UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Amendment No. 2 to
FORM 10-K
x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008 or
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _______________ to ____________________
Commission File Number: 000-21247
B & D FOOD CORP.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware | 13-2622429 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) |
575 Madison Avenue
Ste 1006
New York, New York 10022-257
(Address of Principal Executive Offices)
(212) 937-8456
(Registrant’s Telephone Number)
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) had been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of December 31, 2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $250,000
As of December 31, 2008, there were 149,986,955 shares of Common Stock, par value $0.001 per share issued and outstanding.
TABLE OF CONTENTS
PART I | 1 | ||
Item 1. | Business | 1 | |
Item 1A. | Risk Factors | 4 | |
Item 1B. | Unresolved Staff Comments | 4 | |
Item 2. | Properties | 5 | |
Item 3. | Legal Proceedings | 5 | |
Item 4. | Submission of Matters to a Vote of Security Holders | ||
PART II | 5 | ||
Item 5. | Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 5 | |
Item 6. | Selected Financial Data | 6 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 6 | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 12 | |
Item 8. | Financial Statements and Supplementary Data | 12 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 12 | |
Item 9A. | Controls and Procedures | 12 | |
Item 9B. | Other Information | 13 | |
13 | |||
PART III | |||
Item 10. | Directors, Executive Officers and Corporate Governance | 14 | |
Item 11. | Executive Compensation | 15 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 16 | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 17 | |
Item 14. | Principal Accounting Fees and Services | 17 | |
PART IV | |||
Item 15. | Exhibits and Financial Statement Schedules |
Explanatory Note:
This Annual Report on Form 10-K/A is being filed as Amendment No. 2 to our Annual Report on Form 10-K which was originally filed with the Securities and Exchange Commission (“SEC”) on April 30, 2009. We are filing this form 10-K/A to restate our financial statements for the fiscal year ended December 31, 2008 to reflect an error made in the calculation of foreign exchange of an accounts payable item, to include the current portion of note receivable and to also include the reclassification of long term convertible debenture to current portion. These corrections are described in more detail in Note 20 of the Financial Statements. We have updated “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to the extent they are affected by the correction of the aforementioned errors. In addition, we have corrected certain typographical errors throughout the report and have made changes to the equity section to reflect two stock transactions, previously unrecorded during the year.
For the convenience of the reader, this Form 10-K/A sets forth the entire Form 10-K, which was prepared and relates to the Company as of December 31, 2008. However, this Form 10-K/A only amends and restates the items described above to reflect the effects of the restatement and no attempt has been made to modify or update other disclosures presented in our December 31, 2008 Form 10-K. Accordingly, except for the foregoing amended information, this Form 10-K/A continues to speak as of April 30, 2009 (the original filing date of the December 31, 2008 Form 10-K), and does not reflect events occurring after the filing of our December 31, 2008 Form 10-K and does not modify or update those disclosures affected by subsequent events. Forward looking statements made in the December 31, 2008 Form 10-K have not been revised to reflect events, results or developments that have become known to us after the date of the original filing (other than the current restatements described above), and such forward looking statements should be read in their historical context. Unless otherwise stated, the information in this Form 10-K/A not affected by such current restatements is unchanged and reflects the disclosures made at the time of the original filing.
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References in this annual report to “we,” “us,” or “our” are to B & D Food Corporation and its direct and indirect subsidiaries, unless the context specifies or requires otherwise.
SOURCES OF INFORMATION
Information contained in this annual report concerning the commercial and military portable electronics market, our general expectations concerning these industries and these markets, and our position within these industries are based on market research, industry publications, other publicly available information and on assumptions made by us based on this information and our knowledge of these industries and these markets, which we believe to be reasonable. Although we believe that the market research, industry publications and other publicly available information are reliable, including the sources that we cite in this annual report, they have not been independently verified by us and, accordingly, we cannot assure you that such information is accurate in all material respects. Our estimates, particularly as they relate to our general expectations concerning the portable electronics market, involve risks and uncertainties and are subject to change based on various factors, including those discussed under ‘‘Risk Factors.’’
All dollar amounts are in U.S. dollars unless otherwise noted.
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Words such as “will,” “may,” ‘‘expects,’’ ‘‘anticipates,’’ ‘‘approximates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘intends’’ and ‘‘hopes’’ and variations of such words and similar expressions are intended to identify such forward-looking statements. We have based these statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. These risks and uncertainties include those set forth under ‘‘Risk Factors.’’ The forward-looking statements contained in this annual report may include, among others, statements about:
· | the development and commercialization schedule for our marketing and production; |
· | our financial condition; |
· | the expected cost competitiveness of our services and products; |
· | rapid technological change; |
· | our intellectual property; |
· | the timing and availability of our products; |
· | our business strategy; and |
· | general economic conditions. |
Except for our ongoing obligations to disclose material information under the federal securities laws, we are not obligated to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur.
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PART I
Item 1. Business
History
Until October 2004, B&D Food Corp. (formerly REII Incorporated) was in the business of residential rental real estate in the state of Florida. In October 2004 we exited this business by selling our remaining revenue producing real estate rental assets.
On April 29, 2005, the Company entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Livorno Investments Ltd. (“Livorno”). Pursuant to this agreement, Livorno bought 3,609,850 shares of our common stock, representing approximately 77.5% of the total outstanding number of shares of our common stock. We changed our name from REII Incorporated to B&D Food Corp. on July 5, 2005. On July 5, 2005, our shareholders also approved an increase in the number of authorized shares of common stock, par value $.001 per share (the "Common Stock") of the Company from 20,000,000 shares to 400,000,000 shares and authorized us to issue up to 10,000,000 blank check preferred shares, par value $.001 per share. To date, we have issued no blank check preferred shares.
On July 8, 2005, the Company entered into a Share Purchase Agreement with BDFC. Pursuant to the Agreement, the Company issued 95,344,688 shares of the Company’s common stock to BDFC’s Stockholders in consideration for 99.85% of the outstanding equity stock of BDFC. These issuances were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Regulation D or Regulation S thereunder.
As additional consideration, the Company issued an 8% Convertible Promissory Note, in the amount of $10,000,000 to Livorno. The note will be due in full, together with the accrued interest, in July 2008. At Livorno’s option, the note may be converted into our common stock at the conversion rate of $0.04 per share.
The Company’s present business is to acquire, organize, develop and upgrade companies in the food industry and more specifically in the coffee industry. The Company’s management plans to integrate manufacturing and distribution operations in order to achieve a maximum return on capital.
Organizational History of BDFC
As mentioned above, on July 8, 2005, the Company entered into a share purchase agreement with BDFC and its stockholders pursuant to which we acquired 99.85% of the outstanding equity stock of BDFC.
On the date of the Agreement, BDFC’s stockholders became the controlling stockholders of our company.
BDFC was originally incorporated under the name Eastco Corporation do Brasil Ltda (Eastco) under the laws of Brazil on June 2, 1995. In May 2004, the name of Eastco was changed to Eastco de Alimentos Ltda. and registered as such with the Junta Comercial de Sao Paolo (Commercial Council). On June 28, 2005, Eastco changed its name to BDFC Brasil Alimentos Ltda. BDFC has been in the coffee manufacturing business since 1997. BDFC manufactures and purchases coffee grains, toasted and milled coffee, soluble coffee and related products for sale, import and export.
In November 1, 2000, due to adverse financial conditions, BDFC filed for a Judicial Creditor’s Agreement called “Concordata Preventiva”. This agreement consolidated BDFC’s debts and postponed all obligations to suppliers and banks for a period of time. Pursuant to a Judicial Creditor’s Agreement, Livorno gained control over BDFC. The creditor’s agreement under “Concordata Preventiva” provided for payment in two installments, the first installment of 40% to be paid in one year and the remaining 60% to be paid in two years. BDFC made payment in full consisting of one payment of $144,000 and the other of $216,000 on October 30, 2001 and November 25, 2002, respectively. On March 8, 2005, BDFC paid an additional $15,562, as required by the Brazilian courts.
To generate sufficient cash flow, on January 21, 2003, the Company’s management leased its manufacturing facility and equipment to Comercio e Industrias Brasileiras Coinbre S/A (“Coimbra”), an unrelated party. Rents received from the lease were used by BDFC to pay its past’s debts.
On March 31, 2005, pursuant to Coimbra’s parent company’s decision to cease manufacturing operations, the two parties agreed to terminate the lease agreement. According to the terms of the termination agreement, although Coimbra terminated the lease and vacated the factory, it was required to pay the full rents under the lease until the end of the year 2005 in the amount of a lump sum payment of $940,000. No other penalties were charged to Coimbra and BDFC does not owe any future obligations to Coimbra. The said amount was paid in full to us in April 2005.
In conjunction with the lease termination, we purchased from Coimbra all the coffee stock and certain equipment in the factory for an aggregate amount of $313,779. Subsequently, BDFC resumed the coffee manufacturing operations.
In September 2007, we signed a 99 year lease (with an option to renew for another 99 years) on a 5,000 hectare coffee plantation in Ethiopia to grow arabica coffee beans in one of the world’s most sought-after regions for coffee and have already commenced planting activities thereon.
In January 2008, we entered into a transaction with the Canaan Group, which consists of three companies: Socan Produtos Alimenticios Ltda. (“Socan”), Leite Canaan Industria e Comercio Ltda. (“Leite Canaan”) and Geskan Industria e Comercio Ltda. (“Geskan”) pursuant to which we were to assume full control over the Canaan Group if we were to pay within six months of January 28, 2008 (the “Payment Date”) U.S. $37,500,000.00 by delivery of (a) 50,000,000 shares issued by BDFC, if and when our share price reaches U.S. $0.75 and an average of 2.5% of total outstanding/issued shares trades on a daily basis for the six months, (b) U.S. $37,500,000 in cash prior to the Payment Date or (c) a combination of shares issued by BDFC and cash, as provided for in items "(a)" and "(b)" above until the Payment Date. We were unable to make such payment and this transaction failed to be consummated.
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On July 1, 2008, pursuant to a sale and leaseback agreement dated the same date between the Company and SBKF, the Company sold 100% of its ownership in BDFC to and leased back the Brazilian coffee roasting facility for a period of 18 years from SBKF. After offsetting the amounts to be received by the Company in payment for BDFC, the Company will have to make a net annual lease payment to SBKF of U.S. $100,000.
On October 2008 BDFC has signed a letter of intent with a Brazilian, milk products company with focus on future powdered milk production vision. The LOI signed by both parties stated our efforts and time line to complete the transaction between B&D Food Corp. ("B&D") and the Brazilian firm. Transaction is undergoing aiming to be completed by mid of 2009.
Overview of Business
The Company lease an operating coffee manufacturing facility, including all of the machinery and other equipment in this facility located in the state of Sao Paolo, Brazil through its subsidiary BDFC. We can manufacture coffee products such as roasted, ground and soluble coffee under our own brand names, such as “Brazilian Best,” “Samba Cafe,” “Torino” and “Vivenda.”and, since 2008, Coffee Canaan, Marroscos, Metropolis and Mendense Coffee. BDFC has the ability to manufacture and pack roasted and ground coffee, instant coffee and several mixtures of coffee and tea, such as cappuccino, and other products. After retooling our plant in order to start production, we commenced manufacturing in early 2008 instant coffee for companies that are selling the coffee in and outside of Brazil. To supplement and expand our coffee manufacturing activities, we are actively seeking to acquire different marketing companies in Brazil that can market our coffee.
