Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2006
 
BRAVO! BRANDS INC.
(Name of Small Business Issuer in its Amended Charter)

Commission File Number 0-25039

Delaware  
 
62-1681831
 (State or other jurisdiction of incorporation or organization )
 
 (I.R.S. Employer Identification No.)
 
11300 US Highway 1, Suite 400, North Palm Beach, Florida 33408 USA
 
(Address of principal executive offices)                 (Zip Code)

Telephone number:                   (561) 625-1411
 

 
Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act
Common Stock, $.001 par value
(Title of class)
 


Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. o

The issuer's revenues for its most recent fiscal year were $14,661,852.

The aggregate market value of the voting stock held by non-affiliates of the issuer on March 12, 2007, based upon the $0.34 per share close price of such stock on that date, was $66,822,740 based upon 196,537,471 shares held by non-affiliates of the issuer. The total number of issuer's shares of common stock outstanding held by affiliates and non-affiliates as of March 12, 2007 was 205,705,501.

Transitional Small Business Disclosure Format (check one): Yes o No x
 
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DOCUMENTS INCORPORATED BY REFERENCE: See Exhibits
 
FORWARD-LOOKING STATEMENTS

Statements that are not historical facts, including statements about our prospects and strategies and our expectations about growth contained in this report, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the uncertainty as to our future profitability; the accuracy of our performance projections; and our ability to obtain financing on acceptable terms to finance our operations until profitability.
 
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS

The Company

Bravo! Brands Inc. is a Delaware corporation formed on April 26, 1996. The Company recently changed its name from Bravo! Foods International Corp. We believe the new name more succinctly and accurately reflects our current business model and scope.

Nature of Business
 
We develop, brand, market, distribute and sell nutritious, flavored milk products throughout the United States, and, during the first half of 2006, in the United Kingdom. Our products are available through co-packing agreements with aseptic milk processors and are currently sold under our brand names Slammers® and Bravo!™.

We have employed a co-branding strategy that builds on strong, iconic brands to build awareness and position for our Slammers® and Bravo™ brands. Our focus is on brands that have a strong flavor profile and strong consumer following, which we then leverage to build our sales and brand positioning.
 
The Business

In the third quarter of 2001, we developed branded extended shelf life and aseptic, bacteria free, long life flavored milk products. The extended shelf life (“ESL”) product was sold in 16 ounce single serve plastic bottles and had to be refrigerated. The shelf life of this product was 90 days. In addition, we developed a line of aseptic packaged milks that did not require refrigeration and had a shelf life of 8 months. This product was packaged in an 11.2 ounce Tetra Pak Prisma™ sterile paper container. During early 2004 we were limited to Tetra Pak Prisma™ packaging for aseptic production and ESL processing, with which we distributed and marketed products through the cold distribution network and the ambient distribution network. The licensing agreement with Warner Bros. for Looney Tunes™ trademarks, which commenced in the United States in 2000, was used for both our ESL and aseptic Prisma package designs. The Prisma packaged products were sold through channels where ambient distribution was advantageous. Commencing in February 2004, we used Marvel trademarks for Super Heroes® and Marvel Heroes® for the design and marketing of our sixteen ounce single serve milk with an extended shelf life. Both our ESL and aseptic product categories were produced at Jasper Products, LLC located in Joplin, Missouri.

Through the end of 2004, the majority of our products were shipped through traditional warehouses. The development of an ambient plastic bottle, however, allowed us to sell into the immediate consumption sales channel through the “tobacco and candy” distribution system in 2005. The benefits of this distribution were lower freight costs, wider distribution of a product with a six month shelf life and the ability to utilize the Direct Store Delivery (DSD) distribution network.

During the second half of 2004, we entered into a license agreement with Masterfoods USA, a division of Mars Incorporated. This agreement combined our “better for you” co-branding strategy with the brand recognition and appetite appeal of the Masterfoods product line. Beyond appetite appeal, our Masterfoods brands allowed us to differentiate between flavors in the same way chocolate candy can be differentiated, as well as creating one of the first milk and juice beverage combinations available in the marketplace. We also introduced our shelf-stable packaging with the Masterfoods agreement. In the first quarter of 2005, we began distribution of Masterfoods products.
 
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On August 31, 2005, we signed an exclusive, 10-year distribution agreement with Coca-Cola Enterprises Inc. (CCE), the world’s largest marketer, distributor and producer of bottle and can nonalcoholic beverages. This resulted in a termination of all prior relationships with our beverage brokers and independent distributors, which we formerly utilized for regional distribution across the United States. On November 1, 2005, CCE began distribution of Slammers® Milky Way®, Slammers® 3 Musketeers®, Slammers® Strawberry and Orange Starburst® Slammers®, Vanilla and Chocolate PRO Slammers™ and Vanilla and Chocolate Slim Slammers®.

During the fourth quarter of 2005, we experienced record revenues from the initial CCE order, but due to limited capacity, we were unable to fully meet initial demand. In late 2005, we contracted with Jasper Products to triple production capacity, from 2.5 million bottles per month to 7.5 million bottles per month by July 1, 2006. This increase in production capacity was completed on schedule.

We continued to innovate and expand our product offering during 2006. This was accomplished primarily through new licensing agreements with General Mills® and Organic Valley® for co-branded single serve milk. With these new licenses, we have developed and marketed products including TRIX® Slammers®, COCOA PUFFS® Slammers® and eight-ounce organic white milk, all in aseptic plastic bottles. We also introduced Bravo! Blenders™ in the New York and tri-state area, to be distributed by F&G Distributors of New York.

During early 2006, we began the development of a “snowman” shaped eight ounce bottle that provided the rigidity needed to be stacked for sale in vending machines. Given the potential of sales within the education channel, we developed and began production of the first aseptic eight-ounce vendible bottle with products that met the American Beverage Association (“ABA”) and Clinton Foundation established guidelines for lower calorie and nutritious beverages in schools. The eight-ounce Slammers® are available in an assortment of flavors and can fill vending machine slots traditionally occupied by twelve-ounce soda cans. We began shipment of our new eight-ounce vendible bottles to Coca-Cola Enterprises on October 31, 2006. The production and shipment of our fourteen-ounce vendible bottle is scheduled for first quarter 2007. In addition, we have developed a vendible twelve ounce bottle, which will be added in 2007 to accommodate the Clinton/ABA school guidelines that limit serving size in high schools to twelve ounces.

Master Distribution Agreement - Coca-Cola Enterprises

The appointment of Coca-Cola Enterprises as the exclusive distributor for our products was effective August 31, 2005, while distribution commenced on October 31, 2005. The ten year agreement expires on August 15, 2015, and Coca-Cola Enterprises has the option to renew the Master Agreement for two subsequent periods of ten additional years. Concurrent with the execution of the agreements, we issued three-year warrants to Coca-Cola Enterprises for the right to purchase 30 million shares of our common stock at an exercise price of $0.36 per share.

Under the terms of the agreement, Coca-Cola Enterprises is obligated to use all commercially reasonable efforts to solicit, procure and obtain orders for our products and merchandise and actively promote the sale of such products in the Territory, as defined in the agreement. Distribution in other Territory areas will be dependent upon, among other things, third-party licensing considerations and compliance with the regulatory requirements for the products in foreign countries.
 
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We have agreed to provide the following:
 
· 
strategic direction of our products;
·  maintain sales force education and support
· 
actively market and advertise our products and design and develop point of sale materials and advertising.
 
We are also responsible for handling:
 
· 
consumer inquiries;
· 
product development; and
· 
the manufacture and adequate supply of our products for distribution by Coca-Cola Enterprises.
 
Under the agreement, Coca-Cola Enterprises has the right of first refusal to distribute any new products developed by us, and the agreement establishes a process for the potential expansion of Coca-Cola Enterprises’ distribution of our products to new territories. Our “Allied” sales team distributes products not sold through Coca-Cola Enterprises. Either party may terminate the agreement for a material breach, insolvency or bankruptcy. Coca-Cola Enterprises may terminate the agreement (i) for change of control by our company; (ii) upon a material governmental regulatory enforcement action or threatened governmental action having a material adverse consumer or sales impact on our products; and (iii) upon twelve months notice after August 15, 2006.

Third Party Intellectual Property Licenses

All of our third party licensing agreements recognize that we will use third party production agreements (called co-packing arrangements) for the processing of flavored milk products and that our milk products will be produced and may be distributed directly by those processors.

Masterfoods USA 

On September 21, 2004, we entered into a licensing agreement with Masterfoods USA, a division of Mars, Incorporated, for the use of Milky Way®, Starburst® and 3 Musketeers® trademarks in connection with the manufacture, marketing and sale of single serve flavored milk drinks in the United States, its Possessions and Territories and US Military installations worldwide. On March 31, 2006, we reached an agreement with Masterfoods extending the U.S. license for an additional five years, ending December 31, 2012. In addition the agreement granted us the rights to the Dove Dark Chocolate and Dove Milk Chocolate brands.

Effective January 1, 2006, we signed two new seven year licensing agreements for Canada and Mexico with Masterfoods USA. The Canada licensing agreement provides use of Starburst® Slammers® Fruit & Crème Smoothies and 3 Musketeers® Slammers® Chocolate Milk. The Mexico licensing agreement is for single serve Milky Way® Slammers® Chocolate Milk and 3 Musketeers® Slammers® Chocolate Milk. Each agreement covers most trade channels including grocery, food service, Club Stores as well as schools with children over the age of 13, colleges and universities, vending machines, amusement parks and movie theaters.

We have agreed to pay a royalty based upon the total net sales of the licensed products sold and advance payments of certain agreed upon guaranteed royalties. Ownership of the licensed marks and the specific milk flavors to be utilized with the marks remains with Masterfoods. We have a right of first refusal for other milk beverage products utilizing the Masterfoods marks within the licensed territory.
 
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General Mills

In February 2006, we signed a five year licensing agreement with General Mills Marketing, Inc. for a term extending through December 31, 2011. The agreement covered the production, distribution and marketing of General Mills trademarks including; TRIX Slammers®, COCOA PUFFS® Slammers® and WHEATIES®. In addition to these brands, the agreement covers LUCKY CHARMS®, COUNT CHOCULA®, BOOBERRY® and FRANKENBERRY®.

We have agreed to pay a royalty based upon the total net sales of the licensed products sold and advance payments of certain agreed upon guaranteed royalties. Ownership of the licensed marks and the specific milk flavors to be utilized with the marks remains with General Mills. We have a right of first refusal for other milk beverage products utilizing the General Mills marks within the licensed territory.

Organic Valley

In October 2006, we signed a licensing agreement and a separate organic milk supply agreement with Cooperative Regions of Organic Producer Pools (“CROPP”) to license, produce and sell its brand, Organic Valley®, in a new product line of aseptic packaged organic fluid milk products. Our agreement includes an Evergreen clause with automatic annual renewals and a twelve-month termination notice. We have launched eight-ounce Organic Valley 1% low fat milk and expect to introduce additional flavors such as 1% chocolate milk, vanilla and berry flavors in the near future.

