,000,000 and 5,000,000 shares of
our common stock with strike prices of $0.25 and $2.00, respectively, for a
periods of five and two years, respectively. Net proceeds from this financing
arrangement amounted to $500,000. As of December 31, 2005, this debt is past due
and, accordingly, the outstanding carrying value of $600,000 does not include
the $68,000 of capitalized interest, which is being reflected as accrued
liabilities. The convertible notes are convertible into a fixed number of our
common shares based upon a conversion price of $0.15 with anti-dilution
protection for sales of securities below the fixed conversion price. We have the
option to redeem the convertible notes for cash at 120% of the face value. The
holder has the option to redeem the convertible notes payable for cash at 130%
of the face value in the event of defaults and certain other contingent events,
including events related to the common stock into which the instrument is
convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). In addition, we extended registration rights to the holder that
required registration and continuing effectiveness thereof; we are required to
pay monthly liquidating damages of 2.0% for defaults under this provision. The
maturity dates for these notes have been extended to December 31, 2006.
F-61
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in compound derivative balances
associated with this financing arrangement of $153,700 and $27,833 as of
December 31, 2005 and 2004, respectively. These amounts are included in
Derivative Liabilities on our balance sheet.
As of December 31, 2005 all warrants related to the financing had been
converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $600,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $ (125,867) $ 47,134
=========== =========
Warrant derivative $(5,478,300) $(479,067)
=========== =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, are amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $428,000 and $240,000, respectively.
(d) $240,000 Convertible Note Financing:
On December 22, 2004, we issued $240,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 800,000 shares of common stock at
$0.15 for five years. Net proceeds from this financing arrangement amounted to
$200,000. As of December 31, 2005, this debt had been fully converted. As of
December 31, 2004, this debt had a face value of $210,000. The convertible notes
were convertible into a fixed number of our common shares based upon a
conversion price of $0.10 with anti-dilution protection for sales of securities
below the fixed conversion price. We had the option to redeem the convertible
notes for cash at 120% of the face value. The holder has the option to redeem
the convertible notes payable for cash at 130% of the face value in the event of
defaults and certain other contingent events, including events related to the
common stock into which the instrument is convertible, registration and listing
(and maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the "Default Put"). In addition, we extended
registration rights to the holder that required registration and continuing
effectiveness thereof; we are required to pay monthly liquidating damages of
2.0% for defaults under this provision.
F-62
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. These amounts are included in Derivative
Liabilities on our balance sheet. We estimated the fair value of the warrants on
the inception dates, and subsequently, using the Black-Scholes-Merton Valuation
technique, because that technique embodies all of the assumptions (including,
volatility, expected terms, and risk free rates) that are necessary to fair
value freestanding warrants.
As of December 31, 2005 all warrant liabilities related to the financing had
been fully converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $240,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(55,604) $ 64,600
======== =========
Warrant derivative $ 55,540 $(220,515)
======== =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound derivative.
F-63
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $66,781 and $-0-, respectively.
(e) $693,000 Convertible Note Financing:
On October 29, 2004, we issued $693,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 2,200,000 at $0.15 for five years. Net
proceeds from this financing arrangement amounted to $550,000. As of December
31, 2005, this debt had face value $6,250 outstanding. The convertible notes
were convertible into a fixed number of our common shares based upon a
conversion price of $0.10 with anti-dilution protection for sales of securities
below the fixed conversion price. We had the option to redeem the convertible
notes for cash at 120% of the face value. The holder has the option to redeem
the convertible notes payable for cash at 130% of the face value in the event of
defaults and certain other contingent events, including events related to the
common stock into which the instrument is convertible, registration and listing
(and maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the "Default Put"). In addition, we extended
registration rights to the holder that required registration and continuing
effectiveness thereof; we are required to pay monthly liquidating damages of
2.0% for defaults under this provision. The maturity dates for these notes were
extended to October 1, 2006.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in a compound derivative balance of
$42,878 as of December 31, 2005. Our valuation model resulted in a warrant
derivative balance, arising from the convertible note financing, of $924,120 and
$330,220 as of December 31, 2005 and 2004, respectively. These amounts are
included in Derivative Liabilities on our balance sheet.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $693,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(2,610,699) $(133,492)
----------- ---------
Warrant derivative $ (668,950) $(373,967)
=========== =========
F-64
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $199,000 and $73,000, respectively.
(f) $660,000 Convertible Note Financing:
On April 2, 2004, we issued $660,000 of 10.0% convertible notes payable, due
October 1, 2005, plus warrants to purchase 3,000,000 at $0.15 for five years.
Net proceeds from this financing arrangement amounted to $500,000. As of
December 31, 2005, this debt had a face value of $25,000 outstanding. The
convertible notes were convertible into a fixed number of our common shares
based upon a conversion price of $0.10 with anti-dilution protection for sales
of securities below the fixed conversion price. We had the option to redeem the
convertible notes for cash at 120% of the face value. The holder has the option
to redeem the convertible notes payable for cash at 130% of the face value in
the event of defaults and certain other contingent events, including events
related to the common stock into which the instrument is convertible,
registration and listing (and maintenance thereof) of our common stock and
filing of reports with the Securities and Exchange Commission (the "Default
Put"). In addition, we extended registration rights to the holder that required
registration and continuing effectiveness thereof; we are required to pay
monthly liquidating damages of 2.0% for defaults under this provision.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in a compound derivative balance of
$159,250 and $440,648 as of December 31, 2005 and 2004, respectively. This
amount is included in Derivative Liabilities on our balance sheet.
F-65
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2006, all warrants related to the financing had been fully
converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $660,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(2,787,246) $(194,962)
=========== =========
Warrant derivative $ 61,800 $(276,188)
=========== =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with the remaining compound instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $74,000 and $256,000, respectively.
(g) $1,008,000 Convertible Note Financing:
On June 29, 2004, we issued $1,008,000 of 10.0% convertible notes payable, due
April 30, 2006, plus warrants to purchase 3,200,000 and 8,000,000 shares of our
common stock at $0.25 and $2.00, respectively, for periods of five and two
years, respectively. Net proceeds from this financing arrangement amounted to
$800,000. As of December 31, 2005, this debt had a face value of $187,760
outstanding. The convertible notes were convertible into a fixed number of our
common shares based upon a conversion price of $0.15 with anti-dilution
protection for sales of securities below the fixed conversion price. We had the
option to redeem the convertible notes for cash at 120% of the face value. The
holder has the option to redeem the convertible notes payable for cash at 130%
of the face value in the event of defaults and certain other contingent events,
including events related to the common stock into which the instrument is
convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). In addition, we extended registration rights to the holder that
required registration and continuing effectiveness thereof; we are required to
pay monthly liquidating damages of 2.0% for defaults under this provision. The
maturity dates for these notes have been extended to December 31, 2006.
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection; and it did not otherwise meet the conditions for
equity classification. Since equity classification is not available for the
conversion feature, we were required to bifurcate the embedded conversion
feature and carry it as a derivative liability, at fair value. We also concluded
that the Default Put required bifurcation because, while puts on debt
instruments are generally considered clearly and closely related to the host,
the Default Put is indexed to certain events, noted above, that are not
associated with debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that is carried as a component
of derivative liabilities. We also determined that the warrants did not meet the
conditions for equity classification because these instruments did not meet all
of the criteria necessary for equity classification. Therefore, the warrants are
also required to be carried as a derivative liability, at fair value.
F-66
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inceptions dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in a compound derivative balance of
$564,735 and $1,446,560 as of December 31, 2005 and 2004, respectively. This
amount is included in Derivative Liabilities on our balance sheet.
As of December 31, 2005, all warrants related to the financing had been fully
converted.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the $1,008,000
convertible note financing:
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $ (185,979) $ (29,988)
----------- ---------
Warrant derivative $(1,661,859) $(826,816)
=========== =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
The aforementioned allocations to the compound and warrant derivatives resulted
in the discount in the carrying value of the notes. This discount, along with
related deferred finance costs and future interest payments, were amortized
through periodic charges to interest expense using the effective method.
Interest expense during the years ended December 31, 2005 and 2004 amounted to
approximately $383,000 and $403,000, respectively.
(h) $360,000 Convertible Note Financing:
On April 21, 2005, we issued $360,000, six-month-term, 10% convertible notes
payable, due October 31, 2005. Net proceeds for this financing transaction
amounted to $277,488. The notes were convertible into shares of common stock at
a fixed conversion rate of $0.20, with anti-dilution protection for sales of
securities below the fixed conversion price. The holder converted the notes on
September 30, 2005. We had the option to redeem the notes payable for cash at
120% of the face value. The holder has the option to redeem the convertible
notes payable for cash at 130% of the face value in the event of defaults and
certain other contingent events, including events related to the common stock
into which the instrument is convertible, registration and listing (and
maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the "Default Put").
F-67
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In our evaluation of this instrument, we concluded that the conversion feature
was not afforded the exemption as a conventional convertible instrument due to
the anti-dilution protection afforded the holder; and it did not otherwise meet
the conditions for equity classification. Therefore, we were required to
bifurcate the embedded conversion feature and carry it as a derivative
liability. We also concluded that the Default Put required bifurcation because,
while puts on debt instruments are generally considered clearly and closely
related to the host, the Default Put is indexed to certain events, noted above,
that are not associated debt instruments. We combined all embedded features that
required bifurcation into one compound instrument that was carried as a
component of derivative liabilities through the date of conversion.
We allocated the initial proceeds from the financing first to the compound
derivative instrument in the amount of $113,925 and the balance to the debt host
instrument. We estimated the fair value of the compound derivative on the
inception dates, and subsequently, using the Monte Carlo Valuation technique,
because that technique embodies all of the assumptions (including credit risk,
interest risk, stock price volatility and conversion estimates) that are
necessary to fair value complex derivative instruments.
The following table illustrates fair value adjustments that we have recorded
related to the compound derivative arising from the $360,000 convertible notes
payable.
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(841,650) $--
========= ===
Warrant derivative $ -- $--
========= ===
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. Since the instrument was converted on September 30, 2005,
there will be no future charges or credits to derivative income (expense)
associated with this instrument.
The above allocations resulted in a discount to the carrying value of the notes
amounting to approximately $173,925. This discount, along with related deferred
finance costs and future interest payments, was amortized through periodic
charges to interest expense using the effective method. Interest expense during
the year ended December 31, 2005 amounted to approximately $163,000.
Derivative warrant fair values are calculated using the Black-Scholes-Merton
Valuation technique. Significant assumptions as of December 31, 2005,
corresponding to each of the above financings (by paragraph reference) are as
follows:
6(a) 6(b) 6(c) 6(d) 6(e) 6(f)
----------- ----- ----- ----- ----- -----
Trading market price $0.59 $0.59 $0.59 $0.59 $0.59 $0.59
Strike price $.05--$1.00 $.129 $.10 $.15 $.15 $.15
Volatility 148% 133% 136% 136% 136% 142%
Risk-free rate 3.25% 3.71% 3.30% 3.57% 3.30% 3.45%
Remaining term/life (years) .92 4.63 3.5 4.0 3.83 3.25
F-68
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our stock prices have been highly volatile. Future fair value changes are
significantly influenced by our trading common stock prices. As previously
discussed herein, changes in fair value of derivative financial instruments are
reflected in earnings.
Note 7. Preferred Stock
Our articles of incorporation authorize the issuance of 5,000,000 shares of
preferred stock. We have designated this authorized preferred stock, as follows:
(a) Series H Preferred Stock:
We have designated 350,000 shares of our preferred stock as Series H Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series H Preferred Stock has cumulative dividend rights at 7.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a fixed conversion price of $0.40 per
common share. The Series H Preferred Stock is mandatorily redeemable for common
stock on the fifth anniversary of its issuance. We have the option to redeem the
Series H Preferred Stock for cash at 135% of the stated value. The holder has
the option to redeem the Series H Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
listing of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put").
Based upon our evaluation of the terms and conditions of the Series H Preferred
Stock, we concluded that it was more akin to a debt instrument than an equity
instrument, which means that our accounting conclusions are based upon those
related to a traditional debt security, and that it should be afforded the
conventional convertible exemption regarding the embedded conversion feature
because the conversion price is fixed. Therefore, we are not required to
bifurcate the embedded conversion feature and carry it as a liability. However,
we concluded that the Default Put required bifurcation because, while puts on
debt-type instruments are generally considered clearly and closely related to
the host, the Default Put is indexed to certain events, noted above, that are
not associated debt-type instruments. In addition, due to the default and
contingent redemption features of the Series H Preferred Stock, we classified
this instrument as redeemable preferred stock, outside of stockholders' equity.
Between December 2001 and March 2002, we issued 175,500 shares of Series H
Preferred Stock for cash of $1,755,000, plus warrants to purchase an aggregate
of 4,387,500 shares of common stock at $0.50 for five years. As of December 31,
2005, 64,500 shares of preferred stock remain outstanding; all of the warrants
remain outstanding. We allocated $1,596,228 of the proceeds from the Series H
Preferred financings to the warrants at their fair values because the warrants
did not meet all of the conditions necessary for equity classification and,
accordingly, are carried as derivative liabilities, at fair value. We also
allocated $134,228 to the Default Puts which, as described above are carried as
derivative liabilities, at fair value. We also allocated proceeds of $34,210 to
paid-in capital because the aforementioned allocations resulted in an effective
beneficial conversion feature, which is recorded in equity. Finally, we recorded
derivative expense of $9,666 because one of the financings did not result in
sufficient proceeds to record the derivative financial instruments at fair
values on the inception date.
F-69
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We estimated the fair value of the derivative warrants on the inception dates,
and subsequently, using the Black-Scholes-Merton valuation technique. As a
result of applying this technique, our valuation of the derivative warrants
amounted to $1,264,109 and $376,212 as of December 31, 2005 and 2004,
respectively. We estimated the fair value of the Default Puts on the inception
dates, and subsequently, using a cash flow technique that involves
probability-weighting multiple outcomes at net present values. Significant
assumptions underlying the probability-weighted outcomes included both our
history of similar default events, all available information about our business
plans that could give rise to or risk defaults, and the imminence of impending
or current defaults. As a result of these subjective estimates, our valuation
model resulted in Default Put balances associated with the Series H Preferred
Stock of $381,377 and $156,927 as of December 31, 2005 and 2004, respectively.
These amounts are included in Derivative Liabilities on our balance sheet. The
following table illustrates fair value adjustments that we have recorded related
to the Default Puts on the Series H Preferred Stock.
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(224,451) $ (22,701)
========= =========
Warrant derivative $(887,896) $(253,571)
========= =========
Derivative income (expense) related to the Default Put includes changes to the
fair value arising from changes in our estimates about the probability of
default events and amortization of the time-value element embedded in our
calculations. Higher derivative expense in the year ended December 31, 2005 when
compared to the same period of 2004, reflected the increased probability that
the Default Put would become exercisable because we would not timely file
certain reports with the Securities and Exchange Commission. In fact, we
ultimately did not file our Quarterly Report on Form 10-QSB for the June 2006
reporting period on a timely basis. While the Default Put became exercisable at
that time, the holders of the Series H Preferred Stock did not exercise their
right prior to curing the event. There can be no assurances that the holders of
the Series H Preferred Stock would not exercise their rights should further
defaults arise.
The discounts to the Series H Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
retained earnings using the effective method. The following table illustrates
the components of preferred stock dividends and accretions for the years ended
December 31, 2005 and 204:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Preferred stock dividends $140,400 $140,400
======== ========
Accretions $558,089 $357,392
======== ========
As of December 31, 2005, $315,900 of cumulative dividends are in arrears on
Series H Preferred Stock.