BDFC’s facilities have the capacity to produce the following types of coffee and beverages:
· | soluble spray dried; |
· | agglomerated; |
· | roasted and ground; |
· | cappuccino; |
· | chocolate beverages; |
· | instant teas; and |
· | Milk |
The current capacity of the facility enables us to produce spray dried soluble coffee at the rate of 3,600 tons per year. The facility also maintains the capacity to produce 9,600 tons per year of roasted ground coffee and 3,600 tons per year of chocolate beverages or cappuccinos per year. We are expecting to broaden our manufacturing facilities in the future in order to be able to manufacture 600 tons per year of freeze dried coffee.
We believe that the location of the manufacturing facility is unique because it is within close proximity to the two ports in Brazil: Santos and Rio de Janeiro. We believe that this location is beneficial to our development because it will allow us to maintain lower delivery costs and lower shipping costs.
Suppliers
We purchase coffee beans from farmers and brokers in Brazilian states such as Espirito Santo, Rondonia, Minas Gerais and Sao Paulo. We intend to focus our purchases of coffee beans primarily from Brazilian growers, but we may also purchase from dealers located within the United States for coffees from around the world for the production of blended products, mainly capitalizing on our prior experience and relationships with such suppliers from when we were an operational coffee producing company between 1997 and 2002.
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The supply and price of coffee beans are subject to volatility and are influenced by numerous factors, which are beyond our control. Supply and price can be affected by many factors such as weather, politics and economics in the coffee exporting countries. Increases in the cost of coffee beans can, to a certain extent, be passed on to our customers in the form of higher prices for coffee beans and processed coffee. However, there can be no assurance that we will be successful in passing coffee price increases to customers without losses in sales volume or margin. Drastic or prolonged increases in coffee prices could also adversely impact our business as it could lead to a decline in overall consumption of coffee.
Production Process
Our productions process to generate canned or bagged coffee for public sales consists of, but is not limited to, the following processes:
· | Selection - The production of soluble coffee begins with the selection of coffees from the various producing regions of Brazil which, when properly combined, provide the quality required by our standards. |
· | Roasting - Selected and cleaned coffee beans are processed in three roasters to fully develop their qualities, assuring the maximum retention of the aroma and the appropriate roasting for each organoleptic characteristic required. |
· | Granulation - We use equipment which is specially designed to fragment the roasted beans with a minimum amount of heat, thus retaining aromatic substance and providing a more uniform distribution for granulation. |
· | Extraction - Coffee extraction is similar to homemade coffee where the roasted and ground beans are percolated in hot water. In the industrial process, the fragmented beans receive hot water in stainless steel pressure percolators. |
· | Concentration - In the concentration process, part of the water is removed from the coffee extract, using two different systems to obtain a product that meets market requirements: |
o | Multiple effects evaporator, descendant film; |
o | Thermo-centrifuge concentrator; and |
· | Spray Drying Tower - The concentrated extract is atomized into droplets in the top of a drying tower and is simultaneously submitted to a current of hot air that evaporates the water. The product collected at the base of the tower is soluble coffee, which can be transformed into agglomerated coffee by an additional step in the process. The soluble coffee obtained in this way is called “dry extract” and combines the characteristic aroma and flavor of liquid extract with the advantages of soluble powder. |
· | Agglomeration - We also produce agglomerated soluble coffee with special equipment. The process preserves the natural essence of the product, aromatized by the addition of coffee oil, producing granules of excellent solubility. |
· | Packaging - Traditional powder and dry extract, as well as agglomerated and freeze-dried coffee all have various packaging options in cans and glass jars. We intend to produce coffee tins for sale in packets of 100 and 200 grams, glass jars of coffee of 100 and 200 grams, packs of coffee of 250 grams, pouches of coffee of 40 grams and bulk boxes of fifty kilograms. We also have the ability to support other packaging options which may be demanded by our clients (such as different packaging sizes or different packaging materials). |
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Distribution
In February 2007, we sold most of our production to one customer in Brazil who is a large distributor in the Sao Paulo area that conducts extensive export activities. Due to technical problems we had to stop production and refurbish some of our factory’s equipment. Such refurbishment has been suspended and it is not clear when and if it will be resumed.
Intellectual Property
BDFC has registered the following trade names with the Instituto Nacional de Propriedade Industrial (the Brazilian equivalent of the U.S. Patent and Trademark Office):
· | Samba Café; |
· | Brasilian Best; |
· | Torino; and |
· | Vivenda. |
Such registration entitles BDFC to legal protection for the usage of these names for a period of twenty years in Brazil. We estimate that approximately 10 years of this protection remains.
Competition
The coffee industry is extremely competitive and includes several companies, which have achieved substantially greater market shares than we have and have longer operating histories, larger customer bases and substantially greater financial, development and marketing resources than we do. Our proprietary brand coffees may compete with many other branded coffees which are sold in supermarkets and specialty stores, primarily in Brazil and the United States. Examples of companies we may compete with include, but are not limited to Nestle, Companhia Cacique de Cafe Soluvel, Cafe Soluvel Brasilia and Companhia lguacu de Cafe Soluvel.
Government Regulation
Our coffee production operations are subject to various governmental laws, regulations and licensing requirements relating to customs, health and safety, building and land use and environmental protection. Our industrial facility is subject to state and local air-quality and emissions regulation. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations, then our product offerings could be limited. We believe that we (i) are in compliance in all material respects with all such laws and regulations and (ii) have obtained all material licenses and permits that are required for the operation of our business. In order for us to operate our facilities, we are required to and will maintain an annual municipality license from the municipality of Cruzeiro. BDFC has an environmental license from Cetesb, a Brazilian government corporation, with respect to pollution control in operating its manufacturing facility. Also, as a company in the food industry, BDFC is required to register with the sanitation department of Brazil which is called Departamento de Saude ANVISA and is analogous to the United States FDA. Finally, as a bona fide exporter and importer, BDFC is required to obtain a registration number from Siscomex, a foreign trade system managed by the Foreign Trade Department of the Industry and Commerce Ministry, and is subject to inspections from other statement organizations such as the Ministry of Labor, the State Secretary of Business and Finance and others.
Employees
As at December 31, 2008, the Company, including BDFC, had 2 employees.
Item 1A. Risk Factors
As a small reporting company, we are not required to provide the information required by this item.
Item 1B. Unresolved Staff Comments
Not applicable.
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Item 2. Properties
Our principal executive offices are located at 575 Madison Avenue, Suite 1006, New York, New York 10022, which we rent for $987 per month. We also have executive offices located at Rua Luis Coelho 223, 8th Floor, Conjunto 81, Cerqueira Cesar, Sao Paulo, S.P. - Brazil CEP: 01309-901 which we rent on a monthly basis for $987. We also lease a coffee plant located at Avenida Engenheiro, Penido 1142, Cruzeiro, S.P., Brazil, which consists of 16,620 square meters. BDFC pays a yearly payment of 100k for this factory. We also lease 5000 hectare coffee farm in Ethiopia ,Bdfc pays yearly pay of $802,909. We believe that our properties are adequate for our current and immediately foreseeable operating needs. We do not have any policies regarding investments in real estate, securities or other forms of property.
Item 3. Legal Proceedings
The Company is party to various claims and proceedings arising in the normal course of business. Management does not expect the disposition of these matters to have a material adverse effect on the Company’s results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fiscal year ended December 31, 2008.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the National Association of Securities Dealers OTC Bulletin Board under the symbol “BDFC.” The following quotations, which were obtained from siliconinvestor.com, reflect the high and low bids for our common stock for the periods indicated, based on inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
The high and low bid prices of our common stock for the periods indicated below are as follows:
National Association of Securities Dealers OTC Bulletin Board (1)
Quarter Ended | High | Low | ||||||
December 31, 2008 | $ | 0.02 | $ | 0.01 | ||||
September 30, 2008 | $ | 0.02 | $ | 0.02 | ||||
June 30, 2008 | $ | 0.04 | $ | 0.02 | ||||
March 31, 2008 | $ | 0.04 | $ | 0.04 | ||||
December 31, 2007 | $ | 0.03 | $ | 0.01 | ||||
September 30, 2007 | $ | 0.05 | $ | 0.05 | ||||
June 30, 2007 | $ | 0.05 | $ | 0.05 | ||||
March 31, 2007 | $ | 0.07 | $ | 0.07 | ||||
December 31, 2006 | $ | 0.085 | $ | 0.085 | ||||
September 30, 2006 | N/A | N/A | ||||||
June 30, 2006 | $ | 0.295 | $ | 0.295 | ||||
March 31, 2006 | N/A | N/A |
(1) | Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions. |
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Our common stock is issued in registered form. OTR Transfer, Inc., 1000 SW Broadway Street, Suite 920, Portland, Oregon 97205 (Telephone: 503.225.0626; Facsimile: 503.273.9168) is the registrar and transfer agent for our common stock.
Holders
On December 31, 2008, the stockholders’ list of our common stock showed _ registered stockholders and 149,986,955 shares outstanding. On December 31, 2008, the last reported sale price of our common stock on the National Association of Securities Dealers OTC Bulletin Board was $0.01 per share.
Dividends
We declared no dividends in the fiscal year ended December 31, 2008 and we do not intend to pay any cash dividends in the foreseeable future. Although there are no restrictions that limit our ability to pay dividends on our Common Stock other than as described below, we intend to retain future earnings for use in our operations and the expansion of our business.
Equity Compensation Plan Information
We currently do not have any equity compensation plans.
Item 6. Selected Financial Data
As a small reporting company, we are not required to provide the information required by this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company (formerly REII Incorporated) is a holding company, which focuses on acquiring, organizing, and developing companies in the food industry, and more specifically in the coffee industry. The Company’s management plans to integrate manufacturing and distribution operations in order to achieve maximum return on capital.
In 2005, the Company obtained a manufacturing arm by acquiring BDFC which owns and operates a coffee manufacturing plant. BDFC has the ability to manufacture and pack roasted and ground coffee, instant coffee and several mixtures of coffee and tea like cappuccino and others. Currently, the Company is focusing on selling its coffee products in South America and Eastern Europe. In addition, the Company is looking to acquire a strong marketing capability in the United States.
On September 28, 2008, pursuant to a transfer agreement dated the same date between Livorno, Daniel Ollech, Jacques Ollech and Mark Radom (the “Purchasers”), Livorno transferred its right, title and interest in, under and to the U.S. $10,000,000 promissory note dated July 8, 2005, as amended by the amendment to the promissory note dated May 7, 2007 and the second amendment to the promissory note dated September 28, 2008 to the Purchasers in accordance with their respective ownership interests in Livorno. On the same date thereof, pursuant to a preferred share subscription agreement, the Purchasers converted 100% of the outstanding principal and interest into 3,735,956 preferred shares (the “Series A Preferred shares”) of the Company (the Note having been amended on September 28, 2008 to allow for conversion into preferred shares. The Series A Preferred Shares carry the following rights:
• | Cumulative dividend of U.S. $100,000 (it being understood that the Company has no obligation to declare and pay any dividends, but that Purchasers shall receive with a right of first priority pro rata to their ownership in Livorno U.S. $100,000 for every full calendar year that elapses before the Company declares and pays a dividend prior to the Company paying any dividends to holders of its common shares); |
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• | Conversion at the option of each of the Purchasers upon 45 days’ written notice into one hundred shares of the Company’s common stock for each share of Series A Preferred Shares to be converted (it being understood that the Company shall take any action necessary to effect a conversion into shares of common stock promptly upon receiving written notice from a Purchaser); and |
• | Priority in distributions in the event of a liquidation or winding down of the Company’s business. |
On September 29, 2008, pursuant to a sale and leaseback agreement dated the same date between the Company and SBKF, the Company sold 100% of its ownership in BDFC to and leased back the Brazilian coffee roasting facility for a period of 18 years from SBKF. After offsetting the amounts to be received by the Company in payment for BDFC, the Company will have to make a net annual lease payment to SBKF of U.S. $100,000.
