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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 0-20549
BRAVO! FOODS INTERNATIONAL CORP.
(Exact name of registrant as specified in its amended charter)
formerly
China Premium Food Corporation
Delaware 62-1681831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, North Palm Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 625-1411
Registrant's telephone number
--------------------------------------------------------------
(Former name, former address and former fiscal year if changed
since last report)
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
May 12, 2004 Common Stock 40,296,574
Transitional Small Business Disclosure Format (Check One) YES [ ] NO [x]
BRAVO! FOODS INTERNATIONAL CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Consolidated balance sheets as of F-1
March 31, 2004 (unaudited) and December 31, 2003
Consolidated statements of operations F-3
(unaudited) for the three months ended
March 31, 2004 and 2003
Consolidated statements of cash flows F-4
(unaudited) for the three months ended
March 31, 2004 and 2003
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds 25
Item 6. Exhibits and reports on Form 8-K 28
SIGNATURES 29
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2004
------------ -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 58,859 $ 85,476
Accounts receivable - net 25,921 20,044
Other receivables 6,331 6,331
Inventories 54,995 64,995
Prepaid expenses 201,617 444,379
---------- ----------
Total current assets 347,723 621,225
Furniture and equipment, net 68,623 63,351
License rights, net of accumulated amortization 24,065 191,482
Deferred product development costs 41,711 144,662
Deposits 10,736 10,736
---------- ----------
Total assets $ 492,858 $1,031,456
========== ==========
Liabilities and Capital Deficit
Current liabilities:
Note payable to International Paper $ 187,743 $ 187,743
Notes payable to Alpha Capital 100,000 100,000
Note payable to Mid-Am Capital LLC 150,000 150,000
Note payable to Jasper Products LLC - 917,035
Note payable to Warner Brothers 147,115 147,115
Accounts payable 2,123,705 1,293,196
Deferred income - 152,260
Accrued liabilities 610,665 781,614
---------- ----------
Total current liabilities 3,319,228 3,728,963
Dividends payable 582,823 676,291
Other notes payable 310,098 204,187
---------- ----------
Total liabilities 4,212,149 4,609,441
---------- ----------
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2003 2004
------------ ---------
(Unaudited)
Commitments and contingencies
Capital Deficit (Note 2):
Series B convertible, 9% cumulative, and redeemable
preferred stock, stated value $1.00 per share,
1,260,000 shares authorized, 107,440 shares issued
and outstanding, redeemable at $107,440 107,440 107,440
Series F convertible and redeemable preferred stock,
stated value $10.00 per share, 130,515 and 125,515
shares issued and outstanding 1,205,444 1,159,264
Series G convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
58,810 and 53,810 shares issued and outstanding 520,604 476,334
Series H convertible, 7% cumulative and redeemable
preferred stock, stated value $10.00 per share,
165,500 shares issued and outstanding 895,591 895,591
Series I convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
30,000 shares issued and outstanding 72,192 72,192
Series J convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
200,000 shares issued and outstanding 1,854,279 1,854,279
Series K convertible, 8% cumulative and redeemable
preferred stock, stated value $10.00 per share,
80,000 shares issued and outstanding - 800,000
Common stock, par value $0.001 per share,
300,000,000 shares authorized, 28,047,542 and
32,092,588 shares issued and outstanding 28,045 32,093
Additional paid-in capital 21,144,896 21,547,321
Accumulated deficit (29,548,471) (30,523,188)
Translation adjustment 689 689
------------ ------------
Total capital deficit (3,719,291) (3,577,985)
------------ ------------
Total liabilities and capital deficit $ 492,858 $ 1,031,456
============ ============
See accompanying notes.
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2003 2004
---- ----
(Unaudited) (Unaudited)
Revenue - unit sales $ 92,918 $ 367,458
Revenue - net kit sales 2,737 -
Revenue - gross kit sales 301,775 70,748
----------- -----------
Total revenue 397,430 438,206
Cost of sales (80,362) (330,121)
----------- -----------
Gross margin 317,068 108,085
Selling expenses 361,075 253,038
Product development 494 3,645
General and administrative expense 772,470 700,966
----------- -----------
Loss from operations (816,971) (849,564)
Other income (expense)
Interest expense (2,044) (31,685)
----------- -----------
Loss before income taxes (819,015) (881,249)
Provision for income taxes - -
----------- -----------
Net loss (819,015) (881,249)
Dividends accrued for Series B preferred stock (2,384) (2,411)
Dividends accrued for Series G preferred stock (13,799) (10,864)
Dividends accrued for Series H preferred stock (30,292) (28,883)
Dividends accrued for Series I preferred stock (5,918) (5,984)
Dividends accrued for Series J preferred stock (298,720) (39,890)
Dividends accrued for Series K preferred stock - (5,436)
----------- -----------
Net loss applicable to common shareholders $(1,170,128) $ (974,717)
=========== ===========
Weighted average number of common shares
outstanding 25,843,743 31,001,544
=========== ===========
Basic and diluted loss per share $ (0.05) $ (0.03)
=========== ===========
Comprehensive loss and its components
consist of the following:
Net loss $ (819,015) $ (881,249)
Foreign currency translation adjustment 3,047 -
----------- -----------
Comprehensive loss $ (815,968) $ (881,249)
=========== ===========
See accompanying notes.
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
2003 2004
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(819,015) $(881,249)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 26,202 59,100
Stock issuance for compensation and finder's fee 28,000 90,000
Loss on disposal of fixed assets 15,135 -
Increase (decrease) from changes in:
Accounts receivable 65,187 5,877
Other receivable (17,097) -
Advance to vendors 11 -
Inventories 70 (10,000)
Prepaid expenses (8,149) (242,762)
Accounts payable and accrued expenses 158,340 409,736
Deferred product development costs - (202,952)
--------- ---------
Net cash used in operating activities (551,316) (772,250)
--------- ---------
Cash flows from investing activities:
Purchase of equipment (4,429) (1,133)
--------- ---------
Net cash used in investing activities (4,429) (1,133)
--------- ---------
Cash flows from financing activities:
Proceeds of Series K preferred stock - 800,000
Proceeds of Series J preferred stock 500,000 -
Payment of note payable, bank loan and
license fee payable (98,335) -
--------- ---------
Net cash provided by financing activities 401,665 800,000
--------- ---------
Effect of changes in exchange rates on cash 3,047 -
--------- ---------
Net (decrease) increase in cash and cash equivalents (151,033) 26,617
Cash and cash equivalents, beginning of period 224,579 58,859
--------- ---------
Cash and cash equivalents, end of period $ 73,546 $ 85,476
========= =========
See accompanying notes.