(b) Series J Preferred Stock:
We have designated 500,000 shares of our preferred stock as Series J Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series J Preferred Stock has cumulative dividend rights at 8.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a conversion price of $0.20 per common
share. The Series J Preferred Stock is mandatorily redeemable for common stock
on the fifth anniversary of its issuance. We have the option to redeem the
Series J Preferred Stock for cash at 135% of the stated value. The holder has
the option to redeem the Series J Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
registration and listing (and maintenance thereof) of our common stock and
filing of reports with the Securities and Exchange Commission (the "Default
Put").
F-70
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based upon our evaluation of the terms and conditions of the Series J Preferred
Stock, we concluded that its features were more akin to a debt instrument than
an equity instrument, which means that our accounting conclusions are generally
based upon standards related to a traditional debt security. Our evaluation
concluded that the embedded conversion feature was not afforded the exemption as
a conventional convertible instrument, since it did not meet the conditions for
equity classification. Therefore, we are required to bifurcate the embedded
conversion feature and carry it as a liability. We also concluded that the
Default Put required bifurcation because, while puts on debt-type instruments
are generally considered clearly and closely related to the host, the Default
Put is indexed to certain events, noted above, that are not associated debt-type
instruments. We combined all embedded features that required bifurcation into
one compound instrument that is carried as a component of derivative
liabilities. In addition, due to the default and contingent redemption features
of the Series J Preferred Stock, we classified this instrument as redeemable
preferred stock, outside of stockholders' equity.
In September 2002, February 2003 and May 2003 we issued 100,000 shares, 50,000
shares and 50,000 shares, respectively, of Series J Preferred Stock for cash of
$2,000,000. We also issued warrants for an aggregate of 14,000,000 shares of our
common stock in connection with the financing arrangement. The warrants have
terms of five years and an exercise price of $0.25. We initially allocated
proceeds of $658,000 and $1,190,867 from the financing arrangements to the
compound derivative discussed above and to the warrants, respectively. Since
these instruments did not meet the criteria for classification, they are
required to be carried as derivative liabilities, at fair value.
We estimated the fair value of the compound derivative on the inception dates,
and subsequently, using the Monte Carlo Valuation technique, because that
technique embodies all of the assumptions (including credit risk, interest risk,
stock price volatility and conversion estimates) that are necessary to fair
value complex derivative instruments. We estimated the fair value of the
warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton Valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants. As a result of these
estimates, our valuation model resulted in a compound derivative balance
associated with the Series J Preferred Stock of $5,628,000 and $728,000 as of
December 31, 2005 and December 31,2004, respectively. This amount is included in
Derivative Liabilities on our balance sheet.
The following table illustrates fair value adjustments that we have recorded
related to the derivative financial instruments associated with the Series J
Preferred Stock.
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(4,900,000) $(644,000)
=========== =========
Warrant derivative $(3,136,000) $(713,600)
=========== =========
Changes in the fair value of the compound derivative and, therefore, derivative
income (expense) related to the compound derivative is significantly affected by
changes in our trading stock price and the credit risk associated with our
financial instruments. The fair value of the warrant derivative is significantly
affected by changes in our trading stock prices. Future changes in these
underlying market conditions will have a continuing effect on derivative income
(expense) associated with these instruments.
F-71
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discounts to the Series J Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
paid-in capital using the effective method. The following table illustrates the
components of preferred stock dividends and accretions for the years ended
December 31, 2005 and 2004:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Preferred stock dividends $160,000 $160,000
======== ========
Accretions $385,218 $214,856
======== ========
As of December 31, 2005 $480,000 of cumulative dividends are in arrears on
Series J Preferred Stock.
(c) Series K Preferred Stock:
We have designated 500,000 shares of our preferred stock as Series K Cumulative
Convertible Preferred Stock with a stated and liquidation value of $10.00 per
share. Series K Preferred Stock has cumulative dividend rights at 8.0% of the
stated amount, ranks senior to common stock and is non-voting. It is also
convertible into our common stock at a fixed conversion price of $0.10 per
common share. The Series K Preferred Stock is mandatorily redeemable for common
stock on the fifth anniversary of its issuance. We have the option to redeem the
Series K Preferred Stock for cash at 120% of the stated value. The holder has
the option to redeem the Series K Preferred Stock for cash at 140% of the stated
value in the event of defaults and certain other contingent events, including
events related to the common stock into which the instrument is convertible,
listing of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put").
Based upon our evaluation of the terms and conditions of the Series K Preferred
Stock, we concluded that it was more akin to a debt instrument than an equity
instrument, which means that our accounting conclusions are based upon those
related to a traditional debt security, and that it should afforded the
conventional convertible exemption regarding the embedded conversion feature
because the conversion price is fixed. Therefore, we are not required to
bifurcate the embedded conversion feature and carry it as a liability. However,
we concluded that the Default Put required bifurcation because, while puts on
debt-type instruments are generally considered clearly and closely related to
the host, the Default Put is indexed to certain events, noted above, that are
not associated debt-type instruments.. In addition, due to the default and
contingent redemption features of the Series K Preferred Stock, we classified
this instrument as redeemable preferred stock, outside of stockholders' equity.
In March 2004, we issued 80,000 shares of Series K Preferred Stock for cash of
$800,000. In April 2004, we issued 15,000 shares of Series K Preferred Stock to
extinguish debt with a carrying value of $150,000. At the time of these
issuances, the trading market price of our common stock exceeded the fixed
conversion price and, as a result, we allocated $160,000 and $60,000 from the
March and April issuances, respectively, to stockholders' equity which amount
represented a beneficial conversion feature. In addition, we recorded a debt
extinguishment loss of $60,000 in connection with the April exchange of Series K
Preferred Stock for debt because we estimated that it had a fair value that
exceeded the carrying value of the extinguished debt by that amount. Finally, we
allocated approximately $59,000 and $11,000 to the Default Puts, representing
fair values, in connection with the March and April issuances, respectively.
We estimated the fair value of the Default Puts on the inception dates, and
subsequently, using a cash flow technique that involves probability-weighting
multiple outcomes at net present values. Significant assumptions underlying the
probability-weighted outcomes included both our history of similar default
events, all available information about our business plans that could give rise
to or risk defaults, and the imminence of impending or current defaults. As a
result of these subjective estimates, our valuation model resulted in Default
Put balances associated with the Series K Preferred Stock of $206,200 and
$73,644 as of December 31, 2005 and 2004, respectively. These amounts are
included in Derivative Liabilities on our balance sheet. The following table
illustrates fair value adjustments that we have recorded related to the Default
Puts on the Series K Preferred Stock.
F-72
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $(132,556) $(3,768)
========= =======
Warrant derivative $ -- $ --
========= =======
Derivative income (expense) related to the Default Put includes changes to the
fair value arising from changes in our estimates about the probability of
default events and amortization of the time-value element embedded in our
calculations. Higher derivative expense in the year ended December 31, 2005,
when compared to the same period of 2004, reflected the increased probability
that the Default Put would become exercisable because we would not timely file
certain reports with the Securities and Exchange Commission. In fact, we
ultimately did not file our Quarterly Report on Form 10-QSB for the June 2006
reporting period in a timely basis. While the Default Put became exercisable at
that time, the holders of the Series K Preferred Stock did not exercise their
right prior to curing the event. There can be no assurances that the holders of
the Series K Preferred Stock would not exercise their rights should further
defaults arise.
The discounts to the Series K Preferred Stock that resulted from the
aforementioned allocations are being accreted through periodic charges to
paid-in capital using the effective method. The following table illustrates the
components of preferred stock dividends and accretions for the years ended
December 31, 2005 and 2004:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Preferred stock dividends $76,000 $57,000
======= =======
Accretions $40,407 $30,140
======= =======
As of December 31, 2005, $133,000 of cumulative dividends are in arrears on
Series K Preferred Stock.
(d) Other Preferred Stock Designations and Financings:
Series A Preferred: We have designated 500,000 shares of our preferred stock as
Series A Convertible Preferred Stock. There were no Series A Preferred Stock
outstanding during the periods presented.
Series B Preferred: We have designated 1,260,000 shares of our preferred stock
as Series B Convertible Preferred Stock with a stated and liquidation value of
$1.00 per share. Series B Preferred has cumulative dividend rights of 9.0%,
ranks senior to common stock and has voting rights equal to the number of common
shares into which it may be converted. Series B Preferred is convertible into
common on a share for share basis. Based upon our evaluation of the terms and
conditions of the Series B Preferred Stock, we have concluded that it meets all
of the requirements for equity classification. We have 107,440 shares of Series
B Preferred outstanding as of December 31, 2005.
Series D Preferred: We have designated 165,000 shares of our preferred stock as
Series D Cumulative Convertible Preferred Stock with a stated and liquidation
value of $10 per share. Series D Preferred has cumulative dividend rights of
6.0%, ranks senior to common stock and is non-voting. There are no shares of
Series D Preferred Stock outstanding during any of the periods presented.
However, we continue to have 611,250 warrants outstanding that were issued in
connection with the original Series D Preferred Stock Financing arrangement.
F-73
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series F Preferred: We have designated 200,000 shares of our preferred stock as
Series F Convertible Preferred Stock with a stated and liquidation value of $10
per share. There were 5,248 and 55,515 shares of Series F Preferred Stock
outstanding as of December 31, 2005 and 2004, respectively. Series F Preferred
is non-voting and convertible into common stock at a variable conversion price
equal to the lower of $0.60 or 75% of the trading prices near the conversion
date. In addition, the holder has the option to redeem the convertible notes
payable for cash at 125% of the face value in the event of defaults and certain
other contingent events, including events related to the common stock into which
the instrument is convertible, registration and listing (and maintenance
thereof) of our common stock and filing of reports with the Securities and
Exchange Commission (the "Default Put"). We concluded that the conversion
feature was not afforded the exemption as a conventional convertible instrument
due to a variable conversion feature; and it did not otherwise meet the
conditions for equity classification. Since equity classification is not
available for the conversion feature, we were required to bifurcate the embedded
conversion feature and carry it as a derivative liability, at fair value. We
also concluded that the Default Put required bifurcation because, while puts on
debt-type instruments are generally considered clearly and closely related to
the host, the Default Put is indexed to certain events, noted above, that are
not associated with debt-type instruments. These two derivative features were
combined into one compound derivative instrument. In addition, due to the
default and contingent redemption features of the Series F Preferred Stock, we
classified this instrument as redeemable preferred stock, outside of
stockholders' equity.
Series I Preferred: We have designated 200,000 shares of our preferred stock as
Series I Convertible Preferred Stock with a stated and liquidation value of
$10.00 per share. Series I Preferred has cumulative dividend rights at 8.0% of
the stated value, ranks senior to common stock and is non-voting. Series I
Preferred is convertible into a variable number of common shares at the lower
conversion price of $0.40 or 75% of the average trading market price. There were
no Series I Preferred Stock outstanding as of December 31, 2005. However, we had
30,000 shares outstanding during the year ended December 31, 2004. We accounted
for Series I Preferred Stock, while it was outstanding as an instrument that was
more akin to a debt instrument. We also bifurcated the embedded conversion
feature and freestanding warrants issued with the financing and carried these
amounts as derivative liabilities, at fair value. The table below reflects
derivative income and (expense) associated with changes in the fair value of
this derivative financial instrument.
The following table summarizes derivative income (expense) related to compound
derivatives and freestanding warrant derivatives that arose in connection with
the preferred stock transactions discussed above.
Year ended Year ended
December 31, December 31,
Derivative income (expense) 2005 2004
------------ ------------
Compound derivative $ 152,310 $ (22,535)
=========== =========
Warrant derivative $(2,186,140) $(900,868)
=========== =========
F-74
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes preferred stock dividends related to the
convertible preferred stock discussed above:
Year ended Year ended
December 31, December 31,
2005 2004
------------ ------------
Preferred stock dividends $15,600 $31,200
======= =======
Accretions $ -- $ --
======= =======
Note 8. - Share Based Payments
On April 6, 2005, our Board of Directors adopted an incentive share-based plan
(the "2005 Stock Incentive Plan") that provides for the grant of stock options
for up to 10,397,745 shares of our common stock to our directors, officers, key
employees, and consultants. On May 10, 2005, our Board of Directors adopted the
recommendation of our Compensation Committee to grant options for 8,922,745
shares to our directors and key employees. As of December 31, 2005, there were
1,475,000 shares of common stock reserved for issuance under our stock plan.
Options granted under 2005 Stock Incentive Plan have a contractual life of 10
years and vest over two years in equal annual installments with the first third
exercisable on the grant date, provided that the individual is continuously
employed by us.
In years prior to 2005, we granted options for 650,000 shares to now former
employees and options for 220,000 shares to now former directors, all which are
fully vested and exercisable, under individual plans. Currently, there are no
shares reserved for future issuance under these individual plans.
We adopted the fair-value provisions of FAS No. 123, effective January 1, 2005,
and we recorded compensation costs aggregating $798,870 for the twelve months
ended December 31, 2005. We recognized no tax benefit for share-based
compensation arrangements due to the fact that we are in a cumulative loss
position and recognize no tax benefits in our Consolidated Statements of
Operations.
We estimate the fair value of each stock option on the date of grant using a
Black-Scholes-Merton (BSM) option-pricing formula, applying the following
assumptions and amortize that value to expense over the options' vesting periods
using the straight-line attribution approach. In addition to the issuance of the
outstanding options discussed above, we granted options for 750,000 shares in
2004, which were part of the options for 5,395,000 shares that were exchanged
into an equivalent number of common shares in 2004, as discussed further below.
2005
----
Expected Term (in years) 6
Risk-free rate 5%
Expected volatility 141%
Expected dividends 0%
Expected Term: The expected term represents the period over which the
share-based awards are expected to be outstanding. It has been determined as the
midpoint between the vesting date and the end of the contractual term.
Risk-Free Interest Rate: We based the risk-free interest rate used in our
assumptions on the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equivalent to the stock option award's
expected term.
F-75
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Volatility: The volatility factor used in our assumptions is based on
the historical price of our stock over the most recent period commensurate with
the expected term of the stock option award.
Expected Dividend Yield: We do not intend to pay dividends on our common stock
for the foreseeable future. Accordingly, we use a dividend yield of zero in our
assumptions.
A summary of option activity under the stock incentive plan for the years ended
December 31, 2005 and 2004 are presented below:
2005 2004
--------------------- ----------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Options Options Price Options Price
---------------------------------------- --------- --------- ---------- ---------
Outstanding Balance at beginning of year 1,025,000 $0.46 7,903,705 $ 0.43
Granted 9,122,743 $0.28 750,000 $ 0.29
Exercised -- -- -- --
Forfeited (547,321) $0.28 -- --
Expired -- -- (2,233,705) $(0.76)
Cancelled -- -- (5,395,000) $(0.27)
--------- ----------
Outstanding at the end of the year 9,600,422 $0.30 1,025,000 $ 0.46
========= ==========
Exercisable at the end of the year 3,816,806 $0.33 1,025,000 $ 0.46
========= ==========
The following table summarized the status of the stock options outstanding and
exercisable at December 31, 2005:
2005 2005
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Range Number Contractual Average Number Average
of Exercise of Term Exercise of Exercise
Prices Options (in years) Price Options Price
------------- --------- ----------- --------- --------- ---------
$.20 to $.35 9,200,422 9.18 $0.28 3,416,806 $0.16
$.60 to $1.00 400,000 4.94 $0.78 8 400,000 $0.78
--------- ---------
9,600,422 9.00 $0.30 3,816,806 $0.22
========= =========
The weighted-average exercise prices and weighted-average fair values of options
granted during 2005 for which the exercise prices exceeded the market prices of
the stock was $0.23 and $0.15, respectively. The weighted-average exercise price
and weighted-average fair value of options granted during 2005 for which the
exercise price equaled the market price of the stock was $0.61 and $0.56,
respectively. There were no exercises of options during the years ended December
31, 2005 and 2004.