FINANCIAL CONDITION AND LIQUIDITY
Unless otherwise specified, all figures are as at the Balance Sheet Date.
The Company’s total assets as at December 31, 2008, as reflected in the consolidated balance sheet, totaled $ 6,190,943compared to $1,747,300 as at December 31, 2007.
The Company’s consolidated deficit in working capital amounted to $ 4,249,307and the consolidated quick ratio was 0.12%.
The Company has significantly improved its debt to equity position due to two transactions. The first was the sale of its interest in its subsidiary, BDFC. BDFC accounted for approximately $7,945,000 of the total debt of the Company. The second was to convert $14,943,824 of the convertible promissory notes to preferred shares. This has resulted in the decrease to the Company's total debt of approximately $18,300,000. The Company’s remaining short-term indebtedness was approximately $669.
The Company’s remaining long-term financing is mainly based on convertible promissory notes in the aggregate amount of $3,755,084, issued to third parties.
The shareholders’ equity as at December 31, 2008 totaled $ 9,029 compared to a shareholders’ deficit of $19,330,336 as at December 31, 2007. The increase in shareholders’ equity is derived primarily from the transactions described above less the operating losses during the twelve month period in the aggregate amount of $ $5,727,500.
One of the Company’s shareholders provided a personal guarantee to two banks in Brazil in connection with loans received from those banks by BDFC. The Company had accrued a guarantee fees payable to the shareholder for providing the guarantee, in the amount of $21,250 per quarter. This fee accrual terminated on the sale of BDFC on July 1, 2008.
The Company will need to obtain additional debt or equity financing in the near term in order to have sufficient working capital to execute its business plan or continue as a going concern. The Company is in the process of seeking such financing; however, there is no assurance that it will be able to obtain such financing on satisfactory terms or at all.
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FISCAL YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE FISCAL YEAR ENDED DECEMBER 30, 2008
Net Income (Loss)
The Company’s consolidated net income for the fiscal year ended December 31, 2008 amounted to $3,840,906 compared to a consolidated net loss of $5,242,158 for the previous year.
The net income for the fiscal year ended December 31, 2008 increased in comparison to the previous year mainly due to the Company's profit on the sale of the net liabilities of BDFC.
Revenue
The Company was not in operations and therefore did not generate any revenue for the fiscal year ended December 31, 2008, compared to $78,757 for the previous year.
The revenue from coffee production through the fiscal year ended December 31, 2008 was Nil in light of the Company’s management strategy to make sales through a targeted marketing arm to be acquired in the near future. The Company’s operations are suspended at this moment due to changes in the structure of its operations, including the refurbishment of its factory in Brazil, which is expected to be completed by the fourth quarter of 2009.
Cost of Revenues
As with the Company’s revenues through the fiscal year ended December 31, 2008, the cost of revenues was minimal.
General and Administrative Expenses
The consolidated general and administrative expenses for through the fiscal year ended December 31, 2008 amounted to $5,377,379, compared to consolidated general and administrative expenses of $2,244,304 for the previous year.
The increase in general and administrative expenses was attributable primarily to the additional professional services and traveling expenses of the management of the Company in connection with the suspension of the Company’s operations incurred in the previous year.]
Financial Expenses
The consolidated financial expenses for the fiscal year ended December 31, 2008 amounted to $2,589,248, compared to consolidated financial expenses of $2,692,622 for the previous year.
The decrease in financial expenses through the fiscal year ended December 31, 2008 results from decreased interest and financing charges related to the convertible notes incurred over the past 12 months.
Inflation
Our results of operations have not been affected by inflation and management does not expect that inflation risk would cause material impact on its operations in the future.
Seasonality
Our results of operations are not materially affected by seasonality and we do not expect seasonality to cause any material impact on our operations in the near future.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
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Principles of Consolidation—The consolidated financial statements include the accounts of the Company, it's wholly owned subsidiary BDFC Brazil Alimentos LTDA (“BDFC”). All material intercompany accounts, transactions and profits have been eliminated in consolidation.
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include accrued warranty costs, as well as revenue and costs recorded under the percentage-of-completion method. Actual results could differ from those estimates.
Cash Equivalents—The Company classifies any highly liquid investments purchased with a maturity of three months or less as cash equivalents.
Accounts Receivable—Accounts receivable are carried at original invoice amount less an estimate for doubtful receivables based on a review of all outstanding amounts at year end. Management determines the allowance for doubtful accounts by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.
Property and Equipment—Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is provided for using straight-line methods over the estimated useful lives of the respective assets, usually five years.
Revenue Recognition—Substantially all of the Company’s revenues are on contracts recognized using the percentage-of-completion method, measured by the ratio of costs incurred to date to estimated total costs for each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as supplies and travels. General and administrative costs are charged to expense as incurred. Losses on contracts are recorded in full as they are identified.
Share-Based Payments—The Company adopted Statement of Financial Accounting Standards No 123(R), “Share-Based Payments” (“SFAS No. 123R”) effective January 1, 2006. SFAS No. 123R amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No.123R generally requires such transactions be accounted for using a fair-value-based method. The Company has never issued any stock options to any employees.
Income Taxes—Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is established against deferred tax assets if it is more likely than not that all, or some portion, of such assets will not be realized.
Effective January 1, 2007, we adopted Financial Accounting Standard Board (FASB) Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts.
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Impairment of Long-Lived Assets—The Company adopts SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The Company periodically evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset were less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value.
The assumptions used by management in determining the future cash flows are critical. In the event these expected cash flows are not realized, future impairment losses may be recorded. Management has determined that no impairments of long-lived assets currently exist.
Issuance of Shares by Subsidiaries—Sales of stock by a subsidiary is accounted for in accordance with Staff Accounting Bulletin Topic 5H, “Accounting for Sales of Stock by a Subsidiary.” The Company has adopted the capital transaction method to account for subsidiary stock sales. Accordingly, increases and decreases in the Company’s share of its subsidiary’s net equity resulting from subsidiary stock transactions are recorded on the Consolidated Balance Sheets and Consolidated Statements of Stockholders’ Equity as increases or decreases to Additional paid-in capital.
Concentrations of Credit Risk—Financial instruments that subject the Company to credit risk consist primarily of accounts receivable, which are concentrated in a small number of customers in the Chinese governments. The Company performs ongoing credit evaluations of its customers. To date, there has been no bad debt incurred.
Statement of Cash Flows—In accordance with SFAS No. 95, "Statement of Cash Flows", cash flows from the Company's operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Translation Adjustment—The Brazilian Real ("Real"), the national currency of Brazil, is the primary currency of the economic environment in which the operations of BDFC are conducted. The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes.
The Company translates BDFC's assets and liabilities into U.S. dollars using the rate of exchange prevailing at the balance sheet date, and the statement of income is translated at average rates during the reporting period. Adjustments resulting from the translation of BDFC's financial statements from Real into U.S. dollars are recorded in stockholders' equity as part of accumulated comprehensive gain - translation adjustments. Gains or losses resulting from transactions in currencies other than Real are reflected in income for the reporting period.
Comprehensive Income—Comprehensive income includes accumulated foreign currency translation gains and losses. The Company has reported the components of comprehensive income on its statements of stockholders’ equity.
Fair Value of Financial Instruments— The carrying amounts of cash and cash equivalents, accounts receivable, deposits and accounts payable approximate their fair value because of the short maturity of those instruments.
New Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, FASB issued Staff Position 157-2, Effective Date of FASB Statement No. 157, (FSP 157-2) which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. Most of the provisions of SFAS No. 159 apply only to entities that elect the fair value option. However, the amendment to SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.
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In June 2007, the FASB ratified Emerging Issue Task Force (“EITF”) Issue No. EITF 06-11 Accounting for the Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 provides that tax benefits associated with dividends on share-based payment awards be recorded as a component of additional paid-in capital. EITF 06-11 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007.
In June 2007, the FASB issued EITF Issue No. 07-03, Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (“EITF 07-03”). EITF 07-03 provides guidance on whether non-refundable advance payments for goods that will be used or services that will be performed in future research and development activities should be accounted for as research and development costs or deferred and capitalized until the goods have been delivered or the related services have been rendered. EITF 07-03 is effective for fiscal years beginning after December 15, 2007.
In December 2007, the FASB issued SFAS 141R, “Business Combinations - Revised 2007,” which replaces FASB Statement No. 141, “Business Combinations.” SFAS 141R establishes principles and requirements intending to improve the relevance, representational faithfulness, and comparability of information that a reporting entity provides in its financial reports about a business combination and its effects. This is accomplished through requiring the acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. This includes contractual contingencies only if it is more likely than not that they meet the definition of an asset of a liability in FASB Concepts Statement No. 6, “Elements of Financial Statements - a replacement of FASB Concepts Statement No. 3.” This statement also requires the acquirer to recognized goodwill as of the acquisition date, measured as a residual. However, this statement improves the way in which an acquirer’s obligations to make payments conditioned on the outcome of future events are recognized and measured, which in turn improves the measure of goodwill. This statement also defines a bargain purchases as a business combination in which the total acquisition-date fair value of the consideration transferred plus any noncontrolling interest in the acquiree, and it requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. This therefore improves the representational faithfulness and completeness of the information provided about both the acquirer’s earnings during the period in which it makes a bargain purchase and the measures of the assets acquired in the bargain purchase.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51,” which establishes accounting and reporting standards to improve the relevance, comparability, and transparency of financial information in its consolidated financial statements. This is accomplished by requiring all entities, except not-for-profit organizations, that prepare consolidated financial statements to (a) clearly identify, label, and present ownership interests in subsidiaries held by parties other than the parent in the consolidated statement of financial position within equity, but separate from the parent’s equity, (b) clearly identify and present both the parent’s and the noncontrolling interest’s attributable consolidated net income on the face of the consolidated statement of income, (c) consistently account for changes in parent’s ownership interest while the parent retains it controlling financial interest in subsidiary and for all transactions that are economically similar to be accounted for similarly, (d) measure of any gain, loss or retained noncontrolling equity at fair value after a subsidiary is deconsolidated, and (e) provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This Statement also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods on or after December 15, 2008. The Company does not expect the adoption of this pronouncement to have a material impact on its financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company believes that the adoption of SFAS No. 161 will not have a material impact on its consolidated financial statements.