Diabetes Research Institute

In November 2006, we extended our licensing agreement with Diabetes Research Institute to October 31, 2007. We agreed to a base royalty and a variable royalty rate for the use of intellectual property, which consists of a logo plus design on the labels of our Slim Slammers™, 3 Musketeers® and Bravo! Blenders™ product lines.

Marvel Enterprises, Inc.
 
On February 4, 2005, we entered into a two-year license agreement for the utilization of Marvel Heroes characters on our flavored milks in the United Kingdom and Ireland. In March 2005, we entered into a new one-year license agreement with Marvel Enterprises, Inc. to use its Super Heroesâ properties to promote our branded milk products in the United States, Canada and Mexico. On February 4, 2005, we entered into a license agreement for the utilization of Marvel Heroes characters on our flavored milk bottles in the Middle East. This license will expire March 31, 2007.

We have not renewed these license agreements and have focused on new license agreements on food products that have a perceived taste, flavor or nutritional value.

In House Intellectual Property

In addition to our third-party licenses, we have developed and sell flavored milks bearing trademarks developed by us, including “Slammers®” “Pro Slammers™”, “Slim Slammers®”, Bravo!™ and “Blenders™”.

Production Contracts/Administration

Our operations in the United States, Mexico and Canada are run directly by Bravo! Brands Inc. 
 
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United States

Since 2003, our milk products have been produced by Jasper Products, located in Joplin, Missouri. In addition to the production of our products, Jasper has provided the infra-structure necessary for our invoicing, shipping and collection activities. We anticipate the invoicing and collection responsibilities for these activities will be brought in house during 2007.

In September 2006, we executed a six-year non-exclusive production agreement with HP Hood LLC of Chelsea, Massachusetts, for the production of our products through 2012, with production commencing in the second quarter 2007. The contract specifies annual production volume of 70 million bottles.

United Kingdom & Middle East
 
In 2006 we ceased our international business to focus on fully developing our business in North America.

Canada

In August 2006, we entered into an agreement with William Neilson Limited, a leading Canadian dairy, to produce our Slammer® Starburst® brands. The co-packing agreement covers the production of single-server shelf-stable products to be produced under the license agreement with Masterfoods for the Canadian Market.

Industry Trends

The flavored milk industry has grown from approximately $750 million in 1995 to $2.0 billion in 2006. The single serve portion of this category is difficult to measure, since approximately 2/3 of the sales in the single serve milk industry are sold in immediate consumption channels or other channels that do not report readily available sell through data. For example, Wal-Mart has become the largest retailer in the USA for milk, selling an estimated 15% of total milk sales. Wal-Mart does not report sales for the industry data resources reported and analyzed by market watch companies such as A.C. Neilson or Information Resources Inc. Similarly, most convenience stores and “up-and-down-the-street” retailers in the immediate consumption sales channels, as well as vending and schools, do not report sales data.

We have analyzed the industry using reports available from milk and beverage industry sources. These include the total, segmented and rate of growth sales that are reported, the immediate consumption sales rates for all consumables compared to retail grocery buying patterns and opinions of experts in the milk industry as to the relative size of reported versus non-reported sales. Based upon these reports and analysis, we believe the current size of the single serve flavored milk industry (packaging 16 oz. or smaller) is approximately $1.5 billion domestically. The industry grew at annual rates of between 2 and 10 percent during the last five years. We believe that this space is positioned for growth now and will continue to be in the immediate consumption channels such as vending, convenience stores and food service market segments. In addition, reduced fat flavored milk sales have grown 29% in the last five years.

Market Analysis

The flavored milk business is a relatively new category in the dairy field. The flavored “refreshment” segment is both the fastest growing and most profitable category in the industry and is receiving the most attention in the industry today. Pioneered by Nestle and Dean Foods, this segment is in demand both in the U.S. and internationally.
 
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We estimate that although flavored milk currently amounts to only 8 to 10 percent of milk sales, it represents the majority of the growth in milk sales. With the total milk category exceeding $14.6 billion in 2004, the flavored milk segment was approximately $2.0 billion in 2006, with single serve flavored milk growing to approximately $1.2 billion for the same period. In the past ten years, selling more flavored milks has resulted in more sales of white milk as well.

The International Dairy Foods Association and Dairy Management Inc. have reported on studies suggesting that dairy products may help in weight loss efforts when coupled with a reduced calorie diet, based on data associating adequate calcium intake with lower body weight and reduced body fat. We continue to develop a similar niche in the single serve flavored milk business by utilizing strong, national branding as part of the promotion of our Slammers®, Pro Slammers™, Slim Slammers® and Bravo! Blenders™ products. This niche has as its focus the increased demand for single serve, healthy and refreshing drinks.

In addition there has been major political movement within the beverage industry in an effort to address what has become a national epidemic of childhood obesity. In May 2006, the William J. Clinton Foundation and the American Beverage Association established guidelines for lower calorie and nutritious beverages in schools. Under the new guidelines, schools can sell only water, certain juices, milk and low calorie/no calorie soft drinks. The timeline for implementation of these guidelines is initially set at 75% implementation by the 2008-2009 school year and 100% by 2009-2010, with certain school districts already beginning the implementation. With our development of our eight-ounce vendible bottle, meeting the ABA guidelines and the removal of the majority of carbonated products from schools, the market is set for a rapid increase in single serve milk sales.

Market Segment Strategy

The Bravo! product model addresses a very clear and concise target market. We know from experience that the largest retailers of milk products are demanding new and more diverse refreshment drinks, specifically in the dairy area, in response to consumer interest and demand. To that end, we have and will continue to differentiate our products from those of our competitors through innovative product formulations and packaging designs, such as those implemented in our Slammers®, Pro Slammers™ and Bravo! Blenders™ fortified milk product lines and our Slim Slammers® and Slammers® 3 Musketeers® low calorie, no sugar added products.

Our Slammers® milk products have had promising results penetrating this arena as consumers continue to look for healthy alternatives to carbonated beverages. The positioning of our products as a better for you, fun and great tasting alternative to more traditional beverages at competitive prices, creates value for the producer and the retailer alike. This "profit orientation" for the trade puts old-fashioned milk products in a whole new light. The consumer is happy, the retailer is happy and the producer is able to take advantage of the value added by the brand and the resulting overall increase in milk sales.

We currently are implementing a very important “first-to-market” strategy that we feel will significantly reposition our brands and company. Until now, all single served flavored milk in plastic bottles required refrigeration for storage, distribution and shelf placement. Our co-packing agreements with Jasper Products and HP Hood allow our products to be shipped, warehoused and distributed at ambient temperatures.

The tactical advantage of distributing our milk products at ambient temperatures enables us to overcome a major entry barrier in our immediate consumption strategy. Most beverages are distributed ambient either through Direct Store Delivery (“DSD”) beverage distribution channels or warehouse “candy and tobacco” distributors. Refrigerated milk was relegated to dairy direct-store-delivery systems that are controlled by either regional dairy processors or larger national dairy holding companies such as Dean Foods. We avoid the roadblock of being reliant upon our competition for chilled distribution since we are now in the unique position to use the more traditional distribution network that accommodates non-refrigerated beverages. Currently all of our products are produced in ambient “shelf stable” re-sealable plastic bottles. Most of our bottles are now fully vendible.
 
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We have been and continue to pursue a strategic goal of placing Slammers® milks in elementary, middle and high schools through a-la-carte lunch programs and vending facilities in school cafeterias, and we are promoting our Slim Slammers®, 3 Musketeers™ and Blenders® milks as low calorie, non-sugar added alternatives to traditional soft drinks. Penetration of this market segment has been limited by logistic and economic concerns of school administrators in the push to remove traditional carbonated soft drinks from schools in favor of milk and milk based products.

Competition

Nestle pioneered the single serve extended shelf life plastic re-sealable bottle which has become the standard for this industry, and they currently enjoy a dominant market share. Dean Foods owns a number of regional single serve brands that are sold in this format, and they also have an exclusive license to produce Hershey brand flavored milk nationwide. Both the Nestle and Dean product lines, however, require refrigeration. Our analysis indicates that the Nestle’s Nesquik brand accounts for approximately 30-35 percent of the U.S. single serve milk category. The other competition comes from private label and regional dairy brands.

Employees

We currently have sixty-one employees, sixty of which are full time. The majority of the employees are sales representatives geographically dispersed throughout the United States and Canada.

ITEM 2 - DESCRIPTION OF PROPERTY

Our corporate offices are located at 11300 US Highway 1, Suite 400, North Palm Beach, Florida. Commencing on January 1, 2007, a 10-year lease extension went into effect for our corporate offices, with minimum annual rent payments of $161,426.

ITEM 3. LEGAL PROCEEDINGS

There currently are no material claims or lawsuits against us.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
A special meeting of Shareholders was held on October 11, 2006 in North Palm Beach, Florida. The following is a summary of matters voted on by shareholders:

 
1.
Increase authorized common shares from 300,000,000 to 500,000,000.

2.
Change name from Bravo! Foods International Corp. to Bravo! Brands Inc. 

Shareholders approved both measures with affirmative votes in excess of 98% of the shares entitled to vote.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common stock market price

The Company’s common stock is traded on the OTC Electronic Bulletin Board (ticker symbol BRVO.OB). The approximate number of record holders of the Company’s common stock at March 12, 2007 was 9,800.

The following quarterly quotations for common stock transactions on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.

QUARTER
 
HIGH BID PRICE
 
LOW BID PRICE
 
2005
         
First Quarter
 
$
0.18
 
$
0.11
 
Second Quarter
 
$
1.21
 
$
0.14
 
Third Quarter
 
$
1.43
 
$
0.51
 
Fourth Quarter
 
$
0.80
 
$
0.47
 
               
2006
             
First Quarter
 
$
0.74
 
$
0.51
 
Second Quarter
 
$
0.88
 
$
0.50
 
Third Quarter
 
$
0.65
 
$
0.40
 
Fourth Quarter
 
$
0.54
 
$
0.25
 
 
Dividends

We have not paid dividends on our common stock and do not anticipate paying dividends. Management intends to retain future earnings, if any, to finance working capital and to expand our operations.

The holders of common stock are entitled to receive, pro rata, such dividends and other distributions as and when declared by our board of directors out of the assets and funds legally available therefore. We do not expect to pay dividends to holders of our common stock in the foreseeable future.
 
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Sale of unregistered securities

Quarter Ended December 31, 2006

In July 2006 we sold $30 million four year senior convertible notes in a private sale to five accredited institutional investors. The Notes carried a 9% annual coupon, payable quarterly, and were convertible into shares of common stock at $0.70 per share. We also issued five year Series A warrants to purchase 13,178,571 shares of common stock and Series B warrants to purchase 43,392,856 shares of common stock (exercisable only if we redeem the Notes, on a pro rata basis) at $0.73 per share. Absent our exercise of our call option to redeem the Notes, the holders have no rights to exercise the Series B Warrants and receive common shares to which the contingent warrants are indexed.