F-76
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2004 we granted options for 750,000 shares which were cancelled and
converted into common shares. These options were part of options for 5,395,000
shares that were exchanged into an equivalent number of unregistered common
shares in 2004. In connection with such cancellation, we recorded $269,750 of
compensation expenses at the value of $.05 per each common share. This valuation
was discounted from the quoted market price of $.08 due to restrictions imposed
by insider trading and short swing profits rules on the transferability of such
shares that were issued to our directors and senior management.
In May 2005, we extended the contractual life of fully vested options for
770,000 shares held by two directors. As a result of that modification, we have
recognized, on a restated basis, additional compensation expense of $104,000 for
the second quarter of 2005
Note 9 - Stockholders' Deficit
(a) Convertible Preferred Stock
We have designated 1,260,000 shares of our preferred stock as Series B
Convertible Preferred Stock. Series B Preferred accumulates dividends at the
rate of 9% per annum, payable only upon liquidation or redemption, as a
percentage of the stated value, out of the assets and available funds. Voting
rights of the Series B Convertible Preferred stock are the same as our common
stock. Series B Convertible Preferred stock is convertible anytime after
December 31, 1997 to our common stock at the fixed ratio of one share of common
stock for one share of Series B Convertible Preferred stock surrendered for
conversion. We account for Series B Preferred Stock as perpetual preferred
equity.
(b) Common Stock Warrants
As of December 31, 2005, we had the following outstanding warrants:
Warrants/
Expiration Options Exercise
Warrants Grant date date Granted Price
--------------------------------------- ---------- ---------- ---------- --------
Series D Preferred Stock Financing 3/9/1999 11/17/2008 17,500 0.100
Series D Preferred Stock Financing 4/23/1999 11/17/2008 8,750 0.100
Series D Preferred Stock Financing 2/1/2000 11/17/2008 130,000 0.100
Series D Preferred Stock Financing 2/1/2000 11/17/2008 455,000 0.100
Series F Preferred Stock Financing 10/13/2000 11/17/2008 1,038,259 0.100
Series H Preferred Stock Financing 12/5/2001 12/4/2006 2,637,500 0.500
Series H Preferred Stock Financing 1/30/2002 1/30/2007 375,000 0.500
Series H Preferred Stock Financing 2/15/2002 2/14/2007 125,000 0.500
Series H Preferred Stock Financing 3/18/2002 3/17/2007 1,250,000 0.500
January 2005 Convertible Debt Financing 11/20/2003 11/20/2008 2,000,000 0.050
Warrant to Licensor 6/20/2005 6/19/2007 1,000,000 0.050
Warrant Consultant 4/8/2005 4/7/2007 1,000,000 0.250
Warrant to Distributor 8/30/2005 8/29/2008 30,000,000 0.360
April 2004 Financing 4/20/2004 4/19/09 1,500,000 0.100
October 2004 Financing 10/29/2004 10/28/2009 500,000 0.100
January 2005 Financing 1/31/05 1/30/2010 2,000,000 0.100
November 2005 Common Stock Financing 11/28/2005 11/27/2010 15,667,188 0.800
November 2005 Common Stock Financing 11/28/2005 11/27/2010 1,012,500 0.500
Other Financings 12/27/2001 2/28/2007 25,000 0.400
----------
Total Warrants 60,741,697
==========
F-77
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain conversion features in our debt and preferred stock are indexed to a
variable number of common shares based upon our trading stock price.
Accordingly, in the event of stock price declines, we may have insufficient
shares to share-settle all of our contracts that are convertible into or
exercisable for common stock. As a result, current accounting standards require
us to assume that we would not have sufficient authorized shares to settle these
other warrants and, therefore, reclassify other warrants and contracts that were
otherwise carried in stockholders' equity to derivative liabilities. Such
warrants and contracts that required reclassification were indexed to 49,504,688
and 47,679,688 shares of our common stock as of December 31, 2005 and 2004,
respectively. We are not required to reclassify certain exempt contracts and
employee stock options, so those items are not included in this caption.
Derivative income (expense) associated with these other warrants for the years
ended December 31, 2005 and 2004 are as follows:
Derivative income (expense) 2005 2004
----------- ---------
Warrant derivative $(7,336,788) $(316,829)
=========== =========
Activity for our common stock warrants is presented below:
Weighted
Average
Shares Price
----------- --------
Total warrants outstanding at December 31, 2003 34,700,277 $ 0.33
Warrants granted 27,950,000 1.03
Warrants exercised -- --
Warrants expired (33,000) (2.75)
----------- ------
Total warrants outstanding at December 31, 2004 62,617,277 $ 0.64
Warrants granted 66,329,688 0.39
Warrants exercised (32,873,601) (0.15)
Warrants expired (3,331,667) (1.62)
Warrants redeemed (32,000,000) (0.18)
----------- ------
Total warrants outstanding at December 31, 2005 60,741,697 $ 0.44
=========== ======
(c) Other Stockholders' Equity Transactions
F-78
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2005
Quarter Ended March 31, 2005
New Financing: January 2005 Convertible Notes. On January 31, 2005, we
closed a funding transaction with Longview Fund, LP, Longview Equity Fund, LP,
Longview International Equity Fund, LP, Alpha Capital Aktiengesellschaft and
Whalehaven Funds Limited, five institutional accredited investors, for the
issuance and sale to the Subscribers of up to $2,300,000 of principal amount of
promissory notes convertible into shares of our common stock, and Warrants to
purchase shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. One Million One Hundred Fifty
Thousand Dollars ($1,150,000) of the purchase price was paid on the initial
closing date, and One Million One Hundred Fifty Thousand Dollars ($1,150,000) of
the purchase price will be payable within five (5) business days after the
actual effectiveness of an SB-2 Registration Statement as defined in the
Subscription Agreement. The initial closing notes were at prime plus 4% interest
in the aggregate amount of $1,150,000, plus five-year Warrants for the purchase
of, in the aggregate, 9,200,000 shares of common stock, at the lesser of (i)
$0.16, or (ii) 101% of the closing bid price of the Common Stock as reported by
Bloomberg L.P. for the OTC Bulletin Board for the trading day preceding the
Closing Date. The notes are convertible into shares of our common stock at
$0.125 per common share. Conversions are limited to a maximum ownership of 9.99%
of the underlying common stock at any one time. The notes have a maturity date
two years from closing and are payable in twelve equal monthly installments,
commencing June 1, 2005. The installment payments consist of principal equal to
1/20th of the initial principal amount which, subject to certain conditions
concerning trading volume and price, can be paid in cash at 103% of the monthly
installment, or common stock or a combination of both. The notes have an
acceleration provision upon the change in a majority of the present Board of
Directors except as the result of the death of one or more directors, or a
change in the present CEO. In connection with this transaction, we issued
restricted common stock in the aggregate amount of 460,000 shares plus the
aggregate cash amount of $57,500 for due diligence fees to the investors in this
transaction. We issued the Convertible Promissory Note and the underlying common
stock upon conversion to an accredited investor, pursuant to a Regulation D
offering. The underlying common stock is now registered pursuant to a Form SB-2
registration statement declared effective August 2, 2005.
November 2003 Convertible Notes. We converted $25,000 of our November 2003
Convertible Promissory Notes into 549,340 shares of common stock pursuant to a
notice of conversion from Gamma Opportunity Capital Partners LP, at a fixed
conversion price of $0.05. The conversion included $2,467 of accrued and unpaid
interest on the converted amount. We issued the underlying common stock upon
conversion pursuant to a Form SB-2 registration statement, declared effective on
August 3, 2004.
April 2004 Convertible Notes. We converted $99,999 of our April 2004
Convertible Promissory Notes into 1,141,387 shares of common stock pursuant to
notices of conversion from Longview Fund LP, at a fixed conversion price of
$0.10. The conversions included $14,138 of accrued and unpaid interest. We
issued the underlying common stock upon conversion pursuant to our SB-2
registration statement, declared effective on August 3, 2004.
June 2004 Convertible Notes. We converted $41,666 of our June 2004
Convertible Promissory Notes into 430,327 shares of restricted common stock
pursuant to a notice of conversion from Longview Fund LP, at a fixed conversion
price of $0.15. The conversion included $22,822 of accrued and unpaid interest.
We issued the Convertible Promissory Note and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering. The
underlying common stock is now registered pursuant to a Form SB-2 registration
statement declared effective April 18, 2005.
F-79
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended June 30, 2005
New Financing: April 2005 Convertible Note. On April 21, 2005, we closed a
funding transaction with Alpha Capital Aktiengesellschaft for the issuance of a
convertible 10% note in the aggregate amount of $300,000. The promissory note is
convertible into shares of common stock of the Company at $0.20 per common
share. Conversions are limited to a maximum ownership of 9.99% of the Company's
common stock at any one time. The note has an October 31, 2005 maturity and is
payable in five equal monthly installments, commencing June 1, 2005. The
installment payments consist of principal (equal to 1/5th of the initial
principal amount) plus accrued interest. Installments can be paid in cash or
common stock valued at the average closing price of the Company's common stock
during the five trading days immediately preceding the relevant installment due
date. The Company has repriced Class B Warrants issued on June 30, 2004 from
$2.00 per share to $0.125 per share and issued restricted common stock in the
aggregate amount of 93,750 shares for finder's fees to a third-party to
facilitate this transaction. The Company has the right to prepay the promissory
note by paying to the holder cash equal to 120% of the principal to be prepaid
plus accrued interest. The notes have an acceleration provision upon the change
in a majority of the present Board of Directors except as the result of the
death of one or more directors or a change in the present CEO of the Company.
The common stock underlying the note and the finder's fee common stock have
"piggy back" registration rights. We issued the convertible note and finder's
fee common stock to accredited investors, pursuant to a Regulation D offering.
New Financing: May 2005 Convertible Notes On May 23, 2005, we closed a
funding transaction (the "May '05 Transaction") with Longview Fund, LP,
Whalehaven Funds Limited, Ellis International Ltd., and Osher Capital Corp.,
four institutional accredited investors, for the issuance and sale to the
Subscribers of Five Hundred Thousand Dollars ($500,000) of principal amount of
promissory notes convertible into shares of our common stock and Warrants to
purchase shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. This May '05 Transaction was
a part of a January 23, 2005 funding transaction for an aggregate of Two Million
Three Hundred Thousand Dollars ($2,300,000), One Million One Hundred Fifty
Thousand Dollars ($1,150,000) of which was paid on the initial closing date, and
One Million One Hundred Fifty Thousand Dollars ($1,150,000) of which (the
"Second Tranche") was to be payable within five (5) business days after the
actual effectiveness of an SB-2 Registration Statement covering the aggregate
transaction, as defined in the Subscription Agreement. The May '05 Transaction
for Five Hundred Thousand Dollars ($500,000) is a partial interim closing of the
Second Tranche, which occurred prior to the anticipated effectiveness of the
SB-2 Registration Statement covering the aggregate transaction. Contemporaneous
with the May '05 Transaction, we agreed to a modification of the January 23,
2005 aggregate transaction for the substitution of Ellis International Ltd. and
Osher Capital Corp. in the place of Alpha Capital Aktiengesellschaft, one of the
original investors. The May '05 Transaction convertible notes are at prime plus
4% interest in the aggregate amount of $500,000, plus five-year Warrants for the
purchase of, in the aggregate, 4,000,000 shares of common stock, at an exercise
price of $0.129. The notes are convertible into shares of our common stock at
$0.125 per common share. Conversions are limited to a maximum ownership of 9.99%
of the underlying common stock at any one time. The notes have a maturity date
two years from closing and are payable in twelve equal monthly installments,
commencing June 1, 2005. The installment payments consist of principal equal to
1/20th of the initial principal amount which, subject to certain conditions
concerning trading volume and price, can be paid in cash at 103% of the monthly
installment or common stock or a combination of both. The notes have an
acceleration provision upon the change in a majority of the present Board of
Directors except as the result of the death of one or more directors, or a
change in the present CEO. In connection with this transaction, we issued
restricted common stock in the aggregate amount of 200,000 shares plus the
aggregate cash amount of $25,000 for due diligence fees to Longview Fund, LP,
Gem Funding LLC, Ellis International Ltd., and Osher Capital Corp. in this
transaction. The Second Tranche of the January 23, 2005 aggregate transaction,
now in the amount of $650,000, remains outstanding and will be triggered by the
effectiveness of the pending SB-2 registration statement.
F-80
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conversions: November 2003 Convertible Notes. We converted $50,000 of our
November 2003 Convertible Promissory Note into 1,106,740 shares of common stock
pursuant to a notice of conversion from Gamma Opportunity Capital Partners LP,
at a fixed conversion price of $0.05. The conversion included $5,337 of accrued
and unpaid interest. We issued the underlying common stock upon conversion
pursuant to a Form SB-2 registration statement, declared effective on August 3,
2004.
Warrant Exercise: November 2003 Warrant. We issued 1,000,000 shares of
common stock to Gamma Opportunity Capital Partners LP pursuant to the exercise
of a Warrant issued in connection with the November 2003 financing transaction,
and received $50,000 in warrant exercise payments. The shares of common stock
underlying the warrant were issued pursuant to a Form SB-2 shelf registration
statement, declared effective by the SEC on August 3, 2004.
Warrant Exercise: April 2004 Warrant. We issued 1,500,000 shares of common
stock to Longview Fund LP pursuant to the exercise of a Warrant issued in
connection with the April 2004 financing transaction, and received $225,000 in
warrant exercise payments. The shares of common stock underlying the warrant
were issued pursuant to a Form SB-2 shelf registration statement, declared
effective by the SEC on August 3, 2004.
Conversions: June 2004 Convertible Notes. We converted $528,573 of our
June 2004 Convertible Promissory Notes into 5,633,039 shares of common stock
pursuant to notices of conversion from Longview Fund LP, Gem Funding LLC,
Whalehaven Capital Fund Limited, Stonestreet Limited Partnership and Bi-Coastal
Consulting Corp. at a fixed conversion price of $0.10. The conversion included
$33,689 of accrued and unpaid interest. We issued the common stock upon
conversion pursuant to a Form SB-2 registration statement declared effective by
the Securities and Exchange Commission on April 18, 2005.
Warrant Exercise: June 2004 Warrant. We issued 2,200,000 shares of common
stock to Longview Fund LP, Whalehaven Capital Fund Limited and Stonestreet
Limited Partnership pursuant to the exercise of Warrants issued in connection
with the June 2004 financing transaction, and received $309,000 in warrant
exercise payments. The shares of common stock underlying the warrants were
issued pursuant to a Form SB-2 shelf registration statement, declared effective
by the SEC on April 18, 2005.
Conversions: October 2004 Convertible Notes. We converted $446,250 of our
October 2004 Convertible Promissory Notes into 4,718,514 shares of common stock
pursuant to notices of conversion from Longview Fund LP, Gem Funding LLC,
Whalehaven Capital Fund Limited, Stonestreet Limited Partnership and Bi-Coastal
Consulting Corp. at a fixed conversion price of $0.10. The conversion included
$25,602 of accrued and unpaid interest. We issued the common stock upon
conversion pursuant to a Form SB-2 registration statement declared effective by
the Securities and Exchange Commission on April 18, 2005.
Warrant Exercise: October 2004 Warrant. We issued 1,700,000 shares of
common stock to Longview Fund LP, Whalehaven Capital Fund Limited and
Stonestreet Limited Partnership pursuant to the exercise of Warrants issued in
connection with the October 2004 financing transaction, and received $248,700 in
warrant exercise payments. The shares of common stock underlying the warrants
were issued pursuant to a Form SB-2 shelf registration statement, declared
effective by the SEC on April 18, 2005.
Conversions: December 2004 Convertible Notes. We converted $210,000 of our
December 2004 Convertible Promissory Notes into 2,176,706 shares of common stock
pursuant to notices of conversion, to Momona Capital Corp. and Ellis
International Ltd Inc., at a fixed conversion price of $0.10 per share. The
conversion included $7,450 of accrued and unpaid interest. We issued the
underlying common stock upon conversion pursuant to a Form SB-2 registration
statement, declared effective on April 18, 2005.
