-------------------------------------------------------------------------------
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, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 000-25039
BRAVO! FOODS INTERNATIONAL CORP.
(Exact name of registrant as specified in its amended charter)
formerly
China Premium Food Corporation
Delaware 62-1681831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, North Palm Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 625-1411
Registrant's telephone number
------------------------------------------------------
(Former name, former address and former fiscal year if
changed since last report)
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
May 12, 2006 Common Stock 189,152,148
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, 2006 (unaudited) and December 31, 2005
Consolidated statements of operations F-3
(unaudited) for the three months ended
March 31, 2006 and 2005
Consolidated statements of cash flows F-4
(unaudited) for the three months ended
March 31, 2006 and 2005
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity and Use of Proceeds 21
Item 6. Exhibits 21
SIGNATURES 21
EXHIBITS 22
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 609,785 $ 4,947,986
Accounts receivable net of allowances for
doubtful accounts of $364,941 and $350,000
for 2006 and 2005, respectively 1,537,858 3,148,841
Inventories -- finished goods 3,043,914 391,145
Prepaid expenses 1,950,406 978,299
----------- -----------
Total current assets 7,141,963 9,466,271
Furniture and equipment, net 514,913 288,058
License rights, net 245,263 241,898
Trademarks, net 78,440 70,015
Deferred distribution costs, net 11,205,833 11,503,333
Manufacturing agreement, net 2,557,896 2,700,000
Deposits 20,948 15,231
----------- -----------
Total assets $21,765,256 $24,284,806
=========== ===========
Liabilities and Capital Surplus
Current liabilities:
Note payable to International Paper $ 187,743 $ 187,743
Note payable to Mid-Am Capital LLC 112,480 112,480
Note payable to Libra Finance 43,750 43,750
Note payable to Longview 212 212
Note payable to Osher 6,462 6,462
Note payable to GMAC 55,210 --
Accounts payable 7,997,907 5,962,623
Accrued liabilities 2,290,857 3,239,885
----------- -----------
Total current liabilities 10,694,621 9,553,155
Dividends payable 1,301,134 1,240,682
Notes payable 109,797 --
----------- -----------
Total liabilities 12,105,552 10,793,837
----------- -----------
F-1
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
Commitments and contingencies
Capital Surplus (Note 2):
Series B convertible, 9% cumulative, preferred stock, stated value $1.00
per share, 107,440 shares issued and outstanding; redeemable at our
option for $107,440 plus dividends 107,440 107,440
Series H convertible, 7% cumulative preferred stock, stated value $10.00
per share, 64,500 shares issued and outstanding 349,037 349,037
Series J convertible, 8% cumulative preferred stock, stated value $10.00
per share, 200,000 shares issued and outstanding; redeemable at our
option for 135% of stated value plus dividends 1,854,279 1,854,279
Series K convertible, 8% cumulative preferred stock, stated value $10.00
per share, 95,000 shares issued and outstanding redeemable at our
option for 120% of stated value plus dividends 950,000 950,000
Common stock, par value $0.001 per share, 300,000,000 shares
authorized, 185,753,753 and 184,253,753 shares issued and
outstanding 185,754 184,254
Additional paid-in capital 59,195,583 59,142,613
Common stock subscription receivable (10,000) (10,000)
Deferred compensation expense (403,697) (475,933)
Accumulated deficit (52,537,243) (48,579,962)
Translation adjustment (31,449) (30,759)
------------ ------------
Total capital surplus 9,659,704 13,490,969
------------ ------------
Total liabilities and capital surplus $ 21,765,256 $ 24,284,806
============ ============
See accompanying notes.
F-2
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
2006 2005
----------- -----------
(unaudited) (unaudited)
Revenue -- unit sales $ 3,561,215 $ 864,420
Revenue -- gross kit sales -- 33,350
----------- -----------
Total revenue 3,561,215 897,770
Cost of sales (2,946,460) (677,663)
----------- -----------
Gross margin 614,755 220,107
Selling expenses 2,981,291 623,452
Product development 115,963 63,591
General and administrative expense 1,380,143 653,247
----------- -----------
Loss from operations (3,862,642) (1,120,183)
Other income (expense)
Interest income 15,420 65
Interest expense (38,350) (117,130)
----------- -----------
Loss before income taxes (3,885,572) (1,237,248)
Provision for income taxes -- --
----------- -----------
Net loss (3,885,572) (1,237,248)
Dividends accrued for Series B preferred stock (2,384) (2,384)
Dividends accrued for Series H preferred stock (11,133) (28,566)
Dividends accrued for Series I preferred stock -- (5,918)
Dividends accrued for Series J preferred stock (39,452) (39,452)
Dividends accrued for Series K preferred stock (18,740) (18,740)
----------- -----------
Net loss applicable to common shareholders $(3,957,281) $(1,332,308)
=========== ===========
Weighted average number of common shares
outstanding 184,253,753 59,618,018
=========== ===========
Basic and diluted loss per share $ (0.02) $ (0.02)
=========== ===========
Comprehensive loss and its components
consist of the following:
Net loss $(3,885,572) $(1,237,248)
Foreign currency translation adjustment (690) (8,216)
----------- -----------
Comprehensive loss $(3,886,262) $(1,245,464)
=========== ===========
See accompanying notes.