F-4
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Interim Periods
The accompanying unaudited consolidated financial statements include the
accounts of Bravo! Foods International, Corp. and its wholly-owned
subsidiary China Premium Food Corp (Shanghai) Co., Ltd.. (the "Company").
The Company is engaged in the sale of flavored milk products and flavor
ingredients in the United States, Canada, Mexico and nine countries in the
Middle East.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10QSB and
Article 10 of Regulation S-X. All significant inter-company accounts and
transactions have been eliminated in consolidation. The consolidated
financial statements are presented in U.S. dollars. Accordingly, the
accompanying financial statements do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three-
month period ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report for the year
ended December 31, 2003.
As shown in the accompanying consolidated financial statements, the Company
has suffered operating losses and negative cash flow from operations since
inception and has an accumulated deficit of $30,523,188, a capital deficit
of $3,577,985, negative working capital of $3,107,738 and is delinquent on
certain of its debts at March 31, 2004. Further, the Company's auditors
stated in their report on the Company's Consolidated Financial Statements
for the year ended December 31, 2003, that these conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management plans to increase gross profit margins in its U.S.
business and obtain additional financing and is in the process of
repositioning its products with the anticipated launch of four new product
lines in the second quarter 2004. While there is no assurance that funding
will be available or that the Company will be able to improve its profit
margins, the Company is continuing to actively seek equity and/or debt
financing and has raised $1,350,000 in the fourth quarter 2003 and first
quarter 2004. No assurances can be given that the Company will be
successful in carrying out its plans. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Revenue Recognition
The Company recognizes revenue in the United States at the gross amount of
its invoices for the sale of finished product to wholesale buyers.
Commencing with the first quarter 2004, the Company will no longer use the
sale of "kits" as a revenue event in the United States. Rather, the
Company will take title to its branded flavored milks when they are shipped
by the Company's third party processors and recognize as revenue the gross
wholesale price charged to the Company's wholesale customers. Expenses for
slotting fees and certain promotions are
F-5
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
treated as a reduction of reported revenue. The Company determines gross
margin by deducting from the reported wholesale price the cost charged by
the Company's third party processors to produce the branded milk products.
The sale of "kits" will remain as the revenue model for the Company's
international business
The Company recognizes revenue for its international business at the gross
amount of its invoices for the sale of flavor ingredients and production
rights (collectively referred to as "kits") at the time of shipment of
flavor ingredients to processor dairies with whom the Company has
production contracts for extended shelf life and aseptic long life milk.
This recognition is based upon the Company's role as the principal in these
transactions, its discretion in establishing kit prices (including the
price of flavor ingredients and production right fees), its development and
refinement of flavors and flavor modifications, its discretion in supplier
selection and its credit risk to pay for ingredients if processors do not
pay ingredient suppliers. The revenue generated by the production
contracts under this model is allocated for the processors' purchase of
flavor ingredients and fees charged by the Company to the processors for
production rights. The Company formulates the price of production rights
to cover its royalties under intellectual property licenses, which varies
by licensor as a percentage of the total cost of a kit sold to the
processor dairy under the production agreement. The Company recognizes
revenue on the gross amount of "kit" invoices to the dairy processors and
simultaneously records as cost of goods sold the cost of flavor ingredients
paid by the processor dairies to ingredients supplier. The recognition of
revenue generated from the sale of production rights associated with the
flavor ingredients is complete upon shipment of the ingredients to the
processor, given the short utilization cycle of the ingredients shipped.
The criteria to meet this guideline are: 1) persuasive evidence of an
arrangement exists, 2) delivery has occurred or services have been
rendered, 3) the price to the buyer is fixed or determinable and 4)
collectibility is reasonably assured.
The Company follows the final consensus reached by the Emerging Issues Task
Force (EITF) 99-19, "Reporting Revenue Gross as a Principal versus Net as
an Agent". Pursuant to EITF 99-19, sales of kits made directly to
customers by the Company are reflected in the statements of operations on a
gross basis, whereby the total amount billed to the customer is recognized
as revenue.
Stock-based Compensation
The Company has adopted the intrinsic value method of accounting for
employee stock options as permitted by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS No. 123)
and discloses the pro forma effect on net loss and loss per share as if the
fair value based method had been applied. For equity instruments,
including stock options, issued to non-employees, the fair value of the
equity instruments or the fair value of the consideration received,
whichever is more readily determinable, is used to determine the value of
services or goods received and the corresponding charge to operations.
F-6
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table illustrates the effect on net loss and loss per share
as if the Company had applied the fair value recognition provision of SFAS
No. 123 to stock-based employee compensation.
Three Months Ended
March 31,
--------------------------
2003 2004
---- ----
Net loss applicable to common shareholders
as reported: $(1,170,128) $(947,717)
Add: total stock based employee
compensation expense determined under
fair value method for all awards 4,500 -
----------- ---------
Pro forma net loss $(1,174,628) $(947,717)
=========== =========
Loss per share:
As reported $ (0.05) $ (0.03)
Pro forma $ (0.05) $ (0.03)
Note 2 - Transactions in Capital Deficit
On February 1, 2004, the Company agreed to issue 750,000 shares of
its common stock and warrants to purchase an additional 750,000 shares of
common stock to Marvel Enterprises, Inc. The Company issued its equity in
connection with the grant of an intellectual property license by Marvel on
January 17, 2004, giving the Company the right to use certain Marvel Comics
characters on the Company's 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. The Company 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, the Company held a special meeting of
shareholders at which the shareholders approved an increase of the
Company's authorized common stock from 50,000,000 shares to 300,000,000
shares.
On February 17, 2004, the Company 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 did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's 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.
F-7
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On February 17, 2004, the Company 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 did not include accrued and
unpaid dividends on the converted preferred. The Company and the holder
delayed processing this notice in light of the Company's 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, the Company 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 did not include accrued and
unpaid dividends on the converted preferred. The Company and the holder
delayed processing this notice in light of the Company's 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.