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Off-Balance Sheet Arrangements
We do not have any off-balance arrangements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is seeking to operate primarily in Brazil, making it susceptible to changes in the economic, political, and social conditions in Brazil. Brazil has experienced political, economic, and social uncertainty in recent years, including an economic crisis characterized by exchange rate instability and Brazilian Real devaluation, increased inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemployment. Under its current leadership, the Brazilian government has been pursuing economic stabilization policies, including the encouragement of foreign trade and investment and an exchange rate policy of free market flotation. In the last year, there was an improvement in the Brazilian economic environment. Nevertheless, no assurance can be given that the Brazilian government will continue to pursue these policies, that these policies will be successful if pursued or that these policies will not be significantly altered. In case of a decline in the Brazilian economy, political or social problems or a reversal of Brazil's foreign investment policy it is likely that any such change will have an adverse effect on the Company's results of operations and financial condition. Additionally, inflation in Brazil may lead to higher wages and salaries for employees and increases in the cost of raw materials, which would adversely affect the Company's profitability.
Risks inherent in foreign operations include nationalization, war, terrorism, and other political risks and risks of increases in foreign taxes or changes in U.S. tax treatment of foreign taxes paid and the imposition of foreign government royalties and fees.
The Company does not own, hold or trade in any market risk sensitive instruments or any other instruments of any kind.—please confirm.
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and corresponding notes thereto called for by this item appear at the end of this document commencing on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (collectively, the "Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures for us. Based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing of this annual report, and subject to the limitations noted hereinafter, the Certifying Officers have concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in this annual report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure.
The Certifying Officers have also indicated that, except as set forth above, there were no significant changes in our internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.
Management’s annual report on internal control over financial reporting.
Management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our management evaluated, under the supervision and with the participation of our Chief Executive Officer, the effectiveness of our internal control over financial reporting as of the most recent fiscal year ended December 31, 2008.
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Based on its evaluation under the framework in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that our internal control over financial reporting was not effective as of December 31, 2008, due to the existence of significant deficiencies constituting material weaknesses, as described in greater detail below. A material weakness is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In the course of making our assessment of the effectiveness of internal controls over financial reporting, we identified one material weakness in our internal control over financial reporting. This material weakness consisted of inadequate staffing within the accounting operations of our Company. The small number of employees who are responsible for accounting functions (more specifically, one) prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews.
This annual report does not include an attestation report by the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
Item 9B. Other Information
As of December 31, 2008, the Company is currently in default on its interest obligations under the following Notes:
EGFE | 301,333 | |||
Kobi Livine | 127,101 | |||
Rockwell | 126,191 | |||
Judy Petel | 121,114 | |||
Cinthia Roice | 119,542 | |||
Hila Avisar | 139,440 | |||
Avi sagi | 132,960 | |||
Ofrer S.A. | 117,478 | |||
1,185,159 |
The Company is in the process of negotiating such default with the relevant Noteholders, but no assurances may be given as to the outcome of such negotiations or any actions that the Noteholders may take to enforce their rights under the Notes.
Item 10. Directors, Executive Officers and Corporate Governance
During 2005, the company was reorganized and recapitalized (as discussed in Part I of this report) and changed its business from residential real estate (under the name REII Incorporated) to the food industry, and more specifically, the coffee and beverage industry. As part of these changes, the composition of our board of directors and our executive officers changed. On April 29, 2005, as a result of certain reorganization and recapitalization transactions, Mr. Daniel Ollech joined the board of directors and also became the company’s President, Chief Executive Officer, Secretary and Treasurer. On the same date, Ms. Karen Ricketts, former Vice President, Secretary and director resigned from her officer positions and from the board of directors and Mr. Garfield H. Ricketts, former director, resigned from the board of directors. Ms. Una M. Ricketts, former President, Chief Executive Officer, Treasurer and director, resigned from her officer positions on April 29, 2005 and from the board of directors on May 31, 2005.
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After the company’s reorganization the following persons became directors and officers of the company. On May 31, 2005, Valquiria Cunha was elected a director of the company. On January 12, 2006, Messrs. Yaron Arbell, Jacques Ollech and Yossi Haras became officers of the company and Mr. Daniel Ollech ceased being the company’s chief executive officer and treasurer. Ms. Cunha resigned from the board of directors on March 5, 2006, and on March 31, 2007 Mr. Haras resigned from his position as an officer and was replaced by Mr. Daniel Ollech. On February 13, 2008, Mr. Arbell resigned from his position as an officer and was replaced by Daniel Ollech. Our directors and executive officers, their ages, positions held, and duration as such, are listed in the following table. All directors of our company hold office until the next annual meeting of the stockholders or until their successors have been elected and qualified. The officers of our company are appointed by our board of directors and hold office until their death, resignation or removal from office.
Position Held | Date First Elected or Appointed | ||||
Daniel Ollech | President and Chairman of the Board | April 29, 2005 | |||
Daniel Ollech | Chief Financial Officer | March 31, 2007 | |||
Daniel Ollech | Chief Executive Officer | January 12, 2006 | |||
Jacques Ollech | Executive Vice President and Director | July 12, 2006 |
Business Experience
The following is a brief account of the education and business experience of each director and executive officer during at least the past five years , indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he was employed.
Daniel Ollech has been our Chairman of the Board and President since April 29, 2005 and is currently the Chief Executive Officer and the Chief Financial Officer. From April 29, 2005 until January 12, 2006, Mr. Daniel Ollech was also the company’s Chief Executive Officer, Treasurer and Secretary. From 2003 to the present, Mr. Daniel Ollech has served as a director of Livorno Investments S.A. (“Livorno”), an international holding company with interests in various world trading companies in the areas of coffee, sugar, and oil. Since 2001 Mr. Daniel Ollech has also been a Director (which in Brazil equates to an executive officer), of UCS Group, a company which provides financing through factoring and securitizations. Prior to 2001, Mr. Daniel Ollech managed his own investment portfolio. Mr. Daniel Ollech graduated with a degree in marketing from Escola Superior de Marketing, in 1980.
Jacques Ollech has been a Director and our Executive Vice President since January 12, 2006. Mr. Jacques Ollech has 20 years of experience in the coffee industry as a manufacturer, broker and distributor in Brazil, Russia, China, Europe and Israel. From 1991 to the present, Mr. Jacques Ollech has served as a director of the Livorno.
Significant Employees
We do not currently have any other significant employees aside from the named executive officers (as defined under the caption “Executive Compensation” in Item 10 of this report).
Family Relationships
Daniel Ollech, our chairman, president, Chief Executive Officer and Chief Financial Officer, and Jacques Ollech, our Executive Vice President and a director, are brothers.
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Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
(1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
(2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and
(4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Committees
The company does not currently have a standing audit, nominating or compensation committee of the board of directors, or any committee performing similar functions. The company's board of directors currently performs the functions of audit, nominating and compensation committees.
Item 11. Executive Compensation
No salary or other monetary compensation of any nature whatsoever has been made to any executive officers of the Company since 2005.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers.
Stock Incentive Plan
On September 19, 2006 the Board of Directors authorized the adoption of a global share and option plan for the company (the “Global Share and Option Plan”).
Option/ SAR Grants
There were no grants of options or grant of restricted stock to executive officers or employees in 2008.
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Aggregated Option/ SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/ SAR Values
No stock options were exercised by the named executive officers in 2008.
Long-Term Incentive Plan
There were no awards made to the executive officers in 2008.
Directors’ Compensation
The directors currently receive no compensation for acting as directors.
Employment Contracts and Termination of Employment and Change in Control Arrangements
On March 27, 2007 the Company announced the resignation of Mr. Yossi Haras from his positions as the Company’s chief financial officer and secretary and the nomination of Mr. Daniel Ollech in his place. On February 13, 2008, the Company announced the resignation of Mr. Yaron Arbell from his position as the Company’s chief executive officer and the nomination of Mr. Daniel Ollech in his place.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Principal Stockholders
The following table sets forth, as of December 31, 2008 , certain information with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated.
Amount and Nature | Percentage | |||||||
of Beneficial | of | |||||||
Ownership | Class(2) | |||||||
Name and Address of Beneficial Owner(1) | ||||||||
5% Shareholders | ||||||||
Livorno Investments S.A. (3) Rua Cotoxo 611-cj63 Sao Paulo-SP- Brazil 05021-000 | 91,754,538 | (4) | 48.1 | % | ||||
IDIS Holdings LLC | 15,000,000 | 10.0 | % | |||||
Emerdale Enterprises Ltd c/- Trust Services, Chamer strasse 12C, PO Box 4436, ZUG Switzerland, 6304 | 8,000,000 | 5.3 | % | |||||
Rolf Investments LTD c/- Trust Services, Chamer strasse 12C, PO Box 4436, ZUG Switzerland, 6304 | 7,200,000 | 4.8 | % | |||||
Directors and Executive Officers | ||||||||
Daniel Ollech | 500,000 | (5) | 0.4 | % | ||||
Jacques Ollech | 500,000 | (6) | 0.4 | % | ||||
All Directors and Executive Officers as a Group (4 Persons) | 1,000,000 | (7) | 0.8 | % |
(1) | Each of our directors and executive officers may be reached at 575 Madison Avenue, Suite 1006, New York, New York 10022-2511. |
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(2) | Based on 149,986,955 shares of common stock outstanding as at December 31, 2008. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person. |
(3) | Daniel Ollech, our President and chairman, and Jacques Ollech, our Executive Vice President and director, each are a director of, and own one-third of, Livorno Investments Ltd. The remaining one-third is owned by Maurizio Levi. No one person has voting or investment control over the shares in the company held by Livorno Investments Ltd. |
(4) | Includes 54,977,738 shares held directly by Livorno. Livorno also holds an 8% Convertible Promissory Note in the principal amount of $10,000,000 due on July 8, 2008, which can be converted (principal and accumulated interest) at any time into shares of our Common Stock at a conversion rate of $0.04 per share. On July 19, 2006 the Company issued 4,000,000 shares to Livorno due to accumulated interest on the said note. On September 2, the Company issued 20,000,000 shares to Livorno due to accumulated interest on the said note. |
(5) | Mr. Daniel Ollech holds 500,000 shares directly issued to him on January 18, 2007 in consideration for his personal guarantees to two banks in Brazil in connection with loans received from those banks by BDFC. In addition, Mr. Daniel Ollech owns one-third of Livorno Investments S.A. Livorno beneficially owns 107,644,405 shares (which includes shares issuable upon the conversion of the 8% Convertible Promissory Note). See note 3 for additional information. |
(6) | Mr. Jacques Ollech holds 500,000 shares directly issued to him on January 18, 2007 in consideration for his personal guarantees to two banks in Brazil in connection with loans received from those banks by BDFC. In addition, Mr. Jacques Ollech owns one-third of Livorno Investments S.A. Livorno beneficially owns 107,644,405 shares (which includes shares issuable upon the conversion of the 8% Convertible Promissory Note). See note 3 for additional information. |
(7) | See also 3 and 4 above regarding shares beneficially owned by Livorno. |
Equity Compensation Plan Information
The company has established global equity compensation plans.
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.