F-3
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
2006 2005
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (3,885,572) $ (1,237,248)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 684,642 100,726
Stock issuance for compensation, finders' fee and due diligence fees -- 57,500
Allowance for doubtful accounts 14,941 --
Loss on disposal of fixed assets 1,999 --
Changes in:
Accounts receivable 1,596,042 16,844
Inventories (2,652,769) 6,981
Prepaid expenses and other assets (977,825) (188,703)
Accounts payable and accrued expenses 1,007,871 412,704
Deferred product development costs -- (268,564)
------------ ------------
Net cash used in operating activities (4,210,671) (1,099,760)
------------ ------------
Cash flows from investing activities:
Licenses and trademark costs (163,536) --
Purchase of equipment (249,910) (11,625)
------------ ------------
Net cash used in investing activities (413,446) (11,625)
------------ ------------
Cash flows from financing activities:
Proceeds from conversion of warrants 150,000 --
Convertible notes payable 169,323 1,150,000
Payment of accrued dividends (11,257) --
Payment of notes payable (4,317) --
Registration costs for financing (17,143) (26,728)
------------ ------------
Net cash provided by financing activities 286,606 1,123,272
------------ ------------
Effect of changes in exchange rates on cash (690) (8,216)
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,338,201) 3,671
Cash and cash equivalents, beginning of period 4,947,986 113,888
------------ ------------
Cash and cash equivalents, end of period $ 609,785 $ 117,559
============ ============
See accompanying notes.
F-4
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 -- Basis of Presentation
The accompanying unaudited consolidated financial statements include
the accounts of Bravo! Foods International Corp. and its wholly owned
subsidiary, Bravo! Brands (UK) Ltd. (collectively the "Company"). We are
engaged in the sale of flavored milk products and flavor ingredients in the
United States, the United Kingdom and various countries in the Middle East and
we are establishing an infrastructure to conduct business in Canada.
Subject to the matters described in the "potential restatement
disclosure" set forth below in this Note 1, 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
2 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. All significant inter
company accounts and transactions have been eliminated in consolidation. The
consolidated financial statements are presented in U.S. dollars. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Other
adjustments, however, may be necessary based upon the considerations described
under the "potential restatement disclosure" below. Operating results for the
period ending March 31, 2006 are not necessarily indicative of the results that
may be expected going forward.
Potential Restatement Disclosure
In December 2005, we began to examine the classification of, and our
accounting methodology for, our convertible preferred and convertible debt
financing. We initiated this examination as a result of a review by the
Securities and Exchange Commission of our Form 10-KSB for the fiscal year ended
December 31, 2004 and our pending SB-2 registration statement, which we filed
with the SEC on December21, 2005. We currently are examining the accounting
methodology utilized to report the value of embedded derivatives associated
with certain of our past financings, including the balance sheet
reclassification and valuation of warrants associated with such financing
instruments. Although we have not completed our examination, it is likely that
potential changes will be made in the accounting treatment of these derivatives
in that they will be have to be valued separately and fluctuations of value
during applicable periods will be reflected on our past income statements and
our balance sheets. Going forward, we are taking steps to avoid the recognition
of the fair value fluctuations of such instruments and associated balance sheet
reclassification in subsequent reporting periods, by eliminating, through an
amendment, the variable conversion feature of one outstanding financing
instrument, which may have had a "tainting" effect on all such instruments. We
also are reviewing our accounting for the amortization of discounts, the impact
of certain modifications to warrants and the beneficial conversion features
associated with our various financing instruments.
Additionally, we are reviewing our accounting for employee stock
options, including the fair value calculations made, the method of amortizing
deferred compensation expense and the impact of modifications made to certain
options. Also, as part of this review, the Staff at the Securities and Exchange
Commission has requested that we restate our historical financial statements to
reclassify shipping and handling costs from selling, general and administrative
expense to cost of sales.
As a result of the matters described above, it is likely that we will
restate our financial statements for the years ending December 31, 2005 and
December 31, 2004. In addition, it is likely that we will
F-5
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
restate our interim financial statements for the quarterly periods reported in
2005 and 2004. These possible restatements will not affect or change our
fundamental operational financial results for the reporting periods in
question.
Going Concern
As shown in the accompanying consolidated financial statements, we
have suffered operating losses and negative cash flow from operations since
inception and have an accumulated deficit of $52,537,243 negative working
capital of $3,552,658 and we are delinquent on certain of our debts at March
31, 2006. Further, our auditors stated in their report on our Consolidated
Financial Statements for the period ending December 31, 2005 that these
conditions raise substantial doubt about our ability to continue as a going
concern. Management plans to increase gross profit margins in our U.S.
business, grow our international business, obtain additional financing and
continue the implementation of our Master Distribution Agreement with Coca-Cola
Enterprises Inc. While there is no assurance that funding will be available or
that we will be able to improve our profit margins, we are continuing to
actively seek equity and/or debt financing.