On February 17, 2004, the Company 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 did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's 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, the Company 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
the Company's common stock at a conversion price of $0.10, representing
8,000,000 shares of common stock underlying the preferred. In addition,
the following adjustments were made to prior issued warrants for the
purpose of facilitating future fund raising by the Company arising out of
the exercise of the warrants by Holder. The purchase price, as defined in
the 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 1, 2004, the Company issued 750,000 shares of its common
stock to Knightsbridge in compensation for services to be rendered,
pursuant to a November 2003 engagement letter with Knightsbridge Holdings,
LLC for business and operational consulting services. The Company delayed
the issuance of these shares owing to the necessity of a special meeting of
shareholders to increase the Company's authorized shares, which took place
in
F-8
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 2004. On March 1, 2004, Knightsbridge commenced its services and
the Company issued the shares of common stock.
On March 9, 2004, the Company 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. The Company and
the holder delayed processing this notice in light of the Company's special
meeting of shareholders held February 12, 2004. The shares of common stock
issued pursuant to this conversion were issued to third parties in
accordance with the instructions of Esquire Trade & Finance Inc.
Note 3 - Adoption of New Accounting Standards
Adoption of SFAS 150
In May 2003, Statement of Financial Accounting Standards ("SFAS") No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity," was issued effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. This statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset
in some circumstances). The adoption of SFAS No. 150 did not result in the
reclassification of any financial instruments in the Company's financial
statements.
Adoption of SFAS 149
In April 2003, SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," was issued effective for
contracts entered into or modified after June 30, 2003, with certain
exceptions. This statement amends and clarifies financial accounting and
reporting for derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity."
The Company does not currently engage in hedging activities, and the
adoption of this statement did not have any effect on its financial
statements.
Note 4 - Business Segment and Geographic Information
The Company operates principally in one industry segment. The
following sales information was based on customer location rather than
subsidiary location.
F-9
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Geographic Area Information:
Period Ended Total
March 31, 2004 United States Canada Mexico China Company
------------- ------ ------ ----- -------
Revenue - unit sales $ 367,458 $ - $ - $ - $ 367,458
Revenue - net kit sales - - - - -
Revenue - gross kit sales 44,380 - 26,368 - 70,748
--------- -------- -------- ------ ---------
Total revenue 411,838 - 26,368 - 438,206
Cost of goods sold (322,343) - (7,778) - (330,121)
--------- -------- -------- ------ ---------
Gross margin $ 89,495 $ - $ 18,590 $ - $ 108,085
========= ======== ======== ====== =========
Period Ended Total
March 31, 2003 United States Canada Mexico China Company
------------- ------ ------ ----- -------
Revenue - unit sales $ 92,918 $ - $ - $ - $ 92,918
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 205,945 35,966 59,864 - 301,775
--------- -------- -------- ------ ---------
Total revenue 301,600 35,966 59,864 - 397,430
Cost of goods sold (51,989) (10,403) (17,970) - (80,362)
--------- -------- -------- ------ ---------
Gross margin $ 249,611 $ 25,563 $ 41,894 $ - $ 317,068
========= ======== ======== ====== =========
Note 5 - Subsequent Events
On April 1 2004, the Company 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. The Company and the
holder delayed processing this notice in light of the Company's 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.
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 the Company sold an additional 15,000 shares of its
Series K Convertible Preferred Stock utilizing the proceeds from a certain
promissory note issued by the Company to Mid-Am in the face amount of
$150,000. With the consummation of this sale, the $150,000 promissory note
was deemed paid in full by the Company.
F-10
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 20, 2004, the Company 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 common stock of the Company 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 ten equal monthly installments,
commencing November 1, 2004. The installment payments consist of principal
and a "premium" of 20% of the principal paid per installment. The Company
has the option to defer such payment until the note's maturity date on
October 1, 2005, if the Company's 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, the Company issued two additional notes
in the aggregate amount of $50,000, upon identical terms as the principal
notes, as a finder's fee. The Company also paid $20,000 in legal fees. The
common stock underlying all notes and warrants carry registration rights.
On April 30, 2004, the Company 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. The conversion did not include
accrued and unpaid dividends on the converted preferred.
On April 30, 2004, the Company 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. The conversion did not include accrued
and unpaid dividends on the converted preferred.
F-11
BRAVO! FOODS INTERNATIONAL, CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 30, 2004, the Company 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. The conversion did not include accrued
and unpaid dividends on the converted preferred.
On April 30, 2004, the Company 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. The conversion did not include accrued and
unpaid dividends on the converted preferred.
F-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's prospects and strategies and the Company's expectations about
growth contained in this report are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements represent the present expectations or beliefs
concerning future events. The Company cautions that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the Company's actual results, performance or achievements
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the uncertainty as to the Company's
future profitability; the uncertainty as to whether the Company's new
business model can be implemented successfully; the accuracy of the
Company's performance projections; and the Company's ability to obtain
financing on acceptable terms to finance the Company's operations until
profitability.
OVERVIEW
The Company's business model includes the development and marketing
of a Company owned Slammers(R) trademarked brand, the obtaining of license
rights from third party holders of intellectual property rights to other
trademarked brands, logos and characters and the granting of production and
marketing rights to processor dairies to produce branded flavored milk.
The Company generates revenue in its international (non-US) business
through the sale of "kits" to these dairies. The price of the "kits"
consists of an invoiced price for a fixed amount of flavor ingredients per
kit used to produce the flavored milk and a fee charged to the diaries for
the production, promotion and sales rights for the branded flavored milk.
In the United States, the Company generates revenue from the unit sales of
finished branded flavored milks to retail consumer outlets.
The Company's new product introduction and growth expansion continues
to be expensive, and the Company reported a net loss of $881,249 for the
three-month period ended March 31, 2004. As shown in the accompanying
financial statements, the Company has suffered operating losses and
negative cash flows from operations since inception and at March 31, 2004
has an accumulated deficit, a capital deficit, is delinquent on certain
debts and has negative working capital. These conditions give rise to
substantial doubt about the Company's ability to continue as a going
concern. As discussed herein, the Company plans to work toward
profitability in the Company's U.S. and international business and obtain
additional financing. While there is no assurance that funding will be
available or that the Company will be able to improve the Company's
operating results, the Company is continuing to seek equity and/or debt
financing. No assurances can be given, however, that management will be
successful in carrying out the Company's plans.
