Xstream Beverage Net - Recent Material Event
<![CDATA[XSTREAM BEVERAGE NETWORK, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2007
(Unaudited)..........................................................4
Consolidated Statements of Operations (Unaudited) for the three and
nine months ended September 30, 2007 and 2006........................5
Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2007 and 2006 ............................6
Notes to Consolidated Financial Statements (Unaudited) as of
September 30, 2007 ..................................................7
Item 2. Management's Discussion and Analysis or Plan of Operation...........30
Item 3. Controls and Procedures.............................................40
Part II. Other Information
Item 1. Legal Proceedings...................................................42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.........42
Item 3. Default on Senior Securities........................................42
Item 4. Submission of Matters to a Vote of Security Holders.................42
Item 5. Other Information...................................................42
Item 6. Exhibits............................................................42
3
XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
2007
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current Assets:
Cash $ 562
Note receivable 304,217
Inventory 155,769
Prepaid expenses 471,380
Assets of discontinued operations 289
-------------
Total current assets 932,217
-------------
Property and equipment, net of accumulated depreciation of $18,875 11,690
-------------
Other Assets:
Note receivable 782,308
Restricted marketable equity securities, at market 1,633,500
Capitalized funding costs,net 256,746
Other assets 16,138
-------------
Total other assets 2,688,692
-------------
Total Assets $ 3,632,599
=============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Liabilities:
Current Liabilities:
Loans payable $ 2,588,769
Loans payable - related party 50,455
Revolving line of credit 1,001,590
Convertible notes payable 2,212,993
Current portion of long term debt, net of discount of $110,542 2,358,051
Mandatory redeemable Preferred Series B, $0.001 par value,
48 shares issued and outstanding, net of discount of $22,341 1,485,659
Accounts payable 1,020,595
Accrued expenses 973,525
Dividends payable 20,909
Derivative liabilities 1,082,354
Liabilities of discontinued operations 1,168,852
-------------
Total current liabilities 13,963,752
-------------
Long Term Liabilities:
Notes payable, net of discount of $55,266 1,669,733
Convertible notes payable, net of discount of $1,000,000 1,214,348
-------------
Total long term liabilities 2,884,081
-------------
Total liabilities 16,847,833
-------------
Stockholders' Deficiency
Series A Preferred Stock, $0.001 par value,
200,000 shares issued and outstanding 200
Series D Preferred Stock, $0.001 par value, 4,000,000 shares authorized
1,100,000 shares issued and outstanding 1,100
Common Stock, $0.001 par value, 100,000,000 shares authorized,
1,950,983 issued and outstanding 1,951
Additional paid in capital 54,877,764
Accumulated deficit (67,797,854)
Treasury stock at cost, (24,671 shares) (296,053)
Deferred consulting (2,342)
-------------
Total Stockholders' Deficiency (13,215,234)
-------------
TOTAL LIABILITIES & STOCKHOLDERS' DEFICIENCY $ 3,632,599
=============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ -- $ 9,621 $ 10,147 $ 282,400
Cost of goods sold 3,647 48,835 57,445 259,533
------------ ------------ ------------ ------------
Gross profit (3,647) (39,214) (47,298) 22,867
Expense
Marketing, selling, general and administrative 112,558 1,302,527 1,384,805 4,280,366
------------ ------------ ------------ ------------
Total operating expense 112,558 1,302,527 1,384,805 4,280,366
------------ ------------ ------------ ------------
Loss from continuing operations (116,205) (1,341,741) (1,432,103) (4,257,499)
Other Income/(Expense)
Other income -- -- -- 11,132
Interest income 16,539 -- 44,009 --
Interest expense (7,851,869) (1,622,871) (10,678,227) (9,662,334)
Derivative liability expense -- -- -- (765,528)
Change in fair value of derivatives 219,887 4,591,706 1,343,924 7,144,795
Gain on settlement of accrued expense -- -- 578,497 --
Other expenses -- (68,129) -- (928,968)
Realized loss- restricted investment (1,202,438) -- (12,886,500) --
Realized loss- subscription receivable -- (12,473,190) (1,082,162) (12,473,190)
------------ ------------ ------------ ------------
Total other expense (8,817,881) (9,572,484) (22,680,459) (16,674,093)
------------ ------------ ------------ ------------
Loss from continuing operations (8,934,086) (10,914,225) (24,112,562) (20,931,592)
------------ ------------ ------------ ------------
Discontinued operations:
Gain from disposal of discontinued operations -- -- 16,844,821 --
Loss from discontinued operations (2,054) (69,887) (8,674) (437,414)
------------ ------------ ------------ ------------
Total gain (loss) from discontinued operations (2,054) (69,887) 16,836,147 (437,414)
------------ ------------ ------------ ------------
Net loss (8,936,140) (10,984,112) (7,276,415) (21,369,006)
------------ ------------ ------------ ------------
Transfer of previous unrealized loss on subscription
receivable $ -- $ 12,473,190 $ -- $ 12,473,190
------------ ------------ ------------ ------------
Comprehensive income (loss) (8,936,140) 1,489,078 (7,276,415) (8,895,816)
------------ ------------ ------------ ------------
Preferred stock dividends (22,924) (34,640) (57,758) (101,266)
------------ ------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $ (8,959,064) $(11,018,752) $ (7,334,173) $(21,470,272)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED:
Income (loss) from continuing operations $ (17.51) $ (102.10) $ (90.03) $ (222.59)
Income (loss) from discontinued operations -- (0.65) 62.71 (4.63)
------------ ------------ ------------ ------------
Net income (loss) per common share $ (17.51) $ (102.75) $ (27.32) $ (227.22)
============ ============ ============ ============
Weighted Average Shares Outstanding -Basic and Diluted 511,582 107,240 268,465 94,492
============ ============ ============ ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
XSTREAM BEVERAGE NETWORK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2007 2006
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(24,112,562) (20,931,592)
Adjustments to reconcile loss from continuing operations to net cash
used in continuing operating activities:
Bad debts 4,820 18,008
Depreciation 4,447 4,020
Amortization of deferred fees and consulting 479,086 2,473,820
Amortization of debt discount to interest expense 784,372 4,016,718
Liquidated damages for failure to timely file registration statement 56,550 423,000
Amortization of capitalized funding Costs 676,838 1,873,224
Amortization of prepaid interest 240,835 --
Default premium - Laurus Master Fund -- 166,281
Interest expense in connection with conversion of notes payable 6,578,487 --
Stock based loan fee 90,000 566,665
Stock based consulting services 280,136 1,749,647
Derivative liability expense -- 765,528
Change in fair value of derivative liabilities (1,343,924) (7,144,795)
Gain on settlement of accrued expense (578,497) --
Realized loss-restricted investments 12,886,500 --
Realized loss-transfer of subscription receivable 1,082,162 12,473,190
Changes in operating assets and liabilities:
Accounts receivable 7,407 24,418
Inventory 52,249 (312,834)
Interest receivable included in notes receivable (44,039) --
Other current and non-current assets 54,416 99,151
Accounts payable 207,471 318,208
Accrued expenses 2,707 107,097
Accrued interest included in notes payable and revolving
line of credit 1,903,676 1,111,320
------------ ------------
NET CASH USED IN CONTINUING OPERATIONS (686,863) (2,198,926)
------------ ------------
Income (loss) from discontinued operations 16,836,147 (437,414)
Adjustments to reconcile loss from discontinued operations
to net cash
provided by discontinued operating activities:
Loss on disposal of fixed assets -- 40,174
Gain from disposal of discontinued operations (16,844,821) --
Depreciation 12,668 59,013
Bad debt -- 42,827
Impairment of intangibles -- 65,789
Amortization of intangibles 59,902 299,181
Decrease (Increase) in net assets from discontinued operations 231,009 (145,496)
Increase (Decrease) in net liabilities from discontinued operations (164,920) 240,238
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 129,985 164,312
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (556,878) (2,034,614)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on note receivable 957,514 --
Acquisition of property and equipment - discontinued operations -- (13,641)
Proceeds from disposition of fixed assets - discontinued operations -- 10,420
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 957,514 (3,221)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from related party loans -- 50,100
Repayments of related party loans -- (50,000)
Proceeds from non-related party loans -- 4,700,000
Repayments of non-related party loans (285,000) (3,178,891)
Capitalized funding costs -- (294,500)
Cash overdraft (16,639) 46,960
Proceeds received from revolving line of credit 144,287 4,467,800
Payments on revolving line of credit (244,022) (3,796,031)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (401,374) 1,945,438
------------ ------------
Net cash increase (738) (92,397)
Cash at beginning of period 1,300 92,456
------------ ------------
Cash at end of period $ 562 $ 59
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest paid $ 269,738 $ 1,113,597
Taxes paid $ -- $ --
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
ORGANIZATION AND NATURE OF BUSINESS
-----------------------------------
Xstream Beverage Network, Inc. ("XStream") is an operating brand
development and distribution company and completed the first five
acquisitions anticipated in its business strategy as follows:
Beverage Network of South Florida, ("BNSF") April 9, 2003
Beverage Network of Connecticut, Inc. ("BNCT") May 1, 2003
Beverage Network of Hawaii ("BNHI") March 1, 2004
Beverage Network of Massachusetts ("BNMA") March 15, 2004
Beverage Network of Maryland, Inc. ("BNMD") July 1, 2004
These acquisitions were accounted for under the purchase method.