Note 2. -- Significant Accounting Policies
Revenue Recognition
United States
-------------
In the United States, we utilize third party processors to produce our
products on our behalf, which products consisted of single serve flavored milk
based beverages. Under this model, we are responsible for all product
development, marketing, and promotion, advertising and sales activity. We refer
to this business model as "unit sales".
We have responsibility for the payment to our third-party processor
for all costs associated with the production of our flavored milk based
beverages. In that regard, we pay a negotiated "dock price" per sale unit to
our third-party processor. We also are responsible for the payment of all
freight charges for the finished product to our customers, shipping insurance
charges, broker's fees and product returns.
Our milk-based products are code dated with an "expiration" date. If
our third-party processor has stored inventory that approaches code date and
is, as a result, not capable of being sold, we are responsible for the payment
of the dock price to the third-party processor even absent a sale. If already
shipped product is not sold by a date approaching the code date or has been
damaged in shipment, we issue a credit to our customer.
We establish the wholesale price at which we sell our products. The
price charged is dependent upon practical cost variables including freight and
distribution. We recognize revenue at the full wholesale price charged.
We have sole discretion to change the product visually and its content
to satisfy our specifications. The only limitations are (i) those imposed on
the third party processor by the Food and Drug Administration and local health
officials, and (ii) labeling and content restrictions that the FDA may impose
on us.
We have the sole discretion to select the supplier of flavor and
nutritional ingredients that are sourced by third parties to meet our flavor
and nutritional profile specifications. Similarly, we have the
F-6
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
sole discretion to develop and determine the visual and content specifications
for our products. The only limitations are those imposed by third party license
agreements concerning the visual utilization of trademark issues.
We take title to product upon its removal from quality control
quarantine by our third-party processor. We have insurance coverage during our
ownership, and we are responsible for inventory loss. The point of transfer of
title to the inventory is manifested by the physical removal of the inventory
from our third-party processor's quality control quarantine to its warehouse,
where the risk of loss passes to us. Contemporaneous with that event, the
third-party processor invoices us for the product, which becomes our finished
goods inventory. We bear the risk of loss of non-payment by our customers.
Purchasers of our product pay the "wholesale level" price directly to
our third party processor, which we have appointed as our billing and
collection agent for such purposes. Our third-party processor charges us a fee
for this service. As agent, the third-party processor provides us with an
out-sourced infrastructure for billing, collection, shipment, and recording of
credits to customers allowed by us for promotions, discounts and returns. On a
monthly basis, we reconcile with our third-party processor (i) the revenue
received, (ii) the dock price, (iii) administration charges and (iv) separate
charges against our account for allowed credits to customers for promotions,
discounts and returns.
We record the full wholesale level price as our gross revenue and
record the dock price as the cost of goods sold. In certain circumstances in
our U.S. business, we are required to pay slotting fees, give promotional
discounts or make marketing allowances in order to secure wholesale customers.
These payments, discounts and allowances reduce our reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff Accounting
Bulletin No. 104
International Sales
-------------------
We have two business models for our international sales. In the United
Kingdom, our business model tracks the model used by us in the United States,
and we utilize third party processors to produce our products on our behalf,
which products consist of single serve flavored milk based beverages. The
operational infrastructure for this business is provided pursuant to an agency
contract with a third party, who is responsible as our agent for all aspects of
our sales, distribution, marketing, billing and collections once our products
are shipped from the processor. All of these activities are done on behalf of
our wholly owned UK subsidiary, Bravo! Brands (UK) Ltd., and we recognize
revenue on the same basis as our US unit sales business model.
Under our Middle East business model, however, we are not involved in
the marketing, promotion, advertising or sales of the products. These
activities are the responsibility of regional dairy processors located in
foreign countries that produce and sell the milk products for their own behalf.
In this international business, the "product" sold by us is not our flavored
milk based beverages but consists of (i) the flavor ingredients used to produce
the milk products and (ii) production rights granted to the regional processors
to use the milk product branding and trade dress created by us for our flavored
milk products. We refer to this business model as "kit sales".
Under this kit model, we purchase the flavor ingredients from our
suppliers and have the ingredients shipped directly to the processor to
expedite the production of the flavored milk products. The supplier for the
flavor ingredients invoices us, and we include the amount of that invoice in
our kit price to the processor. At no time is the processor responsible to the
supplier for the cost of the ingredients shipped to it.
F-7
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We recognize revenue in our international kit sales business at the
gross amount of our invoices for the sale of kits at the time of shipment of
flavor ingredients to processor dairies with which we have production contracts
for extended shelf life and aseptic long life milk. We base this recognition on
our role as the principal in these transactions, our discretion in establishing
kit prices (including the price of flavor ingredients and production rights
fees), our development and refinement of flavors and flavor modifications, our
discretion in supplier selection and our 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 us to the processors for
production rights. We formulate the price of production rights to cover our
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.
We recognize revenue on the gross amount of "kit" invoices to the dairy
processors and simultaneously record as cost of goods sold the cost of flavor
ingredients paid by us to the ingredients supplier. The recognition of revenue
generated from the sale of production rights associated with the flavor
ingredients is complete upon shipment of the ingredients to the processor,
given the short utilization cycle of the ingredients shipped.