Item 13. Certain Relationships, Related Transactions and Director Independence
Other than as disclosed in Note 19 to the Consolidated Financial Statements included herein, we have not been a party to any transaction, proposed transaction, or series of transactions in which the amount involved exceeds $60,000, and in which, to our knowledge, any of our directors, officers, five percent beneficial security holder, or any member of the immediate family of the foregoing persons has had or will have a direct or indirect material interest, except that Daniel Ollech, our President and chairman, and Jacques Ollech, our Executive Vice President and director, each own one-third of Livorno Investments, Ltd. to whom we issued a convertible note in the principal amount of $10,000,000. The note bears interest at a rate of 8% per annum and principal and interest can be converted at any time prior to July 8, 2008 into our common stock at a conversion rate of $0.04 per share. In addition, the salaries of the executive officers have been paid in 2006 through an affiliate of Livorno Investments S.A.
Item 14. Principal Accounting Fees and Services
To be disclosed in an amended filing to this 10-K report.
The Company does not have an audit committee and, as such, has not reviewed, considered or otherwise approved any such fees.
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EXHIBITS [to be updated]
Number | Title | |
10.1 | 8-K Report re Entry into a Material Definitive Agreement, September 28, 2008* | |
10.2 | First Amendment to the Series A Preferred Shares Subscription Agreement* | |
10.3 | BDFC Leaseback Agreement* | |
31.1 | Certification by Daniel Ollech, Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification by Daniel Ollech, Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification by Daniel Ollech, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification by Daniel Ollech, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Filed as an exhibit to the Form 10-K filed with the SEC on April 15, 2009
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in New York, New York, on the 10th day of November 2009.
B & D FOOD, CORP. | ||
By: /s/ Daniel Ollech | ||
Daniel Ollech | ||
Chief Executive Officer |
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B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
B&D FOOD CORP. AND SUBSIDIARY
December 31, 2008 and 2007
CONTENTS
Page | |
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-1- F-2 |
CONSOLIDATED FINANCIAL STATEMENTS | |
Consolidated Balance Sheets | F-3 - F-4 |
Consolidated Statements of Operations and Comprehensive Loss | F-5 |
Consolidated Statements of Stockholders' Deficit | F-6 |
Consolidated Statements of Cash Flows | F-7 |
Notes to the Consolidated Financial Statements | F-8 - F-25 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
B&D Food Corp.
We have audited the accompanying consolidated balance sheets of B&D Food Corp. (incorporated in the state of Delaware in the United States of America) as of December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive loss, Stockholders’ deficit and cash flows for the years then ended (all expressed in United States dollars). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable, assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of B&D Food Corp. as of December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has a substantial working capital deficiency and Stockholders’ deficit as at December 31, 2007. These conditions raise substantial doubt about its ability to continue as going concern. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
“SCHWARTZ LEVITSKY FELDMAN LLP” |
Toronto, Ontario, Canada | Chartered Accountants |
May 15, 2008 | Licensed Public Accountants |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
B&D Food Corp.
We have audited the accompanying consolidated balance sheets of B&D Food Corp. (incorporated in the state of Delaware in the United States of America) as of December 31, 2008, and the related consolidated statements of operations and comprehensive loss, Stockholders’ deficit and cash flows for the years then ended (all expressed in United States dollars). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the Standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable, assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of B&D Food Corp. as of December 31, 2008 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has a substantial working capital deficiency and Stockholders’ deficit as at December 31, 2008. These conditions raise substantial doubt about its ability to continue as going concern. The consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.
As discussed in Note 20 to the financial statements, various items have been restated to reflect the corrections, made, as a result of the subsequent error discoveries. We also audited the adjustments described in Note 20 that were applied to restate the December 31, 2008 financial statements. In our opinion, these adjustments are appropriate and have been properly applied.
“Fazzari and Partners LLP” |
Vaughan, Ontario, Canada | Chartered Accountants |
April 30, 2009 expect for Note 20, as to which the date is Nov 18, 2009. | Licensed Public Accountants |
F-2
B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(Expressed in United States Dollars)
2008 (Restated) | 2007 | |||||||||||
ASSETS | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | - | $ | 3,175 | ||||||||
Accounts receivable - trade, net of allowance for doubtful accounts of $Nil (2007 - $47,787) | - | 19,213 | ||||||||||
Note receivable- current portion | 126,424 | - | ||||||||||
Prepaid and sundry assets | 12,885 | 4,689 | ||||||||||
Advances to related parties | 442,800 | - | ||||||||||
Total Current Assets | 582,109 | 27,077 | ||||||||||
Long-Term Assets | ||||||||||||
Other receivables | 5,606,817 | 500 | ||||||||||
Property, plant and equipment, net | 6 | 2,017 | 1,719,723 | |||||||||
Total Long-Term Assets | 5,608,834 | 1,720,223 | ||||||||||
Total Assets | $ | 6,190,943 | $ | 1,747,300 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3
B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
AS AT DECEMBER 31
(Expressed in United States Dollars)
2008 (Restated) | 2007 | |||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Current Liabilities | ||||||||||||
Bank loans | 7 | $ | 669 | $ | 1,380,572 | |||||||
Accounts payable | 8 | 379,867 | 611,689 | |||||||||
Accrued liabilities and other payables | 9 | 2,046,294 | 5,198,371 | |||||||||
Long-term debt - current portion | 10 | - | 1,213,938 | |||||||||
Convertible debentures - current portion | 11 | 2,404,586 | 11,472,557 | |||||||||
Total Current Liabilities | 4,831,416 | 19,877,127 | ||||||||||
Long-Term Liabilities | ||||||||||||
Allowance for severance pay | - | 144,582 | ||||||||||
Long-term debt | 10 | - | 32,453 | |||||||||
Convertible debentures | 11 | 1,350,498 | 1,023,474 | |||||||||
Total Long-Term Liabilities | 1,350,498 | 1,200,509 | ||||||||||
Total Liabilities | 6,181,914 | 21,077,636 | ||||||||||
Commitments and Contingencies | 12 | |||||||||||
Going Concern | 2 | |||||||||||
Stockholders' Equity | 13 | |||||||||||
Preferred shares of $ 0.001 par value; Authorized: 10,000,000 shares; Issued and outstanding: 3,735,956 shares | 373,596 | - | ||||||||||
Additional paid-in capital - preferred shares | 14,570,228 | - | ||||||||||
Common shares of $ 0.001 par value; Authorized: 400,000,000 shares; Issued and outstanding: 149,986,955 | 149,987 | 148,987 | ||||||||||
Additional paid-in capital - common shares | 2,711,769 | 2,682,769 | ||||||||||
Stock to be issued | 145,000 | |||||||||||
Accumulated other comprehensive loss | - | (379,635 | ) | |||||||||
Accumulated deficit | (17,941,551 | ) | (21,782,457 | ) | ||||||||
Total Stockholders' Equity | 9,029 | (19,330,336 | ) | |||||||||
Total Liabilities and Stockholders' Equity | $ | 6,190,943 | $ | 1,747,300 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in United States Dollars)
2008 (Restated) | 2007 | |||||||
REVENUES | $ | - | $ | 78,757 | ||||
COST OF GOODS SOLD | 80,824 | 244,756 | ||||||
GROSS LOSS | (80,824 | ) | (165,999 | ) | ||||
EXPENSES | ||||||||
Management and directors fees | 4,547,260 | - | ||||||
Office and general | 830,119 | 2,244,304 | ||||||
Rent and occupancy costs | 200,727 | - | ||||||
Depreciation | 68,570 | 142,284 | ||||||
TOTAL OPERATING EXPENSES | 5,646,676 | 2,386,588 | ||||||
LOSS FROM OPERATIONS | (5,727,500 | ) | (2,552,587 | ) | ||||
Financial | (2,589,248 | ) | (2,692,622 | ) | ||||
Other income, net | 188,268 | 3,051 | ||||||
Gain on sale of subsidiary interests | 11,969,386 | - | ||||||
INCOME (LOSS) BEFORE TAXES | 3,840,906 | (5,242,158 | ) | |||||
Taxes | - | - | ||||||
NET INCOME (LOSS) | 3,840,906 | (5,242,158 | ) | |||||
COMPREHENSIVE INCOME (LOSS) | $ | 3,840,906 | $ | (5,242,158 | ) | |||
EARNINGS (LOSS) PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | $ | 0.03 | $ | (0.04 | ) | |||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | 149,661,818 | 125,396,355 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Expressed in United States Dollars)
Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||||||||||||||||||
Number | Amount | Additional Paid-In Capital | Number | Amount | Additional Paid-In Capital | Shares to be issued | Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||
Balance January 1, 2007 | - | $ | - | $ | - | 104,250,000 | 104,250 | $ | 1,199,756 | $ | (379,635 | ) | $ | (16,540,299 | ) | $ | (15,615,928 | ) | ||||||||||||||||||||||
Issuance of shares for services | - | - | - | 24,736,955 | 24,737 | 498,013 | - | - | 522,750 | |||||||||||||||||||||||||||||||
Warrants granted for services | - | - | - | - | - | 205,000 | - | - | 205,000 | |||||||||||||||||||||||||||||||
Conversion of convertible note with parent company (note 13) | - | - | - | 20,000,000 | 20,000 | 780,000 | - | - | 800,000 | |||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
Net loss for the period | - | - | - | - | - | - | - | (5,242,158 | ) | (5,242,158 | ) | |||||||||||||||||||||||||||||
Balance, December 31, 2007 | - | $ | - | $ | - | 148,986,955 | $ | 148,987 | $ | 2,682,769 | $ | (379,635 | ) | $ | (21,782,457 | ) | $ | (19,330,336 | ) | |||||||||||||||||||||
Preferred stock issued on conversion of notes | 3,735,956 | 373,596 | 14,570,228 | - | - | - | - | - | 14,943,824 | |||||||||||||||||||||||||||||||
Issuance of shares for services | 1,000,000 | 1,000 | 29,000 | 30,000 | ||||||||||||||||||||||||||||||||||||
Common stock to be issued for cash | 145,000 | |||||||||||||||||||||||||||||||||||||||
Foreign currency translation | - | - | - | - | - | - | 379,635 | - | 379,635 | |||||||||||||||||||||||||||||||
Net earnings for the period | - | - | - | - | - | - | - | 3,840,906 | 3,840,906 | |||||||||||||||||||||||||||||||
Balance, December 31, 2008 | 3,735,956 | $ | 373,596 | $ | 14,570,228 | 149,986,955 | 149,987 | $ | 2,711,769 | 145,000 | $ | - | $ | (17,941,551 | ) | $) | 9,029 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
B&D FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in United States Dollars)
2008 (Restated) | 2007 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net earnings (loss) | $ | 3,840,906 | $ | (5,242,158 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation | 68,570 | 142,284 | ||||||
Convertible debt issued for services | 3,968,268 | - | ||||||
Change in provision for contingencies | - | 40,085 | ||||||
Stock based compensation | 30,000 | - | ||||||
Interest due to convertible notes and bank debts | 841,282 | 1,280,769 | ||||||
Change in allowance for severance pay | 29,254 | - | ||||||
Gain from disposition of property, plant and equipment | 50,000 | (13,289 | ) | |||||
Issuance of shares for services | - | 727,750 | ||||||
Gain on sale of subsidiary interests | (11,969,386 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 19,213 | (9,698 | ) | |||||
Inventory | - | 39,564 | ||||||
Prepaid and sundry assets | (145,124 | ) | 73,253 | |||||
Other receivables | - | 258,975 | ||||||
Accounts payable | 459,624 | 290,417 | ||||||
Accrued liabilities and other payables | 798,195 | 1,262,142 | ||||||
NET CASH USED IN OPERATING ACTIVITIES | (2,009,198 | ) | (1,149,906 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from disposal of property, plant and equipment, net | 50,165 | 14,910 | ||||||
Acquisition of property, plant and equipment, net | - | (1,506 | ) | |||||
NET CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES | 50,165 | 13,404 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Proceeds from bank loans | 314,597 | - | ||||||
Proceeds from (repayment of) long term debt | 151,261 | (100,791 | ) | |||||
Proceeds from convertible debentures | 1,345,000 | 1,237,500 | ||||||
Proceeds from common stock to be issued | 145,000 | - | ||||||
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | 1,955,858 | 1,136,709 | ||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | (3,175 | ) | 207 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,175 | 2,968 | ||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | - | $ | 3,175 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
1. | NATURE OF OPERATIONS AND BUSINESS COMBINATION |
B&D Food Corp. (“B&D” or “the Company”) is a US corporation that concentrates in acquiring, organizing, developing and upgrading companies in the food industry, and more specifically in the coffee industry. Currently the Company is developing a plan of operations for its leased facilities in Brazil.