On July 19, 2007, the Company obtained through a vote of majority of
its stockholders the approval to decrease the authorized common shares
from 250,000,000 to 100,000,000 shares of common stock at $0.001 par
value. The Company effected a 1 for 400 reverse split of its issued and
outstanding common stock. All amounts have been retroactively adjusted
to reflect this split.
DISCONTINUED OPERATIONS
-----------------------
On December 15, 2006, the Company signed a Letter of Intent to sell its
distribution subsidiary, Beverage Network of Maryland, Inc. ("BNMD"),
to Global Beverage Solutions, Inc. ("Global Beverage"). The Company and
Global Beverage signed an Agreement and Plan of Merger ("Merger
Agreement") dated January 31, 2007, as amended on February 23, 2007,
whereby the Company will sell its distribution subsidiary, Beverage
Network of Maryland, Inc. ("BNMD"), to Global Beverage. The Company
closed on this transaction on February 23, 2007.
On December 15, 2006, the Company decided to discontinue the operations
of BNSF, BNCT, BNHI, and BNMA because of (a) the disappointing
performance of the subsidiaries including continuing operating losses;
and (b) the Company's lack of ability to obtain working capital loans
to finance the purchase of inventory and to finance accounts
receivable.
Accordingly, BNMD, BNSF, BNCT, BNHI, and BNMA are reported as
discontinued operations, and prior periods have been restated in the
Company's financial statements and related footnotes to conform to this
presentation.
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
--------------------------------------------------------
The accompanying unaudited consolidated financial statements of Xstream
Beverage Network, Inc. and its subsidiaries (XStream) have been
prepared in accordance with generally accepted accounting principles
for interim consolidated financial information and with the
instructions to Form l0-QSB and Article 10 of Regulation S-B.
Accordingly, they do not include all the information and notes
necessary for comprehensive consolidated financial statements.
In management's opinion, all material adjustments (consisting of normal
recurring adjustments) that are considered necessary for a fair
presentation have been included. Results for the interim periods
presented are not necessarily indicative of the results that might be
expected for the entire fiscal year.
7
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------------------------------------------
The accompanying consolidated financial statements include the accounts
of XStream and its subsidiaries. All material inter-company balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Estimates
are used when accounting for allowances for doubtful accounts,
inventory reserves, depreciation and amortization, taxes,
contingencies, impairment allowances, and valuation of debt discounts,
derivative liabilities and restricted marketable securities. Such
estimates are reviewed on an on-going basis and actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
-------------------------
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of
three months or less and money market accounts to be cash equivalents.
ACCOUNTS RECEIVABLE
-------------------
Accounts receivable result from the sale of the Company's products and
is reported at anticipated realizable value. The Company estimates its
allowance for doubtful accounts based on a specific identification
basis and additional allowances as needed based upon historical
collections experience. Accounts receivable is considered past due if
payment has not been received from the customer within thirty days and
management reviews the customer accounts on a routine basis to
determine if an account should be reserved.
RISKS AND UNCERTAINTIES
-----------------------
The Company maintains its cash and cash equivalent accounts in
financial institutions. Accounts at these institutions are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000.
During the nine months ended September 30, 2007, the Company has
reached bank balances exceeding the FDIC insurance limit. To reduce its
risk associated with the failure of such financial institutions, the
Company evaluates at least annually the rating of the financial
institutions in which it holds deposits.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost, and depreciation is computed
using the straight line method over the estimated economic useful life.
Leasehold improvements are amortized using the straight-line method
over the lease term. Maintenance and repairs are charged to expense as
incurred. Major improvements are capitalized.
8
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------------------------------------------
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
--------------------------------------------------
We account for the impairment of long-lived assets in accordance with
Financial Accounting Standards, SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the book value of the asset may not be
recoverable. Recoverability of the asset is measured by comparison of
its carrying amount to the undiscounted cash flow that the asset or
asset group is expected to generate. If such assets or asset groups are
considered to be impaired, the loss recognized is the amount by which
the carrying amount of the property if any exceeds its fair market
value. It was deemed by management during the nine months ended
September 30, 2007 that the decline in value in the investment on
restricted marketable securities is other than temporary and
accordingly has recognized the $12,886,500 decrease as realized loss on
restricted investments in the accompanying consolidated statements of
operations.
STOCK-BASED COMPENSATION
------------------------
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), SHARE BASED PAYMENT ("SFAS
No. 123R"). SFAS No. 123R establishes the financial accounting and
reporting standards for stock-based compensation plans. As required by
SFAS No. 123R, the Company recognized the cost resulting from all
stock-based payment transactions including shares issued under its
stock option plans in the financial statements.
Prior to January 1, 2006, the Company accounted for stock-based
employee compensation plans (including shares issued under its stock
option plans) in accordance with APB Opinion No. 25 and followed the
pro forma net income, pro forma income per share, and stock-based
compensation plan disclosure requirements set forth in the Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS No. 123"). For the nine months ended September 30,
2007, the Company did not grant any stock options.
REVENUE RECOGNITION
-------------------
The Company follows the criteria of the Securities and Exchange
Commission Staff Accounting Bulletin 104 for revenue recognition. The
Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery of product has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. The Company
recognizes revenue upon acceptance of delivery of its product by its
customers at agreed prices. Based on market conditions, the Company or
its suppliers may choose to promote certain brands by offering free
product or case volume discounts. The cost of any supplier-sponsored
promotion is recoverable in whole or in part from the supplier. The
Company follows the guidance of Emerging Issues Task Force (EITF) Issue
01-9 "Accounting for Consideration Given by a Vendor to a Customer" and
(EITF) Issue 02-16 "Accounting By a Customer (Including a Reseller) for
Certain Considerations Received from Vendors." Accordingly, the Company
does not recognize revenue on free promotional products, discounts or
rebates received. These incentives are recognized as a reduction of the
cost of products. Promotional products given to customers are
recognized as a cost of sales, net of any charge-backs received from
vendors. Cash incentives
9
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------------------------------------------
provided to customers are recognized as a reduction of the related sale
price, and, therefore, are a reduction in sales.
INCOME TAXES
------------
The Company accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized as income in the
period which includes the enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments for
which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's short-term financial instruments,
including accounts receivable, accounts payable, accrued expenses, and
other current asset and liabilities approximate fair value due to the
relatively short period to maturity for these instruments.
RECLASSIFICATION
----------------
Certain amounts in the 2006 consolidated financial statements have been
reclassified to conform to the 2007 presentation. Such
reclassifications had no effect on the reported net loss.
GOING CONCERN
-------------
As reflected in the accompanying consolidated financial statements, the
Company had net loss for the nine months ended September 30, 2007 of
$7,276,415, cash used in operations of $556,878 and an accumulated
deficit of $67,797,854 at September 30, 2007, and a working capital
deficit of $13,031,535 at September 30, 2007. The ability of the
Company to continue as a going concern is dependent on the Company's
ability to further implement its business plan, raise capital, and
generate revenues. The Company continues to raise capital to implement
its business plan. The Company believes that these actions provide the
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
10
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets, an amendment of FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement requires all separately recognized
servicing assets and servicing liabilities be initially measured at
fair value, if practicable, and permits for subsequent measurement
using either fair value measurement with changes in fair value
reflected in earnings or the amortization and impairment requirements
of Statement No. 140. The subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value
eliminates the necessity for entities that manage the risks inherent in
servicing assets and servicing liabilities with derivatives to qualify
for hedge accounting treatment and eliminates the characterization of
declines in fair value as impairments or direct write-downs. SFAS No.
156 is effective for an entity's first fiscal year beginning after
September 15, 2006. The adoption of this statement is not expected to
have a significant effect on the Company's future reported financial
position or results of operations.
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109." This interpretation
provides guidance for recognizing and measuring uncertain tax
positions, as defined in SFAS No. 109, "Accounting for Income Taxes."