F-81
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Exercise: December 2004 Warrant. We issued 500,000 shares of
common stock to Momona Capital Corp. and Ellis International Ltd Inc., pursuant
to the exercise of Warrants issued in connection with the December 2004
financing transaction, and received $72,500 in warrant exercise payments. The
shares of common stock underlying the warrants were issued pursuant to a Form
SB-2 shelf registration statement, declared effective by the SEC on April 18,
2005.
Conversions: January 2005 Convertible Notes. We converted $534,304 of our
January 2005 Convertible Promissory Notes into 4,461,685 shares of restricted
common stock pursuant to notices of conversion, to Longview Fund LP, Longview
Equity Fund LP and Longview International Equity Fund LP at a fixed conversion
price of $0.125 per share. We issued the Convertible Promissory Note and the
underlying common stock upon conversion to an accredited investor, pursuant to a
Regulation D offering. The underlying common stock is now registered pursuant to
a Form SB-2 registration statement declared effective August 2, 2005.
Conversions: Series F Convertible Preferred. We converted 31,134 shares of
our Series F Convertible Preferred, having a stated value of $311,340 into
2,903,839 shares of common stock pursuant to notices of conversion, to
Austinvest Anstalt Balzers and Esquire Trade & Finance Inc. We issued the Series
F Convertible Preferred and the underlying common stock upon conversion to
accredited investors, pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series H Convertible Preferred. We converted 100,000 shares
of our Series H Convertible Preferred, having a stated value of $1,000,000 into
2,500,000 shares of common stock pursuant to notices of conversion, to four
individual and two institutional investors. We issued the Convertible Preferred
and the underlying common stock upon conversion to accredited investors,
pursuant to a Regulation D offering and Rule 144(k).
Conversions: Series I Convertible Preferred. We converted 20,000 shares of
our Series I Convertible Preferred, having a stated value of $200,000 into
2,354,808 shares of common stock pursuant to a notice of conversion, to Alpha
Capital AG. We issued the Convertible Preferred and the underlying common stock
upon conversion to accredited investors, pursuant to a Regulation D offering and
Rule 144(k).
Warrant Exercise: Series I Warrant. We issued 1,333,333 shares of
restricted common stock to Alpha Capital AG, pursuant to the exercise of
Warrants issued in connection with the Series I financing transaction, and
received $133,333 in warrant exercise payments. The shares of common stock
underlying the warrants are now registered pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 2, 2005.
Private Placements. On May 17, 2005 we issued the aggregate of 27,500
restricted shares of the Company's common stock, with a recorded value of
$4,950, to eleven product sales brokers as a bonus for the performance of
services for the Company. We issued the restricted common stock pursuant to
Section 4(6) of the Securities Act of 1933, which provides an exemption from the
registration requirements of the Act for transactions not involving a public
offering.
S-8 Registration. On April 14, 2005 and April 18, 2005, we issued 750,000
and 250,000 shares, respectively, of our common stock to Geoffrey Eiten, for
services rendered for strategic business planning. These shares were part of
1,500,000 shares of the Company's common stock registered under a Form S-8
registration statement filed December 23, 2004.
F-82
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Issue. On June 20, 2005, we issued one year Warrant to Marvel
Enterprises Inc. to purchase 1,000,000 shares of our common stock a $0.05 per
share. This Warrant was issued in connection with the execution of a License
Agreement with Marvel for the United States, Canada and Mexico. We issued the
Warrant pursuant to Section 4(6) of the Securities Act of 1933, which provides
an exemption from the registration requirements of the Act for transactions not
involving a public offering.
Quarter Ended September 30, 2005
Warrant Exercise: Series D Warrant. We issued 696,042 shares of common
stock to Longview Fund LP, Longview Equity Fund LP, Longview International
Equity Fund LP and Esquire Trade & Finance Inc., pursuant to the cashless
exercises of warrants for 763,750 shares of common stock. We issued the Warrants
and the underlying common stock upon exercise to accredited investors, pursuant
to a Regulation D offering and Rule 144(k).
Conversions: Series F Convertible Preferred. We converted 19,133 shares of
our Series F Convertible Preferred, having a stated value of $191,330 into
804,752 shares of common stock pursuant to notices of conversion to Amro
International, SA. We issued the Series F Convertible Preferred and the
underlying common stock upon conversion to accredited investors, pursuant to a
Regulation D offering and Rule 144(k).
Warrant Exercise: Series F Warrant. We issued 3,345,417 shares of common
stock to Austinvest Anstalt Balzers and Esquire Trade & Finance Inc. and Libra
Finance, SA., pursuant to the cashless exercise of warrants for 3,676,518 shares
of common stock. We issued the Warrants and the underlying common stock upon
exercise to accredited investors, pursuant to a Regulation D offering and Rule
144(k).
Conversions: Series H Convertible Preferred. We converted 1,000 shares of
our Series H Convertible Preferred, having a stated value of $10,000 into 25,000
shares of common stock pursuant to notices of conversion, to one individual
investor. We issued the Convertible Preferred and the underlying common stock
upon conversion to accredited investors, pursuant to a Regulation D offering and
Rule 144(k).
Conversions: Series I Convertible Preferred. We converted 10,000 shares of
our Series I Convertible Preferred, having a stated value of $100,000 into
656,953 shares of common stock pursuant to a notice of conversion, to
Tradersbloom Limited. The conversion included $24,000 of accrued and unpaid
interest. We issued the Convertible Preferred and the underlying common stock
upon conversion to accredited investors, pursuant to a Regulation D offering and
Rule 144(k).
Conversions: April 2004 Convertible Notes. We converted $250,000 of our
April 2004 Convertible Promissory Notes into 2,808,219 shares of common stock
pursuant to notices of conversion from Osher Capital Inc., Ellis International
Ltd Inc. and Alpha Capital AG. The conversion included $3,082 of accrued and
unpaid interest on the converted amount. We issued the underlying common stock
upon conversion pursuant to a Form SB-2 registration statement, declared
effective on August 4, 2004.
Conversions: June 2004 Convertible Notes. We converted $250,000 of our
June 2004 Convertible Promissory Notes into 2,796,575 shares of common stock
pursuant to notices of conversion from Alpha Capital AG at a fixed conversion
price of $0.10. The conversion included $29,657 of accrued and unpaid interest
on the converted amount. We issued the common stock upon conversion pursuant to
a Form SB-2 registration statement declared effective by the Securities and
Exchange Commission on April 18, 2005.
F-83
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conversions: October 2004 Convertible Notes. We converted $125,000 of our
October 2004 Convertible Promissory Notes into 1,342,808 shares of common stock
pursuant to notices of conversion from Alpha Capital AG at a fixed conversion
price of $0.10. The conversion included $9,280 of accrued and unpaid interest on
the converted amount. We issued the common stock upon conversion pursuant to a
Form SB-2 registration statement declared effective by the Securities and
Exchange Commission on April 18, 2005.
Warrant Exercise: December 2004 Warrant. We issued 300,000 shares of
common stock to Momona Capital Corp. pursuant to the exercise of Warrants issued
in connection with the December 2004 financing transaction, and received $30,000
in warrant exercise payments. The shares of common stock underlying the warrants
were issued pursuant to a Form SB-2 shelf registration statement, declared
effective by the SEC on April 18, 2005.
Conversions: January 2005 Convertible Notes. We converted $500,071 of our
January 2005 Convertible Promissory Notes into 4,186,644 shares of restricted
common stock pursuant to notices of conversion, to Longview Fund LP, Longview
Equity Fund LP and Longview International Equity Fund LP at a fixed conversion
price of $0.125 per share. The conversion included $23,260 of accrued and unpaid
interest on the converted amount. We issued the common stock upon conversion
pursuant to a Form SB-2 registration statement declared effective by the
Securities and Exchange Commission on August 2, 2005.
Warrant Exercise: January 2005 Warrant. We issued 7,200,000 shares of
common stock to Whalehaven Capital Fund Limited, Longview Fund LP, Longview
Equity Fund LP and Longview International Equity Fund LP pursuant to the
exercise of Warrants issued in connection with the January 2005 financing
transaction, and received $720,000 in warrant exercise payments. The shares of
common stock underlying the warrants were issued pursuant to a Form SB-2 shelf
registration statement, declared effective by the SEC on August 2, 2005.
Conversions: April 2005 Convertible Notes. We converted $300,000 of our
April 2005 Convertible Promissory Note into 1,556,438 shares of restricted
common stock pursuant to notices of conversion, to Alpha Capital AG at a fixed
conversion price of $0.20 per share. The conversion included $11,288 of accrued
and unpaid interest on the converted amount. We issued the common stock upon
conversion pursuant to a Form SB-2 registration statement declared effective by
the Securities and Exchange Commission on August 2, 2005.
Conversions: May 2005 Convertible Notes. We converted $475,000 of our May
2005 Convertible Promissory Notes into 4,141,270 shares of restricted common
stock pursuant to notices of conversion, to Whalehaven Capital Fund Limited,
Ellis International Ltd, Longview Fund LP and Osher Capital Corp. The conversion
included $9,317 of accrued and unpaid interest on the converted amount. We
issued the common stock upon conversion pursuant to a Form SB-2 registration
statement declared effective by the Securities and Exchange Commission on August
2, 2005.
Warrant Exercise: May 2005 Warrant. We issued 4,000,000 shares of common
stock to Whalehaven Capital Fund Limited, Ellis International Ltd, Longview Fund
LP and Osher Capital Corp. pursuant to the exercise of Warrants issued in
connection with the January 2005 financing transaction, and received $400,000 in
warrant exercise payments. The shares of common stock underlying the warrants
were issued pursuant to a Form SB-2 shelf registration statement, declared
effective by the SEC on August 2, 2005.
F-84
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Financing: August 2005 Convertible Notes On August 18, 2005, we closed
a funding transaction (the "August '05 Transaction") with Longview Fund, LP,
Longview Equity Fund, LP and Longview International Equity Fund, LP, three
institutional accredited investors, for the issuance and sale to the Subscribers
of Six Hundred Fifty Thousand Dollars ($650,000) of principal amount of
promissory notes convertible into shares of our common stock and Warrants to
purchase shares of common stock at 100% coverage of the common stock issuable in
accordance with the principal amount of the notes. This August'05 Transaction
was a part of a January 23, 2005 funding transaction for an aggregate of Two
Million Three Hundred Thousand Dollars ($2,300,000). The August '05 Transaction
is the Second Tranche of the January '05 transaction, which occurred upon the
effectiveness of the SB-2 Registration Statement covering the aggregate
transaction. The August'05 Transaction convertible notes are at prime plus 4%
interest in the aggregate amount of $650,000, plus five-year Warrants for the
purchase of, in the aggregate, 5,200,000 shares of common stock, at an exercise
price of $0.129. The notes are convertible into shares of our common stock at
$0.125 per common share. Conversions are limited to a maximum ownership of 9.99%
of the underlying common stock at any one time. The notes have a maturity date
two years from closing and are payable in twelve equal monthly installments. The
installment payments consist of principal equal to 1/20th of the initial
principal amount which, subject to certain conditions concerning trading volume
and price, can be paid in cash at 103% of the monthly installment, or common
stock or a combination of both. The notes have an acceleration provision upon
the change in a majority of the present Board of Directors except as the result
of the death of one or more directors, or a change in the present CEO. In
connection with this transaction, we issued restricted common stock in the
aggregate amount of 260,000 shares plus the aggregate cash amount of $32,500 for
due diligence fees to Longview Fund companies. We issued the equity equivalents,
the underlying common stock upon conversion and the finders' fee common stock
pursuant to a Form SB-2 registration statement declared effective by the
Securities and Exchange Commission on August 2, 2005.
On September 30, 2005, we prepaid $250,000 of the aggregate $650,000 of
the August '05 Transaction notes, as follows: $57,692 to Longview Fund, LP,
$144,231 to Longview Equity Fund, LP and $ $48,077 to Longview International
Equity Fund, LP. The holders of these notes waived the prepayment premium in
lieu of their retention of warrants attached to August '05 Transaction.
Conversions: August 2005 Convertible Notes. We converted $91,217 of our
August 2005 Convertible Promissory Notes into 743,750 shares of restricted
common stock pursuant to a notice of conversion, to Longview Fund LP, at a fixed
conversion price of $0.125 per share. The conversion included $1,752 of accrued
and unpaid interest on the converted amount. We issued the common stock upon
conversion pursuant to a Form SB-2 registration statement declared effective by
the Securities and Exchange Commission on August 2, 2005.
Warrant Exercise: August 2005 Warrant. We issued 5,200,000 shares of
common stock to Longview Fund LP, Longview Equity Fund LP and Longview
International Equity Fund LP pursuant to the exercise of Warrants issued in
connection with the August 2005 financing transaction, and received $520,000 in
warrant exercise payments. The shares of common stock underlying the warrants
were issued pursuant to a Form SB-2 shelf registration statement, declared
effective by the SEC on August 2, 2005.
Private Placements. On August 3, 2005 we issued 500,000 restricted shares
of our common stock to Geoffrey Eiten, for services rendered for strategic
business planning. We issued the restricted common stock pursuant to Section
4(6) of the Securities Act of 1933, which provides an exemption from the
registration requirements of the Act for transactions not involving a public
offering.
F-85
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 29 and September 19, 2005 we issued the aggregate of 1,000,000
restricted shares of our common stock to National Financial Communications Corp.
pursuant to the exercise of Warrants issued in connection with a consulting
agreement for services rendered for strategic business planning. We issued the
restricted common stock pursuant to Section 4(6) of the Securities Act of 1933,
which provides an exemption from the registration requirements of the Act for
transactions not involving a public offering.
On September 19, 2005, we issued 450,000 restricted shares of our common
stock to Alpha Capital AG, an accredited investor, in a sale not involving a
public offering at a price of $1.00 per share. We issued the common stock
pursuant to a Regulation D offering.
Warrant Issue. On August 31, 2005, we issued a three year Warrant to
Coca-Cola Enterprises Inc. to purchase 30,000,000 shares of our common stock a
$0.36 per share. During the first 18 months of the exercise period, the Company
has the option to "call" the exercise of up to 10,000,000 shares of common stock
issuable upon exercise of the Warrant, upon the Company's satisfaction of
certain conditions, including a trading price of not less than $1.08 per share
for 20 consecutive trading days. This Warrant was issued in connection with the
execution of a Master Distribution Agreement on August 31, 2005. We issued the
Warrant pursuant to Section 4(6) of the Securities Act of 1933, which provides
an exemption from the registration requirements of the Act for transactions not
involving a public offering. The Company will record an $11,900,000 net charge
in deferred distribution costs for the issuance of a three year warrant to
Coca-Cola Enterprises to purchase of 30,000,000 shares of our common stock in
connection with the Master Distribution Agreement. The Company will recognize
that cost as a selling expense over the 10-year term of the agreement.
Quarter Ended December 31, 2005
On November 28, 2005, we closed a funding transaction with 13 accredited
institutional investors, for the issuance and sale of 40,500,000 shares of our
common stock for a purchase price of $20,250,000. In addition, we also issued
five-year warrants for the purchase of an additional 15,187,500 shares of common
stock at an exercise price of $0.80 per share. The securities are restricted and
have been issued pursuant to an exemption to the registration requirements of
Section 5 of the Securities Act of 1933 for "transactions of the issuer not
involving any public offering" provided in Section 4(2) of the Act and pursuant
to a Regulation D offering. In connection with this financing, we issued common
stock purchase warrants to purchase 1,012,500 shares of common stock at an
exercise price of $.50 per share and 304,688 shares of common stock at an
exercise price of $.80 per share to SG Cowen & Co., LLC, who acted as placement
agent for this financing.
The shares of common stock and the shares of common stock underlying the
warrants carry registration rights that obligate us to file a registration
statement within 45 days from closing and have the registration statement
declared effective within 120 days from closing.