The Company was incorporated on August 24, 1994 under the laws of the state of Delaware. Until October 2004, the principal business activity of the Company was ownership, management, and sale of residential real estate. This activity was carried on through the wholly owned subsidiary Rickets Enterprises International, Inc. In October 2004, the Company sold all of its remaining revenue producing assets and in December 2004 ceased all its active operations.
On July 11, 2005, the Company entered into a Share Purchase Agreement (the “Agreement”) with BDFC Brasil Alimentos LTDA., a company formed pursuant to the laws of Brazil (“BDFC”) and the stockholders of BDFC (the “BDFC stockholders”) dated as July 8, 2005. Pursuant to the Agreement, the Company acquired effectively 100% of the outstanding equity stock of BDFC from the BDFC stockholders. As consideration for the acquisition of BDFC, the Company agreed to issue 95,344,688 shares of the Company’s common stock to the BDFC stockholders. As additional consideration, the company issued an 8% convertible promissory note, in the amount of $10,000,000 to the BDFC stockholders in consideration for the entire preferred stock of BDFC. The note is payable (principal plus accumulated interest) on July 8, 2008 and may be converted, at the option of the holder, at any time, prior to or at the time of repayment by the Company, to the Company’s common stock at the rate of $0.20 per share. At the date of the agreement, BDFC stockholders were also the controlling shareholder of the Company.
BDFC was originally incorporated under the name Eastco Corporation do Brasil Ltda (“Eastco), under the laws of Brazil on June 2, 1995. In May 2004, the name of Eastco was changed to Eastco de Alimentos Ltda., as registered with the Junta Comercial de Sao Paolo (Commercial Council) and on June 28, 2005 the name was changed to BDFC Brasil Alimentos Ltda. BDFC has been in the coffee manufacturing business since 1997. The Company manufactures and purchases coffee grains, toasted and milled coffee, soluble coffee and related products, for sale, import and export.
On November 1, 2000, due to adverse financial conditions, BDFC filed a Judicial Creditor’s Agreement called “Concordata Preventiva”. This agreement consolidates the Company’s debts and postpones all obligations to suppliers and banks for a period of time. The creditor’s agreement under “Concordata Preventiva” provided for payment in two installments, the first installment of 40% to be paid in one year and the remaining 60% to be paid in two years. BDFC made the full payments of $144,000 and $216,000 on October 30, 2001 and November 25, 2002, respectively. On March 8, 2005, BDFC paid an additional $15,562 as required by the courts. To generate sufficient cash flows, in January 21, 2003 management leased its manufacturing facility and equipment to Comercio e Industrias Brasileiras Coimbre S/A (“Coimbra”), an unrelated party. Rents received from the lease were used by BDFC to pay its debts.
On July 1, 2008, the Company completed execution of a stock purchase agreement with SBKF Investments, Ltd. (the “Purchaser”) for the sale of 100% of the issued and outstanding common stock of BDFC Brasil Alimentos LTDA. a subsidiary of the B&D. The purchase price totaled $5,764,847 and in consideration the Company received a note bearing annual interest of 10% repayable in equal monthly payments of principal and interest of $58,575. The net liabilities of BDFC at the time of the sale was $6,204,539, resulting in a gain on sale of $11,969,386.
F-8
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
2. | GOING CONCERN |
The Company's consolidated financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has raised capital and financing to cover all of its losses from operations since inception but the Company's ability to continue as a going concern is contingent upon its ability to attain and sustain profitable operations and to generate sufficient capital and financing from external investors and lenders. For the year ended 31 December 2008 the Company experienced a net loss of $(3,840,906) (2007 - $5,242,158) and has a working capital deficiency of $4,249,307 (2007 - $19,850,050). In addition, the Company has defaulted on certain bank loans as further described in note 10.
In the opinion of the management, the anticipated growth of operations, the funds raised during 2007 and the first quarter of 2008, and the contacts with potential new investors in the future, will permit the Company to continue as a going concern in the coming year, until such time that the Company obtains profitable operations.
In the event the Company does not reach significant operations, it may become necessary to sell the land and building that the Company operates from.
The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
3. | BASIS OF PRESENTATION |
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and, until July 1, 2008, its effectively 100% owned subsidiary, BDFC Brazil Alimentos LTDA.
Brazilian company’s law required Brazilian corporations to have more than one stockholder. Until July 1, 2008, B&D Foods Corporation held effectively 100% of the shares and the minority interest is held in trust for B&D Food Corporation by a related party in order to comply with local regulations.
All significant inter-company accounts and transactions are eliminated on consolidation.
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts that require significant management estimate include the expected life of property, plant and equipment; the provision for obsolete inventory and bad debts; asset impairments; and the fair value of stock based compensation. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
F-9
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Revenue Recognition
The Company recognizes revenue in accordance with the U.S. Securities and Exchange Commission (the "SEC") Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition ("SAB No. 104"). SAB No. 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured.
Revenues from coffee and coffee products are recognized when persuasive evidence of an arrangement exists and upon delivery of goods and transfer of title to the customers and when collection is reasonably assumed.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on account and short-term investments with remaining maturities at acquisition of three months or less.
Inventory
Cost of raw materials is determined using the “first in, first out” method; and finished products on the basis of direct manufacturing costs plus allocable overhead.
The net realizable value of inventory quantities on hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based primarily on the Company’s forecast of product demand and production requirements.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation, based on the estimated useful lives of the assets, is provided using the under noted annual rates and methods:
Building | 25 year straight line |
Computers, furniture and machinery | 3-16 year straight line |
Motor vehicles | 7 year straight line |
F-10
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Foreign Currency Translation
Prior to January 1, 2007, the Company determined that its foreign operations held in BDFC were self-contained from parent company B&D therefore the functional currency of BDFC was the Brazilian Real. Transactions and balances of BDFC were translated into U.S. dollars, the reporting currency, in accordance with the principles set forth in the Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. All balance sheet accounts, except stockholders’ deficit accounts, had been translated using the exchange rates in effect at the balance sheet date. Stockholders’ deficit accounts were translated at the historical exchange rates. Revenues and costs had been translated at the average exchange rates prevailing during the year. The resulting aggregate translation adjustments were reported as a component of accumulated other comprehensive loss in stockholders’ deficit.
Effective January 1, 2007 the Company determined that its foreign operations held in BDFC were integrated with the operations of the parent company B&D. BDFC has therefore changed its functional currency from the Brazilian Real to U.S. dollars. The U.S. dollar is also the reporting currency of the Holding Company. Under SFAS No. 52, if the entity’s books of record are not maintained in its functional currency, remeasurement into the functional currency is required. The remeasurement process is intended to produce the same result as if the Company’s books of record had been maintained in U.S. dollars. The Company remeasured all balance sheet accounts, except for the property, plant and equipment and the Stockholders’ deficit accounts using the historical exchange rates. Revenues and costs had been translated at the average exchange rates prevailing during the year. The resulting aggregate translation adjustments were reported as a component of the statement of loss as part of the foreign exchange result.
Lease Commitments
The Company recognizes the lease payments of an operating lease pursuant to SFAS 13, Accounting for Leases. When the lease agreement includes rent abatements and escalation in lease payments, the Company recognizes the total cost of the lease on a straight line basis over the entire term of the lease.
Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"). Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
F-11
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Comprehensive Loss
The Company has adopted SFAS No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive loss is presented in the statement of loss and comprehensive loss, and consists of net loss and unrealized gains (losses) on available for sale marketable securities; foreign currency translation adjustments and changes in market value of future contracts that qualify as a hedge; and negative equity adjustments recognized in accordance with SFAS 87, Employers' Accounting for Pensions. SFAS No. 130 requires only additional disclosures in the financial statements and does not affect the Company's financial position or results of operations.
Earnings or Loss Per Share
The Company accounts for earnings per share pursuant to SFAS No. 128, Earnings per Share, which requires disclosure in the financial statements of basic and diluted earnings (loss) per share. Basic net loss per share is computed by dividing the net loss applicable to common stockholders by the weighted-average number of shares of common stock outstanding for the year. Diluted net loss per share reflects the potential dilution that could occur if dilutive securities were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the Company, unless the effect of such inclusion would reduce a loss or increase earnings per share. For the years ended December 31, 2007 and 2006, the effect of the inclusion of dilutive shares would have resulted in a decrease in loss per share. Accordingly, the weighted average shares outstanding have not been adjusted for dilutive shares.
Stock-based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment ("SFAS No. 123R"). SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued.
F-12
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Impairment of Long-lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates annually at year end whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of asset less cost to sell. As described in note 2, the long-lived assets have been valued on a going concern basis. However, substantial doubt exists as to the ability of the Company to continue as a going concern. If the Company ceases operations, the asset values may be materially impaired.
Severance Pay
The Company’s subsidiary liability for severance pay is calculated pursuant to Brazilian laws and employee agreements based on the most recent salary of the employees. Severance pay expenses for the years ended December 31, 2007 and 2006 amounted to $144,582 and $104,479 respectively.
Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments -In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations ("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.
F-13
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Recent Accounting Pronouncements (Continued)
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.
In February 2008, FASB issued FASB Staff Position (“FSP”) on SFAS No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (“FSP SFAS 140-3”). The objective of this FSP is to provide guidance on accounting for a transfer of a financial asset and a repurchase financing. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” ("SFAS 140"). However, if certain criteria are met, the initial transfer and repurchase financing shall not be evaluated as a linked transaction and shall be evaluated separately under SFAS No. 140. FSP SFAS 140-3 is effective for financial statements issued for fiscal years beginning after 15 November 2008, and interim periods within these fiscal years. Earlier application is not permitted. The Company is currently reviewing the effect, if any, the proposed guidance will have on its financial statements.
In February 2008, FASB issued FSP SFAS No. 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP SFAS 157-1”). FSP SFAS 157-1 amends SFAS 157 to exclude FASB Statement No. 13, "Accounting for Leases", and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FASB Statement No. 13. However, this scope exception does not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FASB Statement No. 141, Business Combinations, or FASB Statement No. 141 (revised 2007), Business Combinations, regardless of whether those assets and liabilities are related to leases. FSP SFAS 157-1 is effective upon the initial adoption of SFAS 157.