FIN No. 48 prescribes a threshold condition that a tax position must
meet for any of the benefit of an uncertain tax position to be
recognized in the financial statements. Guidance is also provided
regarding de-recognition, classification, and disclosure of uncertain
tax positions. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect that this interpretation
will have a material impact on its financial position, results of
operations, or cash flows.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "Fair Value Measurements" ("FAS 157"). This
Statement defines fair value as used in numerous accounting
pronouncements, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosure related
to the use of fair value measures in financial statements. The
Statement is to be effective for the Company's financial statements
issued in 2008; however, earlier application is encouraged. The Company
has adopted FAS 157 for the nine months ended September 30, 2007.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
CONSIDERING THE EFFECTS OF PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING
MISSTATEMENTS IN CURRENT YEAR FINANCIAL STATEMENTS ("SAB 108"). SAB 108
requires companies to evaluate the materiality of identified unadjusted
errors on each financial statement and related financial statement
disclosure using both the rollover approach and the iron curtain
approach, as those terms are defined in SAB 108. The rollover approach
quantifies misstatements based on the amount of the error in the
current year financial statement, whereas the iron curtain approach
quantifies misstatements based on the effects of correcting the
misstatement existing in the balance sheet at the end of the current
year, irrespective of the misstatement's year(s) of origin. Financial
statements would require adjustment when either approach results in
quantifying a misstatement that is material. Correcting prior year
financial statements for immaterial errors would not require previously
filed reports to be amended. If a Company determines that an adjustment
to prior year financial statements is required upon adoption of
11
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
-----------------------------------------------------------------------
SAB 108 and does not elect to restate its previous financial
statements, then it must recognize the cumulative effect of applying
SAB 108 in fiscal 2006 beginning balances of the affected assets and
liabilities with a corresponding adjustment to the fiscal 2006 opening
balance in retained earnings. SAB 108 is effective for interim periods
of the first fiscal year ending after November 15, 2006. The adoption
of SAB 108 did not have an impact on the Company's consolidated
financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities - Including
an Amendment of FASB Statement No. 115 ("FAS 159"). This standard
permits entities to choose to measure many financial assets and
liabilities and certain other items at fair value. An enterprise will
report unrealized gains and losses on items for which the fair value
option has been elected at each subsequent reporting date. The fair
value option may be applied on an instrument-by-instrument basis, with
several exceptions, such as those investments accounted for by the
equity method, and once elected, the option is irrevocable unless a new
election date occurs. The fair value option can be applied only to
entire instruments and not to portions thereof. FAS 159 is effective as
of the beginning of an entity's fiscal year beginning after November
15, 2007. Early adoption is permitted as of the beginning of the
previous fiscal year provided that the entity makes that choice in the
first 120 days of that fiscal year and also elects to apply the
provisions of FASB Statement No. 157, Fair Value Measurements. The
Company has adopted FAS 159 for the nine months ended September 30,
2007.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
NOTE 2 - NET LOSS PER COMMON SHARE
-------------------------
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings
per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. In the
2007 and 2006 period, diluted loss per common share is not presented
because it is anti-dilutive.
The Company's common stock equivalents at September 30, 2007 include
the following:
Series A Cumulative Convertible Preferred Stock 500
Series B Convertible Preferred Stock 197,088
Series D Convertible Preferred Stock 2,750
Warrants 24,850
Convertible notes 445,058
----------
670,246
==========
12
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 3 - INVENTORY
---------
Inventories are stated at the lower of cost or market determined on a
"first-in, first-out" basis. The inventory balance consisted of the
following:
September 30,
2007
-------------
Resalable products $ 127,046
Proprietary brand raw materials 28,723
------------
Total: $ 155,769
============
NOTE 4 - FIXED ASSETS
------------
Property and equipment at September 30, 2007 is as follows:
Useful life
Office Equipment 5 years $ 29,565
Furniture & Fixtures 7 years 1,000
----------
30,565
Less: Accumulated depreciation (18,875)
----------
Net $ 11,690
==========
Depreciation expense for the nine months ended September 30 is as
follows:
2007 2006
-------- --------
Depreciation expense $ 4,447 $ 4,020
Depreciation expense - discontinued operations 12,668 59,013
-------- --------
Total Depreciation expense $ 17,115 $ 63,033
======== ========
NOTE 5 - CAPITALIZED FUNDING COSTS, NET
------------------------------
The table below summarizes the balance of capitalized funding costs as
of September 30, 2007:
Capitalized Funding Costs $5,027,822
Accumulated Amortization: (4,771,076)
----------
Net $ 256,746
==========
Amortization of capitalized funding cost for the nine months ended
September 30, 2007 and 2006 was $676,838 and $1,873,224, respectively.
13
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 6 - NOTE RECEIVABLE
---------------
In February 2007, the Company received a $2 million secured promissory
note in connection with the sale of the Company's subsidiary, Beverage
Network of Maryland, Inc., to Global Beverage. The note bears interest
at 6% per annum and matures in March 31, 2011. The note shall be paid
as follows:
A) $229,000 payable upon closing of sale
B) 40% of any cash proceeds received by Global from a private placement
offering in February 2007.
C) The remainder of the balance to be paid in minimum installments of
$25,000 per month commencing on September 1, 2007.
Additionally, in the event Global raises any equity capital while the
note is outstanding, Global shall pay down the note equal to 35% of the
net proceeds from such equity raise. The Company received proceeds of
$957,514 during the nine months ended September 30, 2007. The balance
of the note receivable as of September 30, 2007 was $1,086,525
(Principal and accrued interest current portion of $304,217 and long
term portion of $782,308).
NOTE 7 - INVESTMENT IN RESTRICTED MARKETABLE SECURITIES
----------------------------------------------
On February 23, 2007, the Company completed the sale of its wholly
owned subsidiary, Beverage Network of Maryland, Inc., to Global
Beverage Solutions, Inc. ("Global Beverage"). As part of the
transaction, the Company received 60,500,000 shares in Global Beverage
common stock. The Company has adopted FASB issued Statement of
Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS
157") and FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. FAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles. FAS 159 permits entities to choose to measure
many financial assets and liabilities and certain other items at fair
value.
At the time of issuance, the Company recorded the cost of the
investment at $14,520,000 representing the market value of the shares
less a 25% discount for restrictions relating to restricted stocks. The
Company revalued the investment (using the bid and ask prices taking
into account the 25% discount for restrictions relating to restricted
stocks) at September 30, 2007 which resulted in a $12,886,500 decrease
in the fair value. It was deemed by management during the nine months
ended September 30, 2007 that the decline in value is other than
temporary and accordingly has recognized the $12,886,500 decrease as a
realized loss on restricted investments in the accompanying
consolidated statements of operations.
NOTE 8 - DIVIDENDS PAYABLE
-----------------
The Series B Preferred pays cumulative semi-annual dividends of 6% per
annum, payable at the Company's option in cash, registered shares of
its common stock or additional shares of its Series B Preferred. The
Series B Preferred are mandatorily redeemable at the option of the
holder in January 2008.
In January 2007, the Company issued 3.51 shares of preferred series B
shares which converted to the payment of $175,407 of accrued dividends.
The dividends payable as of September 30, 2007 was $20,909.
14
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 9 - LOANS PAYABLE AND LOANS PAYABLE-RELATED PARTY
---------------------------------------------
XStream Beverage, Inc. ("XBI"), a principal stockholder of the Company
owned by XStream's Chairman, periodically loans money to XStream. In
March 2004, the principal shareholder advanced $25,000 to the Company;
XStream's loans from XBI are non-interest bearing demand notes with no
specified term. The balance due was $50,455 at September 30, 2007.
Loans payable at September 30, 2007 were as follows:
December 2005 - May 2006, 60 day demand notes,
Interest at 5% per month $2,250,038
April 2006, 120 day demand note,
fixed interest of $25,000 338,731
----------
Total Loans Payable $2,588,769
==========
From December 2005 to March 2006, the Company executed sixty day demand
notes to investors that resulted in $550,000 of proceeds to the
Company. The notes contain maturity dates ranging from February 23,
2006 to May 1, 2006 and contain provisions for fixed interest that
amounts to $65,000 if repaid according to terms. The notes accrue 5%
interest per month if in arrears along with a provision whereby the
note holder is entitled to an interest penalty in the amount of $50,000
per month if the notes are not repaid by August 31, 2006. Interest
expense of $1,156,197 was recognized for the nine months ended
September 30, 2007. Additionally, during the nine months ended
September 30, 2007, in connection with these notes, the Company issued
6,750 shares of its common stock for non payment of the principal and
accrued interest in August 2006 and recognized interest expense of
$90,000 during the nine months ended September 30, 2007. The total
balance of the principal notes and accrued interest as of September 30,
2007 was $2,250,038.
In April 2006, the Company executed a $250,000, 120 day demand note,
fixed interest of $25,000 due August 5, 2006. The note accrues 1.5%
interest per month after the due date. The proceeds to the Company were
$210,000 after paying a placement fee of $40,000. The Company recorded
interest expense of $42,917 for the nine months ended September 30,
2007. The total balance of the principal notes and accrued interest as
of September 30, 2007 was $338,731.
NOTE 10 - LAURUS MASTER FUND REVOLVING LINE OF CREDIT
-------------------------------------------
On March 31, 2006, the Company was issued a $4 million line of credit
with the Laurus Master Fund. ("Laurus Debt"). The line of credit bears
interest at the higher of 9% or prime plus 2% and matures in March 2009
and interest is payable monthly. The balance with accrued interest was
$1,001,590 as of September 30, 2007.