On December 29, 2006, we entered into Amendment and Exchange Agreements with these investors. The investors agreed to waive their option to compel redemption, and we agreed to capitalize the $3,750,000 redemption premium with respect to the Investors’ right to compel redemption of the Notes. In connection with these amendments, we issued new amended Notes having an aggregate principal amount of $33,750,000 at a conversion price of $0.32. We also issued new five year Series A warrants to purchase 30,501,048 shares of common stock and new Series B warrants to purchase 105,468,750 shares of common stock (exercisable only if we redeem the Notes, on a pro rata basis) at exercise prices of $0.34 and $0.32, respectively, to replace the warrants previously issued in the financing transaction. On December 29, 2006, the closing market trading price of our common stock was $0.31 per share.

Securities authorized for issuance under equity compensation plans

The equity compensation reported in this section has been issued pursuant to individual compensation contracts and arrangements with employees, directors, consultants, advisors, vendors, suppliers, lenders and service providers. The equity is reported on an aggregate basis as of December 31, 2006. Our security holders have not approved the compensation contracts and arrangements underlying the equity reported.
 
Compensation Plan Category
 
Number of securities to be issued upon exercise of options, warrants and rights
 
Weighted average price of outstanding options, warrants and rights
 
Number of securities remaining for future issuance under equity compensation plans
 
Directors (former)
   
244,554
 
$
0.71
   
0
   
individual plans
 
Employees (former)
   
58,333
 
$
0.24
   
0
   
individual plans
 
Directors/Management & Employees
   
9,050,868
 
$
0.24
   
1,275,000
   
2005 Stock Option Incentive Plan(1)
 
Consultants
   
50,000
 
$
0.24
   
0
   
individual plans
 
Total
   
9,403,755
 
$
0.31
   
1,275,000
       

On April 6, 2005, our Directors voted to adopt a Stock Option Incentive Plan for the grant of options to directors, employees and consultants for the purchase of up to 10,397,745 shares of our common stock. On May 12, 2005, the Board of Directors accepted and adopted the determination of the Compensation Committee to grant 8,922,745 of the authorized option to our employees, directors and certain consultants. The ten-year options vest over a period of eighteen months and have exercise prices varying from $0.20 per share to $0.30 per share, with a weighted average exercise price of $0.24 per share.

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ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE LEVEL OVERVIEW

Our Business Model
 
We develop, market, distribute and sell nutritious single serve flavored aseptic milk products throughout the United States using our Company owned Slammers® and Bravo!™ trademarked brands. Our aseptic (shelf stable) innovation offers several competitive advantages, including eliminating the need for refrigerated warehousing and trucking and offering real milk products with shelf lives of up to eight months. In order to create brand recognition, we have adopted a co-branding strategy and negotiated strategic license agreements with Masterfoods (Milky Way®, Starburst®, 3 Musketeers®, Dove®) General Mills (Trix™, Cocoa Puffs™) and Organic Valley® (organic milk). Our broad product offering targets several specific demographic groups and lifestyles. For instance, we have milk available for candy lovers of any age through our Milky Way®, 3 Musketeers®, Dove®, and Starburst® flavored products. Our Slim-Slammers®, Bravo! Blenders™ and Organic Valley® milk products target health conscious adults, and our Cocoa Puffs® and Trix® flavored milk products focus on kids from ages 6 to 12. Our products are primarily distributed through Coca Cola Enterprises Inc. (“CCE”). In the future, we plan to increase our revenues by significantly expanding our sales force, securing additional distribution channels and entering into new categories including sports, energy and coffee milk based beverages.
 
Industry-Wide Factors Relevant to the Company
 
While retail milk sales have been flat to slightly declining over the past five years, there have been growth niches within this industry. For instance, organic milk sales increased 77% from 1999 to 2004, and single serve flavored milk consumption doubled from 1997 to 2003, while flavored milk sales grew 10.2% in 2004. Furthermore, reduced fat flavored milk sales increased 29% from 2002 to 2006. Our efforts in 2006 have focused on market segments that have exhibited this continued growth. These efforts are consistent with our overall business strategy of exploiting market trends with the quick development of new and innovative products.
 
Summary of Certain Key Events during 2006 and 2005
 
During 2006, we expanded our annual production capacity from 30 million to 160 million bottles. This increase was accomplished by expanding our capacity at Jasper Products from 30 million to 90 million bottles annually and executing a supply agreement with HP Hood on September 19, 2006 for the production of an additional 70 million bottles annually.

Other key accomplishments during 2006 include:
 
 
·
Worked with our co-packers and bottle suppliers to develop new innovative packaging, including the first 8 ounce vendible bottle for Coca Cola and other vending machines and 12 ounce vendible bottles for high schools that meet the new American Beverage Association serving size guidelines
     
 
·
Reduced average costs per 14 ounce bottle by 13%
     
 
·
Established the Allied Brands sales channel to focus on expanding business beyond CCE
     
 
·
Introduced an organic milk line through partnership with Organic Valley’s Cooperative Regions of Organic Producer Pools
 
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·
Signed licensing agreement with General Mills for use of the Cocoa Puffs®, Trix®, FrankenBerry®, BooBerry® and Wheaties® products that will introduce our Slammers® brand to a younger demographic
     
 
·
Negotiated Masterfoods license to 2012 (five year extension) and broadened our co-branded offering to include Dove® Dark and Dove® Milk Chocolate
     
 
·
Created Bravo’s first formalized and detailed three year Strategy and Financial Plan
     
 
·
Added talent and resources across all departments to support company growth

During 2006, like many early-stage organizations that often seek private-investment in public-enterprise type (PIPE) financings, we faced major challenges associated with our accounting and reporting for our financing arrangements. Unfortunately, issues raised by the Securities and Exchange Commission resulted in the restatement of the financial statements in our 2005 Annual Report. While we addressed the issues and made corrections to the satisfaction of the SEC, correcting our financial statements led to delays in our periodic SEC filings and registration statements related to the PIPE securities which, in turn, resulted in significant penalties that were paid to our investors. Such penalties have ceased to accrue, but contractual terms and conditions that could result in additional future penalties for non-filings, loss of effectiveness or suspension of trading remain. We have increased our internal financial department resources and have engaged highly-specialized consultants, where necessary, to be more responsive to the ever-increasing financial complexities with which, as an issuer, we have been and expect to continue to be confronted.

On August 31, 2005, we entered into a Master Distribution Agreement (“MDA”) with CCE. The ten year exclusive MDA significantly expanded our distribution network. Under the terms of the MDA, CCE has the right of first refusal to distribute all of our new products. We currently are developing a secondary national distribution system for all other products that CCE does not carry.

In January 2005, we launched our Slammers® Starburst® line of Fruit & Cream Smoothies utilizing a “shelf stable” re-sealable plastic bottle for milk products that does not require refrigeration. Until that launch, all single served flavored milk in plastic bottles required refrigeration for storage, distribution, and shelf placement. The tactical advantage of distributing milk products ambient enables us to overcome a major entry barrier to reach the immediate consumption market. Refrigerated milk is relegated to the cold dairy direct-store-delivery systems that are controlled by either regional dairy processors or larger national dairy holding companies that carry their own brands of flavored milks. Shelf stable re-sealable plastic bottles allow us to use a more traditional distribution network that accommodates the non-refrigerated beverages. Also, milk products packaged in shelf stable re-sealable plastic bottles have significantly longer shelf life for storage, allowing us to ship in full truckloads resulting in decreased freight costs. We have converted all of our products to “shelf stable” re-sealable plastic bottles.

DISCUSSION AND ANALYSIS

This discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles that are generally accepted in the United States of America.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most critical estimates included in our financial statements are the following:

·
Estimating the fair value of our complex derivative financial instruments that are required to be carried as liabilities at fair value pursuant to Statements on Financial Accounting Standards No. 133 Accounting for Derivative Financial Instruments and Hedging Activities (FAS 133)
 
13

 
·
Estimating the future recoverability of our long-lived assets, consisting of property and equipment and intangible assets, pursuant to Statements on Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-lived Assets (FAS 144)

We use all available information and appropriate techniques to develop our estimates. However, actual results could differ from our estimates.

Derivative Financial Instruments

We do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we frequently enter into certain other financial instruments and contracts, such as debt financing arrangements, redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts or (iii) may be net-cash settled by the counterparty to a financing transaction. As required by FAS 133, these instruments are required to be carried as derivative liabilities, at fair value, in our financial statements.

We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective measuring of fair values. In selecting the appropriate technique(s), we consider, among other factors, the nature of the instrument, the market risks that such instruments embody and the expected means of settlement. For less complex derivative instruments, such as free-standing warrants, we generally use the Black Scholes Merton option valuation technique, since it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk free rates) necessary to fair value these instruments. For complex derivative instruments, such as embedded conversion options, we generally use the Flexible Monte Carlo valuation technique since it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, we project and discount future cash flows applying probability-weightage to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in our trading market price which has high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Impairment of Long-Lived Assets

Our long-lived assets consist principally of intangible assets, and to a much lesser extent, furniture and equipment. These balances represent approximately 65% of total assets at December 31, 2006. We evaluate the carrying value and recoverability of our long-lived assets when circumstances warrant such evaluation by applying the provisions of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. 
 
14


RESULTS OF OPERATIONS

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Consolidated Revenues

   
2006
 
2005
 
$ Change
 
% Change
 
Revenues
 
$
14,661,852
 
$
11,948,921
 
$
2,712,931
   
22.7
%

The increase in our revenues in 2006 compared to 2005 is the result of our Master Distribution Agreement with CCE, which went into effect in November 2005. Accordingly, we reported a full year of revenue from this contract in 2006, compared to only two months in 2005. Our agreement with CCE stipulates lower unit selling prices than are charged to other customers. CCE is a significant customer and contributed 78% and 34% of our revenues in 2006 and 2005, respectively. Prior to our MDA with CCE, we relied on wholesalers and independent resellers for distribution of our products. Following our execution of the Master Distribution Agreement, we have reduced our reliance on wholesalers and independent resellers to distribute our product and, accordingly, our revenues from these sources decreased from 66% in 2005 to 22% in 2006. The loss of CCE as a customer, or the curtailment of business with CCE, would have a material adverse effect on our operations.

Revenues are net of industry-standard slotting fees and cash discounts of $563,070 and $487,221 in 2006 and 2005, respectively. Slotting fees, which totaled $463,256 and $442,625 in 2006 and 2005, are common in the large store channel and represent cash payments made for rights to place our products on customer retail shelves for a stipulated period of time. A component of our growth plan includes increasing penetration in the large store channel. Therefore, we expect slotting fees to increase in the future.

We plan to increase our revenues during 2007 by reorganizing and augmenting our internal sales force, securing additional national distributors, expanding our product offering, increasing our volume per outlet and driving further penetration of our products into CCE’s current customer base.

Geographically, our revenues are dispersed 99% and 1% between the United States of America and internationally, respectively. We plan to develop opportunities to augment our international sales, in particular within Canada and Mexico, during 2007.
 