Pursuant to EITF 99-19, international sales of kits made directly to
customers by us are reflected in the statements of operations on a gross basis,
whereby the total amount billed to the customer is recognized as revenue.
Loss Per Common Share:
----------------------
Basic earnings per share is calculated by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period adjusted to reflect potentially
dilutive securities. In accordance with SFAS No. 128 "Earnings Per Share" (SFAS
No. 128"), we have not included the effect of potential exercises of stock
options and warrants or the conversion features of our convertible preferred
and convertible debt outstanding at March 31, 2006 and 2005. As such, we have
not included 110,362,179 and 146,156,178 shares of common stock equivalents,
respectively, in the computation of diluted loss per share for those periods,
as they were anti-dilutive.
Note 3 -- Stock Based Compensation Plans
We grant stock options for a fixed number of common shares to
employees and directors from time to time. As of March 31, 2006, approximately
1,475,000 shares are available for future issuance under our stock option plan.
Effective January 1, 2005, we adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation
("SFAS No. 123") to account for employee stock options. Accordingly,
compensation cost was recognized in the Consolidated Statement of Operations
based on the vesting period of the underlying options. Prior to January 1,
2005, we accounted for employee stock options using the intrinsic value method
under the provisions of APB Opinion No. 25 Accounting for Stock Issued to
Employee, and no compensation expense was recognized prior to January 1, 2005.
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123, using the
modified prospective transition method. Under this method, compensation cost
recognized for the three months ended March 31, 2006 included 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 SFAS No. 123. No options were
granted during the first quarter of 2006. Results for periods prior to December
31, 2005 have not been restated.
We recorded compensation expense of $72,000 for the three months ended
March 31, 2006 resulting from the issuance and vesting of options during that
period. No compensation expense was recorded for the three months ended March
31, 2005 due to the fact that all options granted prior to the beginning of
that quarter were fully vested and no options were granted during that quarter.
We recognized no tax benefit for share-based compensation arrangements due to
the fact that we are in a
F-8
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
cumulative loss position and recognize no tax benefits in our Consolidated
Statement of Operations.
We calculate the fair value of employee stock options using a
Black-Scholes-Merton option pricing model at the time the stock options are
granted and amortize that value to expense over the option's vesting period
using the straight-line attribution approach. The fair value for employee stock
options for the three months ended March 31, 2006 was calculated based on the
following assumptions:
First
Quarter
2006
----------
Expected term (in years) 2.25
Risk-free interest rate 3.75%
Expected volatility 106%
Expected dividend yield 0.0%
As required by SFAS No. 123R, we now 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/senior management and all other employees, based on historical
experience. Estimated forfeitures are adjusted to actual forfeiture experience
as needed. The cumulative effect of adopting SFAS No. 123(R) of $17,000, which
represents estimated forfeitures for stock option grants outstanding at the
date of adoption, was not material and therefore has been recorded as a
reduction in stock-based compensation expense rather than displayed separately
as a cumulative change in accounting principle in the Condensed 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
three months ended March 31, 2006.
As we had previously adopted the provisions of SFAS No. 123 effective
January 1, 2005, prior year pro forma disclosure is not applicable.
The following table summarizes information related to our stock option
activity for the three months ended March 31, 2006:
Weighted
Average
Exercise
Shares Price
---------- ---------
Outstanding as of December 31, 2005 10,358,459 $ 0.31
Granted 0 $
Exercised 0 $
Forfeited (155,000) $ 0.75
----------
Outstanding as of March 31, 2006 10,203,459 $ 0.31
----------
Exercisable as of March 31, 2006 4,251,991 $ 0.39
----------
F-9
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes information about options outstanding
and exercisable as of March 31, 2006:
Options
Options Outstanding Exercisable
------------------------------------ ------------------
Weighted
Average Weighted Weighted
Range Remaining Average Average
of Exercise Contractual Exercise Exercise
Prices Life (Years) Shares Price Shares Price
------------- ------------ --------- ------- -------- --------
$0.20 to $0.35 8.8 9,308,459 $ 0.25 3,356,991 $ 0.25
$0.60 to $2.00 7.9 895,000 $ 0.93 895,000 $ 0.93
---------- ---------
8.7 10,203,459 $ 0.31 4,251,991 $ 0.39
---------- ---------
The total intrinsic value of options outstanding and options
exercisable was $2,813,580 and $998,382, respectively as of March 31, 2006.
As of March 31, 2006, there was $387,000 of total unrecognized
compensation cost related to non-vested stock options, which is expected to be
recognized, on a straight-line basis through May 2007.
Note 4 -- Transactions in Capital
On March 31, 2005, we received notices of exercise for and issued to
Alpha Capital AG 1,000,000 shares of common stock as provided in our June 2004
A Warrant and 500,000 shares of our October 2004 C Warrant. These Warrants were
exercised at a price of $0.10 per share. The shares of common stock underlying
these Warrants were registered pursuant to a registration statement declared
effective April 18, 2005.