NOTE 11 - CONVERTIBLE NOTES PAYABLE
-------------------------
The balance of the convertible term notes, accrued interest and related
debt discount at September 30, 2007 is as follows:
Term note 18% per annum $ 225,000
Term note 12% per annum 1,418,500
Accrued interest 569,493
----------
$2,212,993
==========
15
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 11 - CONVERTIBLE NOTES PAYABLE (continued)
-------------------------------------
The Company secured $725,000 from investors resulting from a debt
placement offering originating in February 2005. The debt instruments
were convertible term notes at 18% per annum, with maturity dates
ranging from September 1 to November 15, 2005. As collateral for these
notes the Company pledged 250 (post-split) shares of common stock and
Theodore Farnsworth, our CEO, pledged 250 (post-split) shares of common
stock personally owned by him. Attached to the notes was a provision
whereby the purchasers were issued common stock warrants, with a five
year term and exercisable at $600 (post-split), in an amount equivalent
to the face value of each note. Should the Company default, the
exercise price of the warrants is automatically reduced by 5% for each
30 day period in which the Company remains in default. The notes also
contain, at the discretion of the holder, a conversion option
contingent upon a future secondary offering prior to maturity date. The
1,813 (post-split) warrants issued to these debt holders were valued at
$635,511 and recorded as a derivative liability at the date of their
respective issuances. During the nine months ended September 30, 2007,
the Company repaid $210,000 of the principal amount of these notes and
issued 537 shares of common stock for payment of principal including
interest of $14,007. Additionally, in September 2007, the Company
issued 239,852 shares of common stock for payment of principal
including accrued interest of $279,827 and accordingly, recognized
additional interest expense of $814,305 in connection with the issuance
of these shares. As of September 30, 2007, the Company reflected a
balance of principal and accrued interest of $225,000 and $165,246,
respectively.
In September 2005, we received a notice of default in connection with
the 18% secured promissory notes issued above by the Company from two
note holders in the aggregate principal amount of $300,000. These notes
were due and payable on September 1, 2005. The Company has repaid
$100,000 of the principal balance, however, the note holders are
demanding payment of $233,279. In August 2006 the Company received a
notice of final default judgment from the note holders demanding
$270,106 of principal and accrued interest. The Company was unable to
satisfy the entire balance due and the bank account was garnished for
$98,829 by the note holders; $45,403 was remitted to the note holders
and $53,426 was returned to the Company as it was secured through a
deposit control agreement between Wachovia Bank and Laurus Master Fund,
LTD, our senior secured lender. The Company has repaid $210,000 of the
principal amount of these two notes during the nine months ended
September 30, 2007 with a remaining balance of $45,534.
As of November 8, 2005, the Company had completed the sale of
$3,019,500 of its securities to 44 institutional and/or accredited
investors. The units consisted of 250 (post-split) principal amount of
convertible notes, warrants to purchase 250 (post-split) shares of
common stock at an exercise price of $304 (post-split) per share with a
term of five years and 10,000 shares of common stock. The maturity date
of the notes range from July 6 through November 8, 2006 and bear
interest at the rate of 12% per annum payable at the maturity date or
upon conversion of the notes if prior to the maturity date. The holders
of the notes have the option to convert the notes into common shares of
the Company at a price equal to the public offering price of common
shares of the Company in any underwritten registered public offering
involving common stock of the Company less a discount of 20%. If the
Company does not complete a public offering prior to maturity, the
holders may, at their option, convert their notes at maturity date into
common shares at a price
16
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 11 - CONVERTIBLE NOTES PAYABLE (continued)
-------------------------------------
of $304 (post-split)per share, subject to adjustment in the event of
any dilution events. In January 2007, the Company issued 977 shares of
common stock for payment of principal including interest of $26,215.
Additionally, in September 2007, the Company issued 1,512,928 shares of
common stock for payment of principal including accrued interest of
$2,017,235 and accordingly, recognized an additional interest expense
of $5,764,182 in connection with the issuance of these shares. As of
September 30, 2007, the Company reflected a balance of principal and
accrued interest due amounting to $1,418,500 and $404,247,
respectively.
Notice of Default:
The event of default under the Laurus Secured Convertible Term Note
(See Note 15 - Long Term Notes Payable), prior to being paid as of
March 31, 2006, has triggered an event of default under the 12%
unsecured promissory notes in the aggregate principal amount of
$2,994,500 which the Company issued to an aggregate of 44 purchasers in
a private placement of securities between June and November, 2005. At
the option of the holders of greater than 50% of the face amount of
these outstanding notes, the notes will become immediately due and
payable. The Company does not know at this time what action, if any,
the note holders may take.
NOTE 12 - CURRENT PORTION, LONG TERM DEBT
The current portion of long term debt and debt discount as of September
30, 2007 is as follows:
Interest bearing demand note 6% per annum, due
April 2012 (Maui Trademark) $ 212,051
Senior secured note ("Laurus")* 2,256,542
Debt discount on senior secured note ("Laurus")* (110,542)
----------
$2,358,051
==========
* (See Note 15 - Long Term Notes Payable)
On June 28, 2006, the Company received a notice of final default
judgment from the principal owner of the Maui Juice Company for failure
to pay principal payments under the terms of the Purchase and Sale
Agreement for the Maui Juice trademark. The amount in arrears is
approximately $86,250 and the Company's attorney is negotiating with
the plaintiffs for an alternative payment schedule. The balance due as
of September 30, 2007 is $212,051.
The Company issued a convertible promissory note for $2,000,000 payable
in 60 equal monthly payments and bearing 6% interest per annum in
connection with the acquisition of BNMD in July 2004. In connection
with the sale of Beverage Network of Maryland to Global in February
2007, Master Distributors, Inc. received from Global a secured
convertible promissory note in the amount of $2,000,000 and other
consideration as a novation for the initial promissory note in the same
amount issued by the Company on July 1, 2004 as part of the initial
acquisition by the Company of Beverage Network of Maryland. Global
assumed the principal balance including interest of $2,088,374 in
connection with this sale.
17
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 12 - CURRENT PORTION, LONG TERM DEBT (continued)
-------------------------------------------
The Company is in the process of obtaining its original promissory note
and formal confirmation of the novation of that obligation. It is
anticipated that this will occur no later than December 31, 2007.
On March 31, 2006, the Company issued a $4 million non convertible
secured note ("Laurus Debt"). The Laurus Debt bears interest at the
highest of 9% or prime plus 2% and matures in March 2009. Interest on
the $4 million secured note is payable monthly. Principal on the $4
million secured note is payable monthly as follows:$75,000 a month
between December 2006 and November 2007, $137,500 a month between
December 2007 and November 2008, $187,500 a month between December 2008
and March 2009, with the remaining balance due in March 2009.
Accordingly, the Company recorded $2,256,542 of this secured note as
current portion as well as the related debt discount of $110,542 (See
Note 15 - Long Term Notes Payable). The Company has not been paying the
principal payments as stipulated in the loan agreements and we do not
know what action, if any, Laurus will take at this time.
NOTE 13 - DERIVATIVE LIABILITY
--------------------
The fair value of the derivative liabilities at September 30, 2007 are
as follows:
Embedded conversion
features and liquidated damages
and freestanding warrants issued to investors-
$3,000,000 convertible note $ 11,676
$2,000,000 convertible note 8,260
Series B preferred shares 976,013
Convertible notes 54,403
Freestanding warrants issued to
placement agents-
$3,000,000 convertible note 4,485
Series B preferred shares 2,024
Convertible notes 8,021
Other warrants 17,472
-----------
$ 1,082,354
===========
The Company used the following assumptions to measure the identified
derivatives as follows:
Embedded conversion feature and liquidated damages at post-split:
At September 30,
2007
----------------
Market price: $5.25
Conversion price: $2.00-180.00
Term: 1.00-2.50 years
Volatility: 144%
Risk-free interest rate: 4.01%
Freestanding warrants
At September 30,
2007
----------------
Market price: $5.25
Exercise price: $2.00-184.00
Term: 1.25-2.75 years
Volatility: 144%
Risk-free interest rate: 4.01%
18
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 13 - DERIVATIVE LIABILITY (continued)
--------------------------------
The embedded conversion features are as follows:
Reset Feature Following Subsequent Financing- 50% for all debt
financing, which is the effective discount to market value the Company
would offer in the event we provide for a subsequent private placement
financing.
Liquidated Damage Clause: 46% and 48.75% for the convertible note and
the preferred Series B shares, respectively, which is the difference,
in months between the time the underlying shares are free-trading and
the grace period to obtain a registration statement, multiplied by the
liquidated damage rate ranging between 1.25% to 2% per month.
Prepayment Penalty: 25% for the convertible note, which is the stated
penalty rate in the event of prepayment.
Default Premium: 25% and 23% for the convertible notes and the
Preferred Series B shares, respectively, which is the stated premium in
event of default.
Incremental Default Interest Rate: 54% for the convertible notes, which
is the difference between the default rate and the stated rate,
multiplied by the term of the loan.
The variation in fair value of the derivative liabilities between
measurement dates amounted to a decrease of approximately $1.3 million
and a decrease of $7.1 million during the nine months ended September
30, 2007 and 2006, respectively.
The decrease in fair value of the derivative liabilities has been
recognized as a component of other income/expenses.