Consolidated Product and Shipping Costs

   
2006
 
% of Revenues
 
2005
 
% of Revenues
 
$ Change
 
% Change
 
Product costs
 
$
12,649,884
   
86.3
%
$
8,938,692
   
74.8
%
$
3,711,192
   
41.5
%
Shipping costs
   
1,530,297
   
10.4
%
 
1,505,035
   
12.6
%
 
25,262
   
1.7
%
Total
 
$
14,180,181
   
96.7
%
$
10,443,727
   
87.4
%
$
3,736,454
   
35.8
%
 
15

 

Product and Shipping Costs

Product costs as a percentage of revenue increased 11.5% in 2006 primarily for three reasons. First, our average selling price per unit decreased compared with our average selling price in 2005 due to pricing concessions agreed to with CCE under our MDA. These pricing concessions were agreed to in anticipation of increased revenues generated through our relationship with CCE. As provided for in our agreement with CCE, we are increasing selling prices in early 2007.

Second, we sold certain products with remaining shelf life of less than what is allowed under the CCE agreement to other customers at a loss aggregating $440,000. These selling losses are attributed to contract implementation issues with CCE and are expected to be less material during 2007.

Finally, we recorded inventory obsolescence expense of $347,000 in 2006 compared to $0 in 2005. The 2006 expense represents reserves established primarily for the remaining 14 ounce “Commodore” bottles, which have been replaced with the vendible “Snowman” bottles.

Our shipping cost decreased 2.2% as a percentage of revenues. With the increase in sales volume from our relationship with CCE, we were able to decrease our overall shipping costs. This was done by shipping full truck loads of our product in 2006 instead of partial truck loads in 2005.
 
Consolidated Operating Expenses

   
2006
 
% of Revenues
 
2005
 
% of Revenues
 
$ Change
 
% Change
 
Marketing and Advertising
 
$
7,467,605
   
50.9
%
$
1,564,665
   
13.1
%
$
5,902,940
   
377.3
%
Selling
   
11,859,652
   
80.9
%
$
5,900,211
   
49.4
%
 
5,959,441
   
101.0
%
General and administrative
   
10,685,831
   
72.9
%
 
7,263,284
   
60.8
%
 
3,422,547
   
47.1
%
Product development
   
601,574
   
4.1
%
 
636,342
   
5.3
%
 
(34,768
)
 
(5.5
)%
Non-recurring finder’s fee
   
-
   
0.0
%
 
3,000,000
   
25.1
%
 
(3,000,000
)
 
(100.0
)%
Total
 
$
30,614,662
   
208.8
%
$
18,364,502
   
153.7
%
$
12,250,160
   
66.7
%

Marketing Expense and Advertising:

During 2006, we significantly increased our marketing budget by sponsorship of National Hot Rod Association (“NHRA”) pro stock race cars. We incurred approximately $3 million in expenses surrounding our NHRA advertising during 2006, which included retail promotions, personal appearances and sales events. The remainder of the increase in marketing and advertising expenditures is attributed to the creation of Bravo!’s first two television commercials, point of sale spending, and radio commercials. This included approximately $2,000,000 in fourth quarter radio and television advertising aimed at boosting brand awareness in our strongest geographic markets. Investment in marketing and advertising is important as we continue to build brand recognition and generate consumer trial and loyalty, and we expect to continue this investment in 2007.

16

 

Selling Expense:

Our selling expenses in 2006 increased by approximately $6.0 million due primarily to the hiring of additional sales personnel, a national CCE sales campaign and the non-cash amortization of an intangible asset. During 2006, our sales force headcount increased from 3 to 17 personnel, resulting in $1.3 million incremental payroll expenses. We also spent approximately $1.5 million on a nationwide campaign aimed at educating, motivating, and building brand awareness of the Slammers products within the CCE sales force. Included in selling expense is the non-cash amortization of an intangible asset associated with the CCE agreement, with expense of $1.6 million and $532,000 for 2006 and 2005, respectively. Royalty and travel expenses also contributed to the overall increase in 2006 selling expenditures.

During 2007, we plan to expand our sales force, which will be situated throughout the United States and Canada, from 17 to 112 personnel. The majority of these sales people will be tasked with working very closely with CCE sales personnel. Others will be focused exclusively on targeting customers outside of the CCE distribution network. Our sales force reorganization plan is a major component of our 2007 strategy. We believe that this investment will increase our sales by improving our penetration rates and increasing volume sold to existing customers. Due to the sales force expansion plan, we expect that total selling expenses will increase in 2007.

General and Administrative Expense:

There were two major new expenditures incurred in 2006 that drove our increase in general and administrative expenses. First, we incurred $2.8 million in unused capacity penalties as a result of our manufacturing agreement with Jasper Products. These expenditures were a necessary byproduct of our strategic plan for securing additional capacity in the limited FDA approved shelf-stable plant arena. At the time that increased capacity was secured, however, the need for extra capacity that we anticipated would exist from a ramp-up in sales, had not materialized. We expect these penalties to decrease in 2007, as our sales volume increases. Second, we recorded intangible assets in late 2005 and in 2006 associated with our manufacturing agreements. The amortization expense for these intangible assets amounted to $611,000 in 2006 compared to $0 in 2005.
 
As a percentage of total revenue, our general and administrative expense increased from 61% in 2005 to 73% in 2006. Total general and administrative expenses are expected to increase as we continue to build the company infrastructure. However, we expect that the expense as a percentage of revenue will be reduced due to revenue growth, cost cutting efforts and the refinement of business operations.
 
Product Development Expense:

Product development expense in both 2006 and 2005 relates to costs associated with package development. There was a slight decrease in expense in 2006 compared to 2005 due to a more efficient utilization of our resources. Our focus continues to be the development of innovative new products while expanding our current product base.
 
Non-Recurring Finders’ Fee:

We recorded a $3,000,000 one time, non-recurring finder’s fee in connection with our execution of the MDA with CCE in 2005. We did not incur similar costs during 2006 and do not expect to incur similar costs in the foreseeable future since our business opportunity with CCE is expected to be further developed over that period.
 
17


Consolidated Other Income (Expense)

   
2006
 
% of Revenues
 
2005
 
% of Revenues
 
$ Change
 
% Change
 
Derivative income (expense)
 
$
4,159,981
   
28.4
%
$
(60,823,574
)
 
509.0
%
$
64,983,555
   
(106.8
)%
Interest expense
   
(3,245,198
)
 
22.1
%
 
(1,667,294
)
 
14.0
%
 
(1,577,904
)
 
94.6
%
Liquidated damages
   
(6,472,000
)
 
44.1
%
 
(303,750
)
 
2.5
%
 
(6,168,250
)
 
2,030.7
%
Legal settlement
   
(552,600
)
 
3.8
%
 
-
   
0.0
%
 
(552,600
)
 
100.0
%
Gain (loss) on extinguishment
   
(454,205
)
 
3.1
%
 
125,273
   
1.0
%
 
(579,478
)
 
(462.6
)%
Total
 
$
(6,564,022
)
 
44.8
%
$
(62,669,345
)
 
524.5
%
$
56,105,323
   
(89.5
)%

Derivative Income/Expense

Derivative (income) expense arises from changes in the fair value of our derivative financial instruments and, in rare instances, day-one losses when the fair value of embedded and freestanding derivative financial instruments issued or included in financing transactions exceed the proceeds or other basis. Derivative financial instruments include freestanding warrants and compound embedded derivative features that have been bifurcated from debt and preferred stock financings. In addition, derivative financial instruments arose from the reclassification of other non-financing derivative and other contracts from stockholders’ equity because share settlement was presumed not to be within our control while certain variable share price indexed financing instruments were outstanding. We continue to review our derivative liabilities and the terms and conditions that give rise to their liability classification. During the fourth quarter of 2006, we reclassified approximately $19.5 million of our derivative liabilities to stockholders’ equity upon the amendment of terms or the conversion of instruments that had a ‘tainting’ impact. Accordingly, our derivative income and expense in future periods will not be affected by fair value changes arising from these reclassified financial instruments.

Changes in the fair value of compound derivatives indexed to our common stock are significantly affected by changes in our trading stock price and the credit risk associated with our financial instruments. The fair value of warrant derivatives is significantly affected by changes in our trading stock prices. The fair value of derivative financial instruments that are settled solely with cash fluctuate with changes in management’s weighted probability estimates following the financing inception and are generally attributable to the increasing probability of default events on debt and preferred stock financings. The fair value of the derivative instruments declined principally due to the decline in our common stock trading price. Since these instruments are measured at fair value, future changes in assumptions, arising from both internal factors and general market conditions, may cause further variation in the fair value of these instruments. Future changes in these underlying internal and external market conditions will have a continuing effect on derivative expense associated with our derivative financial instruments.

Our derivative income amounted to $4,159,981 for the year ended December 31, 2006, compared to derivative expense of $60,823,574 in the prior year. The magnitude of the derivative loss during the year ended December 31, 2005 when compared with the income for the year ended December 31, 2006 reflects the following:

During the year ended December 31, 2005, and specifically commencing in the second quarter, the trading price of our common stock reached significantly high levels relative to its trend. The trading price of our common stock significantly affects the fair value of our derivative financial instruments. To illustrate, our trading stock price at the end of the first quarter of 2005 was $0.15 and then increased to $0.93 by the end of the second quarter. Our trading stock price then declined to $0.61 and $0.59 at the end of the third and fourth quarters, respectively. However, the higher stock price had the effect of significantly increasing the fair value of our derivative liabilities and, accordingly, we were required to adjust the derivatives to these higher values with charges to our income. Furthermore, during the year ended December 31, 2005, we entered into a $2,300,000 debt and warrant financing arrangement, more fully discussed in Note 7(b) in the accompanying financial statements. In connection with our accounting for this financing, we encountered the unusual circumstance of a day-one loss related to the recognition of derivative instruments arising from the arrangement. That means that the fair value of the bifurcated compound derivative and warrants exceeded the proceeds that we received from the arrangement, and we were required to record a loss to record the derivative financial instruments at fair value. The loss that we recorded amounted to $8,663,869. We did not enter into any other financing arrangements during the periods reported that reflected such day-one losses.
 
18


The most significant factor driving the $4,159,981 derivative income recognized during the year ended December 31, 2006 was the decline in our stock price during the year. To illustrate, the closing price of our common stock at the close of 2006 was $0.31, compared to $0.59 at the close of 2005, representing a 47% decline in the stock price. Partially offsetting the derivative income was a $3.6 million derivative expense associated with a December 2006 amendment to the July 2006 $30 million convertible debt agreement. In the amendment, the investors agreed to waive their rights to exercise their default put in exchange for an increase in the face value of the financing agreement. This transaction is more fully discussed in Note 7(j) in the accompanying financial statements.