13
CORPORATE GOVERNANCE
The Board of Directors
The Company's board has positions for nine directors that are elected
as Class A or Class B directors at alternate annual meetings of the
Company's shareholders. The Company presently has two mid-term vacancies
on the board. Six of the seven current directors of the Company's board
are independent. The Company's chairman and chief executive officer are
separate. The board meets regularly, at least four times a year, and all
directors have access to the information necessary to enable them to
discharge their duties. The board, as a whole, and the audit committee in
particular, reviews the Company's financial condition and performance on an
estimated vs. actual basis and financial projections as a regular agenda
item at scheduled periodic board meetings, based upon separate reports
submitted by the Company's chief executive officer and chief financial
officer. Directors are elected by the Company's shareholders after
nomination by the board or are appointed by the board when a vacancy arises
prior to an election. This year the Company has adopted a nomination
procedure based upon a rotating nomination committee made up of those
members of the director Class not up for election. The board presently is
examining whether this procedure, as well as the make up of the audit and
compensation committees, should be the subject of an amendment to the by-
laws.
Audit Committee
The Company's audit committee is composed of three independent
directors and functions to assist the board in overseeing the Company's
accounting and reporting practices. The Company's financial information is
booked in house by the Company's CFO's office, from which the Company
prepares financial reports. These financial reports are audited or
reviewed by Lazar Levine & Felix LLP, independent certified accountants and
auditors. The Company's chief financial officer reviews the preliminary
financial and non-financial information prepared in house with the
Company's securities counsel and the auditors. The committee reviews the
preparation of the Company's audited and unaudited periodic financial
reporting and internal control reports prepared by the Company's chief
financial officer. The committee reviews significant changes in accounting
policies and addresses issues and recommendations presented by the
Company's internal and external certified accountants as well as the
Company's auditors. Currently, there is one vacancy on the audit
committee.
Compensation Committee
The Company's compensation committee is composed of three independent
directors who 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 the Company's other members of
management and the recommendations of the chief executive officer with
respect to the compensation of those individuals. Given the size of the
Company, all such employment contracts are periodically reviewed by the
board. The board must approve all compensation packages that involve the
issuance of the Company's stock or stock options. Currently, there is one
vacancy on the compensation committee.
14
Nominating Committee
The nominating committee was established in the second quarter 2002
and consists of those members of the director Class not up for election.
The committee is charged with determining those individuals who will be
presented to the shareholders for election at the next scheduled annual
meeting. The full board fills any mid term vacancies by appointment.
CRITICAL ACCOUNTING POLICIES
Estimates
This discussion and analysis of the Company's consolidated financial
condition and results of operations are based on the Company's consolidated
financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the Company to make
estimates and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates the Company's estimates, including those related to reserves for
bad debts and valuation allowance for deferred tax assets. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
result of which forms the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ materially from these estimates under
different assumptions or conditions. The Company's use of estimates,
however, is quite limited as the Company has adequate time to process and
record actual results from operations.
Revenue recognition
United States - Production Agreement with Jasper Products
---------------------------------------------------------
The Company recognizes revenue in the United States at the gross
amount of its invoices for the sale of kits at the time of shipment of
flavor ingredients to processor dairies with whom the Company has
production contracts for extended shelf life and aseptic long life milk.
This recognition is based upon the Company's role as the principal in these
transactions, its discretion in establishing kit prices (including the
price of flavor ingredients and production right fees), its development and
refinement of flavors and flavor modifications, its discretion in supplier
selection and its credit risk to pay for ingredients if processors do not
pay ingredient suppliers. The revenue generated by the production
contracts under this model is allocated as follows: 90% to 95% of the
revenue is for the processors' purchase of flavor ingredients; the balance
of 5% to 10% represents fees charged by the Company to the processors for
production rights. The price of production rights is formulated to cover
the Company's intellectual property licenses, which varies by licensor as a
percentage of the total cost of a kit sold to the processor dairy under the
production agreement. The Company recognizes revenue on the gross amount
of "kit" invoices to the dairy processors and simultaneously records as
cost of goods sold the cost of flavor ingredients paid by the processor
dairies to ingredients supplier. The recognition of revenue generated from
the sale of production rights associated with the flavor ingredients is
complete
15
upon shipment of the ingredients to the processor, given the short
utilization cycle of the ingredients shipped.
Jasper Products and Shamrock Farms, processor dairies for the
Company's products in 2003, charge the Company with the cost of producing
the Company's branded flavored milk. The Company is responsible for freight
charges from processor dairies to retail destinations, promotion costs and
product returns of product owing to defects and out of date products. In
addition, the Company pays the fee charged by food brokers retained by the
Company to generate sales of the branded flavored milk products to retail
outlets. In return, the Company is entitled to keep the difference between
the cost charged by processor dairies and the wholesale price determined by
the Company and charged to retail outlets. The Company treats this second
earning event as "unit sales revenue" when the revenue is realized or
realizable and accrues any estimated expenses which are related to the
Company's revenue at the end of each reporting period. Because the Company
benefits only from the price difference and does not own the inventory, it
recognizes the revenue generated through this model at net.
Commencing with the first quarter 2004, the Company will no longer
use the sale of "kits" as a revenue event in the United States. Rather,
the Company will take title to its branded flavored milks when they are
shipped by the Company's third party processors and recognize as revenue the
gross wholesale price charged to the Company's wholesale customers. The
Company's gross margin will be determined by the reported wholesale price
less the cost charged by the Company's third party processors to produce
the branded milk products. The sale of "kits" will remain as the revenue
model for the Company's international business.
International Sales
-------------------
The Company recognizes revenue in its international (non US) business
at the gross amount of its invoices for the sale of kits at the time of
shipment of flavor ingredients to processor dairies with whom the Company
has production contracts for extended shelf life and aseptic long life
milk. This recognition is based upon the Company's role as the principal
in these transactions, its discretion in establishing kit prices (including
the price of flavor ingredients and production right fees), its development
and refinement of flavors and flavor modifications, its discretion in
supplier selection and its credit risk to pay for ingredients if processors
do not pay ingredient suppliers. The revenue generated by the production
contracts under this model consists of the cost of the processors' purchase
of flavor ingredients and fees charged by the Company to the processors for
production rights. The price of production rights is formulated to cover
the Company's intellectual property licenses, which varies by licensor as a
percentage of the total cost of a kit sold to the processor dairy under the
production agreement. The Company recognizes revenue on the gross amount
of "kit" invoices to the dairy processors and simultaneously records as
cost of goods sold the cost of flavor ingredients paid by the processor
dairies to ingredients supplier. The recognition of revenue generated from
the sale of production rights associated with the flavor ingredients is
complete upon shipment of the ingredients to the processor, given the short
utilization cycle of the ingredients shipped.