NOTE 14 - SERIES B CONVERTIBLE PREFERRED STOCK
------------------------------------
On August 2, 2004 Xstream Beverage Group, Inc. sold 43.2 shares of its
Series B Convertible Preferred Stock to nine accredited investors and
issued the purchasers Series A Common Stock Purchase Warrants and
Series B Common Stock Purchase Warrants in a private transaction exempt
from registration under the Securities Act of 1933 in reliance on
Section 4(2) of that act and Rule 506 of Regulation D. Pursuant to the
terms of the placement documents the debt instrument is convertible or
redeemable at the discretion of the holder at the end of the 42 month
term or in January 2008. The Company recognized interest expense of
$201,466 from amortization of debt discount for the nine months ended
September 30, 2007. In January 2007, the Company issued 3.51 shares of
preferred series B shares which converted to the payment of $175,407 of
accrued dividends. Additionally, in January 2007, the Company issued
4.32 shares of preferred series B shares which converted to the payment
of $215,167 of accrued liquidated damages. The balance of the Series B
Convertible preferred stock liabilities net of debt discount of $22,341
was $1,485,659 as of September 30, 2007.
19
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 15 - LONG TERM - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
-------------------------------------------------------
The following table reflects the principal amounts plus accrued
interest and debt discount as of September 30, 2007:
Senior Secured convertible note ("Laurus") $ 2,214,347
Senior secured note ("Laurus") 3,981,542
Less: Debt discount Secured convertible note ("Laurus") (1,000,000)
Less: Debt discount on senior secured note ("Laurus") (55,266)
Less: Current portion of senior secured note * (2,256,542)
------------
$ 2,884,081
============
------------
* (see Note 12 - Current Portion of Long Term Debt)
On March 31, 2006, the Company issued a $4 million secured note, a $2
million senior secured convertible note and a $4 million line of credit
("Laurus Debt"). The Laurus Debt bears interest at the highest of 9% or
prime plus 2% and matures in March 2009. Interest on the $2 million
senior secured convertible note is due at maturity, while interest on
the $4 million secured note and $4 million line of credit is payable
monthly (See Note 10- Laurus Master Fund revolving Line of Credit). The
$2 million senior convertible note is convertible at a fixed rate of
$180 (post-split) per share.
Principal on the $4 million secured note is payable monthly as follows:
$75,000 a month between December 2006 and November 2007, $137,500 a
month between December 2007 and November 2008, $187,500 a month between
December 2008 and March 2009, with the remaining balance due in March
2009. In December 2006, the Company paid $75,000 towards the principal
balance of the $4 million secured note.
Additionally, if the Company's cash flows from operating activities
adjusted for the aforementioned principal repayments ("Excess Cash
flows") exceeds the fixed principal repayments, the Company shall make
additional principal repayments of 50% of the Excess Cash Flows. In the
event of default, the Laurus Debt bears additional interest of 2% per
month, a default payment amounting to 130% of the outstanding principal
at the time of default.
The proceeds from the $4 million secured note were disbursed as
follows:
1. $3,486,192 to Laurus in satisfaction of all amounts due and
payable including principal, interest and penalties, under the
terms of a secured convertible term note dated May 14, 2006
issued to Laurus by the Company;
2. $254,500 as placement fees and recognized as capitalized funding
cost;
3. $259,308 to the Company for working capital.
The $2 million note was issued for payment of liquidated damages of
$1,170,000 and default interest of $332,563. Accordingly, the remaining
balance was recognized as debt discount in connection with the $2
million and $4 million secured note which amounted to $165,812 and
$331,625, respectively, and is being amortized to interest expense over
the term of the notes.
20
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 15 - LONG TERM - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE (continued)
-------------------------------------------------------------------
Additionally, the $2 million convertible note was stripped of its
conversion feature due to the accounting for the conversion feature as a
derivative, which was recorded using the residual proceeds method. The
conversion feature (an embedded derivative) included in this note resulted
in an additional debt discount of $1,834,188 (See Note 13 -Derivative
Liability). In accordance with EITF No. 00-19, EITF No. 00-27, Application
if Issue NO. 98-5 to Certan Convertible Instruments, the values assigned
to both the note, and conversion feature were allocated based on their fair
values. The amount allocated as a discount on the note for the value of the
conversion option is being amortized to interest expense, using the
effective interest method, over the term of the note.
Amortization of debt discount in connection with the $2 million and $4
million secured note during the nine months ended September 30, 2007
amounted to $500,001 and $82,905, respectively.
The balance of principal and accrued interest on the $2 million secured
convertible note was $2,214,348 as of September 30, 2007.
The balance of principal and accrued interest on the $4 million note was
$3,981,542 as of September 30, 2007. The Company recorded $2,256,542 of
this secured note as current portion as well as the related debt discount
of $110,542 (See Note 12- Current portion of long term debt).
To secure the payment of all obligations, Xstream Beverage Network, Inc.
"XBNI" and its subsidiaries entered into a Master Security Agreement which
assigns and grants to Laurus Funds a continuing security interest in all of
the following property now owned or at any time upon execution of the
agreement, acquired by XBNI or its subsidiaries, or in which any Assignor
now has or at any time in the future may acquire any right, title or
interest (the "Collateral"): all cash, cash equivalents, accounts, deposit
accounts, inventory, equipment, goods, documents, instruments (including,
without limitation, promissory notes), contract rights, general tangibles,
chattel paper, supporting obligations, investment property,
letter-of-credit rights, trademarks, trademark applications, patents,
patent applications, copyrights, copyright applications, tradestyles and
any other intellectual property, in each case, in which any Assignor now
has or may acquire any right, title or interest, all proceeds and products
thereof, (including, without limitation, proceeds of insurance), and all
additions, accessions and substitutions. In the event any Assignor wishes
to finance an acquisition in the ordinary course of business of any
hereafter-acquired equipment and has obtained a commitment from a financing
source to finance such equipment from an unrelated third party, Laurus
Funds agrees to release its security interest on such hereafter-acquired
equipment so financed by such third party financing source.
21
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 16 - COMMITMENTS AND CONTINGENCIES
-----------------------------
LITIGATIONS
-----------
Our subsidiary, Beverage Network of Massachusetts, Inc. was named as a
party in a legal proceeding filed by Kraft Foods, Inc. in the Superior
Court of the County of Middlesex, Commonwealth of Massachusetts with
respect to Civil Docket Number MICV2005-02503. For financial reasons
the Company was unable to contest the plaintiff's claims and on August
26, 2005 a default order was entered in favor of Kraft Foods, Inc.
against Beverage Network of Massachusetts, Inc. On October 4, 2005
Beverage Network of Massachusetts, Inc. was served with an execution
order in the amount of $91,902, which includes costs. The Company
agreed the terms of a payment plan with the plaintiff's attorney to
remit monthly payments of $14,172 until the entire balance is paid. The
remaining balance due was $20,905 as of September 30, 2007.
On September 12, 2005 the Company received a notice of default under
the terms of two secured promissory notes issued by us to investors in
the aggregate principal amount of $300,000. The notes were due and
payable on September 1, 2005. As collateral for these notes the Company
pledged 100,000 shares of restricted common stock and Theodore
Farnsworth, our CEO, pledged 100,000 shares of common stock personally
held by him. The note holders are demanding payment of $328,814. As we
have been unable to pay these amounts, the note holders are entitled to
foreclose on the collateral at any time. On March 16, 2006, an
agreement was made with the two note holders whereby the Company would
redeem the notes and make all payments due to the note holders, on or
before March 31, 2006. As consideration, the Company granted each note
holder 750,000 shares of restricted common stock along with 500,000
shares of restricted common stock to each note holder which would be
subject to release from escrow on March 31, 2006 should the notes not
be redeemed by that date. The Company failed to redeem the notes and
consequently, the shares in escrow have been released by the escrow
agent to the note holders. On July 10, 2006 the Company received a
notice of final judgment by default from the note holders in the amount
of $270,106. The remaining balance due to these note holders was
$45,575 as of September 30, 2007. The default under these notes created
another event of default under the unsecured convertible term notes in
the principal amount of $3,019,500.
In October 2005, American Beverage, Inc. filed a demand against
Beverage Network of Connecticut and Beverage Network of Massachusetts
in the amount of $69,452. We obtained an agreement for a settlement
plan with their attorneys but have not been able to abide by the terms
due to insufficient operating capital during fiscal 2006 and 2005. We
do not know what action, if any, the vendor will take at this time.
In October 2005, Good-O Beverages was awarded a judgment on the amount
of $28,500 against Beverage Network of Connecticut for product ordered
by the Company in fiscal 2004. We have made regular payments in
settlement of this amount and there is a balance of $1,904 as of
September 30, 2007.
On November 16, 2005 Beverage Network of Connecticut received a demand
letter from the attorneys representing Food Collage, Inc. for payment
of $17,068 on products ordered by the Company in 2004. Although we
agreed on a settlement with their attorneys, we have not been able to
abide by a payment arrangement due to insufficient operating capital
during fiscal 2006 and 2005.
22
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 16 - COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------------------
LITIGATIONS (continued)
-----------------------
We do not know what action, if any, the vendor will take at this time.
On December 5, 2005 Hobarama, Inc. obtained a judgment in the amount of
$16,740 against Beverage Network of Connecticut. Although we agreed on
a settlement with their attorneys, we have not been able to abide by a
payment arrangement due to insufficient operating capital during fiscal
2006 and 2005. We do not know what action, if any, the vendor will take
at this time.
On January 15, 2006 Export Development Canada obtained a judgment
against Total Beverage Network, Inc.,("BNSF") in the amount of $22,357.