Note 5 -- Business Segment and Geographic Information
We operate principally in the single serve flavored milk industry
segment, under two distinct business models. In the United States and the
United Kingdom we are responsible for the sale of finished Slammers[R] and
Bravo![] flavored milks (referred to as "unit sales") to retail outlets. For
these unit sales, we recognize as revenue the invoiced wholesale prices that we
charge to the retail outlets or distributors that purchase our flavored milks.
In countries other than the United States and the United Kingdom, our
F-10
BRAVO! FOODS INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
revenue is generated by the sale of kits to dairy processors. Each kit consists
of flavor ingredients for our Slammers[R] flavored milks and production rights
to manufacture and sell the milks. In line with our revenue recognition
policies, we recognize the full invoiced kit price as revenue and record our
cost to purchase the flavor ingredients as cost of goods sold. We currently
sell kits to a third party dairy processor located in Oman, for distribution
to nine Middle Eastern countries.
Note 6 -- Subsequent Events
On April 13, 2006, we issued 457,125 shares of common stock to
Longview Fund, LP 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 Amro International, SA. These
Warrants were exercised on a cashless basis, resulting in the cancellation of
the entire Amro Series F Warrant. The shares of common stock underlying the
Warrant was issued pursuant Regulation D.
On April 21, 2006, we issued 437,500 shares of common stock to Libra
Finance, SA pursuant to notices of conversion 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.
On April 28, 2006 we issued 1,500,000 shares of common stock
underlying our April 2004 Warrant to Alpha Capital, SA. The shares of common
stock underlying the Warrant were registered pursuant to a registration
statement declared effective on August 3, 2004.
On April 28, 2006, we issued 196,078 shares of our common stock in a
private placement, pursuant to Section 4(a) of the Securities Act of 1933, to
Amro International, SA, an accredited investor. We received $100,000 for these
shares.
On May 12, 2006, we obtained financing in the amount of $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 shares 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-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2006
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about
our prospects and strategies and our 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. We caution that
such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause our 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 our future
profitability; the uncertainty as to whether our new business model can be
implemented successfully; the accuracy of our performance projections; and our
ability to obtain financing on acceptable terms to finance our operations until
profitability.
OVERVIEW
Our business model includes the development and marketing of our
Company owned Slammers[R] and Bravo![] 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 new product introduction and growth expansion continues to be
expensive, and we reported a net loss of $3,885,572 for the period ended March
31, 2006. As shown in the accompanying financial statements, we have suffered
operating losses and negative cash flows from operations since inception and,
at March 31, 2006, have an accumulated deficit of $52,537,243. These conditions
give rise to substantial doubt about our ability to continue as a going
concern. As discussed herein, we plan to work toward profitability in our U.S.
and international business and obtain additional financing. While there is no
assurance that funding will be available or that we will be able to improve our
operating results, we are continuing to seek equity and/or debt financing. We
cannot give any assurances, however, that management will be successful in
carrying out our plans.
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
12
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.
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 generally
accepted in the United States of America. The preparation of these financial
statements requires us 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, we evaluate our company's estimates, including those related to reserves
for bad debts and valuation allowance for deferred tax assets. We base our
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. Our use of estimates, however, is quite limited as we have adequate
time to process and record actual results from operations.
13
Revenue Recognition
-------------------
We have two business models that affect revenue recognition: one for
the United States and the United Kingdom and another for our international
business in the Middle East. We follow the final consensus reached by the
Emerging Issues Task Force (EITF) 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent" in determining our revenue recognition
reporting status for both business models. See Note 1 to the Financial
Statements.
Slotting Fees
-------------
From time to time, we enter into arrangements with new customers
whereby, in exchange for cash payments to our customers, we obtain rights to
place our products on customers' shelves for resale at retail. We also engage
in promotional discount programs in order to enhance sales in specific
channels. 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 reduce our reported revenue in
accordance with the guidelines set forth in EITF 01-9 and SEC Staff Accounting
Bulletin No. 104.
We record our obligation under each arrangement at inception and
amortize the total required payments using the straight-line method over a term
of one year, which is normally the minimum time that we are allowed to sell our
products in given retail outlets. We record the balance of the amortized
slotting fee not used in the current period as prepaid expenses. As we apply
the amortized slotting fee as contra revenue for a current period, we reduce
the reported gross revenue by an amount equal to the reduction in such
prepayments.
Classification of Financial Instruments with a Convertible Feature
------------------------------------------------------------------
In determining whether the conversion feature of our financial
instruments would be classified in stockholder's equity, we examine the
guidance of Paragraph 4 of EITF 00-19, which provides two avenues of analysis.