All of the above offerings and sales were deemed to be exempt under rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933, as amended. No
advertising or general solicitation was employed in offering the securities. The
offerings and sales were made to a limited number of persons, all of whom were
accredited investors, or business associates of Bravo! Brands Inc., and transfer
was restricted by Bravo! Brands Inc. in accordance with the requirements of the
Securities Act of 1933. In addition to representations by the above-referenced
persons, we have made independent determinations that all of the
above-referenced persons were accredited or sophisticated investors, and that
they were capable of analyzing the merits and risks of their investment and that
they understood the speculative nature of their investment. Furthermore, all of
the above-referenced persons were provided with access to our Securities and
Exchange Commission filings.
F-86
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrant Exercise: June 2004 Warrant. In December 2005, we issued 2,500,000
shares of common stock to Alpha Capital AG pursuant to the exercise of a "B"
Warrant issued in connection with the June 2004 financing transaction and
received $250,000 in warrant exercise payments. The shares of common stock
underlying the warrants were issued pursuant to a Form SB-2 shelf registration
statement, declared effective by the SEC on April 18, 2005.
Year ended December 31, 2004
On February 1, 2004, we agreed to issue 750,000 shares of our common stock
and warrants to purchase an additional 750,000 shares of common stock to Marvel
Enterprises, Inc. We issued this equity in connection with the grant of an
intellectual property license by Marvel on January 17, 2004, giving us the right
to use certain Marvel Comics characters on our Slammers(R) line of flavored
milks. The warrants have an exercise price of $0.10 per share for the first year
and, upon the occurrence of certain conditions tied to the royalty performance
under the license, can be extended for an additional year with an exercise price
of $0.14 per share. We made this private offering to Marvel Enterprises, an
accredited investor, pursuant to Rule 506 of Regulation D and Section 4(2) of
the Securities Act of 1933.
On February 12, 2004, we held a special meeting of shareholders at which
the shareholders approved an increase of our authorized common stock from
50,000,000 shares to 300,000,000 shares.
On February 17, 2004, we converted 875 shares of Series G Convertible
Preferred Stock into 215,164 shares of common stock pursuant to a January 12,
2004 notice of conversion from Nesher, LP, at a conversion price of $0.0407. The
conversion included accrued and unpaid dividends on the converted preferred. We
delayed processing this notice in light of our special meeting of shareholders
held February 12, 2004. The shares of common stock issued pursuant to this
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Nesher, LP.
On February 17, 2004, we converted 1,400 shares of Series G Convertible
Preferred Stock into 343,980 shares of common stock pursuant to a January 12,
2004 notice of conversion from Talbiya Investments, Ltd., at a conversion price
of $0.0407. The conversion included accrued and unpaid dividends on the
converted preferred. We delayed processing this notice in light of our special
meeting of shareholders held February 12, 2004. The shares of common stock
issued pursuant to this conversion were retired and cancelled on March 5, 2004
and issued to third parties on that date in accordance with the instructions of
Talbiya Investments, Ltd.
On February 17, 2004, we converted 700 shares of Series G Convertible
Preferred Stock into 172,162 shares of common stock pursuant to a January 12,
2004 notice of conversion from The Keshet Fund, LP, at a conversion price of
$0.0407. The conversion included accrued and unpaid dividends on the converted
preferred. We delayed processing this notice in light of our special meeting of
shareholders held February 12, 2004. The shares of common stock issued pursuant
to this conversion were retired and cancelled on March 5, 2004 and issued to
third parties on that date in accordance with the instructions of The Keshet
Fund, LP.
F-87
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 17, 2004, we converted 2,025 shares of Series G Convertible
Preferred Stock into 497,951 shares of common stock pursuant to a January 12,
2004 notice of conversion from Keshet LP, at a conversion price of $0.0407. The
conversion included accrued and unpaid dividends on the converted preferred. We
delayed processing this notice in light of our special meeting of shareholders
held February 12, 2004. The shares of common stock issued pursuant to this
conversion were retired and cancelled on March 5, 2004 and issued to third
parties on that date in accordance with the instructions of Keshet, LP.
On March 1,2004, we issued 80,000 shares of non-voting Series K 8%
Convertible Preferred stock, to Mid-Am Capital, LLC, having a stated value of
$10.00 per Preferred K share, for the aggregate purchase price of $800,000. Each
preferred share is convertible to 100 shares of our common stock at a conversion
price of $0.10, representing 8,000,000 shares of common stock underlying the
preferred. In addition, we made the following adjustments to prior issued
warrants for the purpose of facilitating future fund raising by us arising out
of the exercise of the warrants by Holder. The purchase price, as defined in the
Warrant No. 2003-B-002, has been reduced to $0.10, subject to further adjustment
as described in the warrant. The expiration date, as defined in the warrant,
remains as stated. 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.
On March 9, 2004, we converted 5,000 shares of Series F Convertible
Preferred Stock into 1,315,789 shares of common stock pursuant to a January 8,
2004 notice of conversion from Esquire Trade & Finance Inc., at a conversion
price of $0.038. The conversion did not include accrued and unpaid dividends on
the converted preferred. We delayed processing this notice in light of our
special meeting of shareholders held February 12, 2004. The shares of common
stock issued pursuant to this conversion were issued to third parties on that
date in accordance with the instructions of Esquire Trade & Finance Inc.
On April 1 2004, we converted 5,000 shares of Series F Convertible
Preferred Stock into 1,315,789 shares of common stock pursuant to a January 27,
2004 notice of conversion from Austinvest Anstalt Balzers, at a conversion price
of $0.038. The conversion did not include accrued and unpaid dividends on the
converted preferred. We delayed processing this notice in light of our special
meeting of shareholders held February 12, 2004. The shares of common stock
issued pursuant to this conversion were issued to third parties on that date in
accordance with the instructions of Austinvest Anstalt Balzers. We issued the
preferred and the underlying common stock upon conversion to an accredited
investor, pursuant to a Regulation D offering.
On April 2, 2004, the Company and Mid-Am Capital, LLC entered into
Supplement No.1 to the Series K Convertible Preferred Subscription Agreement, by
which we sold an additional 15,000 shares of our Series K Convertible Preferred
Stock utilizing the proceeds from a certain promissory note issued by us to
Mid-Am in the face amount of $150,000. With the consummation of this sale, the
$150,000 promissory note was deemed paid by us in full. We issued the preferred
and the underlying common stock upon conversion to an accredited investor,
pursuant to a Regulation D offering.
On April 8, 2004, we converted 4,862 shares of Series G Convertible
Preferred Stock into 700,000 shares of common stock pursuant to a March 25, 2004
notice of conversion from Nesher, LP, at a conversion price of $0.0853. The
conversion included accrued and unpaid dividends of $11,089 on the preferred
converted. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
F-88
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 8, 2004, we converted 4,478 shares of Series G Convertible
Preferred Stock into 650,000 shares of common stock pursuant to a March 25, 2004
notice of conversion from Talbiya B. Investments, Ltd., at a conversion price of
$0.0853. The conversion included accrued and unpaid dividends of $10,662 on the
preferred converted. We issued the preferred and the underlying common stock
upon conversion to an accredited investor, pursuant to a Regulation D offering.
On April 8, 2004, we converted 1,919 shares of Series G Convertible
Preferred Stock into 275,000 shares of common stock pursuant to a March 25, 2004
notice of conversion from The Keshet Fund, LP, at a conversion price of $0.0853.
The conversion included accrued and unpaid dividends of $4,265 on the preferred
converted. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On April 8, 2004, we converted 7,677 shares of Series G Convertible
Preferred Stock into 1,100,000 shares of common stock pursuant to a March 25,
2004 notice of conversion from Keshet, LP, at a conversion price of $0.0853. The
conversion included accrued and unpaid dividends of $17,060 on the preferred
converted. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On April 20, 2004, we entered into a Subscription Agreement with Longview
Fund, LP and Alpha Capital Aktiengesellschaft for the issuance of two
convertible 10% notes in the amount of $250,000 each and five-year warrants for
the purchase of, in the aggregate, 3,000,000 shares of common stock, at $0.15
per share. The notes are convertible into shares of our common stock at $0.10
per common share. Conversions are limited to a maximum ownership of 9.99% of the
underlying common stock at any one time. The notes are payable in twelve equal
monthly installments, commencing November 1, 2004. The installment payments
consist of principal and a "premium" of 20% of the principal paid per
installment. We have the option to defer such payment until the note's maturity
date on October 1, 2005, if our common stock trades above $0.20 for the five
trading days prior to the due date of an installment payment. In connection with
this transaction, we issued two additional notes in the aggregate amount of
$50,000, upon identical terms as the principal notes, as a finder's fee, and
paid $20,000 in legal fees. The common stock underlying all notes and warrants
carry registration rights. We issued the convertible notes and warrants to
accredited investors, pursuant to a Regulation D offering.
On April 30, 2004, we converted 20,000 shares of Series F Convertible
Preferred Stock into 1,945,525 shares of common stock pursuant to an April 27,
2004 notice of conversion from Esquire Trade & Finance Inc., at a conversion
price of $0.1028. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On April 30, 2004, we converted 20,000 shares of Series F Convertible
Preferred Stock into 1,945,525 shares of common stock pursuant to an April 27,
2004 notice of conversion from Austinvest Anstalt Balzers, at a conversion price
of $0.1028. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On April 30, 2004, we converted 2,500 shares of Series F Convertible
Preferred Stock into 243,191 shares of common stock pursuant to an April 27,
2004 notice of conversion from Esquire Trade & Finance Inc., at a conversion
price of $0.1028. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On April 30, 2004, we converted 2,500 shares of Series F Convertible
Preferred Stock into 243,191 shares of common stock pursuant to an April 27,
2004 notice of conversion from Austinvest Anstalt Balzers, at a conversion price
of $0.1028. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
F-89
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 20, 2004, we converted 9,226 shares of Series G Convertible
Preferred Stock into 620,578 shares of common stock pursuant to a May 19, 2004
notice of conversion from Nesher, LP, at a conversion price of $0.148. The
conversion did not include accrued and unpaid dividends on the converted
preferred. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On May 20, 2004, we converted 13,972 shares of Series G Convertible
Preferred Stock into 939,782 shares of common stock pursuant to a May 19, 2004
notice of conversion from Keshet, LP, at a conversion price of $0.148. The
conversion did not include accrued and unpaid dividends on the converted
preferred. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering.
On June 17, 2004, we issued 87,195 of our common stock to Stephen Nollau,
a former consultant, for services rendered. We issued the common stock pursuant
to a Form S-8 registration statement, filed by us on June 16, 2004.
On June 29, 2004, we converted 234 shares of Series G Convertible
Preferred Stock into 13,604 shares of common stock pursuant to a June 15, 2004
notice of conversion from Nesher, LP, at a conversion price of $0.172. The
conversion did not include accrued and unpaid dividends on the converted
preferred. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering. This
conversion exhausted the outstanding Series G convertible preferred held by this
investor.
On June 29, 2004, we converted 1,850 shares of Series G Convertible
Preferred Stock into 107,558 shares of common stock pursuant to a June 15, 2004
notice of conversion from Keshet, LP, at a conversion price of $0.172. The
conversion did not include accrued and unpaid dividends on the converted
preferred. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering. This
conversion exhausted the outstanding Series G convertible preferred held by this
investor.
On June 29, 2004, we converted 3,472 shares of Series G Convertible
Preferred Stock into 201,860 shares of common stock pursuant to a June 15, 2004
notice of conversion from The Keshet Fund, LP, at a conversion price of $0.172.
The conversion did not include accrued and unpaid dividends on the converted
preferred. We issued the preferred and the underlying common stock upon
conversion to an accredited investor, pursuant to a Regulation D offering. This
conversion exhausted the outstanding Series G convertible preferred held by this
investor.
On June 29, 2004, we converted 8,091 shares of Series G Convertible
Preferred Stock into 470,406 shares of common stock pursuant to a June 15, 2004
notice of conversion from Talbiya B. Investments, Ltd, at a conversion price of
$0.172. The conversion did not include accrued and unpaid dividends on the
converted preferred. We issued the preferred and the underlying common stock
upon conversion to an accredited investor, pursuant to a Regulation D offering.
This conversion exhausted the outstanding Series G convertible preferred held by
this investor.
On June 30, 2004, we entered into Subscription Agreements with Longview
Fund, LP, Alpha Capital Aktiengesellschaft, Whalehaven Funds Limited,
Stonestreet Limited Partnership and Mid-Am Capital L.L.C for the issuance of
convertible 10% notes in the aggregate amount of $1,300,000 and five-year "A"
warrants for the purchase of, in the aggregate, 5,200,000 shares of common
stock, at $0.25 per share, and five-year "B" warrants for the purchase of, in
the aggregate, 13,000,000 shares of common stock, at $2.00 per share. The notes
are convertible into shares of our common stock at $0.15 per common share.
Conversions are limited to a maximum ownership of 9.99% of the underlying common
stock at any one time. The notes are payable in twelve equal monthly
installments, commencing January 1, 2005. The installment payments consist of
principal and a "premium" of 20% of the principal paid per installment. We have
the option to defer such payment until the note's maturity date on December 1,
2005, if our common stock trades above $0.20 for the five trading days prior to
the due date of an installment payment. In connection with this transaction, we
issued additional notes in the aggregate amount of $40,000 to Gem Funding, LLC,
Bi-Coastal Consulting Corp., Stonestreet Limited Partnership and Libra Finance,
S.A upon identical terms as the principal notes, as a finder's fee, and paid
$12,500 in legal fees. The common stock underlying all notes and warrants carry
registration rights. We issued the convertible notes and warrants to accredited
investors, pursuant to a Regulation D offering.
F-90
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 9, 2004, we converted $50,000 of our November 2003 Convertible
Promissory Note into 1,000,000 shares of common stock pursuant to an August 5,
2004 notice of conversion from Gamma Opportunity Capital Partners LP, at a fixed
conversion price of $0.05. The conversion did not include accrued and unpaid
interest on the converted amount. We issued the underlying common stock upon
conversion pursuant to our SB-2 registration statement, declared effective on
August 3, 2004.
On August 23, 2004, we converted $50,000 of our April 2004 Convertible
Promissory Note into 500,000 shares of common stock pursuant to an August 5,
2004 notice of conversion from Longview Fund LP, at a fixed conversion price of
$0.10. The conversion did not include accrued and unpaid interest on the
converted amount. We issued the underlying common stock upon conversion pursuant
to our SB-2 registration statement, declared effective on August 3, 2004.
On September 27, 2004, we converted $50,000 of our April 2004 Convertible
Promissory Note into 500,000 shares of common stock pursuant to a September 21,
2004 notice of conversion from Longview Fund LP, at a fixed conversion price of
$0.10. The conversion did not include accrued and unpaid interest on the
converted amount. We issued the underlying common stock upon conversion pursuant
to our SB-2 registration statement, declared effective on August 3, 2004.
On October 6, 2004, we converted $25,000 of our November 2003 Convertible
Promissory Note into 500,000 shares of common stock pursuant to a September 23,
2004 notice of conversion from Gamma Opportunity Capital Partners LP, at a fixed
conversion price of $0.05. The conversion did not include accrued and unpaid
interest on the converted amount. We issued the underlying common stock upon
conversion pursuant to our SB-2 registration statement, declared effective on
August 3, 2004.
On October 6, 2004, we issued 500,000 shares of our common stock to
Knightsbridge Holdings, LLC, pursuant to a consulting agreement dated November
10, 2003. We issued the common stock pursuant to our SB-2 registration
statement, declared effective on August 3, 2004. The issued and outstanding
equity reported in our Form 10QSB for the period ended March 31, 2004 reflects
these shares of common stock.
On October 13, 2004, we issued 250,000 restricted shares of our common
stock in a private placement to Arthur Blanding, at the market price of $0.12
per share, pursuant to Section 4(2) of the Securities Act of 1934. Mr. Blanding,
who solicited the purchase, is an accredited investor and has been a director of
the Company since 1999.