We have not yet reached an agreement with the plaintiff and we do not
know what action, if any, the vendor will take at this time.
On January 25, 2006, the Company received a Civil Action Summons from
the attorney for the Maui Juice Company and Lawrence Lassek for breach
of contract, for failure to pay certain installment payments under the
terms of the Purchase and Sale Agreement with Maui Juice Company in the
amount of $55,000. Although we agreed on a settlement with Mr. Lassek's
attorneys, we have not been able to abide by a payment arrangement due
to insufficient operating capital during fiscal 2006 and 2005. We do
not know what action, if any, Mr. Lassek will take at this time.
In February, 2006 the Company received a demand letter from Ayer
Beverage, Inc. in the amount of $72,934 for payments due under the
Purchase and Sale Agreement between Ayer Beverage and Beverage Network
of Massachusetts. Under the same agreement, the Company is also
required to make payments under obligations that was assumed for $7,889
plus costs and interest to Citizen's Bank and $30,000 to Mr. Tom
MacIntire. We have reached agreement with Mr. Lehan and Ayer Beverage,
Inc. to pay the obligations due to Mr. MacIntire. The Citizen's Bank
obligation was satisfied in April 2006; the balance due to Mr.
MacIntire is $12,600 as of September 30, 2007. Although we agreed to
pay Ayer Beverage, Inc. $36,467 followed by three monthly payments
thereafter of $9,467, we have not been able to abide by the terms of
this agreement due to insufficient operating capital during 2006. We do
not know what action, if any, Mr. Lehan will take at this time.
In February 2006, Total Beverage Network ("BNSF") received a demand
from Le Natures, Inc in the amount of $17,057 for product that was
ordered in 2004 but not paid in full. We have not yet reached an
agreement with the plaintiff and we do not know what action, if any,
the vendor will take at this time.
In March of 2004, the Company contracted with Florida Employer
Solutions, Inc. "FES" to process the Company payroll and certain other
employee benefits such as health insurance. The collection and payment
of payroll taxes was an integral part of this service. In June 2005,
the Company was informed by the Internal Revenue Service and other
state tax agencies that payroll tax payments had not been remitted on
our behalf. The Company had remitted all required taxes to "FES" for
payment of payroll taxes. The principals of "FES" admitted to the
Company and to the IRS that they had not made the mandatory payments
when due. The IRS has agreed to waive certain penalties upon receiving
the principal balance due. In September 2005 the Company filed a
complaint in the 17th Judicial Circuit in and for Broward County,
Florida against "FES" along with Luis Ferrer and Maria G. Legarda,
23
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 16 - COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------------------
LITIGATIONS (continued)
-----------------------
officers of "FES". The complaint alleges breach of contract, fraud,
conversion, violation of the Florida Unfair and Deceptive Trade
Practices Act and unjust enrichment and seeks judgment against "FES"
for all damages, interests and costs. In September 2006 mediation
hearing, the Company was awarded a judgment in the amount of $679,466
against "FES". This represented the amount of principal tax along with
damages in the form of estimated penalties, interest and legal
expenses. The IRS negotiated a voluntary payment arrangement whereby
Xstream Beverage Network, Inc. ("XBNI") would remit payments of $20,000
per month until the entire balance is paid. The balance due as of
September 30, 2007 is $330,515 whereby $8,870 of this amount is related
to continuing operations and the remaining amount of $321,645 is
related to discontinued operations which was included in liabilities of
discontinued operations in the accompanying consolidated balance sheet.
Our subsidiary, Beverage Network of Massachusetts, Inc. was named as a
party in a legal proceeding filed by Fuze Beverage, LLC in the Superior
Court for the County of Middlesex, Commonwealth of Massachusetts with
respect to Civil Docket Number MICV2005-01392. For financial reasons
the Company was unable to contest the plaintiff's claims and on May 27,
2005 a default order was entered in favor of Fuze Beverage, LLC against
Beverage Network of Massachusetts, Inc. The court has entered a
judgment in the amount of $36,873 and was included in liabilities of
discontinued operations in the accompanying consolidated balance sheet.
NOTE 17 - STOCKHOLDERS' DEFICIENCY
-------------------------
PREFERRED STOCK
---------------
In January 2007, the Company issued 3.51 shares of preferred series B
shares which converted to the payment of $175,407 of accrued dividends.
Additionally, in January 2007, the Company issued 4.32 shares of
preferred series B shares which converted to the payment of $215,167 of
accrued liquidated damages. The balance of the Series B Convertible
preferred stock liabilities net of debt discount of $22,341 was
$1,486,659 as of September 30, 2007.
COMMON STOCK
------------
On July 19, 2007, the Company obtained through a vote of majority of
its stockholders the approval to decrease the authorized common shares
from 250,000,000 to 100,000,000 shares of common stock at $0.001 par
value. The Company effected a 1 for 400 reverse split of its issued and
outstanding common stock. All amounts have been retroactively adjusted
to reflect this split.
During the nine months ended September 30, 2007, the Company issued a
total of 1,819,188 shares of restricted common stock. Shares issued for
services, compensation, prepaid interest and loan fees are valued at
the closing price of the stock on the grant date and recognized over
the term of the corresponding contract and/or agreements; shares issued
for payment or conversion of notes payable including accrued interest
were determined based on the converted amount of liabilites and
additional interest expense arising from such conversion.
24
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 17 - STOCKHOLDERS' DEFICIENCY (continued)
-------------------------------------
The table below represents the activity of shares issued as of
September 30, 2007:
<TABLE>
<CAPTION>
AGGREGATE DEFERRED EXPENSE
CONSIDERATION NO. SHARES PRICE RANGE VALUE PORTION RECOGNIZED
------------------------ ---------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Services 10,006 $12 - $40 $ 295,136 $ 15,000 $ 280,136
Loan Fees 8,000 $8 - $20 115,000 25,000 90,000
Conversion of notes payable
and accrued interest 1,757,432 $4.50 - $24 8,953,434 -0- 6,578,487
Prepayment of interest in
connection with notes
payable 43,750 $16 700,000 -0- -0-
---------- ----------- ----------- --------- ----------
TOTAL: 1,819,188 N/A $10,063,570 $ 35,000 $6,948,623
---------- ----------- ----------- --------- ----------
</TABLE>
Amortization of deferred fees and consulting in connection with the
granting of stocks in fiscal 2006 and during the nine months ended
September 30, 2007 amounted to $479,086.
Amortization of prepaid interest in connection with the granting of
stocks for the prepayment of interest during the nine months ended
September 30, 2007 amounted to $240,835.
STOCK WARRANTS
--------------
A summary of the options and warrants issued as of September 30, 2007
is presented below at post-split:
Weighted
Average
Number of Exercise
Warrants Price
--------- -------
Balance at January 1, 2007 24,889 $392.00
Granted -- --
Exercised -- --
Expired (39) 30,769
--------- -------
Balance at September 30, 2007 24,850 $342.00
========= =======
Warrants exercisable at
September 30, 2007 24,850 $342.00
--------- -------
Weighted average fair value of
options granted during the period $ -
=======
25
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 17 - STOCKHOLDERS' DEFICIENCY (continued)
-------------------------------------
The following table summarizes information about stock warrants
outstanding at September 30, 2007:
Warrants Outstanding and exercisable
---------------------------------------------------------------------
Weighted Weighted
Range of Number Average Average
Exercise Outstanding and Remaining Exercise
Price exercisable Contractual Price
----------- ----------------- ----------- --------
$2,560 - 3,600 561 6.63 Years $3,093.00
1,200 - 2,080 369 6.81 Years 1,334.00
304 - 800 3,997 4.25 Years 670.00
80 24 1.50 Years 80.00
180 19,899 2.33 Years 180.00
--------- --------
24,850 $ 342.00
========= ========
NOTE 18 - SUBSCRIPTION RECEIVABLE
-----------------------
The Company has entered into a series of related agreements with a
placement agent and certain investors pursuant to which the Company has
issued 49,342 (post-split)common shares at a purchase price of $304
(post-split) per share.
The fair value of such shares at the date of issuance amounted to
$15,000,000. The price per common share was based on a discount of 20%
from the closing price of the common stock in June 2005. In connection
with the issuance of shares, the investors deposited $15,000,000 in US
government bonds, which are held by the placement agent for the
potential future benefit of the Company.
In conjunction with this investment, the Company and the placement
agent entered into an escrow agreement with the investors as well as
Cogent pursuant to which the 39,474 (post-split) shares, as well as the
bonds, were deposited with the designated escrow agent.
In addition, the Company and the placement agent entered into the
following agreements:
1. 2002 Master Agreement conforming to the form of the International
Swaps and Derivatives Association, Inc.;
2. Credit Support Annex to the Master Agreement consistent with the
ISDA form;
3. Equity swap transaction letter of agreement; and
4. Equity option transaction letter of agreement.
Under the terms of the equity swap, the 39,474 (post-split) common
shares and the bonds are maintained in escrow until the earlier of 42
months from June 2005 or such time
as all of these shares are covered by an effective registration
statement filed with the SEC. The Company, however, is not obligated to
register the common shares.