Interest Expense

The increase in interest expense in 2006 compared to 2005 was due to an increase in our debt balance. During 2006, we issued approximately $31.7 million in new debt financings. We also allocated proceeds from these financings to warrants and other features that required bifurcation from hybrid, convertible debt instruments. As a result, our debt is recorded at a discount, and we are required to amortize this discount through periodic charges to interest expense using the effective method. During 2006 and 2005, amortization of debt discounts amounted to approximately $1.9 million and $1.4 million respectively. Applying the effective method results in an increasing interest (or amortization) over the term of the debt. In addition, we issued $30.0 million of our total 2006 indebtedness during July 2006. Accordingly, our interest expense will increase in future periods due to (i) increased discount amortization and (ii) the increased interest from our average debt balances being outstanding for longer periods.

Liquidated Damages

During 2006, we recorded liquidated damages expense of $6,472,000 compared to $303,750 in 2005. We have entered into registration rights agreements with certain investors that require us to file a registration statement covering underlying indexed shares, become effective on the registration statement, maintain effectiveness and, in some instances, maintain the listing of the underlying shares. Certain of these registration rights agreements require our payment of cash penalties to the investors in the event we do not achieve the requirements. We record our best estimate of liquidated damages penalties as liabilities and charges to our income when the cash penalties are probable and estimable. Effective February 2007, such penalties have ceased to accrue, but contractual terms and conditions that could result in additional future penalties for non-filings, loss of effectiveness or suspension of trading remain. We will evaluate our estimate of liquidated damages in future periods and adjust our estimates for changes, if any, in the facts and circumstances underlying their calculation.
 
19


Legal Settlement

During 2006, we recorded a legal settlement with Marvel for $552,600 that provided solely for the extension of the terms of previously issued warrants. When we extend expired or otherwise expiring warrants, we are required to remeasure them at their fair value on the modification date. Our charge represents the fair value of the options using the Black-Scholes-Merton valuation technique.
 
Gain (loss) on extinguishment of debt
 
Debt extinguishment gains and losses arise from modifications that we make from time to time to our debt arrangements. Certain modifications required our re-measurement of the carrying value of the debt to fair value when the modification is deemed to be significant, which is determined based upon changes in cash flows or changes in the fair value of embedded conversion options. We may further modify other debt arrangements as explained under the discussion related to our derivative financial instruments. Each modification will require a determination whether an extinguishment occurred and, if so, an extinguishment gain or loss may require recognition.
 
Consolidated Net Loss

We reported a net loss in 2006 of $36,697,013 compared with a net loss of $79,528,653 in 2005. There were several factors that gave rise to our losses in 2006 and 2005. First, we are currently expending funds for marketing programs, developing our administrative and operating infrastructure and developing new and existing sales channels. As a result, our current revenue volume has not been sufficient to recover all of our operating expenses. We anticipate that our operating expenses as a percentage of our sales will decrease in future periods as our revenues increase and our costs stabilize. In addition, we incurred a one-time $3,000,000 fee during 2005 related to the signing of the MDA with CCE. Finally, the overall magnitude of the 2005 net loss can be attributable largely to the fair value adjustments related to our derivative financial instruments of $60,823,574. See the discussion above about our derivative income (expense) for additional information.

Consolidated Loss Applicable to Common Shareholders

We reported a loss applicable to common shareholders in 2006 of $37,977,475 compared with $80,850,670 in 2005. Loss applicable to common shareholders represents net loss as adjusted for preferred stock dividends and accretion of our redeemable preferred stock and our equity classified preferred stock to redemption values using the effective method. Many of our preferred stock series have cumulative dividend features, and we will continue to reflect preferred stock dividends in our loss applicable to common shareholders until the preferred stock is converted, if ever. In addition, many of our redeemable preferred stock series were initially discounted due to the allocation of financing proceeds to detachable warrants and embedded derivative financial instruments. We use the effective method to amortize these discounts. The use of the effective method involves the accretion of our discounted redeemable preferred stock to redemption values. Accretion is the change of present value of a financing instrument to its appropriate future value over the anticipated life of the instrument. This method causes accretion to increase over the redemption period of these instruments as the carrying values increase. Accordingly, accretions will increase in future periods until the preferred stock is fully accreted to redemption values or converted.

20

 
Consolidated Loss per Common Share Applicable to Common Stockholders

The Company’s basic loss per common share applicable to common stockholders in 2006 was $(0.20) compared with a basic loss per common share applicable to common stockholders in 2005 of $(0.60). Because the Company experienced net losses in 2006 and 2005, all potential common share conversions existing in our financial instruments would have an antidilutive impact on earnings per share; therefore, diluted loss per common share equals basic loss per common share for both years.

The weighted average common shares outstanding increased from 135,032,836 for the year ended 2005 to 192,450,151 for the year ended 2006. The increase is attributed primarily to conversions of our convertible debt and preferred instruments into common shares. Potential common stock conversions excluded from the computation of diluted earnings per share amounted to 195,933,793 and 108,059,082 for 2006 and 2005, respectively.

Consolidated Comprehensive Loss

Comprehensive loss differs from net loss for 2006 and 2005 by $49,264 and ($30,759), respectively, which represents the effects of foreign currency translation on the financial statements of our subsidiaries denominated in foreign currencies. Our foreign operations are currently not significant. Increases in our foreign operations will likely increase the effects of foreign currency translation adjustments on our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

We have yet to achieve profitability, and our ability to continue as a going concern will be dependent upon receiving additional third party financings to fund our business at least through the first eight months of 2007. Ultimately, our ability to continue is dependent upon the achievement of profitable operations. There is no assurance that further funding will be available at acceptable terms, if at all, or that we will be able to achieve profitability. These conditions raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments that may result from the outcome of this uncertainty.

Working Capital Needs and Major Cash Expenditures
 
In 2006, we experienced delays in filing our financial statements and registration statements due to errors in our historical accounting which we have corrected. As a result of our inability to make these filings timely, we incurred approximately $6.5 million in penalties, the majority of which we paid in cash to our investors during 2006 and January 2007. We also incurred approximately $1.4 million in outside accounting and legal fees during 2006 to remediate the underlying issues leading to the late filings. We are addressing the internal control weaknesses that resulted in the incurrence of these penalties, and we do not expect such material penalty expenditures in the future.
 
We currently have monthly working capital needs of approximately $1,500,000. This amount is however expected to increase in 2007, primarily due to the following factors:
     
 
·
Principal payments related to our July 2006 convertible note (described below) commence in May 2007, at which time approximately $1.8 million in principal will become due every other month. In addition, approximately $750,000 in interest is payable to these investors each quarter.
     
 
·
Our payroll, which currently approximates $400,000 monthly, is expected to double by late 2007, due largely to a planned major sales force expansion.

21

 
Material Covenants of Debt Obligations

On February 14, 2007, the Securities and Exchange Commission declared effective a Form SB-2 registration statement covering 60.55% of the securities in a July 2006 transaction, as amended, pursuant to which we issued and sold $30 million senior convertible notes that are due in 2010 and warrants that expire in July 2011. The senior notes are convertible into 105,468,750 shares of our common stock and the warrants can be exercised to purchase an additional 27,605,040 shares of our common stock. Of the securities underlying the notes and warrants, the February 14, 2007 registration statement was limited to and registered 60.55% of the securities in the July 2006 transaction, as amended, consisting of 74.2% of the common stock issuable upon a conversion of the notes and 8.6% of the common stock issuable upon the exercise of the warrants. We anticipate filing an additional registration statement to cover the underlying shares of our common stock not covered by the February 14, 2007 effective statement, as soon as we have the legal ability to do so.

External Sources of Liquidity:

On November 28, 2005, we closed a funding transaction with 13 accredited institutional investors, for the issuance and sale of 40,500,000 shares of our common stock for a purchase price of $20,250,000. In addition, we issued five-year warrants for the purchase of an additional 15,187,500 shares of common stock at an exercise price of $0.80 per share. Our issuance of these securities was pursuant to an exemption to the registration requirements of Section 5 of the Securities Act of 1933 for “transactions of the issuer not involving any public offering” provided in Section 4(2) of the Act and pursuant to a Regulation D offering. In connection with this financing, we issued common stock purchase warrants to purchase 1,012,500 shares of common stock at an exercise price of $.50 per share and 304,688 shares of common stock at an exercise price of $.80 per share to SG Cowen & Co., LLC, who acted as placement agent for this financing. On November 7, 2006, the Securities and Exchange Commission declared effective a Form SB-2 registration statement covering the November 28, 2005 transaction securities.
 
In July 2006, the Company sold $30 million four year senior convertible notes (the “July 2006 Notes”) in a private sale to five accredited institutional investors. The July 2006 Notes carried a 9% annual coupon, payable quarterly, and were convertible into shares of common stock at $0.70 per share. We also issued five year Series A warrants to purchase 13,178,571 shares of common stock and Series B warrants to purchase 43,392,856 shares of common stock (exercisable only if the Company redeems the July 2006 Notes, on a pro rata basis) at $0.73 per share. Absent the Company’s exercise of its call option to redeem the July 2006 Notes, the holders have no rights to exercise the Series B Warrants and receive common shares to which the contingent warrants are indexed.

On August 31, 2006, the Company entered into Amendment Agreements with respect to the July 2006 Notes, as a result of the Company’s delay in filing its second quarter Form 10QSB. The Company issued new Amended and Restated Notes (the “Restated July 2006 Notes”), at a reduced conversion price of $0.51 per share and granted the investors a “put” to compel the Company’s redemption of the Restated July 2006 Notes through December 15, 2006.

On December 29, 2006, the Company entered into Amendment and Exchange Agreements with the July 2006 investors. The investors agreed to waive their option to compel redemption, and the Company agreed to capitalize the $3,750,000 redemption premium with respect to the investors’ right to compel redemption of the Restated July 2006 Notes. In connection with these amendments, the Company issued new Restated July 2006 Notes having a conversion price of $0.32 and Series A and B Warrants having exercise prices of $0.34 and $0.32, respectively. On December 29, 2006, the closing market trading price of the Company’s common stock was $0.31 per share. On February 14, 2007, the Securities and Exchange Commission declared effective a Form SB-2 registration statement covering 60.55% of the securities in the July 2006 transaction, as amended.
 
22


On February 12, 2007, we obtained financing in the amount of $2,000,000 and issued promissory notes aggregating that principal amount to three accredited investors. The notes provide for rights of participation in a subsequent financing by us. We also issued five year warrants for 2,000,000 shares of our common stock at an exercise price of $0.34 per share in connection with this financing. The warrants and underlying common stock were issued pursuant to Regulation D.

On March 15, 2007, we issued promissory notes to three accredited investors aggregating $625,000, and obtained financing from them in that principal amount.  The notes provide for interest at 12% per annum, a maturity date of July 12, 2007, rights of participation in a subsequent financing by us and the ability of the investors to convert the notes to common stock at $0.34 per share upon an event of default.  We also issued five year warrants for the purchase of 625,000 shares of our common stock at an exercise price of $0.34 per share in connection with this financing.  The warrants and underlying common stock were issued pursuant to an exemption to Section 5 of the Securities Act of 1933, as amended, set forth in Section 4(2) of the Act and Regulation D, promulgated thereunder.