In February 2008, FASB issued FSP SFAS No. 157-2, Effective date of FASB Statement No. 157 (“FSP SFAS 157-2”). FSP SFAS 157-2 delays the effective date of SFAS No. 157, Fair Value Measurement to fiscal years beginning after 15 November 2008, and interim periods within those fiscal years.
In March 2008, FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 ("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after 15 November 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.
F-14
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
4. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Recent Accounting Pronouncements (Continued)
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The Company does not expect SFAS No. 162 to have a material impact on its financial statements.
In October 2008, the FASB issued Staff Position No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 clarifies the application of SFAS No. 157, which we adopted as of 1 January 2008, in cases where a market is not active. The Company has considered the guidance provided by FSP 157-3 and determined that the impact was not material on estimated fair values as of 31 December 2008.
5. | INVENTORY |
2008 | 2007 | |||||||
Packaging | $ | - | $ | 122,247 | ||||
Dissolvable coffee | - | 16,871 | ||||||
Material for resale | - | 4,479 | ||||||
Fuel and lubricants | - | 6,129 | ||||||
Less provision for obsolescence | - | (149,726 | ) | |||||
$ | - | $ | - |
6. | PROPERTY, PLANT AND EQUIPMENT |
The components of property, plant and equipment were as follows:
2008 | 2007 | |||||||
Land and building | $ | - | $ | 1,955,167 | ||||
Computers, furniture and machinery | 6,583 | 1,337,034 | ||||||
Motor vehicles | - | 24,687 | ||||||
6,583 | 3,316,888 | |||||||
Accumulated depreciation | (4,566 | ) | (1,597,165 | ) | ||||
Net book value | $ | 2,017 | $ | 1,719,723 |
F-15
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
7. | BANK LOANS |
2008 | 2007 | |||||||
UCS Fomento Comercial S.A. | $ | - | $ | 857,786 | ||||
Unibanco | - | 468,969 | ||||||
Banco Real | 669 | 30,156 | ||||||
Other bank overdrafts | - | 23,661 | ||||||
$ | 669 | $ | 1,380,572 |
8. | ACCOUNTS PAYABLE |
2008 | 2007 | |||||||
Trade payable (*) | $ | 379,868 | $ | 1,226,864 | ||||
Less judicial deposits | - | (615,174 | ) | |||||
$ | 379,868 | $ | 611,690 |
(*) The judicial deposit represent payments made mainly in 2001 and 2002 under the Judicial Creditors Agreement (see also note 1).
9. | ACCRUED LIABILITIES AND OTHER PAYABLES |
2008 (Restated) | 2007 | |||||||
Brazilian taxes payable other than income tax | $ | - | $ | 2,437,611 | ||||
Employees and related institutions | 1,483,694 | 1,739,384 | ||||||
Provision for contingencies (note 14) | - | 427,372 | ||||||
Amounts payable to stockholders of the Company, unsecured, non interest bearing and payable on demand | 93,284 | 152,384 | ||||||
Other accrued liabilities | 469,316 | 441,620 | ||||||
$ | 2,046,294 | $ | 5,198,371 |
Included in employees and related institutions is $1,253,241 (December 31, 2007 - $1,002,138) in accrued management fees which are payable to a corporate shareholder.
F-16
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
10. | LONG-TERM DEBT |
2008 | 2007 | |||||||
Mortgage, payable in blended monthly installments of $31,330, bearing interest at the rate of TR, due March 2008. The mortgage is secured by the property disclosed in note 7. The Company has defaulted on its payments and is currently attempting to renegotiate the terms with the bank. | $ | - | $ | 980,114 | ||||
Various unsecured term loans at TR plus 0.2%. | - | 266,277 | ||||||
- | 1,246,391 | |||||||
Less current portion | - | (1,213,938 | ) | |||||
$ | - | $ | 32,453 |
11. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES |
Composed of:
2008 | 2007 | |||||||
Convertible debentures - parent company | $ | - | $ | 10,377,778 | ||||
Convertible debentures - other | 2,215,671 | 1,755,691 | ||||||
Promissory notes | 1,539,413 | 362,562 | ||||||
3,755,0844 | 12,496,031 |
The convertible debentures and promissory notes are unsecured and mature and become due as follows:
2008 | 2007 | |||||||
Amount due in 2008 | - | 11,472,557 | ||||||
Amount due in 2009 | 2,404,586 | 732,863 | ||||||
Amount due in 2010 | 106,361 | - | ||||||
Amount due in 2011 | 310,611 | 290,611 | ||||||
Amount due in 2013 | 933,526 | - | ||||||
$ | 3,755,0844 | $ | 12,496,031 |
F-17
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
11. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued) |
On December 20, 2005, the Company issued an unsecured convertible promissory note in the amount of $250,000 to a third party. The note bears annual interest of 8% and matures on December 20, 2011. The note may be converted, at the option of the holder, into shares of the Company’s common stock par value $0.001 six months after issuance at a discount of 10% of the average closing price per share for the common stock as recorded on the OTC Bulletin Board for the ten trading days prior to the conversion. The embedded derivative was separated and was included in accounts payable. The fair value of the embedded derivative as of December 31, 2007 total to $Nil (2006 - $5,833). After separating the embedded derivative, the effective interest of the note is 15%. Interest accumulated in the year 2007 net of amortization of the referred embedded derivative due to this note amounted to $64,951.
On July 11, 2005, in connection with the business combination described in note 1, the Company issued an unsecured 8% convertible promissory note, in the amount of $10,000,000 to the BDFC stockholders in consideration for the entire preferred stock of BDFC. The note is payable (principal plus accumulated interest) on July 8, 2008 and may be converted, at the option of the holder, at any time, prior to or at the time of repayment by the Company, to the Company’s common stock at the rate of $0.20 per share. At the date of the agreement, BDFC stockholders were also the controlling stockholders of the Company. On July 11, 2006, pursuant to a conversion notice received from Livorno Investment S.A (“Livorno”), by which Livorno elected to convert all of the annual accumulated interest on its convertible note (which amounted to $800,000) into shares of the Company’s common stock at a conversion price of $0.20 per share, the Company issued 4,000,000 shares of common stock to Livorno. Livorno is a corporate shareholder of the Company. Interest accumulated in the year 2007 due on this note amounted to $357,260. On May 7, 2007 the Company agreed to amend the terms of the note with Livorno to change the conversion rate from $0.20 to $0.04 per share. On August 1, 2007, pursuant to a conversion notice received from Livorno, by which Livorno elected to convert notes in the amount of $800,000 into shares of the Company’s common stock at a conversion price of $0.04 per share, the Company issued 20,000,000 shares of common stock to Livorno. The remaining balance and interest payable as at December 31, 2007 was $10,377,778.
On February 24, 2006, the Company issued an unsecured convertible promissory note in the principal amount of $100,000 to a third party. On March 8, 2006 and April 19, 2006 the Company issued another two convertible promissory notes, to another third party, in the aggregate principal amount of $100,000. The notes bears annual interest of 9.5% and mature after two years. At any time after the first six months, the holder has the right to convert the principal and interest due on the note into fully paid and non assessable shares of the Company’s common stock, par value $.001 per share. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount of the plus accrued interest (if any) by 0.65. Interest accumulated in the year 2007 due to this note amounted to $35,007.
F-18
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
11. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued) |
On June 7, 2006, the Company issued an unsecured convertible promissory note, to another third party, in the principal amount of $250,000. The note bears annual interest of 8% and matures after two years. At any time after the first six months, the holder has the right to convert the principal and interest due on the June Note into fully paid and non-assessable shares of the Company’s common stock. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount of the note plus accrued interest (if any), by ninety percent (90%) of the average closing price per share for the common stock as recorded on the OTC Bulletin Board for the ten trading days prior to conversion. The embedded derivative was separated and was included in accounts payable. The fair value of the embedded derivative as of December 31, 2007 total to $5,833. After separating the embedded derivative, the effective interest of the note is 15%. Interest accumulated in the year 2007 net of amortization of the referred embedded derivative due to this note amounted to $50,113.
During 2007, the Company issued unsecured convertible promissory notes to various third parties in the principal amount of $1,017,500. The notes bear annual interest ranging from 8% to 11% and mature after either one or two years. At any time after the first six months, the holder has the right to convert the principal and interest due into fully paid and non-assessable shares of the Company’s common stock, par value $.001 per share. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount plus accrued interest (if any) by rates ranging from 0.04 to 0.35. Interest accumulated in the year 2007 due to these notes amounted to $57,442.
During 2007, the Company issued unsecured promissory notes to various third parties in the principal amount of $340,000. The notes bear annual interest ranging from 6% to 10.5% and mature after one year. Interest accumulated in the year 2007 due to these notes amounted to $22,562.
During January 2008, the Company issued unsecured convertible promissory notes to an unrelated individual in the principal amount of $190,000. The notes bear annual interest at 13% and mature after one year. At any time after the first six months, the holder has the right to convert the principal and interest due into fully paid and non-assessable shares of the Company’s common stock, par value $.001 per share. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount plus accrued interest (if any) by 0.10.
During May 2008, the Company issued unsecured convertible promissory notes to an unrelated individual in the principal amount of $100,000. The notes bear annual interest at 10% and mature after one year. At any time after the first six months, the holder has the right to convert the principal and interest due into fully paid and non-assessable shares of the Company’s common stock, par value $.001 per share. The number of shares of common stock to be issued upon such conversion shall be equal to the quotient obtained by dividing the entire principal amount plus accrued interest (if any) by 0.30.
During May 2008, the Company issued an unsecured promissory note to an unrelated individual in the principal amount of $855,000. The note is unsecured, bears annual interest at an effective rate pf aprproximately 11% and matures after fiveyears.
F-19
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
11. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued) |
On September 28, 2008 the Board approved the transfer of the outstanding convertible promissory note held by Livorno Investments S.A. (“Livorno”) to the respective owners of Livorno (the "Purchasers"). The Company also issued additional convertible notes to the Purchasers totalling $3,968,268 for services rendered related to the sale of BDFC. Immediately thereafter, the Company received a conversion notice, by which the Purchasers elected to convert all of the principal and accumulated interest on their convertible notes (which amounted to $14,943,824) into shares of the Company’s preferred stock at a conversion price of $0.04 per share. On conversion, the Company issued 3,735,956 shares of preferred stock to the Purchasers. The terms of the preferred shares subscription agreement state that the preferred shares are convertible to common shares at a rate of 1 to 100.
On November 11, 2008, the Company issued an unsecured promissory note, convertible into shares of the Company's common stock at the option of the holder, to an unrelated corporation in the principal amount of $25,000 as payment for certain accounts payable, bearing interest at an annual rate of 15% and maturing on December 31, 2009.
12. | COMMITMENT |
On September 26, 2008, the Company entered into a lease agreement with SBKF Investments, Ltd for a term of 18 years, whereby they would leaseback all of the land building and factory that was sold to them, as described in Note 1. The Company's remaining lease obligations, with future minimum annual payments (exclusive of taxes, insurance and maintenance costs) are as follows:
Year One | 802,909 | |||
Year Two | 802,909 | |||
Year Three | 802,909 | |||
Year Four | 802,909 | |||
Year Five and thereafter | 11,240,726 | |||
$ | 14,452,362 |
F-20
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
13. | CAPITAL STOCK |
The following transactions occurred from January 1, 2006 to December 31, 2008:
On July 11, 2006, pursuant to a conversion notice received from Livorno Investment S.A (“Livorno”), by which Livorno elected to convert all of the annual accumulated interest on its convertible note (which amounted to $800,000) into shares of the Company’s common stock at a conversion price of $0.20 per share, the Company issued 4,000,000 shares of common stock to Livorno. Interest accumulated in the year 2006 due on this note amounted to $789,040.