26
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 18 - SUBSCRIPTION RECEIVABLE (continued)
-----------------------------------
Pursuant to the series of arrangements with the placement agent, the
consideration that the Company will receive in connection with the
issuance of the shares to the investors will vary based on the
Company's stock price at predetermined periods ("Subscription
Receivable"). In addition, the Company unilaterally can terminate the
agreement by exercising the call option for the common shares in
escrow.
The Subscription Receivable is computed as follows: at the earliest of
the Company's completion of a registration statement covering the
49,342 (post-split) common shares of the Company or the common shares
have satisfied the holding period under Rule 144 at June 10, 2007, the
Company will be entitled to receive a quarterly amount equal to 6,579
(post-split) shares times the Company's price per share of common stock
for the last ten days of the preceding quarter. At that time, the
shares and the corresponding value of the funds are released from
escrow to the appropriate party.
As additional consideration, the Company has agreed to compensate the
private placement agent with a monthly payment amounting to LIBOR +
1.25% times $15,000,000, less the interest earned on the US Government
bonds. This amount is payable until the funds and the shares are
released from escrow. The Company estimates the aggregate payments
under this arrangement to amount to $1,178,250 over the terms of the
agreement. The Company has recorded a corresponding amount as accrual
for placement agent fees at the date of issuance of shares, which was
offset against additional paid-in capital. On May 21, 2007, the Company
executed an agreement with the placement agent for an early termination
of this equity swap transaction agreement. On May 21, 2007, the
subscription receivable amounted to $571,973 which was offset against
accrued expenses owed to the placement agent. The balance of accrued
expenses related to this transaction was $1,150,470 before the
termination which resulted in a gain on settlement of $578,497. The
decrease in subscription receivable for the nine months ended September
30, 2007 amounted to $1,082,162 and is reflected as a realized loss in
the accompanying consolidated statements of operations. The
Subscription Receivable at May 21, 2007 is based on a discount rate of
4.95% and a stock price of $12 (post-split).
Additionally, the Company exercised the call option on the 24,671
(post-split) shares of the Company's common stock at $12 (post-split)
per share which is the fair value of the shares at the date of
termination. The Company recorded treasury stock amounting to $296,053
during the nine months ended September 30, 2007.
27
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 19 - DISCONTINUED OPERATIONS
-----------------------
As described in Note 1, on December 15, 2006, the Company decided to
discontinue the operations of BNMD, BNHI, BNSF, BNMA, and BNCT. These
subsidiaries are reported as a discontinued operation and prior periods
have been restated in the Company's financial statements and related
footnotes to conform to this presentation.
On December 15, 2006, the Company signed a Letter of Intent to sell its
distribution subsidiary, Beverage Network of Maryland, Inc. ("BNMD"),
to Global Beverage Solutions, Inc. ("Global Beverage"). The Company and
Global Beverage signed an Agreement and Plan of Merger ("Merger
Agreement") dated January 31, 2007, as amended on February 23, 2007,
whereby the Company will sell its distribution subsidiary, Beverage
Network of Maryland, Inc. ("BNMD"), to Global Beverage. The Company
closed on this transaction on February 23, 2007.
The Company received 60,500,000 in Global Beverage common stock based
on the agreement and calculated at $.24 per share taking into account
the 25% discount for restrictions relating to restricted stocks on
February 23, 2007 (closing date) or $14,520,000. In addition, Global
Beverage issued a $2 million note payable to the Company (See Note 6 -
Note receivable). Global Beverage assumed the principal balance
including interest of a note payable to Masters Distributors, Inc.
amounting to $2,088,374 (See Note 12- Current portion of long term
debt). Accordingly, in connection with the sale of BNMD, for the nine
months ended September 30, 2007, the Company recorded a gain from
disposal of discontinued operations of $16,844,821.
The remaining assets and liabilities of discontinued operations are
presented in the balance sheet under the caption "Assets of
discontinued operation" and "Liabilities of discontinued operation".
The carrying amounts of the major classes of these liabilities as of
September 30, 2007 are summarized as follows:
Assets:
-------
Cash $ 289
----------
Assets of discontinued operation $ 289
==========
Liabilities:
------------
Notes payable (1) $ 89,812
Accounts payable and accrued expenses 1,079,040
----------
Liabilities of discontinued operation $1,168,852
==========
(1) Resulted from the acquisition of Beverage Network of Massachusetts
Inc. ("BNMA")
28
XSTREAM BEVERAGE NETWORK INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
NOTE 19 - DISCONTINUED OPERATIONS (continued)
-----------------------------------
The following table sets forth for the nine months ended September 30,
2007 indicated selected financial data of the Company's discontinued
operations.
Revenues $ 1,303,314
Cost of sales 1,145,180
------------
Gross profit 158,134
Operating and other non-operating expenses (166,808)
------------
Loss from discontinued operations (8,674)
Gain from disposal of discontinued operations 16,844,821
------------
Total gain from discontinued operations $ 16,836,147
============
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
financial statements and the accompanying notes appearing elsewhere in this
Annual Report.
OVERVIEW
We develop, market, and sell new age beverage category natural sodas,
fruit juices and energy drinks. Following our acquisition in April 2003 of Total
Beverage Network, our focus was to build a network of small to medium sized
beverage distribution businesses in the Eastern United States, with the goal of
becoming a leading distributor of beverage products through multiple
distribution channels. Between April 2003 and July 2004, we acquired additional
beverage distribution companies together with a natural juice company and
certain intellectual property rights related to other beverage names.
Our business strategy was predicated upon our ability to raise
sufficient working capital and acquisition funds concurrently with the expansion
of our business. While we raised capital from time to time, much of the capital
was in the form of debt and the amount of funding we received was not sufficient
for our working capital needs. During fiscal 2006, we were unable to meet our
funding requirements. As a result, we were unable to execute our acquisition
plan successfully, nor did we have sufficient capital to fund our ongoing
operations and satisfy our debt obligations. During the nine months ended
September 30, 2007, our distribution operations in New England, Hawaii,
Connecticut, and South Florida were non operational and in December 2006 we
determined to discontinue their operations. In February 2007 we sold our
Beverage Network of Maryland ("BNMD") subsidiary which historically represented
a significant portion of our revenues. The effect of the sale of this subsidiary
on our financial statements for the nine months ended September 30, 2007 is
described later in this section.
As a result of the foregoing, we have adopted the sole business
strategy to remain as developers and marketers of new age beverage category
natural sodas, fruit juices and energy drinks. We will seek distribution of our
proprietary brands to our target markets, through independent distributors and
gain access to retail chains through direct negotiation for sales of our
products with each chain at a national or semi-national level.
We are in default under various loan covenants and agreements which
could be accelerated by the parties involved as described in notes to our
consolidated financial statements (unaudited) appearing elsewhere in this
report. We do not currently have sufficient assets or resources to satisfy these
obligations at the present time and do not have immediate prospects of obtaining
such financing at this juncture. Laurus Master Fund has a security interest in
substantially all of our assets, and it is unlikely that any of the other
parties who have obligations owing to them by us would be in a position to
receive any recovery in the event that Laurus Master Fund were to exercise
dominion over our assets should it seek to exercise its remedies on the default.
We are in discussions with all of the affected parties, and while we believe we
have a reasonable relationship with all of these parties, there can be no
assurances that any of these parties might proceed to undertake legal action
against our Company or pursue other measures to enforce any remedies to which
they would be entitled.
On July 19, 2007, we obtained through a vote of majority of our
stockholders the approval to decrease the authorized common shares from
250,000,000 to 100,000,000 shares of common stock at $0.001 par value. We
affected a 1:400 reverse split of our issued and outstanding common stock. All
amounts have been retroactively adjusted to reflect this split.
SALE OF SUBSIDIARY AND DISCONTINUED OPERATIONS
On December 15, 2006, we decided to discontinue the operations of our
subsidiaries Beverage Network of South Florida ("BNSF"), Beverage Network of
Connecticut ("BNCT"), Beverage Network of Hawaii ("BNHI"), and Beverage Network
of Massachusetts ("BNMA") because of the disappointing performance of the
subsidiaries including continuing operating losses and our inability to raise
sufficient working capital to fund their operations.
30
On February 23, 2007, we sold our BNMD subsidiary to Global Beverage
Solutions, Inc. As consideration, we received 60,500,000 shares of Global
Beverage's common stock valued at $14,520,000 and a $2 million principal amount
secured promissory note maturing on March 31, 2011. The note, as amended, bears
interest at 6% per annum and is collateralized by a blanket security interest in
Global Beverage's assets under the terms of a Master Security Agreement,
guaranteed by the BNMD subsidiary (after consummation of the merger) and a
pledge to us of the stock of Global Merger Corp., the Global Beverage subsidiary
which was merged into BNMD at closing, and the stock of BNMD, both pursuant to a
Stock Pledge Agreement. The payment terms of the note, as amended, provide:
o we received $229,000 at the closing of the transaction as a
reduction in principal;
o we were entitled to receive 40% of any cash proceeds received by
Global Beverage from an offering it conducted which resulted in an
additional $463,796 principal reduction;
o we are to receive a minimum of $25,000 per month against the
outstanding principal and interest due under the note, commencing
September 1, 2007; and
o if Global Beverage raises any additional equity capital we are
entitled to receive payments towards the note in an amount equal
to 35% of the net proceeds received by Global Beverage in such
equity raise.