Information about our cash flows

Cash provided by (used in):
 
2006
 
2005
 
$ Change
 
% Change
 
Operating activities
 
$
(27,226,081
)
$
(9,301,078
)
$
(17,925,003
)
 
192.7
%
Investing activities
   
(1,327,339
)
 
(4,043,665
)
 
2,716,326
   
(67.2
)%
Financing activities
   
27,339,732
   
18,209,600
   
9,130,132
   
50.1
%

The net increase in cash used in operating activities is due to a number of factors. Our net loss decreased from $79,528,653 in 2005 to $36,697,013 in 2006. However, our net loss in 2005 included a non-cash derivative expense of $60,823,574, while our 2006 net loss included a non-cash derivative gain of $4,159,981. Changes in accounts receivable contributed to a decrease in cash used by operating activities of $2,393,108, as compared to contributing to an increase of $3,356,477 for 2005 for a difference of $5,749,585. Cash used by operating activities increased as a result of changes in inventory during 2006 by $2,113,721, compared to $379,489 for the same period in 2005. This was the result of our building inventory during 2006 in connection with the continued implementation of our MDA with CCE. The changes in accounts payable and accrued liabilities for the year ended December 31, 2006 contributed to a reduction in cash used by operating activities of $5,265,914, whereas such changes in 2005 contributed to a decrease in cash used by operating activities of $7,294,548. Cash flows generated by our operating activities were inadequate to cover our cash disbursement needs for the year ended December 31, 2006, and we had to rely on private placement financing and new convertible debt financing to cover operating expenses.

Cash used in the year ended December 31, 2006 in our investing activities was $1,327,339 for license and trademark costs and equipment purchases, compared to $4,043,665 for the same period in 2005.

Net cash provided by our financing activities for the year ended December 31, 2006 was $27,339,732. Net cash provided by financing activities for the same period in 2005 was $18,209,600, for a net increase of $9,130,132. The increase is attributed to proceeds received from convertible notes payable of $31,669,323 in 2006.

23

 
EFFECTS OF INFLATION

We believe that inflation has not had any material effect on our net sales and results of operations.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements for the years ended December 31, 2006 and 2005 are contained on Pages F-1 to F-61 which follows.
 
24

 
BRAVO! BRANDS INC. AND SUBSIDIARY
 
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005

F-1


BRAVO! BRANDS, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
 
F-3
     
Consolidated Balance Sheets
 
F-4 to F-5
     
Consolidated Statements of Operations and Comprehensive Loss
 
F-6
     
Consolidated Statements of Cash Flows
  F-7 to F-8
     
Consolidated Statements of Stockholders’ Deficit
 
F-9 
     
Notes to Consolidated Financial Statements
 
F-10 to F-61

F-2


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
Bravo! Brands Inc.
North Palm Beach, Florida

We have audited the accompanying consolidated balance sheets of Bravo! Brands Inc. (formerly Bravo! Foods International Corp.) as of December 31, 2006 and 2005 and the related consolidated statements of operations and comprehensive loss, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bravo! Brands Inc. as of December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the financial statements, the Company incurred a net loss of $36,697,013 for the year ended December 31, 2006 and as of that date had a working capital deficit of $54,378,517 and an accumulated deficit of $157,031,836. The Company is also delinquent in payment of certain debts. These conditions raise substantial doubt about their ability to continue as a going concern. Management's actions in regard to these matters are more fully described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.


/s/ Lazar Levine & Felix LLP

New York, New York
March 28, 2007

F-3

 
 
BRAVO! BRANDS INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
 
   
December 31,
 
   
2006
 
2005
 
Assets
         
           
Current assets:
         
Cash and cash equivalents
 
$
3,783,562
 
$
4,947,986
 
Accounts receivable, net of allowance for doubtful accounts of  $140,000 and $350,000 for 2006 and 2005, respectively
   
965,733
   
3,148,841
 
Inventories, net of allowance for slow moving and obsolete inventory of $347,000 and $0, respectively
   
2,157,866
   
391,145
 
Prepaid expenses
   
388,565
   
973,299
 
Total current assets
   
7,295,726
   
9,461,271
 
Fixed assets
   
1,211,556
   
288,058
 
Intangible assets, net
   
18,537,612
   
18,593,560
 
Other assets
   
3,332,856
   
15,231
 
Total assets
 
$
30,377,750
 
$
28,358,120
 
 
See accompanying notes
 
F-4

 
BRAVO! BRANDS INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
 
   
 December 31
 
   
2006
 
2005
 
Liabilities, Redeemable Preferred Stock and Stockholders’ Deficit
         
           
Current liabilities:
         
Accounts payable
 
$
8,987,940
 
$
5,987,219
 
Accrued liabilities
   
7,014,263
   
4,872,277
 
Notes payable
   
243,968
   
937,743
 
Convertible notes payable
   
25,486,990
   
1,012,780
 
Derivative liabilities
   
19,941,082
   
35,939,235
 
Total current liabilities
   
61,674,243
   
48,749,254
 
Non-current notes payable
   
67,500
   
-
 
             
Commitments and contingencies
         
               
Redeemable preferred stock:
             
Series F convertible, par value $0.001 per share, 200,000 shares designated Convertible Preferred Stock, stated value $10.00 per share, 5,248 shares issued and outstanding for 2005
   
-
   
52,480
 
Series H convertible, par value $0.001 per share, 350,000 shares designated, 7% Cumulative Convertible Preferred Stock, stated value $10.00 per share, 64,500 shares issued and outstanding for 2005
   
-
   
388,305
 
Series J, par value $0.001 per share, 500,000 shares designated, 8% Cumulative Convertible Preferred Stock, stated value $10.00 per share, 200,000 shares issued and outstanding for 2006 and 2005
   
1,561,707
   
871,043
 
Series K, par value $0.001 per share, 500,000 shares designated, 8% Cumulative Convertible Preferred Stock, stated value $10.00 per share, 95,000 shares issued and outstanding for 2006 and 2005
   
837,769
   
792,672
 
Total redeemable preferred stock
   
2,399,476
   
2,104,500
 
               
Stockholders’ Deficit:
             
Preferred stock, 5,000,000 shares authorized;
             
Series B convertible, par value $0.001 per share, 1,260,000 shares designated, 9% Convertible Preferred Stock, stated value $1.00 per share, 107,440 shares issued and outstanding for 2006 and 2005
   
107,440
   
107,440
 
Series H convertible, par value $0.001 per share, 350,000 shares designated, 7% Cumulative Convertible Preferred Stock, stated value $10.00 per share, 53,500 shares issued and outstanding for 2006
   
535,000
   
-
 
Common stock, par value $0.001 per share, 500,000,000 shares authorized, 202,429,528 and 184,253,753 shares issued and outstanding for 2006 and 2005, respectively
   
202,430
   
184,254
 
Additional paid-in capital
   
122,414,992
   
96,507,932
 
Common stock subscription receivable
   
(10,000
)
 
(10,000
)
Accumulated deficit
   
(157,031,836
)
 
(119,254,501
)
Translation adjustment
   
18,505
   
(30,759
)
Total stockholders’ deficit
   
(33,763,469
)
 
(22,495,634
)
               
Total liabilities, redeemable preferred stock and stockholders’ deficit
 
$
30,377,750
 
$
28,358,120
 
 
See accompanying notes
 
F-5

 
BRAVO! BRANDS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
 
   
Years ended December 31,
 
   
2006
 
2005
 
           
Revenues
 
$
14,661,852
 
$
11,948,921
 
Product costs
   
(12,649,884
)
 
(8,938,692
)
Shipping costs
   
(1,530,297
)
 
(1,505,035
)
Gross margin
   
481,671
   
1,505,194
 
               
Operating expenses:
             
Marketing and advertising
   
7,467,605
   
1,564,665
 
Selling
   
11,859,652
   
5,900,211
 
General and administrative
   
10,685,831
   
7,263,284
 
Product development
   
601,574
   
636,342
 
Non-recurring finder’s fee
   
-
   
3,000,000
 
     
30,614,662
   
18,364,502
 
Loss from operations
   
(30,132,991
)
 
(16,859,308
)
               
Other income (expenses), net:
             
Derivative income (expense)
   
4,159,981
   
(60,823,574
)
Interest income (expense), net
   
(3,245,198
)
 
(1,667,294
)
Liquidated damages
   
(6,472,000
)
 
(303,750
)
Legal settlement
   
(552,600
)
 
-
 
Gain (loss) on extinguishment of debt
   
(454,205
)
 
125,273
 
     
(6,564,022
)
 
(62,669,345
)
               
Loss before income taxes
   
(36,697,013
)
 
(79,528,653
)
Provision for income taxes
   
-
   
-
 
Net loss
   
(36,697,013
)
 
(79,528,653
)
               
Adjustments to net loss to arrive at loss applicable to common stockholders:
             
Preferred stock dividends and accretion
   
(1,280,462
)
 
(1,322,017
)
               
Loss applicable to common stockholders
 
$
(37,977,475
)
$
(80,850,670
)
               
Basic and diluted loss per common share
 
$
(0.20
)
$
(0.60
)
               
Weighted average number of common shares outstanding
   
192,450,151
   
135,032,836
 
               
Comprehensive loss and its components consist of the following:
             
Net loss
 
$
(36,697,013
)
$
(79,528,653
)
Foreign currency translation adjustment
   
49,264
   
(30,759
)
Comprehensive loss
 
$
(36,647,749
)
$
(79,559,412
)

See accompanying notes
 
F-6

 
BRAVO! BRANDS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
   
Years ended December 31,
 
   
2006
 
2005
 
           
Cash flows from operating activities:
         
Net loss
 
$
(36,697,013
)
$
(79,528,653
)
Adjustments to reconcile net loss to net cash used in operating activities:
             
Depreciation and amortization
   
3,345,404
   
2,251,646
 
Stock issuances for compensation
   
1,372,000
   
346,438
 
Equity instruments issued and warrant costs for consulting expenses
   
317,566
   
1,472,261
 
Stock compensation expense
   
444,779
   
798,869
 
Legal settlement for Marvel warrants
   
552,600
   
-
 
Bad debt expense
   
(210,000
)
 
259,604
 
Inventory obsolescence
   
347,000
   
-
 
(Gain) loss on debt extinguishment
   
454,205
   
(125,273
)
Derivative (gain) expense, net
   
(4,159,981
)
 
60,823,574
 
Amortization of debt discount
   
1,880,046
   
1,428,638
 
Loss on disposal of fixed assets
   
3,542
   
-
 
Increase (decrease) in cash from changes in:
             
Accounts receivable
   
2,393,108
   
(3,356,477
)
Inventories
   
(2,113,721
)
 
(379,489
)
Prepaid expenses and other assets
   
(421,530
)
 
(586,764
)
Accounts payable and accrued expenses
   
5,265,914
   
7,294,548
 
               
Net cash used in operating activities
   
(27,226,081
)
 
(9,301,078
)
               
Cash flows from investing activities:
             
Licenses and trademark costs
   
(278,240
)
 
(3,823,521
)
Purchase of equipment
   
(1,049,099
)
 