On October 15, 2004, we issued 750,000 shares of our common stock to
Marvel Enterprises, Inc., as partial compensation under a license agreement
dated February 1, 2004. We issued the common stock pursuant to our SB-2
registration statement, declared effective on August 3, 2004. The issued and
outstanding equity reported in our Form 10QSB for the period ended March 31,
2004 reflects these shares of common stock.
F-91
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 29, 2004, we entered into Subscription Agreements with Longview
Fund, LP, Alpha Capital Aktiengesellschaft, Whalehaven Funds Limited and
Stonestreet Limited Partnership for the issuance of convertible 10% notes in the
aggregate amount of $550,000 and five-year "C" warrants for the purchase of, in
the aggregate, 2,200,000 shares of common stock, at $0.15 per share, and the
repricing of five-year "A" warrants, issued June 30, 2004 for the purchase of,
in the aggregate, 3,200,000 shares of common stock, from $0.25 to $0.15 per
share. The notes are convertible into shares of our common stock at $0.10 per
common share. Conversions are limited to a maximum ownership of 9.99% of the
underlying common stock at any one time. The notes are payable in twelve equal
monthly installments, commencing May 1, 2005. The installment payments consist
of principal and a "premium" of 20% of the principal paid per installment. We
have the option to defer such payment until the note's maturity date on April
30, 2006, if our common stock trades above $0.15 for the five trading days prior
to the due date of an installment payment and the underlying common stock is
registered. In connection with this transaction, we issued additional notes,
without attached warrants, in the aggregate amount of $27,500 to Gem Funding,
LLC, Bi-Coastal Consulting Corp., Stonestreet Limited Partnership and Libra
Finance, S.A upon identical terms as the principal notes, as a finder's fee, and
paid $12,500 in legal fees. The common stock underlying all notes and warrants
carry registration rights. We issued the convertible notes and warrants to
accredited investors, pursuant to a Regulation D offering.
On December 17, 2004, we converted $50,000 of our April 2004 Convertible
Promissory Note into 500,000 shares of common stock pursuant to a December 8,
2004 notice of conversion from Longview Fund LP, at a fixed conversion price of
$0.10. The conversion did not include accrued and unpaid interest on the
converted amount. We issued the underlying common stock upon conversion pursuant
to our SB-2 registration statement, declared effective on August 3, 2004.
On December 20, 2004, we converted $25,000 of our April 2004 Convertible
Promissory Note into 265,958 shares of common stock pursuant to a December 9,
2004 notice of conversion from Bi Coastal Consulting Corp., at a fixed
conversion price of $0.10. The conversion included $1,595.89 accrued and unpaid
interest on the converted amount. We issued the underlying common stock upon
conversion pursuant to our SB-2 registration statement, declared effective on
August 3, 2004.
On December 20, 2004, we converted $50,000 of our November 2003
Convertible Promissory Note into 1,000,000 shares of common stock pursuant to a
December 8, 2004 notice of conversion from Gamma Opportunity Capital Partners
LP, at a fixed conversion price of $0.05. The conversion did not include accrued
and unpaid interest on the converted amount. We issued the underlying common
stock upon conversion pursuant to our SB-2 registration statement, declared
effective on August 3, 2004.
On December 27, 2004, we converted 10,000 shares of Series F Convertible
Preferred Stock into 1,290,323 shares of common stock pursuant to a December 27,
2004 notice of conversion from Austinvest Anstalt Balzers, at a conversion price
of $0.0775. The conversion did not include accrued and unpaid dividends on the
converted preferred. We issued the preferred and the underlying common stock
upon conversion to an accredited investor, pursuant to a Regulation D offering
and Rule 144.
On December 27, 2004, we converted 10,000 shares of Series F Convertible
Preferred Stock into 1,290,323 shares of common stock pursuant to a December 27,
2004 notice of conversion from Esquire Trade & Finance Inc., at a conversion
price of $0.0775. The conversion did not include accrued and unpaid dividends on
the converted preferred. We issued the preferred and the underlying common stock
upon conversion to an accredited investor, pursuant to a Regulation D offering
and Rule 144.
F-92
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 29, 2004, we closed a funding transaction with Momona Capital
Corp. and Ellis International Ltd. for the issuance of convertible 10% notes in
the aggregate amount of $200,000 and five-year "C" warrants for the purchase of,
in the aggregate, 800,000 shares of common stock, at $0.15 per share. The notes
are convertible into shares of our common stock at $0.10 per common share.
Conversions are limited to a maximum ownership of 9.99% of the underlying common
stock at any one time. The notes are payable in twelve equal monthly
installments, commencing May 1, 2005. The installment payments consist of
principal and a "premium" of 20% of the principal paid per installment. We have
the option to defer such payment until the note's maturity date on April 30,
2006, if our common stock trades above $0.15 for the five trading days prior to
the due date of an installment payment, and the underlying common stock is
registered. In connection with this transaction, we issued additional notes,
without attached warrants, in the aggregate amount of $10,000 to the investors
upon identical terms as the principal notes, as a finder's fee, and paid $3,500
in legal fees. The common stock underlying all notes and warrants carry
registration rights. We issued the convertible notes and warrants to accredited
investors, pursuant to an amendment to an October 29, 2004 Regulation D
offering.
On December 31, 2004, we issued 8,095,105 shares of our common stock and
options for 150,000 shares at an exercise price of $0.25 per share to our
employees and consultants for services rendered, pursuant to a Form S-8
registration statement filed December 23, 2004.
Note 10 - Income Taxes
We have recorded no income tax benefit for our taxable losses during the years
ended December 31, 2005 and 2004 because there is no certainty that we will
realize those benefits. The components of our deferred tax assets and
liabilities as of December 31, 2005 and 2004 are as follows:
2005 2004
------------ -----------
Tax effect of net operating loss carryforwards $ 14,875,732 $ 9,100,463
Accrued expenses that are deductible in future periods 1,479,268 57,304
Bad debt reserves that are deductible in future periods 130,550 33,718
Debt discounts that affect the timing of our interest 25,477 405,805
Depreciation and amortization method differences 1,645 (37,102)
------------ -----------
Net deferred tax assets $ 16,512,672 $ 9,560,188
============ ===========
Valuation allowances $(16,512,672) $(9,560,188)
============ ===========
Our valuation allowances increased by $6,952,484 and $1,934,561 during the years
ended December 31, 2005 and 2004, respectively.
As of December 31, 2005, we have a net tax operating loss of $39,881,318 that
will be available to offset future taxable income, if any. The use of net
operating loss carryforwards to reduce future income tax liabilities is subject
to limitation and these amounts will begin to expire in 2022.
The following table illustrates the reconciliation of the tax benefit at the
federal statutory rate to our effective rate for each year ended December 31,
2005 and 2004:
2005 2004
------ ------
Benefit at federal statutory rate (34.00)% (34.00)%
Benefit at state rate, net of federal benefit (3.30)% (3.30)%
Non-deductible derivative fair value losses 28.64% 20.43%
Effect of changes in our valuation allowances 8.63% 16.80%
Non-deductible travel expenses and charitable donations 0.03% 0.07%
----- -----
Benefit at our effective rate (0.00)% (0.00)%
===== =====
F-93
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We operate in certain foreign jurisdictions that are not reflected in the above
rate reconciliation because these operations are insignificant. However, we plan
to increase our foreign operations and, as a result, we may generate tax
liabilities in these foreign operations in future periods.
Note 11 - Commitments and Contingencies
Lease of Office
We lease office space at our corporate office in Florida under an original
operating lease that expired March 8, 2004. We have renewed the operating lease
for an additional six-year period that will expire October 30, 2015.
Future minimum rental payments required under the operating lease as of December
31, 2005 are as follows:
Years ending December 31, Amount
------------------------- -------
2006 $92,868
2007 $92,868
2008 $92,868
2009 $92,868
2010 $81,140
Rental expense for the years ended December 31, 2005 and 2004 are $90,000 and
$68,784, respectively.
Licenses
Royalty advances are payable against earned royalties on a negotiated basis. The
table below identifies each Licensor to which our licenses require advance
payments and, in addition, reflects the term of the respective licenses as well
as the advance royalties remaining to be paid on such negotiated advance royalty
payments, as of September 25, 2006. We currently are in default of our
guaranteed royalty payments to Marvel Enterprises on our license for the United
Kingdom by the aggregate advance remaining listed below for Marvel (UK).
Aggregate Advance
Licensor Term Remaining
--------------------------- ----------- -----------------
Marvel (UK) Two years $ 120,960
Masterfoods Three years $2,430,000
Diabetes Research Institute One year $ 2,500
Marvel Enterprises, Inc. (Super Heroes(R) and Marvel Heroes(R))
On February 4, 2005, we entered into a two-year license agreement for the
utilization of Marvel Heroes characters on our flavored milks in the United
Kingdom and Ireland. We agreed to a royalty rate of 4% of net wholesale sales in
the territory as the cost of the license. We have adopted the unit sales model
currently used in the United States. We have outsourced the infrastructure
required for the production, promotion, marketing, distribution and sale of our
products through a production agreement with Waterfront Corporation in the UK
and through an exclusive sales agency agreement with Drinks Brokers, Ltd., a UK
registered company responsible for the launch and growth of several major
beverage brands in the licensed territory.
F-94
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2005, we entered into a new one-year license agreement with
Marvel Enterprises, Inc. to use its Super Heroes(R) properties to promote our
branded milk products in the United States, Canada and Mexico. Under the terms
of the license agreement, we agreed to a royalty rate of 5% of net wholesale
sales in the United States, 4% for school lunch channels and 2.5% for school hot
lunch programs. We also agreed to a 11% royalty on the amount invoiced to dairy
processors for "kits" in Canada and Mexico.
On February 4, 2005, we entered into an eighteen month license agreement
for the utilization of Marvel Heroes characters on our flavored milks in nine
Middle East Countries. We agreed to a 11% royalty on the amount invoiced to
third party dairy processors for "kits" in the territory against the prepayment
of a guaranteed minimum royalty amount of $75,600.
Chattanooga Bakery, Inc.( Moon Pie(R))
In October 2003, we executed a two-year license agreement with MD
Enterprises, Inc. on behalf of Chattanooga Bakery. Under the terms of the
license agreement, we have the exclusive right to manufacture, distribute,
market and sell Moon Pie(R) flavored milk products in the United States. We
agreed to a variable royalty rate of 2% to 3% of net wholesale sales, depending
upon volume, as the cost of the license. This license has been extended
verbally.
Masterfoods USA (Starburst(R), Milky Way(R), 3 Musketeers(R))
On September 21, 2004, we entered into a licensing agreement with
Masterfoods USA, a division of Mars, Incorporated, for the use of Masterfood's
Milky Way(R), Starburst(R) and 3 Musketeers(R) trademarks in connection with the
manufacture, marketing and sale of single serve flavored milk drinks in the
United States, its Possessions and Territories and US Military installations
worldwide. The license limits the relationship of the parties to separate
independent entities. The amended term of the license agreement expires December
31, 2012. We have agreed to pay a 5% to 7% royalty based upon the total net
sales value of the licensed products sold as the cost of the license. Ownership
of the licensed marks and the specific milk flavors to be utilized with the
marks remains with Masterfoods. We have a right of first refusal for other milk
beverage products utilizing the Masterfoods marks within the licensed territory.
Diabetes Research Institute
In June 2005, we agreed to extend our licensing agreement with Diabetes
Research Institute for a term beyond the original June 30, 2006 termination
date.. We agreed to a variable royalty rate of 0.25% of net sales as the cost of
the license. We use this intellectual property, which consists of a logo plus
design on the labels of our Slim Slammers(TM) product line.
Employment Contracts
Mr. Warren has an employment contract effective October 1, 2005, having an
annual base salary of $300,000, plus a bonus of .25% of top line net sales
revenue and normal corporate benefits. This contract has minimum two-year terms
plus a severance package upon change of control based on base salary.
Messrs. Toulan, Patipa, Edwards and Kee have employment contracts
effective January 1, 2006, having annual base salaries aggregating $710,000,
plus discretionary bonuses and normal corporate benefits. These contracts have
minimum two-year terms plus severance packages upon change of control based on
base salary.
F-95
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mr. Kaplan has an employment contract effective November 1, 2005, having
an annual base salary of $180,000 for year one, $200,000 for year two and
$220,000 for year three, plus discretionary bonuses and normal corporate
benefits. This contract has a minimum three-year terms plus a severance package
upon change of control based on base salary
Marketing Commitments
Coca-Cola Enterprises. We are obligated to spend an aggregate of
$5,000,000 on marketing activities in 2005 and 2006 and thereafter, beginning in
2007, an amount per year in each country in the defined territory equal or
greater than 3% of our total revenue in such defined territory (on a country by
country basis). Such national and local advertising for our defined products
includes actively marketing the Slammers mark, based on a plan to be mutually
agreed each year. We are required to maintain our intellectual property rights
necessary for the production, marketing and distribution of our products by CCE.
Marvel UK. We are obligated to contribute to a discretionary marketing
fund at the rate of 3% of royalties payable to Marvel for our sales in the UK,
if requested by Marvel. We satisfied this obligation with a lump-sum payment of
$1,000 at the inception of the license.
Note 12 - Master Distribution Agreement
On August 31, 2005, we entered into a Master Distribution Agreement with
Coca-Cola Enterprises, Inc., which included the attendant grant of three year
warrants to CCE for the right to purchase 30 million shares of the Company's
common stock at an exercise price of $0.36 per share. The fair value of the
warrants has been recorded as deferred distribution costs and is being amortized
over the life of the distribution agreement.
Under the terms of the agreement, Coca-Cola Enterprises is obligated to
use all commercially reasonable efforts to solicit, procure and obtain orders
for our products and merchandise and actively promote the sale of such products
in the Territory, as defined in the agreement. The agreement establishes a
comprehensive process for the phased transition from our existing system of
distributors to Coca-Cola Enterprises, dependent upon distribution territory,
product and sales channels. The parties have agreed that Coca-Cola Enterprises
will implement its distribution on a ramp-up basis, with the initial
distribution commencing in the United States on or about the October 31, 2005
effective distribution date. Coca-Cola Enterprises' distribution in other
Territory areas will be dependent upon, among other things, third-party
licensing considerations and compliance with the regulatory requirements for the
products in foreign countries.
Note 13 -- Restatements of Prior Financial Statements
We have restated our prior financial statements. This footnote is organized to
reflect (i) our annual and quarterly statements of operations as reported and as
restated, (ii) a tabular summary of the amounts of adjustments and descriptions
of matters that gave rise to the restatements of our statements of operations
and (iii) a tabular summary of the amounts of adjustments and the descriptions
of matters that gave rise to the restatements of our balance sheets. See also
Notes 1, 5, 6, 7, 8, 9 and 10 for additional disclosures.