16
RESULTS OF OPERATIONS
Financial Condition at March 31, 2004
-------------------------------------
As of March 31, 2004, we had an accumulated deficit of $30,523,188
and cash on hand of $85,476 and reported total capital deficit of
$3,577,985.
For this same period of time, we had revenue of $438,206 and general
and administrative expense of $700,966.
After interest expenses of $31,685, cost of goods sold of $330,121,
product development costs of $3,645 and selling expenses of $253,038
incurred in the operations of the Company, we had a net loss of $881,249.
Three Months Ended March 31, 2004 Compared to
---------------------------------------------
Three Months Ended March 31, 2003
---------------------------------
Consolidated Revenue
We had revenues for the three months ended March 31, 2004 of
$438,206, with cost of sales of $330,121, resulting in a gross margin of
$108,085. Of the $438,206, $411,838 was from sales in the U.S. operation
and $26,368 from sales in Mexico. We did not have revenue for this period
in Canada or China. Our revenue for the three months ended March 31, 2004
increased by $40,776, a 10.26% increase compared to revenue of $397,430 for
the same period in 2003. This increase is the result of a change in the
Company's method of revenue recognition in the United States, as well as
the phasing out of the Company's Looney Tunes(TM) flavored milk products
and the development of four new branded product lines in the United States,
which commenced during this period.
Consolidated Cost of Sales
We incurred cost of goods sold of $330,121 for the three months ended
March 31, 2004, $322,343 of which was incurred in our U.S. operation and
$7,778 in Mexico. Our cost of goods sold in 2004 increased by $249,759, a
310.79% increase compared to $80,362 for the same period in 2003. The
increase in cost of goods sold reflects the change in the Company's method
of revenue recognition during this period.
In countries except the United States, the Company's revenue is
generated by the sale of kits to dairy processors. Each kit consists of
flavor ingredients for the Company's Slammers(R) flavored milks and
production rights to manufacture and sell the milks. In line with the
Company's revenue recognition policies, the Company recognizes the full
invoiced kit price as revenue and credits the processor dairies with the
cost of the raw flavor ingredients, which the Company records as cost of
goods sold.
In the United States, the Company is responsible for the sale of
finished Slammers(R) flavored milk (referred to as "unit sales") to retail
outlets. For these unit sales, the Company recognizes as revenue the
invoiced wholesale prices that the Company charges to the retail outlets
that purchase the Slammers(R) flavored milks. The Company reports as cost
of goods sold
17
the price charged to it by Jasper Products, a third party processor under
contract with the Company, for producing the finished Slammers(R) products.
Segmented revenues and costs of sales
The following table presents revenue by source and type against costs
of goods sold, as well as combined gross revenues and gross margins.
Revenues from Mexico are generated from kit sales to Neolac, a dairy
processor in central Mexico. In the United States, revenues for the period
ended March 31, 2004 were generated by kit sales to Parmalat, which is
responsible for marketing and sales. These sales were the result of orders
placed with the Company prior to December 31, 2003 but shipped subsequent
to that date. Sales of "kits" to Parmalat will not continue beyond the
current reported quarter. The Company recorded revenues from these sales
are under "gross kit sales" on the accompanying table.
The Company's revenue from the sale of Slammers(R) finished product
to retail outlets is recorded as "unit sales" on the following table.
Going forward, revenue from the Company's United States business will be
from unit sales only.
Period Ended Total
March 31, 2004 United States Canada Mexico China Company
------------- ------ ------ ----- -------
Revenue - unit sales $ 367,458 $ - $ - $ - $ 367,458
Revenue - net kit sales - - - - -
Revenue - gross kit sales 44,380 - 26,368 - 70,748
--------- -------- -------- ------ ---------
Total revenue 411,838 - 26,368 - 438,206
Cost of goods sold (322,343) - (7,778) - (330,121)
--------- -------- -------- ------ ---------
Gross margin $ 89,495 $ - $ 18,590 $ - $ 108,085
========= ======== ======== ====== =========
Period Ended Total
March 31, 2003 United States Canada Mexico China Company
------------- ------ ------ ----- -------
Revenue - unit sales $ 92,918 $ - $ - $ - $ 92,918
Revenue - net kit sales 2,737 - - - 2,737
Revenue - gross kit sales 205,945 35,966 59,864 - 301,775
--------- -------- -------- ------ ---------
Total revenue 301,600 35,966 59,864 - 397,430
Cost of goods sold (51,989) (10,403) (17,970) - (80,362)
--------- -------- -------- ------ ---------
Gross margin $ 249,611 $ 25,563 $ 41,894 $ - $ 317,068
========= ======== ======== ====== =========
United States (Jasper and Parmalat Sales)
-----------------------------------------
Revenues for the period ended March 31, 2004 from kit sales in the
United States decreased from $205,945 for the same period in 2003 to
approximately $44,380, a 78.4% decrease. The kit sales for the current
period were from orders placed prior to December 31, 2003 but shipped
subsequent to that date. The decrease is the result of the transition from
the
18
Looney Tunes(TM) product line to the Company's four new product lines
during this period and the elimination of kit sales in the Company's United
Sates business.
In addition to kit sales, in the period ended March 31, 2004, the
Company had revenues of $367,458 from selling finished product unit sales
to retail outlets, compared to $92,918 for the same period in 2003, for an
increase of $274,540, or 295.46%. The increase was the result of the
continuation of the initial phasing in of the original unit sales model in
the first quarter of 2003.
In the period ended March 31, 2004, the Company's gross margin for
U.S. sales of $89,495, decreased by $160,116, or by 64%, from $249,611 for
the same period in 2003. The decrease in gross margin was the result of
the phasing out of the Company's Looney Tunes(TM) product line and the
development of four new product lines by the Company utilizing newly
licensed and directly owned branded trademarks. The Company launched the
new product lines, as scheduled, in the second quarter 2004.
Mexico and Canada
-----------------
Revenues for the period ended March 31, 2004 from kit sales in Mexico
decreased $33,496 or 55.9% from $59,864 for the same period in 2003 to
$26,368 in 2004. The decrease in gross margin was the result of the
phasing out of the Company's Looney Tunes(TM) product line and the
development of four new product lines by the Company utilizing newly
licensed and directly owned branded trademarks. The Company did not report
sales from Canada for the period ended March 31, 2004, compared with
revenue of $35,966 for the period ended March 31, 2003.