On August 20, 2006, the Board of Directors authorized the issuance of 1,000,000 shares of the Company’s common stock to two of the Company’s stockholders in consideration for their personal guarantees to two banks in Brazil in connection with loans received from those banks by BDFC. The shares were issued on January 18, 2007. Based on the closing price of the Company’s common stock as recorded on the OTC Bulletin Board at the Balance Sheet Date, the Company recorded an allowance for this liability in an amount of $85,000.
On January 4, 2007, the Board of Directors authorized the issuance of 4,150,000 shares of the Company’s common stock to two of the Company’s officers in consideration for their services. The shares were issued on January 18, 2007. The services were valued at the market rate of the Company's common stock on the date of issuance, totalling $352,750.
On June 13, 2007 and December 6, 2007 the company issued 15,000,000 and 4,500,000 shares respectively of its common stock at a price of $0.02 per share for services rendered. In connection with the issuance the Company granted warrants, exercisable at $0.10 per share, to the lender providing to the lender the right to buy 19,500,000 shares of common stock of the Company.
On August 1, 2007, pursuant to a conversion notice received from Livorno, by which Livorno elected to convert notes in the amount of $800,000 into shares of the Company’s common stock at a conversion price of $0.04 per share, the Company issued 20,000,000 shares of common stock to Livorno.
On August 31, 2007 the Company issued 1,086,955 shares of its common stock for services rendered by a consultant valued at $50,000.
On April 28, 2008 the company issued 1,000,000 shares of its common stock as compensation for financial services rendered relating to negotiating raising funds with potential investors.
In May 2008, the Company entered into a subscription agreement with an investor to issue a total of 5,000,000 shares of common stock for the payment of an aggregate amount of $145,000.These amount is recorded as stock to be issued.
On September 28, 2008 the Company received a conversion notice, by which the Purchasers elected to convert all of the principal and accumulated interest on their convertible notes (which amounted to $14,943,824) into shares of the Company’s preferred stock at a conversion price of $0.04 per share. On conversion, the Company issued 3,735,956 shares of preferred stock to the Purchasers. The terms of the preferred shares subscription agreement state that the preferred shares are convertible to common shares at a rate of 1 to 100.
F-21
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
14. | INCOME TAXES |
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS No. 109 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The effects of future changes in tax laws or rates are not anticipated.
Under SFAS No. 109 income taxes are recognized for the following: a) amount of tax payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes.
The components of deferred income taxes have been determined at the Brazilian statutory rate of 24% (2007 - 24%) and the combined U.S. federal and state statutory rate of 35% (2007 - 35%) and are as follows:
2008 | 2007 | |||||||
Deferred income tax assets (liabilities): | ||||||||
Net operating loss carry-forwards | $ | 2,805,203 | $ | 2,805,203 | ||||
Property, plant and equipment | - | 62,249 | ||||||
Valuation allowance | (2,805,203 | ) | (2,867,452 | ) | ||||
Deferred income taxes | $ | - | $ | - |
The Company has approximate tax losses available to be applied against future years income totalling approximately $8,840,000.
Due to the losses incurred since inception and expected future operating results, management has determined that the Company does not meet the 'more likely than not' criteria that the deferred tax assets resulting from the tax losses available for carry-forward and the differences in tax bases of assets will be realized through the reduction of future income tax payments, accordingly a 100% valuation allowance has been recorded for deferred income tax assets.
F-22
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
15. | WARRANTS |
A summary of stock warrant activity is as follows:
Shares Subject to Warrants | Weighted Average Exercise Price | |||||||
Outstanding on 31 December 2006 | - | $ | - | |||||
Granted | 19,500,000 | 0.10 | ||||||
Exercised / forfeited / expired | - | - | ||||||
Outstanding on 31 December 2007 | 19,500,000 | 0.10 | ||||||
Granted | 30,000,000 | 0.01 | ||||||
Exercised / forfeited / expired | - | - | ||||||
Outstanding and exercisable on 31 December 2008 | 49,500,000 | $ | 0.05 |
The following transactions occurred from 1 January 2006 through 31 December 2008:
On June 13, 2007 and December 6, 2007 the company issued 15,000,000 and 4,500,000 shares respectively of its common stock at a price of $0.02 per share. In connection with the issuance the Company granted warrants, exercisable at $0.10 per share, to the lender providing to the lender the right to buy 19,500,000 shares of common stock of the Company. The warrants expire after two years.
The warrants were valued using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 3.03% - 5.08%, expected dividend yield of zero, expected life of two years and expected volatility of 62.67%
In January 2008 the Company granted 30,000,000 warrants, exercisable at $0.01 per share in conjunction with the convertible debentures issued, as described in Note 11.
F-23
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
16. | SUPPLEMENTAL CASH FLOW INFORMATION |
During the year ended 31 December 2008 the Company paid $1,747,966 (2007 - $1,411,853) in interest and there were no income taxes paid.
On January 4, 2007, the Board of Directors authorized the issuance of 4,150,000 shares of the Company’s common stock to two of the Company’s officers in consideration for their services. The shares were issued on January 18, 2007. The services were valued at the market rate of the Company's common stock on the date of issuance, totaling $352,750.
On June 13, 2007 and December 6, 2007 the company issued 15,000,000 and 4,500,000 shares respectively of its common stock at a price of $0.02 per share for services rendered. In connection with the issuance the Company granted warrants, exercisable at $0.10 per share, to the lender providing to the lender the right to buy 19,500,000 shares of common stock of the Company.
On August 31, 2007 the Company issued 1,086,955 shares of its common stock for services rendered by a consultant valued at $50,000.
On April 28, 2008, the Board of Directors authorized the issuance of 1,000,000 shares of the Company’s common stock to a Company in consideration for their services. The shares were issued on April 28, 2008. The services were valued at the market rate of the Company's common stock on the date of issuance, totaling $30,000.
On November 11, 2008, the Company issued an unsecured promissory note, convertible into shares of the Company's common stock at the option of the holder, to an unrelated corporation in the principal amount of $25,000 as payment for certain accounts payable, bearing interest at an annual rate of 15% and maturing on December 31, 2009.
17. | TRANSACTIONS WITH RELATED PARTIES |
Related party transactions are in the normal course of operations and are recorded at the exchange amounts established and agreed between the related parties. Related party transactions not disclosed elsewhere in these consolidated financial statements are as follows:
The Company accrued interest on the convertible debenture payable to Livorno in the amount of $800,000 and interest on a bank loan payable to a company controlled by a stockholder for in the amount of $118,883 for the year ended December 31, 2007.
On January 4, 2007, the Board of Directors authorized the issuance of 4,150,000 shares of the Company’s common stock to two of the Company’s officers in consideration for their services. The shares were issued on January 18, 2007. The services were valued at the market rate of the Company's common stock on the date of issuance, totaling $352,750.
Included in accrued liabilities and expensed in general and administrative is a guarantee fee $85,000 payable to a stockholder of the Company for providing guarantees on certain bank loans.
F-24
B&D FOOD CORP. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007
(Expressed in United States Dollars)
18. | FINANCIAL RISKS |
Financial Instruments
Interest rate risk exists from the bank indebtedness and term loans which are exposed to fluctuations in interest rates.
Monetary assets and liabilities held by BDFC are in Brazilian currency and they are subject to the Brazilian devaluation.
Unless otherwise noted, it is management's opinion that the Company is not exposed to significant currency or credit risks arising from the financial instruments. The fair value of the financial instruments approximates their carrying values, unless otherwise noted.
Concentrations
SFAS No. 105, Disclosure of Information About Financial Instruments with Off Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk, requires disclosure of any significant off balance sheet risk and credit risk concentration. The Company does not have significant off balance sheet risk or credit concentration. The Company maintains cash with major financial institutions. From time to time, the Company has funds on deposit with commercial banks that exceed federally insured limits. Management does not consider this to be a significant risk. Trade receivables are derived from sales to major customers located primarily in Brazil. The Company’s subsidiary performs ongoing credit evaluations of its customers and obtains letters of credit and bank guarantees for certain receivables. An allowance for doubtful accounts is determined with respect to those amounts that were determined to be doubtful of collection and a general allowance is provided to cover additional potential exposures.
19. | COMPARATIVE FIGURES |
Certain figures in the 2007 consolidated financial statements have been reclassified to conform with the basis of presentation used in 2008.
20. | RESTATEMENT OF FINANCIAL STATEMENTS |
Subsequent to the original release of B&D Food Corp’s December 31, 2008 financial statements, the Company concluded the financial statements are required to be restated due to accounting errors. Management determined there to be an error in a calculation of the exchange gain relating to an accounts payable item and also that there was an incorrect classification of the current portions of certain convertible debentures and note receivables. In addition management identified two unrecorded stock transactions.
The effect of these adjustments on the financial statements are as follows:
Balance Sheet as of December 31, 2008
Previously Reported | Increase (Decrease) | Restated | ||||||||||
Current Assets | $ | 455,685 | $ | 126,424 | $ | 582,109 | ||||||
Other Assets | 5,735,258 | (126,424 | ) | 5,608,834 | ||||||||
Total Assets | 6,190,943 | - | 6,190,943 | |||||||||
Current Liabilities | 4,498,052 | 333,364 | 4,831,416 | |||||||||
Long term Liabilities | 1,643,885 | (293,387 | ) | 1,350,498 | ||||||||
Total Liabilities | 6,141,937 | 39,977 | 6,181,914 | |||||||||
Stockholders’ Deficit: | - | - | - | |||||||||
Accumulated Deficit—December 31, 2007 | (21,782,457 | ) | - | (21,782,457 | ) | |||||||
Net Income (Loss) for 2008 | 4,055,883 | (214,977 | ) | 3,840,906 | ||||||||
Accumulated Deficit—December 31, 2008 | (17,726,574 | ) | 214,977 | (17,941,551 | ) | |||||||
Total Liabilities and Stockholders’ Deficit | 6,190,943 | - | 6,190,943 |
Statement of Operations for the Year Ended December 31, 20X1
Previously Reported | Increase (Decrease) | Restated | ||||||||||
Net Sales | - | - | - | |||||||||
Cost of Sales | 80,824 | - | 80,824 | |||||||||
Gross Profit(loss) | (80,824 | ) | - | (80,824 | ) | |||||||
Selling and Administrative Expenses | 5,616,676 | 30,000 | 5,646,676 | |||||||||
Income (Loss) from Operations | (5,697,500 | ) | 30,000 | (5,727,500 | ) | |||||||
Financial | (2,404,271 | ) | 184,977 | (2,589,248 | ) | |||||||
Income (Loss) before Taxes | 4,055,883 | (214,977 | ) | 3,840,906 | ||||||||
Provision for Income Taxes | - | - | ||||||||||
Net Income (Loss) | 4,055,883 | (214,977 | ) | 3,840,906 |
F-25