During the nine months ended September 30, 2007 we received $957,514 in
proceeds as payment under this note.
The note also includes a provision whereby Global Beverage may prepay
the note in whole, or in part at any time, with accrued interest to the date of
prepayment. In the event of default (as defined in the note), the interest rate
increases to 10%.
Global Beverage has agreed to file a registration statement with the
Securities and Exchange Commission to register for resale the 60,500,000 shares
of its common stock issued to us as partial consideration, which represented
approximately 49% of its outstanding common stock at the closing of the
transaction.
In connection with the sale of BNMD to Global Beverage, Global Beverage
assumed the outstanding balance of $2,088,374 due to Master Distributors, Inc.,
the company from whom we purchased the assets which comprised BNMD, under a note
we issued in July 2004 as part of our initial acquisition of the asset of Master
Distributors.
Under the terms of our loan agreements with Laurus Master Fund, Ltd.,
we have granted Laurus Master Fund a blanket security interest in all of our
assets and pledge the stock of our subsidiary corporations as collateral. The
stock and assets of our BNMD subsidiary remain subject to these terms. We have
orally advised Laurus Master Fund of the closing of the sale of BNMD to Global
Beverage and we will seek to cause Laurus Master Fund to execute such releases
as are necessary so that the asset and stock of BNMD is released from the
collateral position to the benefit of Laurus Master Fund. We are currently
engaged in dialogue with the Laurus Master Fund to obtain their formal
acceptance and release for the sale of BNMD while simultaneously restructuring
our debt obligations to them. We anticipate this to be completed before December
31, 2007.
Accordingly, BNMD, BNSF, BNCT, BNHI, and BNMA are reported as
discontinued operations, and prior periods have been restated in our financial
statements and related footnotes to conform to this presentation. In connection
with the sale of BNMD, we recorded a gain from disposal of discontinued
operations of $16,844,821 during the nine months ended September 30, 2007.
So long as we hold shares of Global Beverage under generally accepted accounting
principles we are required to "mark to market" the carrying value of these
securities on a quarterly basis. At the time of issuance, we recorded the cost
of the investment at $14,520,000 representing the market value of the shares
less a 25% discount for restrictions relating to restricted stocks. We revalued
the securities using the bid and ask prices of Global Beverage's common stock as
quoted on the OTC Bulletin Board at September 30, 2007 taking into account the
25% discount for restrictions relating to restricted stocks which resulted in a
$12,886,500 decrease in the fair value. It was deemed by management during the
nine months ended September 30, 2007 that the decline in value is other than
temporary and accordingly has recognized the $12,886,500 decrease as a realized
loss-restricted investments.
SPECIAL CONSIDERATIONS REGARDING THE INVESTMENT COMPANY ACT OF 1940
U.S. companies that have more than 100 shareholders or are publicly
traded in the U.S. and are, or hold themselves out as being, engaged primarily
in the business of investing, reinvesting or trading in securities are subject
31
to regulation under the Investment Company Act of 1940. While we do not believe
our company is an "investment company" within the scope of the Investment
Company Act of 1940, by virtue of the percentage of the value of Global Business
Solutions' securities that we hold to our total assets, under certain
circumstances we could be subject to the provisions of the Investment Company
Act of 1940.
Because Investment Company Act regulation is, for the most part,
inconsistent with our core business of marketing and selling proprietary brands
of new age beverages, we cannot feasibly operate our business as a registered
investment company. Our board of directors has adopted a resolution stating that
it is not our intent to become subject to the Investment Company Act of 1940 and
authorizing our officers to take such actions as are necessary, including the
periodic liquidation of any marketable equity securities we may own to reduce
those holdings below the threshold level as prescribed by the Investment Company
Act of 1940. Notwithstanding that we have been grated registration rights over
these securities, there are no assurances we will be able to timely liquidate a
sufficient number of these shares to reduce our holdings to a level below the
necessary threshold. If we are deemed to be, and are required to register as, an
investment company, we will be forced to comply with substantive requirements
under the Investment Company Act of 1940, including:
o limitations on our ability to borrow;
o limitations on our capital structure;
o restrictions on acquisitions of interests in associated
companies;
o prohibitions on transactions with affiliates;
o restrictions on specific investments; and
o compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations.
Given the significant number of shares that we own, it is likely that
our future sales of the Global Beverage securities will create downward pressure
on the trading price for that stock. We are unable at this time to predict the
amount of proceeds we will inevitably receive from the sale of these shares.
Results of Operations
Nine Months Ended September 30, 2007 as compared to the Nine Months Ended
September 30, 2006
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
2007 2006 $ %
------------ ------------ ------------ ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 10,147 $ 282,400 (272,253) -96%
Cost of goods sold 57,445 259,533 (202,088) -78%
------------ ------------
Gross profit (47,298) 22,867 (70,165) -307%
Expense
Marketing, selling, general and administrative 1,384,805 4,280,366 (2,895,561) -68%
------------ ------------
Total operating expense 1,384,805 4,280,366 (2,895,561) -68%
------------ ------------
Loss from continuing operations (1,432,103) (4,257,499) 2,825,396 -66%
Other Income/(Expense)
Other income -- 11,132 (11,132) NM
Interest income 44,009 -- 44,009 NM
Interest expense (10,678,227) (9,662,334) (1,015,893) 11%
Derivative liability expense -- (765,528) 765,528 -100%
Change in fair value of derivatives 1,343,924 7,144,795 (5,800,871) -81%
Settlement gain, (loss) 578,497 -- 578,497 NM
Other expenses -- (928,968) 928,968 -100%
Realized loss- restricted investment (12,886,500) -- (12,886,500) NM
Realized loss- subscription receivable (1,082,162) (12,473,190) 11,391,028 NM
------------ ------------
Total other income/(expense) (22,680,459) (16,674,093) (6,006,366) 36%
------------ ------------
Income (Loss) from continuing operations (24,112,562) (20,931,592) (3,180,970) 15%
------------ ------------
Total gain (loss) from discontinued operations 16,836,147 (437,414) 17,273,561 -3949%
------------ ------------
Net Income (loss) (7,276,415) (21,369,006) 14,092,591 -66%
------------ ------------
</TABLE>
NM: Not Meaningful
Net Sales
Our net sales for the nine months ended September 30, 2007 were $10,147
as compared to net sales of $282,400 for the nine months ended September 30,
2006, a decrease of $272,253 or approximately 96%. During the nine months ended
September 30, 2007, we spent a substantial amount of time coordinating and
facilitating the sale of our BNMD subsidiary to Global Beverage as described
above which diverted management's attention from our core business.
Additionally, the decline in sales was due do to a change in product mix between
third party and proprietary brands following the discontinuing of our
distribution operations as described above. During the nine months ended
September 30, 2007, distribution of third party brands represented approximately
34% of our sales and sales of our proprietary products represented approximately
66% of our sales. For the nine months ended September 30, 2006 sales of third
party brands and sales of our proprietary products represented approximately 99%
and approximately 1%, respectively, of our sales. While we continue to implement
our strategy of developing and growing corporate owned brands, given our lack of
working capital and other contingencies facing our company we cannot assure that
we will ever be able to successfully implement our current business strategy or
increase our revenues in future periods.
Cost of Goods Sold
Our cost of goods sold includes the cost of buying third-party beverage
products as well as the manufacturing costs of our proprietary brands and along
with warehouse and distribution costs for all products sold. The cost of goods
sold as a percentage of net sales was approximately 566% and 92%, respectively,
for the nine months ended September 30, 2007 and 2006. Our cost of sales as a
percentage of net sales increased due to a decrease in net sales during the nine
months ended September 30, 2007 while we still continuously incur warehouse
related expenses. These warehouse related expenses should decrease for the
remainder of fiscal 2007. We anticipate that our cost of goods sold should
decrease and related gross profit margins to increase, if ever, we are
successful in increasing sales of our proprietary products, which carry higher
gross profit margins.
32
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses are comprised primarily of
consulting fees, salaries and benefits of our sales and administrative staff,
marketing programs and related sales expenses. The decrease in selling, general
and administrative expenses during the nine months ended September 30, 2007 when
compared to the same period during 2006, is primarily attributable to:
* a decrease of approximately $50,000, or 60%, in marketing and selling
expenses of our parent company. The decrease during the nine months
ended September 30, 2007 was primarily due to a decrease in brand
development and promotional expenses as compared to the same period
during 2006. These expenses include promotional spending at point of
sale along with salaries and commissions of sales personnel. We
anticipate that our marketing expenses will continue to decrease for
the remainder year fiscal 2007, subject to our ability to generate
working capital.
* a decrease of approximately $1,909,000, or 89%, in compensation during
the nine months ended September 30, 2007 as compared to the same
period during 2006. The number of employees was reduced during 2007
due to insufficient working capital and in our efforts to maximize the
utilization of financial resources. Additionally, during the same
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