First, if the characteristics of the financial instrument constitute a
"conventional" convertible instrument, the instrument qualifies for the scope
exception of paragraphs 11(a) and 12 (c) of Statement 133, the conversion
feature is not considered a derivative for the purposes of Statement 133. In
order to determine whether the instrument is "conventional", we analyze whether
it would constitute stockholders' equity as a freestanding derivative. Second,
absent the "conventional" instrument classification and the resultant scope
exception, we analyze whether the instrument meets the equity condition
requirements of paragraphs 12 - 32 of EITF 00-19. Issue 00-19's classification
provisions are based on an issuer's control over the form of ultimate
settlement of an instrument. An issuer is deemed to control the form of
settlement if it has both the contractual right to settle in equity shares and
the ability to deliver equity shares. When an issuer controls the form of
settlement, an instrument is generally classified as equity. If an issuer does
not control the form of settlement of an instrument, net-cash settlement is
assumed and the instrument is classified as an asset or liability (paragraphs
12, 13 of EITF 00-19).
We examine the general pronouncements contained in paragraphs 12 and
13 EITF 00-19 prohibiting equity classification where net cash settlement or a
cash payment for physical settlement could occur, in light of the eight
conditions discussed in paragraphs 14 -- 32 of EITF 00-19. If these conditions
are satisfied, then equity classification is appropriate. The eight conditions
are:
o The instrument permits the issuer to settle in unregistered shares
(paragraphs 14 -- 18)
o The issuer has sufficient authorized shares available to settle in
its shares (paragraph 19)
o The instrument contains an explicit limit on the number of shares to
be delivered in a share settlement (paragraphs 20 -- 24)
14
o There are no cash payments to the counterparty in the event that the
issuer fails to make timely filings with the SEC (paragraph 25)
o There are no cash settled "top-off" or "make whole" provisions
(paragraph 26)
o The contract requires net-cash settlement only where in the
circumstances the holders of shares underlying the instrument also
would receive cash in exchange for shares (paragraph 27 - 28)
o There are no provisions giving the counterparty greater rights than
those of a shareholder of the stock underlying the instrument
(paragraph 29 - 31)
o There is no requirement to post collateral for any reason (paragraph
32)
Our analysis of these considerations requires us to exercise our
judgment within the stated guidelines in making our determination as to whether
a particular financial instrument is appropriately classified as equity or a
liability or asset.
POTENTIAL RESTATEMENT DISCLOSURE
On December 1, 2005, the Exchange Commission ("SEC") issued a comment
letter concerning a limited number of accounting issues associated with our
Form 10-KSB for the year ended December 31, 2004 (the "Initial Comment
Letter"). In an effort to satisfy our registration requirements, on December
21, 2005, in accordance with a Registration Rights Agreement associated with
our November 2005 financing, we filed a registration statement registering the
Shares and the shares of common stock underlying the Warrants issued in
connection with the financing with the SEC, as well as a response letter
addressing the seven comments discussed by the SEC in the Initial Comment
Letter.
On December 1, 2005, the SEC's Division of Corporation Finance issued
guidance on the application of EITF 00-19 ("Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock") and
FAS 133 to financial instruments containing an embedded conversion feature,
such as convertible preferred stock, convertible notes and associated warrants.
Since then, many companies have been contacted by the SEC for review of
accounting issues relating to FAS 133 and EITF 00-19.
In general, EITF 00-19 requires that certain types of convertible
equity instruments to be reclassified as liabilities in cases where the
issuer's ability to settle the instrument in equity is not entirely within the
issuer's control. The standard also requires, if liability classification is
determined to be appropriate, that the instrument be valued separately with
future fluctuations of value reflected on the income statement. As we have
financed our operations with various convertible instruments over the last
several years, we were required to work through each of our financings in order
to ensure the proper treatment under EITF 00-19.
As a result of the SEC's comment December 1, 2005 comment letter, we
immediately began to examine the classification of and our accounting
methodology for our convertible preferred and convertible debt financing. Based
upon comments from the SEC Staff, we believe that our classification of our
convertible preferred stock and convertible notes as equity or liabilities will
not change. We currently are examining the accounting methodology utilized to
report the value of embedded derivatives associated with our financing
instruments, including the balance sheet reclassification and valuation of
warrants associated with such financing instruments. Potential changes likely
will occur in the accounting treatment of these derivatives in that they will
have to be valued separately, and fluctuations of value will be reflected on
our past income statements and our balance sheets. Going forward, we have taken
steps to avoid the recognition of the fair value fluctuations of such
instruments, and associated balance sheet reclassification, in subsequent
reporting periods, by eliminating, through an amendment, the variable
conversion feature of one financing instrument, which may have had a "tainting"
effect on all
15
such instruments. We also are reviewing our accounting for the amortization of
discounts, the impact of certain modifications to warrants and the beneficial
conversion features associated with our various financing instruments.
Additionally, we are reviewing our accounting for employee stock
options, including the fair value calculations made, the method of amortizing
deferred compensation expense and the impact of modifications made to certain
options. Lastly, the Staff of the SEC has requested that we restate our
historical financial statements to reclassify shipping and handling costs from
selling expense to cost of sales.
As a result of the items described above, it is likely that we will
restate our financial statements for the years ending December 31, 2005 and
December 31, 2004. In addition, it is likely that we will restate our interim
financial statements for the quarterly periods reported in 2005 and 2004. These
possible restatements will not affect or change our fundamental operational
financial results for the reporting periods in question.