(220,144
)
Net cash used in investing activities
   
(1,327,339
)
 
(4,043,665
)
               
Cash flows from financing activities:
             
Exercise of warrants
   
625,000
   
3,208,509
 
Proceeds from convertible notes payable
   
31,669,323
   
2,850,000
 
Proceeds from sale of common stock and warrants
   
151,951
   
20,690,000
 
Payment of preferred stock dividends
   
(87,866
)
 
-
 
Payments for redemption of warrants
   
-
   
(5,900,000
)
Payment of note payable
   
(2,295,598
)
 
(500,000
)
Registration and other costs of financing
   
(2,723,078
)
 
(2,138,909
)
Net cash provided by financing activities
   
27,339,732
   
18,209,600
 
               
Effect of changes in exchange rate on cash
   
49,264
   
(30,759
)
               
Net increase (decrease) in cash and cash equivalents
   
(1,164,424
)
 
4,834,098
 
Cash and cash equivalents, beginning of period
   
4,947,986
   
113,888
 
Cash and cash equivalents, end of period
 
$
3,783,562
 
$
4,947,986
 
 
See accompanying notes
 
F-7


BRAVO! BRANDS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
Supplemental Cash Flow Information
 
Years ended December 31,
 
   
2006
 
2005
 
Cash paid during the year for interest
 
$
414,423
 
$
10,741
 
Cash paid for taxes
 
$
-
 
$
-
 
               
Non-cash investing and financing activities:
             
Purchase of intangible assets with derivative warrants
 
$
2,488,354
 
$
15,960,531
 
Conversion of notes payable and accrued interest
 
$
3,573,098
 
$
20,343,934
 
Conversion of redeemable preferred stock and related dividends
 
$
152,480
 
$
2,644,326
 
Reclassification of derivative warrants
 
$
19,547,072
 
$
35,230,018
 
 
See accompanying notes
 
F-8

 
BRAVO! BRANDS INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31 2006 AND 2005
 
 
 
 
 
 
 
 
 
 
 
 
Common
   
Accumulated
       
   
Additional
         
Stock
   
Other
       
     
Preferred Stock
   
Common Stock
   
Paid In
   
Accumulated
     
Subscription
   
Comprehensive
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
     
Receivable
   
Loss
   
Total
 
                                                           
Balance, December 31, 2004
    107,440   $
107,440
    57,793,501   $
57,791  
  $
21,387,210
   $
(38,716,131
)
 
$
-
 
$
-
   
(17,163,690
)
                                                           
Conversion of redeemable preferred stock and dividends
   
-
   
-
   
9,245,352
   
9,247
   
2,659,079
   
(24,000
)
   
-
   
-
   
2,644,326
 
Conversion of notes payable
   
-
   
-
   
41,248,858
   
41,249
   
20,302,685
   
-
     
-
   
-
   
20,343,934
 
Exercise of warrants
   
-
   
-
   
32,474,792
   
32,475
   
38,406,052
   
-
     
-
   
-
   
38,438,527
 
Private placement financing
   
-
   
-
   
40,950,000
   
40,950
   
20,649,050
   
-
     
-
   
-
   
20,690,000
 
Common stock subscribed but not paid
   
-
   
-
   
-
   
-
   
-
   
-
     
(10,000
)
 
-
   
(10,000
)
Financing costs
   
-
   
-
   
-
   
-
   
(2,138,909
)
 
-
     
-
   
-
   
(2,138,909
)
Stock issued for compensation
   
-
   
-
   
2,541,250
   
2,542
   
343,896
   
-
     
-
   
-
   
346,438
 
Stock option expense
   
-
   
-
   
-
   
-
   
798,869
   
-
     
-
   
-
   
798,869
 
Redemption of warrants
   
-
   
-
   
-
   
-
   
(5,900,000
)
         
-
   
-
   
(5,900,000
)
Accretion of preferred stock
   
-
   
-
   
-
   
-
   
-
   
(985,717
)
   
-
   
-
   
(985,717
)
Net loss for 2005
   
-
   
-
   
-
   
-
   
-
   
(79,528,653
)
   
-
   
-
   
(79,528,653
)
Translation adjustment
   
-
   
-
   
-
   
-
   
-
   
-
     
-
   
(30,759
)
 
(30,759
)
Balance, December 31, 2005
   
107,440
   
107,440
   
184,253,753
   
184,254
   
96,507,932
   
(119,254,501
)
   
(10,000
)
 
(30,759
)
 
(22,495,634
)
                                                           
Conversion of redeemable preferred stock
   
-
   
-
   
436,527
   
437
   
152,043
   
-
     
-
   
-
   
152,480
 
Exercise of warrants
   
-
   
-
   
9,752,145
   
9,753
   
615,247
   
-
     
-
   
-
   
625,000
 
Conversion of notes payable
   
-
   
-
   
6,164,662
   
6,164
   
3,566,934
   
-
     
-
   
-
   
3,573,098
 
Private placement financing
   
-
   
-
   
279,199
   
279
   
151,672
   
-
     
-
   
-
   
151,951
 
Stock issued for compensation
   
-
   
-
   
1,750,000
   
1,750
   
1,370,250
   
-
     
-
   
-
   
1,372,000
 
Warrants issued for royalty agreement
   
-
   
-
   
-
   
-
   
104,299
   
-
     
-
   
-
   
104,299
 
Other
   
-
   
-
   
(206,758
)
 
(207
)
 
207
   
-
     
-
   
-
   
-
 
Financing costs
   
-
   
-
   
-
   
-
   
(45,443
)
 
-
     
-
   
-
   
(45,443
)
Stock option expense
   
-
   
-
   
-
   
-
   
444,779
   
-
     
-
   
-
   
444,779
 
Change in derivative liability
   
-
   
-
   
-
   
-
   
19,547,072
   
-
     
-
   
-
   
19,547,072
 
Payment of preferred stock dividends
   
-
   
-
   
-
   
-
   
-
   
(87,866
)
   
-
   
-
   
(87,866
)
Accretion of preferred stock
   
53,500
   
535,000
   
-
   
-
   
-
   
(992,456
)
   
-
   
-
   
(457,456
)
Net loss for 2006
   
-
   
-
   
-
   
-
   
-
   
(36,697,013
)
   
-
   
-
   
(36,697,013
)
Translation adjustment
         
-
   
-
   
-
   
-
   
-
     
-
   
49,264
   
49,264
 
 
                                                         
Balance, December 31, 2006
160,940   $
642,440
   
202,429,528
  $
202,430
  $
122,414,992
  $
(157,031,836
)   $
(10,000
)
$
  18,505   $
(33,763,469
)
 
See accompanying notes
 
F-9

 
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
Note 1 -Nature of Business, Liquidity and Management’s Plans and Significant Accounting Policies

Nature of Business:

Bravo! Brands Inc., a Delaware corporation, and subsidiary (“the Company”) is engaged in the sale of flavored milk products, primarily in the United States. In the future, the Company plans to expand its distribution throughout various international markets.

Liquidity and Management’s Plans:

As reflected in the accompanying consolidated financial statements, the Company has continued to incur operating losses and negative cash flows from operations and has a significant working capital deficiency at December 31, 2006. The Company has been dependent upon third party financing as it executes its business model and plans. In addition, during 2006 the Company incurred significant penalties to its investors as a result of its inability to complete its SEC filings on a timely basis. Finally, the Company’s revenues are concentrated with one major customer. The loss of this customer or curtailment in business with this customer could have a material adverse affect on the Company’s business. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company plans to increase its sales, primarily by significantly increasing its sales force, partnering with a second national distributor/customer and by broadening its product offerings. The Company’s margins are expected to improve due to increased sales, unit price escalations and a major focus on cost containment measures. However, the Company expects to be dependent on third party financing at least through the first eight months of 2007. Ultimately, the Company’s ability to continue as a going concern is dependent upon the achievement of profitable operations. There is no assurance that further funding will be available at acceptable terms, if at all, or that the Company will be able to achieve profitability.

The accompanying financial statements do not reflect any adjustments that may result from the outcome of this uncertainty.

Significant Accounting Policies:

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant estimates included in the Company’s financial statements are the following:

·
Estimating the fair value of the Company’s financial instruments that are required to be carried at fair value.
 
·
Estimating the recoverability of the Company’s long-lived assets.
 
·
Estimating future bad debts on accounts receivable that is carried at net realizable values.
 
·
Estimating the Company’s reserve for unsalable and obsolete inventories that are carried at lower of cost or market.

The Company uses all available information and appropriate techniques to develop its estimates. However, actual results could differ from the Company’s estimates.
 
F-10


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
Business Segment and Geographic Information

The Company operates in one dominant industry segment that it has defined as the single serve flavored milk industry. While the Company’s international business is expected to grow in the future, it currently contributes less than 2% of the Company’s revenues, and the Company has no physical assets outside of the United States. The Company currently has one customer in the United States that provided 78% and 34% of its revenue during the years ended December 31, 2006 and 2005, respectively.

Revenue Recognition

Revenues are recognized pursuant to formal revenue arrangements with the Company’s customers, at contracted prices, when the Company’s product is delivered to their premises and collectibility is reasonably assured. The Company extends merchantability warranties to its customers on its products but otherwise does not afford its customers with rights of return. Warranty costs have historically been insignificant.

The Company’s revenue arrangements often provide for industry-standard slotting fees where the Company makes cash payments to the respective customer to obtain rights to place the Company’s products on their retail shelves for a stipulated period of time. The Company also engages in other promotional discount programs in order to enhance its sales activities. The Company believes its participation in these arrangements is essential to ensuring continued volume and revenue growth in the competitive marketplace. These payments, discounts and allowances are recorded as reductions to the Company’s reported revenue. Unamortized slotting fees are recorded in prepaid expenses.

Principles of Consolidation

The Company’s consolidated financial statements include the accounts of Bravo! Brands Inc. and its wholly-owned subsidiary Bravo! Brands (UK) Ltd. All material intercompany balances and transactions have been eliminated. Cumulative translation adjustments that the Company makes to reflect the accounts of Bravo! Brands (UK) Ltd. in United States Dollars are recorded as a component of other comprehensive income (loss) and stockholders’ deficit. Foreign currency transaction gains and losses are reported as a component of other income (expense).

Shipping and Handling Costs

Shipping and handling costs incurred to deliver products to the Company’s customers are included as a component of cost of sales. These costs amounted to $1,530,297 and $1,505,035 for the years ended December 31, 2006 and 2005, respectively.

Marketing and Advertising Costs

Marketing and advertising costs, which are expensed as incurred, aggregated $7,467,605 and $1,564,665 for the years ended December 31, 2006 and 2005, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. The Company maintains, at times, deposits in federally insured financial institutions in excess of federally insured limits.  Management attempts to monitor the soundness of the financial institution and believes the Company’s risk is negligible.
 