The Company recorded $7,778 in cost of sales in Mexico for the period
ended March 31, 2004, a decrease of $10,192 or 56.7% from $17,970 for the
same period in 2003.
For the period ended March 31, 2004, the Company's gross profit of
$18,590 for sales in Mexico decreased by $23,304, or 55.63%, from $41,849
for the same period in 2003. The decrease in gross profit was consistent
with the decrease in sales volume for this period.
Consolidated Operating Expenses
The Company incurred selling expenses of $253,038 for the period
ended March 31, 2004, all of which the Company incurred in its United
States operations. The Company's selling expense for this period decreased
by $108,037, a 29.92% decrease compared to selling expense of $361,075 for
the same period in 2003. The decrease in selling expenses in the current
period was due to decreased freight and promotional charges associated with
the Company's transition away from its Looney Tunes(TM) product line and
the development of four new product lines by the Company, utilizing newly
licensed and directly owned branded trademarks.
The Company incurred general and administrative expenses for the
period ended March 31, 2004 of $700,966, all of which the Company incurred
in its United States business operations. The Company's general and
administrative expenses for this period decreased by $71,504, a 9.3%
decrease compared to $772,470 for the same period in 2003, $709,535 of
which the Company incurred in its United states operations and $62,935 in
China in 2003. The
19
decrease of $71,504 in general and administrative expenses for the current
period in 2004 is the result of a continued reduction in overhead expenses,
including management salaries, travel and other cost saving measures.
As a percentage of total revenue, the Company's general and
administrative expenses decreased from 194.4% in the period ended March 31,
2003, to 160% for the current period in 2004. The Company anticipates a
continued reduction of these expenses through cost cutting efforts and the
refinement of business operations.
Interest Expense
The Company incurred interest expense for the period ended March 31,
2004 of $31,685. The Company's interest expense increased by $29,641, a
1450% increase compared to approximately $2,044 for the same period in
2003. The increase was due to additional loans in 2003.
Loss Per Share
The Company accrued dividends payable of $93,468 to various series of
preferred stock during the period ended March 31, 2004. The Company's
accrued dividends decreased for this period by $257,645, or 73.3%, from
$351,113 for the same period in 2003. The increase in net loss before
accrued dividends of $62,234, from $819,015 for the period ended March 31,
2003 to $881,249 for the current period, was offset by the 73.3% decrease
in accrued dividends, resulting in a decrease in the Company's current
period loss per share from $0.05 for the same period in 2003, compared to
loss per share of $0.03 for the current period.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, the Company reported that net cash used in
operating activities was $772,250, net cash provided by financing
activities was $800,000 and net cash used in investing activities was
$1,133. The Company had a negative working capital of $ 3,107,738 as of
March 31, 2004.
Compared to $551,316 of net cash used in operating activities in the
period ended March 31, 2003, the Company's current year net cash used in
operating activities increased by $220,934 to $772,250 due to the fact that
the Company did not use its equity to pay service providers in lieu of cash
payments in this current period. Included in the net loss in this current
period were depreciation and amortization and stock compensation of
$149,100, compared to $54,202 for the same period in 2003.
Changes in accounts receivable in this current period in 2004
resulted in a cash increase of $5,877, compared to a cash increase in
receivables of $65,187 for the same period in 2003, having a net result of
a decrease of $59,310. The changes in accounts payable and accrued
liabilities in the period ended March 31, 2003 contributed to a cash
increase of $158,340, whereas the changes in accounts payable and accrued
liabilities for the current period in 2004 amounted to an increase of
$409,736. The Company has adopted and will keep implementing cost cutting
measures to lower its costs and expenses and to pay the Company's accounts
20
payable and accrued liabilities by using cash and equity instruments. The
Company's cash flow generated through operating activities was inadequate
to cover all of its cash disbursement needs in the period ended March 31,
2004, and the Company had to rely on equity financing to cover expenses.
The Company's cash used in 2004 in investing activities for furniture
and equipment was $1,133 for computer equipment in the U.S. Compared to
disbursements in the same period in 2003, the $1,133 expenditure was
insignificant.
The Company's net cash provided by financing activities for the
period ended March 31, 2004 was $800,000. New cash provided by financing
activities for the same period in 2003 was $401,665, for a net increase of
$398,335. The increase was due to issuing Series K preferred stock with
total proceeds of approximately $800,000 in this current period.
The Company used the proceeds of the Series K issue for working
capital purposes. Notwithstanding total cash proceeds of $800,000, the
Company owed approximately $917,000 as of March 31, 2004 for the note to
Jasper Products.
Going forward, the Company's primary requirements for cash consist of
(1) the continued development of the Company's business model in the United
States and on an international basis; (2) general overhead expenses for
personnel to support the new business activities; and (3) development,
launch and marketing costs for the Company's line of new aseptic branded
flavored milk products. The Company estimates that its need for financing
to meet cash needs for operations will continue to the fourth quarter of
2004, when cash supplied by operating activities will approach the
anticipated cash requirements for operation expenses. The Company
anticipates the need for additional financing in 2004 to reduce the
Company's liabilities, assist in marketing and to improve shareholders'
equity status. No assurances can be given that the Company will be able to
obtain additional financing or that operating cash flows will be sufficient
to fund the Company's operations.
The Company currently has monthly working capital needs of
approximately $220,000. The Company will continue to incur significant
selling and other expenses in 2004 in order to derive more revenue in
retail markets, through the introduction and ongoing support of its new
products. Certain of these expenses, such as slotting fees and freight
charges, will be reduced as a function of unit sales costs as the Company
expands its sales markets and increases its sales within established
markets. Freight charges will be reduced as the Company is able to ship
more full truck-loads of product given the reduced per unit cost associated
with full truck loads versus less than full truck loads. Similarly,
slotting fees, which are paid to warehouses or chain stores as initial set
up or shelf space fees, are essentially one-time charges per new customer.
The Company believes that along with the increase in the Company's unit
sales volume, the average unit selling expense and associated costs will
decrease, resulting in gross margins sufficient to mitigate the Company's
cash needs. In addition, the Company is actively seeking additional
financing to support its operational needs and to develop an expanded
promotional program for the Company's products.