RESULTS OF OPERATIONS
Financial Condition at March 31, 2006
-------------------------------------
As of March 31, 2006, we had an accumulated deficit of $52,537,243,
cash on hand of $609,785 and reported total capital surplus of $9,659,704.
For this same period of time, we had revenue of $3,561,215 and general
and administrative expense of $1,380,143.
After interest expenses of $38,350, cost of goods sold of $2,946,460,
product development costs of $115,963 and selling expenses of $2,981,291
incurred in our operations, we had a net loss of $3,885,572.
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
-------------------------------------------------------------------------------
Consolidated Revenue
We had revenues for the three months ended March 31, 2006 of
$3,561,215, with cost of sales of $2,946,460, resulting in a gross margin of
$614,755. This revenue and resultant gross margin is net of slotting fees and
promotional discounts for this period in the amount of $279,973. Of the
reported $3,561,215, U.S. sales accounted for $3,531,352 with an additional
$29,863 from sales in the United Kingdom. We did not have revenue in this
period in the Middle East. Our reported revenue for the three months ended
March 31, 2006 increased by $2,663,445, a 296.67% increase compared to revenue
of $897,770 for the same 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 Coco-Cola Enterprises
in the last quarter of 2005 and the first quarter of 2006.
Consolidated Cost of Sales
We incurred cost of goods sold of $2,946,460 for the three months
ended March 31, 2006, $2,812,587 of which was incurred in our U.S. business and
$133,873 of which was incurred in our United Kingdom operations. Cost of goods
sold in this period increased by $2,268,797, a 334% increase
16
compared to $677,663 for the same period in 2005. The increase in cost of goods
sold reflects an increase in sales and the concomitant increase in reported
cost of goods sold associated with that increase.
Segmented Revenues and Costs of Sales
The following table presents revenue by source and type against costs
of goods sold, as well as combined gross revenues and gross margins. In
countries other than the United States and the United Kingdom, revenues for the
period ended March 31, 2006 were generated by kit sales to third party
processors. Our revenue from the sale of finished product to retail outlets is
recorded as "unit sales" on the following table.
Three Months Ended United Total
March 31, 2006 United States Kingdom Middle East Company
------------- ------- ----------- -------
Revenue -- unit sales $ 3,531,352 $ 29,863 $ -- $ 3,561,215
Revenue -- gross kit sales -- -- -- --
----------- --------- -------- -----------
Total revenue 3,531,352 29,863 -- 3,561,215
Cost of goods sold (2,812,587) (133,873) -- (2,946,460)
----------- --------- -------- -----------
Gross margin $ 718,765 $(104,010) $ -- $ 614,755
=========== ========= ======== ===========
Three Months Ended United Total
March 31, 2005 United States Kingdom Middle East Company
------------- ------- ----------- -------
Revenue -- unit sales $ 864,420 $ -- $ -- $ 864,420
Revenue -- gross kit sales -- -- 33,350 33,350
----------- --------- -------- -----------
Total revenue 864,420 -- 33,350 897,770
Cost of goods sold (675,050) -- (2,613) (677,663)
----------- --------- -------- -----------
Gross margin $ 189,370 $ -- $ 30,737 $ 220,107
=========== ========= ======== ===========
United States
-------------
Revenues for the period ended March 31, 2006 from unit sales in the
United States increased from $864,420 for the same period in 2005 to $3,531,352
in 2005, a 308.52% increase. The 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 last
quarter of 2005 and the first quarter of 2006.
In the period ended March 31, 2006, our gross margin for U.S. sales of
$718,765 increased by $529,395, or by 279.55%, from $189,370 for the same
period in 2005. The increase in gross margin was the result of the increased
sales and greater efficiencies in the production and distribution of our
products.
Foreign Sales
-------------
Revenues for the period ended March 31, 2006 from sales in the United
Kingdom commenced at the end of the second quarter of 2005. The cost of sales
for the current period exceeded revenue by $104,010.
17
This negative gross margin was the result of difficulties encountered in
initial market penetration with new products introduced in the last half of
2005. We currently are re-examining our initial effort to penetrate this market
in terms of available resources and product type, including packaging.
We did not make any kit sales to the Middle East for the period ended
March 31, 2006. The third party dairy processor that has the right to produce
and sell our products in the Middle East had created a large pipeline inventory
of our products during 2005, which it has been selling during this current
period.. We expect to resume kit sales to this processor during the second
quarter of 2006.
Consolidated Operating Expenses
We incurred selling expenses of $2,981,291 for the period ended March
31, 2006, of which $2,901,005 was incurred in our United States operations. Our
selling expense for this period increased by $2,357,839, a 378.19% increase
compared to our selling expense of $623,452 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 sales
and our development of four new product lines.
We incurred general and administrative expenses for the period ended
March 31, 2006 of $1,380,143, of which $1,358,431 was incurred in our United
States business operations. Our general and administrative expenses for this
period increased by $726,896, a 111% increase compared to $653,247 for the
same period in 2005. The increase in general and administrative expenses for
the current period is the result of the hire of additional staff and other
costs associated with the management and implementation of our relationship
with Coca-Cola Enterprises under the Master Distribution Agreement..