F-96
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
Years Ended December 31, 2005 and 2004
Year ended Year ended
December 31, 2005 December 31, 2005
(As Restated) (As Reported)
----------------- -----------------
Revenues $ 11,948,921 $ 11,948,921
Product costs (10,443,727) (8,938,692)
Operating expenses (18,364,502) (17,209,180)
Other income (expense) (62,669,345) (307,679)
------------ ------------
Net (loss) (79,528,653) (14,506,630)
============ ============
Loss applicable to common (80,850,670) (14,842,933)
============ ============
Loss per common share (0.60) (0.11)
============ ============
Comprehensive loss $(79,559,412) $(14,537,389)
============ ============
Year ended Year ended
December 31, 2004 December 31, 2004
(As Restated) (As Reported)
----------------- -----------------
Revenues $ 3,344,699 $ 3,344,699
Product costs (2,873,118) (2,374,805)
Operating expenses (4,183,863) (4,529,373)
Other income (expense) (7,805,338) (240,447)
------------ -----------
Net (loss) (11,517,620) (3,799,926)
============ ===========
Loss applicable to common (12,505,640) (4,188,558)
============ ===========
Loss per common share (0.31) (0.10)
============ ===========
Comprehensive loss $(11,518,309) $(3,800,615)
============ ===========
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2005 and 2004
Three months ended Three months ended
March 31, 2005 March 31, 2005
(As Restated) (As Reported)
------------------ ------------------
Revenues $ 897,770 $ 897,770
Product costs (816,113) (677,663)
Operating expenses (1,282,309) (1,340,290)
Other income (expense) 547,582 (117,065)
----------- -----------
Net (loss) (653,070) (1,237,248)
=========== ===========
Loss applicable to common (924,185) (1,332,308)
=========== ===========
Loss per common share (0.02) (0.02)
=========== ===========
Comprehensive loss $ (661,093) $(1,245,464)
=========== ===========
Three months ended Three months ended
March 31, 2004 March 31, 2004
(As Restated) (As Reported)
------------------ ------------------
Revenues $ 438,206 $ 438,206
Product costs (409,835) (330,121)
Operating expenses (976,424) (957,649)
Other income (expense) (3,524,664) (31,685)
----------- ---------
Net (loss) (4,472,717) (881,249)
=========== =========
Loss applicable to common (4,698,116) (974,717)
=========== =========
Loss per common share (0.15) (0.03)
=========== =========
Comprehensive loss $(4,472,717) $(881,249)
=========== =========
F-97
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2005 and 2004
Three months Six months Six months
Three months ended ended Ended ended
June 30, 2005 June 30, 2005 June 30, 2005 June 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
------------------ ------------- ------------- -------------
Revenues $ 2,448,618 $ 2,448,618 $ 3,346,388 $ 3,346,388
Product costs (1,972,850) (1,680,464) (2,788,963) (2,358,127)
Operating expenses (2,696,152) (2,007,000) (3,978,461) (3,347,290)
Other income (expense) (78,224,912) (103,181) (77,677,330) (220,246)
------------ ----------- ------------ -----------
Net (loss) (80,445,296) (1,342,027) (81,098,366) (2,579,275)
============ =========== ============ ===========
Loss applicable to common (81,038,891) (1,421,928) (81,963,076) (2,754,236)
============ =========== ============ ===========
Loss per common share (1.12) (0.02) (1.24) (0.04)
============ =========== ============ ===========
Comprehensive loss $(80,442,600) $(1,351,790) $(81,103,693) $(2,597,254)
============ =========== ============ ===========
Three months Six months Six months
Three months ended ended Ended ended
June 30, 2004 June 30, 2004 June 30, 2004 June 30, 2004
(As Restated) (As Reported) (As Restated) (As Reported)
------------------ ------------- ------------- ------------
Revenues $ 1,441,356 $ 1,441,356 $ 1,879,562 $ 1,879,562
Product costs (1,051,120) (934,966) (1,460,955) (1,265,087)
Operating expenses (1,198,967) (1,342,970) (2,175,391) (2,300,619)
Other income (expense) (9,376,541) (43,310) (12,901,205) (74,995)
------------ ----------- ------------ -----------
Net (loss) (10,185,272) (879,890) (14,657,989) (1,761,139)
============ =========== ============ ===========
Loss applicable to common (10,431,608) (980,710) (15,129,724) (1,955,427)
============ =========== ============ ===========
Loss per common share (0.26) (0.02) (0.43) (0.06)
============ =========== ============ ===========
Comprehensive loss $(10,185,272) $ (879,890) $(14,657,989) $(1,761,139)
============ =========== ============ ===========
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2005 and 2004
Three months Nine months Nine months
Three months ended ended Ended ended
Sept. 30, 2005 Sept. 30, 2005 Sept. 30, 2005 Sept. 30, 2005
(As Restated) (As Reported) (As Restated) (As Reported)
------------------ -------------- -------------- --------------
Revenues $ 3,245,305 $ 3,245,305 $ 6,591,693 $ 6,591,693
Product costs (2,755,957) (2,360,884) (5,544,920) (4,719,011)
Operating expenses (2,439,020) (2,717,708) (6,417,482) (6,064,998)
Other income (expense) 19,628,825 (3,073,169) (58,048,505) (3,293,415)
------------- ----------- ------------ -----------
Net (loss) 17,679,153 (4,906,456) (63,419,214) (7,485,371)
============= =========== ============ ===========
Loss applicable to common 17,463,463 (4,994,496) (64,499,613) (7,748,732)
============= =========== ============ ===========
Loss per common share 0.15 (0.04) (0.79) (0.09)
============= =========== ============ ===========
Comprehensive loss $ 17,660,830 $(4,912,126) $(63,442,863) $(7,509,380)
============= =========== ============ ===========
F-98
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months Three months Nine months Nine months
ended ended Ended ended
Sept. 30, 2004 Sept. 30, 2004 Sept. 30, 2004 Sept. 30, 2004
(As Restated) (As Reported) (As Restated) (As Reported)
-------------- -------------- -------------- --------------
Revenues $ 825,430 $ 825,430 $ 2,704,992 $ 2,704,992
Product costs (781,856) (628,747) (2,242,811) (1,893,834)
Operating expenses (1,182,112) (1,237,853) (3,357,503) (3,538,472)
Other income (expense) 7,436,020 (79,822) (5,465,185) (154,817)
------------ ----------- ------------ -----------
Net (loss) 6,297,482 (1,120,992) (8,360,507) (2,882,131)
============ =========== ============ ===========
Loss applicable to common 6,043,897 (1,218,164) (9,085,827) (3,173,591)
============ =========== ============ ===========
Loss per common share 0.14 (0.03) (0.24) (0.08)
============ =========== ============ ===========
Comprehensive loss $ 6,297,482 $(1,120,992) $(8,360,507) $(2,882,131)
============ =========== ============ ===========
The following tables reflect the individual components of our restatements and a
description of the nature of the adjustment:
Quarter ended Quarter ended Quarter ended Quarter ended Year ended
March 31, 2005 June 30, 2005 Sept. 30, 2005 Dec. 31, 2005 Dec. 31, 2005
-------------- -------------- -------------- -------------- --------------
Net income (loss), as reported $ (1,237,248) $ (1,342,027) $ (4,906,456) $ (7,020,899) $ (14,506,630)
Share-based payments -- (551,810) (102,782) 569,620 (84,972)
Deferred development costs (12,586) (94,768) (128,711) -- (236,065)
Derivative income (expense) 1,471,743 (77,311,393) 23,321,020 (8,304,944) (60,823,574)
Amortization of debt discount (772,181) (489,633) (73,864) (92,960) (1,428,638)
Liquidated damages expense -- -- -- (303,750) (303,750)
Investor relations charges (30,000) (332,954) (634,541) (484,766) (1,482,261)
Other (72,798) (322,711) 204,487 (471,740) (662,762)
-------------- -------------- -------------- -------------- --------------
Net income (loss), as restated $ (653,070) $ (80,445,296) $ 17,679,153 $ (16,109,439) (79,528,653)
============== ============== ============== ============== ==============
Share-based payments: We improperly measured and deferred share-based payment
expense related to employee stock options that were issued commencing in the
second quarter of the year ended December 31, 2005. These adjustments, which are
reflected in operating expenses, reflect the effects of re-measurement of the
stock options and the elimination of previously deferred compensation amounts.
Deferred development costs: We improperly capitalized development costs on our
balance sheet. These adjustments reflect our revised policy that requires
development costs to be expensed as they are incurred. We record development
costs as a component of operating expenses.
Derivative income (expense): Derivative income (expense) arises from adjustments
to our derivative liabilities to carry these instruments at fair value at the
end of each reporting period. Our derivative financial instruments consist of
compound and freestanding instruments. These derivative financial instruments
arose from (i) our notes payable, convertible notes payable and preferred stock
financing transactions and (ii) the reclassification of non-exempt warrants from
stockholders' equity to derivative liabilities because share settlement is
presumed not to be within our control. We previously did not properly allocate
proceeds from our financing transactions to derivative liabilities where
applicable; nor did we reclassify our other warrants to derivative liabilities
when we presumably lost our ability to share settle such instruments.
Amortization of debt discounts and other charges: We have adjusted our notes
payable and convertible notes payable to reflect the allocation of proceeds to
derivative liabilities. These allocations have resulted in discounts to the face
value of the debt, and we are required to amortize these discounts through
periodic charges to interest expense using the effective method. The adjustments
reflect the difference between our previous method of recognizing interest
expense based upon the stated interest rate and amounts derived from the
application of the effective interest method. Other charges include gains and
losses on extinguishments of our debt instruments that have arisen when
modifications to such instruments were considered to be significant.
F-99
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidated damages: We have restated our consolidated financial statements to
record estimated liquidated damages that arose in connection with a registration
rights agreement, pursuant to financial accounting standard No. 5, Accounting
for Contingencies. In our previous filing, we recorded these amounts as
incurred. During the year ended December 31, 2005, we recorded liquidated
damages expense of $303,750 (none in 2004).
Investor relations charges: We entered into a contract with an investor
relations firm during 2005 that required payment in our equity securities. We
incorrectly did not recognize the value of these services until the securities
were issued. This adjustment reflects the proper recognition of the consulting
cost in general and administrative expenses and a reciprocal amount in accrued
liabilities.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2005 June 30, 2005 Sept. 30, 2005 Dec. 31, 2005 31, 2005
--------------- --------------- --------------- --------------- ---------------
Loss applicable to common $ (1,332,308) $ (1,421,928) $ (4,994,496) $ (7,094,201) $ (14,842,933)
stockholders, as reported
Adjustments to net loss 584,178 (79,103,269) 22,585,608 (9,088,540) (65,022,023)
Preferred stock accretion (176,055) (513,694) (127,649) (168,316) (985,714)
--------------- --------------- --------------- --------------- ---------------
Loss applicable to common
stockholders, as restated $ (924,185) $ (81,038,891) $ 17,463,463 $ (16,351,057) $ (80,850,670)
=============== =============== =============== =============== ===============
Preferred stock accretions: We did not allocate proceeds from certain of our
preferred stock financings to derivative financial instruments (warrants and
compound derivatives) and stockholders' equity (beneficial conversion features).
These adjustments reflect the accretion of discounts to the preferred stock
carrying values, which are reductions to net income (loss) to arrive at income
(loss) applicable to common shareholders. We have accreted these discounts in
our restated financial statements through periodic charges to retained earnings
using the effective method.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended,
March 31, 2005 June 30, 2005 Sept. 30, 2005 Dec. 31, 2005 Dec, 2005
--------------- --------------- --------------- --------------- ---------------
Loss per common share, $ (0.02) $ (0.02) $ (0.04) $ (0.00) $ (0.11)
as reported
Share-based payments -- (0.01) (0.00) (0.00) (0.00)
Deferred development costs (0.00) (0.00) (0.00) -- (0.01)
Derivative income (expense) 0.02 (1.07) 0.21 (0.05) (0.45)
Amortization of debt discount (0.01) (0.01) (0.00) (0.00) (0.01)
Liquidated damages expense -- -- -- (0.00) (0.00)
Investor relations charges (0.00) (0.00) (0.01) (0.03) (0.01)
Preferred stock
accretions/dividends (0.00) (0.01) (0.00) (0.00) (0.01)
--------------- --------------- --------------- --------------- ---------------
Net income (loss) per common share,
as restated $ (0.02) $ (1.12) $ 0.15 $ (0.10) $ (0.60)
--------------- --------------- --------------- --------------- ---------------
Diluted income per common share, as
restated $ (0.02) $ (1.12) $ 0.01 $ (0.10) $ (0.60)
=============== =============== =============== =============== ===============
See descriptions that we have provided under the tables for net income (loss)
and income (loss) applicable to common stockholders. Our restated income (loss)
per common share reflects the application of the treasury stock method and the
if-converted methods where those methods are appropriate.
F-100
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2005 June 30, 2005 Sept. 30, 2005 Dec. 31, 2005 31, 2005
--------------- --------------- --------------- --------------- ---------------
Comprehensive loss,
as reported $ (1,245,464) $ (1,351,790) $ (4,912,126) $ (7,028,009) $ (14,537,389)
--------------- --------------- --------------- --------------- ---------------
Comprehensive loss,
as restated $ (661,093) $ (80,442,600) $ 17,660,830 $ (16,116,549) $ (79,559,412)
=============== =============== =============== =============== ===============
Our restated comprehensive income (loss) reflects the adjustments attributable
to net income (loss), above.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2004 June 30, 2004 Sept. 30, 2004 Dec. 31, 2004 31, 2004
--------------- --------------- --------------- --------------- ---------------
Net income (loss), as reported $ (881,249) $ (879,890) $ (1,120,992) $ (917,795) $ (3,799,926)
Deferred development costs (102,951) (28,790) (1,089) 12,372 (120,458)
Derivative income (expense) (3,430,564) (9,105,816) 8,005,711 (1,779,264) (6,309,933)
Amortization of debt discount (57,500) (162,500) (484,901) (470,344) (1,175,245)
Other (453) (8,276) (101,247) (2,082) (112,058)
--------------- --------------- --------------- --------------- ---------------
Net income (loss), as restated $ (4,472,717) $ (10,185,272) $ 6,297,482 $ (3,157,113) $ (11,517,620)
=============== =============== =============== =============== ===============
Deferred development costs: We improperly capitalized development costs on our
balance sheet. These adjustments reflect our revised policy that requires
development costs to be expensed as they are incurred. We record development
costs as a component of operating expenses.
Derivative income (expense): Derivative income (expense) arises from adjustments
to our derivative liabilities to carry these instruments at fair value at the
end of each reporting period. Our derivative financial instruments consist of
compound and freestanding instruments. These derivative financial instruments
arose from (i) our notes payable, convertible notes payable and preferred stock
financing transactions and (ii) the reclassification of non-exempt warrants from
stockholders' equity to derivative liabilities because share settlement is
presumed not to be within our control. We previously did not properly allocate
proceeds from our financing transactions to derivative liabilities where
applicable; nor did we reclassify our other warrants to derivative liabilities
when we presumably lost our ability to share settle such instruments.
Amortization of debt discounts and other charges: We have adjusted our notes
payable and convertible notes payable to reflect the allocation of proceeds to
derivative liabilities. These allocations have resulted in discounts to the face
value of the debt, and we are required to amortize these discounts through
periodic charges to interest expense using the effective method. The adjustments
reflect the difference between our previous method of recognizing interest
expense based upon the stated interest rate and amounts derived from the
application of the effective interest method. Other charges include gains and
losses on extinguishments of our debt instruments that have arisen when
modifications to such instruments were considered to be significant.
Investor relations charges: We entered into a contract with an investor
relations firm during 2005 that required payment in our equity securities. We
incorrectly did not recognize the value of these services until the securities
were issued. This adjustment reflects the proper recognition of the consulting
cost in general and administrative expenses and a reciprocal amount in accrued
liabilities. See descriptions that we have provided under the tables for net
income (loss) and income (loss) applicable to common stockholders. Our restated
income (loss) per common share reflects the application of the treasury stock
method and the if-converted methods where those methods are appropriate.
F-101
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See descriptions that we have provided under the tables for net income (loss)
and income (loss) applicable to common stockholders. Our restated income (loss)
per common share reflects the application of the treasury stock method and the
if-converted methods where those methods are appropriate.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2004 June 30, 2004 Sept. 30, 2004 Dec. 31, 2004 31, 2004
--------------- --------------- --------------- --------------- ---------------
Loss applicable to common $ (974,717) $ (980,710) $ (1,218,164) $ (1,014,967) $ (4,188,558)
stockholders, as reported
Adjustments to net loss (3,591,468) (9,305,352) 7,418,444 (2,239,318) (7,717,694)
Preferred stock accretion (131,931) (145,546) (156,383) (165,528) (599,388)
--------------- --------------- --------------- --------------- ---------------
Loss applicable to common
stockholders, as restated $ (4,698,116) $ (10,431,608) $ 6,043,897 $ (3,419,813) $ (12,505,640)
=============== =============== =============== =============== ===============
Preferred stock accretions: We did not allocate proceeds from certain of our
preferred stock financings to derivative financial instruments (warrants and
compound derivatives) and stockholders' equity (beneficial conversion features).