The Company is continuing to explore new points of sale for its
branded flavored milk. Presently, the Company is aggressively pursuing the
school and vending market through trade/industry shows and individual
direct contacts. The implementation of such a school base program, if
viable, could have an impact on the level of the Company's revenue during
2004.
21
Similarly, the Company expects that the greater control over sales
resulting from its refined business model and the anticipated expansion
into bodega stores as well as national chains, such as 7-Eleven, will have
a positive impact on revenues in the second quarter of 2004.
In the third quarter 2003, the Company commenced an analysis of the
Looney Tunes(TM) brand performance within the context of the possible
renewal of its Warner Bros. licenses for United States, Mexico, China and
Canada. In the fourth quarter 2003, the Company concluded that, as a
function of the sales of flavored milks, the Looney Tunes(TM) brand has not
supported the guaranteed royalty structure required by Warner Bros. for its
licenses. In the fourth quarter 2003, the Company decided not to renew its
license agreements with Warner Bros., and began to develop new products in
anticipation of the consummation of other license relationships with Marvel
Comics and MoonPie for co-branded flavored milk, as well as a new single
Slammers(R) brand. The Company has developed new aseptic products in
anticipation of these licenses and its own singular brand. The Company
plans to launch the following new products in the second quarter 2004.
Brand Marvel-Slammers Moon Pie- Slim Slammers Pro-Slammers
Slammers
---------------------------------------------------------------------------------------------------
Item Ultimate Milkshake Flavored milk; Low calorie, no Protein Shake
reduced fat 2% sugar added,
milk low carb 1%
milk
---------------------------------------------------------------------------------------------------
Licensed Marvel Super Hero MoonPie logo and Slim Slammers Extreme Sports
Property comic book trade dress, and trademark athletes, and Pro
characters and Slammers mark (owned by Slammers mark
Slammers mark (owned by Bravo! Bravo! Foods) (owned by
(owned by Bravo! Foods) Bravo! Foods)
Foods)
---------------------------------------------------------------------------------------------------
Packaging 16 oz bottles; 11.2 16 oz bottles; 11.2 16 oz bottles 16 oz bottles;
oz Tetra Prisma oz Tetra Prisma 11.2 oz Tetra
Prisma
---------------------------------------------------------------------------------------------------
Description Whole milk shake; 5 Chocolate and Chocolate Double protein
flavors; vitamin banana flavors; Fudge and shake; 4 flavors;
fortification matches fortified with 10 French Vanilla; fortified with 10
Marvel Super Hero essential vitamins calcium added essential
powers vitamins
---------------------------------------------------------------------------------------------------
Coincident with these new licenses, the Company executed a production
agreement with Saudia Dairy & Foodstuff Company (SADAFCO), one of the
largest Middle East dairy processors, headquartered in Jeddah, Saudi
Arabia. SADAFCO will process the Company's Slammers (R) branded flavored
milks, including the Marvel line, for distribution in nine Middle East
countries. SADAFCO has the capacity to process the Company's branded milk
products for distribution throughout the European Community. The Company's
international business is
22
facilitated by AsheTrade, the Company's international agent, with offices
in Miami, FL and Jeddah, Saudi Arabia.
DEBT STRUCTURE
As of March 31, 2004, the Company held two licenses for Looney
Tunes(TM) characters and names from Warner Bros. The Company accounts for
the guaranteed royalty payments under these licenses as debt and licensing
rights as assets. The following is a summary of the balances owed as of
March 31, 2004 and the license expiration dates:
Amount Expiration
License Guaranty Balance Due Past Due Date
---------------------------------------------------------------------
U.S. License $500,000 $ - $ - 12/31/03
U.S. TAZ $250,000 $ - $ - N/A
China $400,000 $147,115 $147,115 10/29/03
Mexico $145,000 $ - $ - 05/31/04
Canada $ 32,720 $ - $ - 03/31/04
The China license had been extended to October 29, 2003 by agreement
of the parties, and the Company did not seek another license from Warner
Bros. for China. This decision was based upon the lack of sales in the
Company's China markets and what the Company perceived to be the licensor's
continuing overall lack of brand support in China. The Company and Warner
Bros. dispute the contractual necessity of the payment of the balance owed
on the China license as a result of the above circumstances.
International Paper
-------------------
During the process of acquiring from American Flavors China, Inc. the
52% of equity interest in Hangzhou Meilijian, the Company issued an
unsecured promissory note to assume the American Flavors' debt owed to a
supplier, International Paper. The face value of that note was $282,637 at
an interest rate of 10.5% per annum, without collateral. The note had 23
monthly installment payments of $7,250 with a balloon payment of $159,862
at the maturity date of July 15, 2000. On July 6, 2000, International
Paper agreed to extend the note to July 1, 2001, and the principal amount
was adjusted due to a different interest calculation. International Paper
imposed a charge of $57,000 to renegotiate the note owing to the failure of
Hangzhou Meilijian to pay for certain packing material, worth more than
$57,000 made to order in 1999. The current outstanding balance on this
note is $187,743. The Company is delinquent in its payments under this
note.
Individual Loans
----------------
On November 6 and 7, 2001, respectively, the Company received the
proceeds of two loans aggregating $100,000 from two offshore lenders. The
two promissory notes, one for $34,000 and the other for $66,000, were
payable February 1, 2002 and bear interest at the annual rate of 8%. These
loans are secured by a general security interest in all the Company's
assets. On February 1, 2002, the parties agreed to extend the maturity
dates until the completion of the anticipated Series H financing. On June
18, 2002, the respective promissory note maturity dates were extended by
agreement of the parties to December 31, 2002. On June 18, 2002, the
23
Company agreed to extend the expiration dates of warrants issued in
connection with the Company's Series D and F preferred until June 17, 2005
and to reduce the exercise price of certain of those warrants to $1.00, in
partial consideration for the maturity date extension. The holders of
these notes have agreed to extend the maturity dates and the notes are now
payable on a demand basis.
On August 27, 2003, the Company received the proceeds of a loan from
Mid-Am Capital, L.L.C., in the amount of $150,000. The note was payable
November 25, 2003 and bears interest at the annual rate of 10%. This loan
is secured by a general security interest in all the Company's assets. On
April 2, 2004, this note was paid and cancelled.