As a percentage of total revenue, our general and administrative
expenses decreased from 72.8% in the period ended March 31, 2005, to 38.8% for
the current period in 2006. We anticipate a continued effort to reduce these
expenses as a percentage of sales through revenue growth, cost cutting efforts
and the refinement of business operations.
Interest Expense
We incurred interest expense for the period ended March 31, 2006 of
$38,350. Our interest expense decreased by $78,780, a 67.3% increase compared
to $117,130 for the same period in 2005. The decrease was due to our payment of
debt instruments incurred in 2005 to finance our operations.
Loss Per Share
We accrued dividends payable of $71,709 for various series of
preferred stock during the period ended March 31, 2006. The accrued dividends
decreased for this period by $23,351, or 24.6%, from $95,060 for the same
period in 2005. The net loss before accrued dividends for the current period
increased $2,648,324, from $1,237,248 for the period ended March 31, 2005 to
$3,885,572 for the current period. The increase in the net loss was offset by
the increase in the weighted average number of common shares outstanding,
resulting in no change in our current period loss per share of $0.02.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2006, we reported that net cash used in operating
activities was $4,210,671, net cash provided by financing activities was
$286,606 and net cash used in investing activities was $413,446. We had a
negative working capital of $3,552,658 as of March 31, 2006.
18
Compared to $1,099,760 of net cash used in operating activities in the
period ended March 31, 2005, our current period net cash used in operating
activities increased by $3,110,911 to $4,210,671. This increase was the result
of increased depreciation and amortization, our utilization of cash rather than
equity to pay service providers in this current period, and changes in
inventory, prepaid expenses, accounts payable and accrued expenses. Included in
the net loss in this current period were depreciation and amortization of
$684,643, compared to $100,726 for the same period in 2005.
Changes in accounts receivable in this current period in 2006 resulted
in a cash increase of $1,596,042, compared to a cash increase in receivables of
$16,844 for the same period in 2005, having a net result of an increase of
$1,579,198. Cash used for inventory in the current period was $2,652,769,
compared to cash generated of $6,981 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 current period
ending March 31, 2006 contributed to a cash increase of $1,007,871, whereas the
changes in accounts payable and accrued liabilities for the period ended March
31, 2005 amounted to an increase of $412,704. Cash flow generated through our
operating activities was inadequate to cover all of our cash disbursement needs
in the period ended March 31, 2006, and we had to rely on prior equity and debt
financing to cover expenses.
Cash used in the period ended March 31, 2006 in our investing
activities for equipment was $413,446 for license and trademark costs,
furniture, computer equipment, and our purchase of eight vans in the U.S.,
compared to $11,625 for the same period in 2005.
Net cash provided by our financing activities for the period ended
March 31, 2006 was $286,606. Net cash provided by financing activities for the
same period in 2005 was $1,123,272, for a net decrease of $836,666.
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 quarter of 2006, when we expect that
cash supplied by operating activities will approach the anticipated cash
requirements for operating expenses. We anticipate the need for additional
financing in 2006 to reduce our liabilities, assist in marketing and to improve
shareholders' equity status. No assurances can be given that we will be able to
obtain additional financing, or that operating cash flows will be sufficient to
fund our operations.
We currently have monthly working capital needs of approximately
$400,000. 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
sales within established markets. Freight charges will be reduced as we are
able to ship more full truckloads of product given the reduced per unit cost
associated with full truckloads versus less than full truckloads. Similarly,
slotting fees, which are paid to warehouses or chain stores as initial set up
or shelf space fees, are essentially one-time charges per new customer. We
believe that along with the
19
increase in our unit sales volume, the average unit selling expense and
associated costs will decrease, resulting in gross margins sufficient to
mitigate cash needs. In addition, we are actively seeking additional financing
to support our operational needs and to develop an expanded promotional program
for our products.
External Sources of Liquidity
-----------------------------
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.
We have utilized this financing for, among other things, our working
capital needs throughout the current period. We anticipate the need for
additional financing in 2006, to support our expanding operations in connection
with the continued implementation of our Master Distribution Agreement with
Coca-Cola Enterprises.
EFFECTS OF INFLATION
We believe that inflation has not had any material effect on our net
sales and results of operations.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, as
of the end of the period covered by this report, we conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Act of 1934, as of the end of the period covered by this report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that, as of the period covered by this report, our disclosure
controls and procedures were effective to provide reasonable assurance that the
information required to be included in our Securities and Exchange Commission
("SEC") reports is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, including our consolidated
subsidiary, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.
(b) Changes in Internal Controls Over Financial Reporting
In connection with the evaluation required by paragraph (d) of Rule
13a-15 under the Exchange Act, there was no change identified in our internal
control over financial reporting that occurred during this fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
20
Subsequent Events
See Note 6 of Notes to Consolidated Financial Statements
Item 6. Exhibits
Exhibits - Required by Item 601 of Regulation S-B:
No. 31: Rule 13a-14(a) / 15d-14(a) Certifications
No. 32: Section 1350 Certifications
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 15, 2006
/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 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 15, 2006
and Director
/S/ Tommy E. Kee Chief Accounting Officer May 15, 2006
21