These adjustments reflect the accretion of discounts to the preferred stock
carrying values, which are reductions to net income (loss) to arrive at income
(loss) applicable to common shareholders. We have accreted these discounts in
our restated financial statements through periodic charges to retained earnings
using the effective method.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2004 June 30, 2004 Sept. 30, 2004 Dec. 31, 2004 31, 2004
--------------- --------------- --------------- --------------- ---------------
Loss per common share, $ (0.03) $ (0.02) $ (0.03) $ (0.02) $ (0.09)
as reported
Deferred development costs (0.00) (0.00) (0.00) 0.00 (0.00)
Derivative income (expense) (0.12) (0.24) 0.18 (0.04) (0.16)
Amortization of debt discount (0.00) (0.00) (0.01) (0.01) (0.03)
Investor relations charges (0.00) (0.00) (0.00) (0.00) (0.00)
Preferred stock accretions/dividends (0.01) (0.01) (0.01) (0.01) (0.02)
--------------- --------------- --------------- --------------- ---------------
Net income (loss) per common share,
as restated $ (0.15) $ (0.26) $ 0.14 $ (0.07) $ (0.31)
--------------- --------------- --------------- --------------- ---------------
Diluted income per common share, as
restated $ (0.15) $ (0.26) $ 0.01 $ (0.07) $ (0.31)
=============== =============== =============== =============== ===============
See descriptions that we have provided under the tables for net income (loss)
and income (loss) applicable to common stockholders. Our restated income (loss)
per common share reflects the application of the treasury stock method and the
if-converted methods where those methods are appropriate.
Quarter ended Quarter ended Quarter ended Quarter ended Year ended Dec.
March 31, 2004 June 30, 2004 Sept. 30, 2004 Dec. 31, 2004 31, 2004
--------------- --------------- --------------- --------------- ---------------
Comprehensive loss,
as reported $ (881,249) $ (879,890) $ (1,120,992) $ (918,494) $ (3,800,625)
--------------- --------------- --------------- --------------- ---------------
Comprehensive loss,
as restated $ (4,472,717) $ (10,185,272) $ 6,297,482 $ (3,157,802) $ (11,518,309)
=============== =============== =============== =============== ===============
F-102
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our consolidated balance sheets as of December 31, 2005 and 2004 have been
restated as illustrated in the following table:
Redeemable Stockholders
Total Total Preferred Equity
Assets Liabilities Stock (Deficit)
----------- ------------- ------------ -------------
As reported (December 31, 2005) $24,284,806 $(10,793,837) $(3,153,316) $ 10,337,653
Adjustments:
Intangible assets 4,073,314 -- -- --
Accrued liabilities -- (1,656,988) -- --
Dividends payable -- 1,240,682 -- --
Derivative liabilities -- (35,939,235) -- --
Notes payable and convertible notes -- (1,599,876) -- --
Paid in capital -- -- -- 37,365,319
Preferred stock adjustments -- -- 1,048,816 --
Accumulated Deficit -- -- -- (70,674,539)
Deferred compensation -- -- 475,933
----------- ------------ ----------- ------------
As restated (December 31, 2005) $28,358,120 $(48,749,254) $(2,104,500) $(22,495,634)
=========== ============ =========== ============
Redeemable Stockholders
Total Total Preferred Equity
Assets Liabilities Stock (Deficit)
------------ ------------ ------------ ------------
As reported (December 31, 2004) $ 1,093,847 $ (4,123,541) $ (4,284,802) $ (7,314,496)
Adjustments:
Prepaid Expenses (163,644) -- -- --
Intangible assets 165,605 -- -- --
Accrued liabilities -- (69,024) -- --
Dividends payable -- 928,379 -- --
Derivative liabilities -- (10,835,629) -- --
Notes payable and convertible notes -- (1,228,228) -- --
Common Stock -- -- -- --
Paid in Capital -- -- -- (4,870,092)
Preferred stock adjustments -- -- 1,353,347 --
Accumulated Deficit -- -- -- (4,979,102)
------------ ------------ ------------ ------------
As restated (December 31, 2004) $ 1,095,808 $(15,328,043) $ (2,931,455) $(17,163,690)
============ ============ ============ ============
Accumulated Deficit
-------------------
As reported (December 31, 2005) $ (48,579,962)
Adjustments:
Cumulative Derivative Expense (59,476,877)
Amortization of Licenses and Distribution Agreements (584,243)
Cumulative Amortization of Debt Expense (2,627,050)
Cumulative Accretion of Preferred Stock (6,774,620)
Cumulative Reversal of Accrued Dividends 1,240,682
Share based payments - 2005 (84,972)
Liquidated damages expense - 2005 (303,750)
Investor relations charges - 2005 (1,482,261)
Cumulative Other (581,448)
As restated (December 31, 2005) $ (119,254,501)
Accumulated Deficit
-------------------
As reported (December 31, 2004) $ (33,737,029)
Adjustments:
Cumulative Derivative Income 1,346,697
Cumulative Product Development Expenses (162,169)
Cumulative Amortization of Debt Discount Expense (1,198,412)
Cumulative Accretion of Preferred Stock (5,788,903)
Cumulative Reversal of Accrued Dividends 928,379
Cumulative Other (104,694)
As restated (December 31, 2004) $ (38,716,131)
Intangible assets: We entered into a Master Distribution Agreement with Coca
Cola Enterprises on August 31, 2005 that provided for the issuance of 30,000,000
warrants to purchase our common stock. We originally did not value these
warrants using a proper valuation method. We have restated the intangible asset
to reflect its proper valuation. In addition, the warrants did not meet all of
the criteria for equity classification and are carried as derivative liabilities
at fair value in the amount of $14,220,657 as of December 31, 2005.
Stockholders' equity (deficit) reflects the reclassification of the original
value, the adjustments to fair value and adjusted amortization for the revised
intangible asset carrying value.
Accrued liabilities: We entered into a contract with an investor relations firm
during 2005 that required payment in our equity securities. We incorrectly did
not recognize the value of these services until the securities were issued. This
adjustment reflects the proper recognition of the consulting cost in general and
administrative expenses and a reciprocal amount in accrued liabilities.
Dividends payable: We originally reported dividends payable of $1,240,682 on
certain series of our preferred stock; it was the only non-current liability at
December 31, 2005. These dividends were not declared and, therefore, they have
been reversed against the related charges in retained earnings. In the future we
will accrue preferred stock dividends when they have been declared.
Derivative liabilities: We issued certain debt and preferred stock that embody
variable conversion rates having the effect of extending share settlement of our
share obligations beyond our control. As a result, we reclassified our other
warrants to derivative liabilities and carry them at fair value in our revised
balance sheet. Derivative financial instruments are initially and subsequently
measured at fair values using techniques consistent with the risks associated
with the derivative financial instruments. Stockholders' equity (deficit)
reflects the reclassification of the original equity related to these warrants
and fair value adjustments.
F-103
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable and convertible notes payable: We have allocated proceeds from our
note payable, convertible note payable and preferred stock financing
transactions, where applicable, to compound and freestanding derivative
financial instruments in our restated financial statements. As noted above, we
have also re-classed certain non-exempt warrants from stockholders' equity to
derivative liabilities because share settlement is presumed not to be within our
control. In addition to the adjustments to notes payable described under
derivative financial instruments above, we have restated other notes payable to
properly reflect discounts and their carrying amounts. These adjustments
generally were made through charges to interest expense using the effective
interest method over the periods such notes were outstanding.
Preferred Stock Adjustments: We previously reported the aggregate carrying value
of $3,153,316 related to our Series F, H, J and K Preferred Stock in
stockholders' equity. We are required to carry these instruments outside of
stockholders' equity, under the caption redeemable preferred stock, because
these instruments have features where the investors' could require us to redeem
them for cash. As of December 31, 2005 the carrying value of these series of
preferred stock amounted to $2,104,500. See also Note 7.
The financial instruments issued in the original preferred stock financing
transactions included both freestanding derivatives (principally warrants) and
compound embedded derivatives (principally conversion and default put features)
that we are required to carry as derivative liabilities, and at fair values. As
of December 31, 2005, these derivative liabilities had a fair value of
$36,868,468.
The allocation of proceeds from our preferred stock financing transactions
resulted in discounts to the carrying values of the preferred stock. The
restated financial statements reflect periodic accretions of these discounts,
through charges to retained earnings, using the effective method. We also
incorrectly accrued undeclared dividends and have reversed those provisions.
The aggregate of our adjustments to preferred stock, including the periodic
(charges) and credits to derivative income (expense), resulted in a decrease in
our stockholders' equity of $1,048,816. The effects on income (loss)
attributable to these adjustments are reflected in the tables, above.
Deferred Compensation: We previously reported deferred compensation as a
component of stockholders' equity of $475,933. We have restated our balance
sheet to revalue the underlying options and properly recognize the compensation
expense amounting to $560,904 and paid in capital of $84,972.
Note 14 - Subsequent Events (UNAUDITED)
On April 13, 2006, we issued 457,125 shares of common stock pursuant to a notice
of conversion of interest and premium associated with our June 2004 convertible
note. The common stock underlying this note was registered pursuant to a
registration statement declared effective on April 18, 2005.
On April 17, 2006, we issued 807,692 shares of common stock underlying our
Series F Warrant for 1,000,000 shares to an accredited investor. The shares of
common stock underlying the Warrant were issued pursuant Regulation D.
On April 21, 2006, we issued 437,500 shares of common stock to an accredited
investor pursuant to notices of conversion of our April, June and October 2004
convertible notes. The common stock underlying these notes was registered
pursuant to a registration statement declared effective on August 3, 2004 and
April 18, 2005, respectively.
F-104
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 28, 2006, we issued 196,078 shares of our common stock in a private
placement, pursuant to Section 4(2) of the Securities Act of 1933, to an
accredited investor.
On April 28, 2006 we issued 1,500,000 shares of common stock underlying our
April 2004 Warrant. The shares of common stock underlying the Warrant were
registered pursuant to a registration statement declared effective on August 3,
2004.
On May 12, 2006, we issued $2,500,000, six-month-term, 10% notes payable plus
detachable warrants to purchase 1,500,000 shares of our common stock with a
strike price of $0.80 for a period of five-years. Net proceeds from this
financing transaction amounted to $2,235,000. The holder has the option to
redeem the notes for cash in the event of defaults and certain other contingent
events, including events related to the common stock into which the instrument
is convertible, registration and listing (and maintenance thereof) of our common
stock and filing of reports with the Securities and Exchange Commission (the
"Default Put"). We evaluated the terms and conditions of the notes and warrants
and determined that (i) the Default Put required bifurcation because it did not
meet the "clearly and closely related" criteria of FAS 133 and (ii) the warrants
did not meet all of the requisite conditions for equity classification under FAS
133. As a result, the net proceeds from the arrangement were first allocated to
the Default Put ($87,146) and the warrants ($901,665) based upon their fair
values, because these instruments are required to be initially and subsequently
carried at fair values. These instruments will be carried in our balance sheet
following the financing under the classification, Derivative Liabilities and
adjusted to fair value. The warrants and shares of common stock underlying the
warrants and notes were issued to two accredited investors in a private
placement exempt from registration under the Securities Act of 1933 pursuant
Regulation D.
On May 16, 2006, we issued 2,000,000 shares of common stock pursuant to an
exercise of a warrant associated with our January 2005 convertible note
financing. The common stock underlying this warrant was registered pursuant to a
registration statement declared effective by the Securities and Exchange
Commission on August 2, 2005.
On June 7, 2006, we issued 101,100 shares of common stock pursuant to a
conversion of our May 2005 convertible note. The shares of common stock
underlying this convertible note were issued pursuant to a registration
statement declared effective by the Securities and Exchange Commission on August
2, 2005.
On June 23, 2006, we issued 2,000,000 shares of common stock pursuant to an
exercise of a warrant associated with our November 2003 convertible notes
financing. The common stock underlying this warrant was registered pursuant to a
registration statement declared effective by the Securities and Exchange
Commission on August 2, 2005.
On July, 6, 2006, we issued 83,121 shares of our common stock in a private
placement, pursuant to Section 4(2) of the Securities Act of 1933, to an
accredited investor.
On July, 14, 2006, we issued 436,388 shares of common stock upon the cashless
exercise of a warrant associated with our Series D convertible preferred stock.
These shares were issued to an accredited investor pursuant to Regulation D and
Section 4(2) of the Securities Act of 1933.
On July 14, August 14 and August 31, 2006, we issued, in the aggregate, 250,000
shares of common stock pursuant to a conversion of our Series H preferred stock.
The shares of common stock underlying the preferred were issued pursuant to
Regulation D.
On July, 19, 2006, we issued 1,008,065 shares of common stock upon the cashless
exercise of a warrant associated with our Series H convertible preferred stock.
These shares were issued to an accredited investor pursuant to Regulation D and
Section 4(2) of the Securities Act of 1933.
F-105
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 27, 2006, we entered into definitive agreements to sell $30 million
senior convertible notes that are due in 2010 to several institutional and
accredited investors in a private placement exempt from registration under the
Securities Act of 1933. The notes initially carry a 9% coupon, payable quarterly
and are convertible into shares of common stock at $0.70 per share. In 2007, the
coupon may decline to LIBOR upon the Company achieving certain financial
milestones. The notes will begin to amortize in equal, bi-monthly payments
beginning in mid-2007. We concurrently issued warrants to purchase 12,857,143
shares of common stock at $0.73 per share that expire in July 2011 to the
investors in the private placement. Under the terms of the financing, we will
sell $30 million notes, of which $15.0 million of the notes will be held in
escrow. The release of the escrowed funds will be subject to stockholder
approval. We intend to file a proxy statement seeking such shareholder approval
as soon as practical. As a result of our failure to file our March 31, 2006 Form
10QSB timely, an event of default has occurred under the terms of the Notes, and
the interest rate on the Notes, payable quarterly, was increased from 9% to 14%
per annum. Pursuant to the terms of the Notes, upon the occurrence of an event
of default, holders of the Notes may, upon written notice to the Company, each
require the Company to redeem all or any portion of their Notes, at a default
redemption price calculated pursuant to the terms of the Notes. We have entered
into an Amendment Agreement with the holders of the Notes to amend the Notes in
certain respects as consideration for the holders' release of the Company's
default resulting from its delay in the filing of this quarterly report.
On August 24, 2006, we issued 168,937 shares of common stock pursuant to a
conversion of our May 2005 convertible note. The shares of common stock
underlying the convertible note were issued pursuant to a registration statement
declared effective by the Securities and Exchange Commission on August 2, 2005.
On September 13 2006, we issued, in the aggregate, 161,527 shares of common
stock pursuant to a conversion of our Series F preferred stock. The shares of
common stock underlying the preferred were issued pursuant to Regulation D.
On September 28, 2006, we issued 4,000,000 shares of common stock pursuant to a
conversion of our November 2003 convertible note. The shares of common stock
underlying the convertible note were issued pursuant to a registration statement
declared effective by the Securities and Exchange Commission on August 3, 2004.
On September 28, 2006, we issued 1,000,000 shares of common stock pursuant to a
conversion of our June 2004 convertible note. The shares of common stock
underlying the convertible note were issued pursuant to a registration statement
declared effective by the Securities and Exchange Commission on April 18, 2005.
F-106
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58,004,688 SHARES
OF OUR
COMMON STOCK
BRAVO! BRANDS INC.
----------------
PROSPECTUS
----------------
November 7, 2006
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