On January 28, 2004, the Company converted accounts payable in the
amount of $1,128,385 by the issuance of a 10% short term promissory note to
Jasper Products, LLC, dated January 1, 2004, in the principal amount of
$1,128,385 for amounts owed to Jasper in connection with Jasper's
processing and sale of the Company's products. As of March 31, 2004, the
Company paid $200,000 in principal and was credited an additional $11,350.
On April 20, 2004, the Company paid an additional $200,000. On May 7,
2004, the Company paid $718,368 in full payment of the note's principal and
accrued interest.
On May 6, 2004, the Company issued a secured promissory note to Mid-
Am Capital LLC in the principal amount of $750,000. The note provides for
8% interest and has a maturity date of September 4, 2004. The Company
issued warrants to purchase 3,000,000 shares of the Company's common stock
to Mid-Am in connection with this promissory note. The warrants are
exercisable for one year from issue at an exercise price of $0.25 per
share. The Company used the proceeds of this promissory note to pay the
promissory note issued to Jasper Products in January 2004.
EFFECTS OF INFLATION
The Company believes that inflation has not had any material effect
on its net sales and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and the Company's principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-
14(c) and 15d-14(c) as of a date within 90 days of the filing date of this
report on Form 10-QSB (September 30, 2003), have concluded that as of the
Evaluation Date, the Company's disclosure controls and procedures were
adequate and effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries would be made known to
them by others within those entities, particularly during the period in
which this quarterly report on Form 10-QSB was being prepared.
b) Changes in Internal Controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect the Company's disclosure
24
controls and procedures subsequent to the Evaluation Date, nor any
significant deficiencies or material weaknesses in such disclosure controls
and procedures requiring corrective actions. As a result, no corrective
actions were taken.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 1, 2004, the Company agreed to issue 750,000 shares of
its common stock and warrants to purchase an additional 750,000 shares of
common stock to Marvel Enterprises, Inc. The Company issued its equity in
connection with the grant of an intellectual property license by Marvel on
January 17, 2004, giving the Company the right to use certain Marvel Comics
characters on the Company's 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. The Company 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, the Company held a special meeting of
shareholders at which the shareholders approved an increase of the
Company's authorized common stock from 50,000,000 shares to 300,000,000
shares.
On February 17, 2004, the Company 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 did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's 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, the Company 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 did not include accrued
and unpaid dividends on the converted preferred. The Company and the
holder delayed processing this notice in light of the Company's 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, the Company 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 did not include accrued and
unpaid dividends on the converted preferred. The Company and the holder
delayed processing this notice in light of the Company's special meeting of
shareholders
25
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.
On February 17, 2004, the Company 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 did not include accrued and unpaid
dividends on the converted preferred. The Company and the holder delayed
processing this notice in light of the Company's 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, the Company 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
the Company's common stock at a conversion price of $0.10, representing
8,000,000 shares of common stock underlying the preferred. In addition,
the following adjustments were made to prior issued warrants for the
purpose of facilitating future fund raising by the Company arising out of
the exercise of the warrants by Holder. The purchase price, as defined in
the 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 1, 2004, the Company issued 750,000 shares of its common
stock to Knightsbridge in compensation for services to be rendered,
pursuant to a November 2003 engagement letter with Knightsbridge Holdings,
LLC for business and operational consulting services. The Company delayed
the issuance of these shares owing to the necessity of a special meeting of
shareholders to increase the Company's authorized shares, which took place
in February 2004. On March 1, 2004, Knightsbridge commenced its services
and the Company issued the shares of common stock.
On March 9, 2004, the Company 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. The Company and
the holder delayed processing this notice in light of the Company's special
meeting of shareholders held February 12, 2004. The shares of common stock
issued pursuant to this conversion were issued to third parties in
accordance with the instructions of Esquire Trade & Finance Inc.
Subsequent Events
On April 1 2004, the Company 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. The Company and the
26
holder delayed processing this notice in light of the Company's 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.
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 the Company sold an additional 15,000 shares of its
Series K Convertible Preferred Stock utilizing the proceeds from a certain
promissory note issued by the Company to Mid-Am in the face amount of
$150,000. With the consummation of this sale, the $150,000 promissory note
was deemed paid in full by the Company.
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 8, 2004, the Company 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.
On April 20, 2004, the Company 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 common stock of the Company 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 ten equal monthly installments,
commencing November 1, 2004. The installment payments consist of principal
and a "premium" of 20% of the principal paid per installment. The Company
has the option to defer such payment until the note's maturity date on
October 1, 2005, if the Company's 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, the Company issued two additional notes
in the aggregate amount of $50,000, upon identical terms as the principal
notes, as a finder's fee, and $20,000 in legal fees. The common stock
underlying all notes and warrants carry registration rights.
27
On April 30, 2004, the Company 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. The conversion did not include
accrued and unpaid dividends on the converted preferred.
On April 30, 2004, the Company 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. The conversion did not include accrued
and unpaid dividends on the converted preferred.
On April 30, 2004, the Company 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 Esquire Trade &
Finance Inc., at a conversion price of $0.1028. The conversion did not
include accrued and unpaid dividends on the converted preferred.
On April 30, 2004, the Company 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. The conversion did not include accrued and
unpaid dividends on the converted preferred.
Item 6. Exhibits and Reports on Form 8-K
Exhibits - Required by Item 601 of Regulation S-B: None
(b) Reports on Form 8-K
Form 8-K concerning Marvel license, transition from Warner Bros.,
intention to close China operation, and special meeting of shareholders,
filed on February 18, 2004
Form 8-K concerning production agreement with SADAFCO, filed on March
15, 2004
Form 8-K concerning resignation and change of accountants, filed on
March 17, 2004
Amended Form 8-K concerning resignation and change of accountants,
filed on March 26, 2004
Form 8-K concerning marketing plans, filed on April 20, 2004
Form 8-K concerning business update, filed on April 29, 2004
28
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf of the
undersigned, duly authorized.
BRAVO! FOODS INTERNATIONAL CORP.
(Registrant)
Date: May 14, 2004
/s/ Roy G. Warren
Roy G. Warren, Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, Bravo! Foods
International Corp. has caused this amended report to be signed on its
behalf by the undersigned in the capacities and on the dates stated.
Signature Title Date
------------ ----- ----
/S/ Roy G. Warren Chief Executive Officer May 14, 2004
and Director
/S/ Tommy E. Kee Chief Financial Officer May 14, 2004
29