F-11


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
Accounts Receivable

The Company’s accounts receivable are exposed to credit risk. During the normal course of business, the Company extends unsecured credit to its customers with normal and traditional trade terms. Typically credit terms require payments to be made by the thirtieth day following the sale. The Company regularly evaluates and monitors the creditworthiness of each customer. The Company provides an allowance for doubtful accounts based on its continuing evaluation of its customers’ credit risk and its overall collection history. As of December 31, 2006 and 2005, the allowance of doubtful accounts aggregated $140,000 and $350,000, respectively.

In addition, the Company’s accounts receivable are concentrated with one customer that represents 70% of the Company’s gross accounts receivable balances at December 31, 2006 and 2005, respectively. Approximately 3% of the Company’s gross accounts receivable at December 31, 2006 are due from international customers.

Inventories

Inventories, which consist primarily of finished goods, are stated at the lower of cost on the first in, first-out method or market. Further, the Company’s inventories are perishable. Accordingly, the Company estimates and records lower-of-cost or market and unsalable-inventory reserves based upon a combination of the Company’s historical experience and on a specific identification basis. As of December 31, 2006 and 2005, the reserve for inventory obsolescence was $347,000 and $0, respectively.

Fixed Assets

Fixed assets are stated at cost. Depreciation is computed using the straight-line method over a period of seven years for furniture, five years for equipment, vehicles, and IT hardware, and three years for purchased software. Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Additions and betterments to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts, and any resulting gain or loss is included in the statement of operations.

Intangible Assets

The Company’s intangible assets, which are recorded at cost, consist primarily of the unamortized cost basis of warrants issued in connection with the Company’s distribution agreement with Coca-Cola Enterprises (“CCE”). Also included are warrants issued to H.P. Hood (“Hood”), a producer, and Organic Valley, a licensor, as well as a cash payment made to Jasper Products, LLC to secure additional capacity. These assets are being amortized on a straight line basis over estimated useful lives, which range from three to ten years.

Impairment of Long-Lived Assets

The Company evaluates the carrying value and recoverability of its long-lived assets when circumstances warrant such evaluation by applying the provisions of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). FAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
 
F-12


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

Financial Instruments

Financial instruments, as defined in Financial Accounting Standard No. 107 Disclosures about Fair Value of Financial Instruments (FAS 107), consist of cash, evidence of ownership in an entity and contracts that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii) conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity, or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Accordingly, the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, notes payable, derivative financial instruments, convertible debt and redeemable preferred stock that the Company has concluded is more akin to debt than equity.

The Company carries cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities at historical costs; their respective estimated fair values approximate carrying values due to their current nature. The Company also carries notes payable, convertible debt and redeemable preferred stock at historical cost; however, fair values of debt instruments and redeemable preferred stock are estimated for disclosure purposes (below) based upon the present value of the estimated cash flows at market interest rates applicable to similar instruments.

As of December 31, 2006, estimated fair values and respective carrying values of the Company’s notes payable, convertible debt and redeemable preferred stock are as follows:

Instrument
 
Note
 
Fair Value
 
Carrying Value
 
$187,743 Note Payable
   
6 (b
)
$
187,743
 
$
187,743
 
$123,725 Note Payable
   
6 (c
)
 
123,725
   
123,725
 
$600,000 Convertible Note Payable
   
7 (c
)
 
501,000
   
450,000
 
$30,000,000 Convertible Note Payable
   
7 (j
)
 
23,716,000
   
25,036,990
 
Series H Preferred Stock
   
9 (a
)
 
535,000
   
535,000
 
Series J Preferred Stock
   
9 (b
)
 
1,857,000
   
1,561,707
 
Series K Preferred Stock
   
9 (c
)
 
733,000
   
837,769
 
 
F-13

 
BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

As of December 31, 2005, estimated fair values and respective carrying values of the Company’s notes payable, convertible debt and redeemable preferred stock were as follows:

Instrument
 
Fair Value
 
Carrying Value
 
$750,000 Note Payable
 
$
750,000
 
$
750,000
 
$187,743 Note Payable
   
187,743
   
187,743
 
$200,000 Convertible Note Payable
   
190,000
   
187,934
 
$ 15,000 Convertible Note Payable
   
13,300
   
1,620
 
$600,000 Convertible Notes Payable
   
668,000
   
600,000
 
$ 6,250 Convertible Note Payable
   
6,375
   
5,188
 
$ 25,000 Convertible Note Payable
   
25,500
   
30,278
 
$187,760 Convertible Note Payable
   
187,760
   
187,760
 
Series F Preferred Stock
   
46,000
   
52,480
 
Series H Preferred Stock
   
535,000
   
388,305
 
Series J Preferred Stock
   
1,731,000
   
871,043
 
Series K Preferred Stock
   
881,000
   
792,672
 

Derivative financial instruments, as defined in Financial Accounting Standard No. 133, Accounting for Derivative Financial Instruments and Hedging Activities (FAS 133), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements, redeemable preferred stock arrangements and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. As required by FAS 133, these instruments are required to be carried as derivative liabilities, at fair value, in the Company’s financial statements.

The following table summarizes the effects on the Company’s income (loss) associated with changes in the fair values of its derivative financial instruments by type of financing for the years ended December 31, 2006 and 2005:

Derivative income (expense):
 
2006
 
2005
 
Convertible note and warrant financings
 
$
(9,581,790
)
$
(42,172,053
)
Preferred stock and warrant financings
   
4,083,139
   
(11,314,733
)
Other warrants and derivative contracts
   
9,658,632
   
(7,336,788
)
Total Derivative Income (Expense)
 
$
4,159,981
 
$
(60,823,574
)

Additional information related to individual financings can be found in notes 7 through 9.
 
F-14


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

The following table summarizes the number of common shares indexed to the derivative financial instruments as of December 31, 2006:

 
Financing or other contractual arrangement:
 
 
Note
 
Conversion
Features
 
 
Warrants
 
 
Total
 
June 2004 $600,000 Convertible Note Financing
   
7(c
)
 
3,075,000
   
-
   
3, 075,000
 
May 2006 $2,500,000 Note Financing
   
7(i
)
 
-
   
900,000
   
900,000
 
July 2006 $30,000,000 Convertible Note Financing
   
7(j
)
 
105,468,750
   
27,605,040
   
133,073,790
 
Series H Convertible Preferred Stock (a)
   
9(a
)
 
-
   
500,000
   
500,000
 
Series J Convertible Preferred Stock
   
9(b
)
 
28,000,000
   
-
   
28,000,000
 
Total Common Shares Indexed
         
136,543,750
   
29,005,040
   
165,548,790
 

 
(a)
As more fully described in Note 6(a) this instrument was afforded the conventional convertible exemption, which means the Company did not have to bifurcate the embedded conversion feature. However, the Company was required to bifurcate certain other embedded derivatives as discussed in the note. Although the conversion feature did not require derivative accounting, the Company is required to also consider the 1,312,500 common shares into which this instrument is convertible into determining whether the Company has sufficient authorized and unissued common shares for all of the Company’s share-settled obligations.

During October 2006, the Financial Accounting Standards Board exposed for public comment FASB Staff Position 00-19(b), Accounting for Registration Payment Arrangements, which, if promulgated in its current form would amend Financial Accounting Standard No. 133 Accounting for Derivative Financial Instruments and Hedging Activities. Generally, the proposed amendment will provide for the exclusion of registration payments, such as the liquidated damages that the Company has incurred, from the consideration of classification of financial instruments. Rather, such registration payments would be accounted for pursuant to Financial Accounting Standard No. 5 Accounting for Contingencies, which is the Company’s current accounting practice. That is, all registration payments will require recognition when they are both probable and reasonably estimable. The Company’s current financial arrangements result in liability classification because of registration payments and variable-priced instruments that cause share settlement of all of the Company’s derivative instruments to be beyond its control. Until the Company can amend or redeem the variable-indexed instruments, the Company will not receive the benefit of equity classification. Upon amendment or redemption, substantially all of the Company’s derivative financial instruments will be reclassified to stockholders’ equity at their adjusted fair value, and the Company will no longer be required to reflect fair value changes in its earnings.

Share-Based Payments

Effective January 1, 2005, the Company adopted Financial Accounting Standards No. 123(R), Share-Based Payments (FAS123R). Under the fair value method, the Company recognizes compensation expense for all share-based payments granted after January 1, 2005, as well as all share-based payments granted prior to, but not yet vested, as of January 1, 2005, in accordance with SFAS No. 123. Under the fair value recognition provisions of FAS 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Prior to the adoption of FAS 123 and FAS 123(R), the Company accounted for share-based payments under Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees and the disclosure provisions of SFAS No. 123. For further information regarding the adoption of SFAS No. 123(R), see Note 10 to the consolidated financial statements.
 
F-15


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

Income Taxes

The Company accounts for income taxes using the liability method, which requires an entity to recognize deferred tax liabilities and assets. Deferred income taxes are recognized based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. Further, the effects of enacted tax laws or rate changes are included as part of deferred tax expense or benefit in the period that covers the enactment date. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.

Loss Per Common Share
 
The Company’s basic loss per common share is computed by dividing loss applicable to common stockholders by the weighted average number of common shares outstanding during the reporting period. Diluted loss per common share is computed similar to basic loss per common share except that diluted loss per common share includes dilutive common stock equivalents, using the treasury stock method, and assumes that the convertible debt instruments were converted into common stock upon issuance, if dilutive. For the years ended December 31, 2006 and 2005 potential common shares arising from the Company’s stock options, stock warrants, convertible debt and convertible preferred stock amounting to 195,933,793 and 108,059,082 shares, respectively, were not included in the computation of diluted loss per share because their effect was anti-dilutive.
 
Recent Accounting Pronouncements Affecting the Company:
 
Statement of Financial Accounting Standard 157, Fair Value Measurements (“SFAS 157”)
 
On September 15, 2006, the Financial Accounting Standards Board issued a standard that provides enhanced guidance for using fair value to measure assets and liabilities. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including financial statements for an interim period within that fiscal year. The Company will adopt this pronouncement effective January 1, 2007. The Company is currently evaluating the impact of adopting this pronouncement on its financial statements.
 
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes

In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in consolidated financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 effective January 1, 2007.
 
F-16


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

Note 2 - Fixed Assets

The Company’s fixed assets are comprised of the following as of December 31, 2006 and 2005:

   
2006
 
2005
 
Equipment
 
$
617,776
 
$
209,085
 
Furniture and fixtures
   
189,568
   
189,068
 
Automobiles
   
255,327
   
29,295
 
Leasehold improvements
   
-
   
23,714
 
Purchased software
   
8,630
   
3,223
 
     
1,071,301
   
454,385
 
Less: accumulated depreciation
   
(264,970
)
 
(166,327
)
     
806,331
   
288,058
 
Construction in Process
   
405,225
   
-
 
Total Fixed Assets
 
$
1,211,556
 
$
288,058
 

Depreciation expense aggregated $122,058 and $43,292 for 2006 and 2005, respectively.

Note 3 - Intangible Assets

The Company’s intangible assets consist primarily of the unamortized costs of warrants issued in connection with the Company’s Master Distribution Agreement (“MDA”) with CCE. Also included are trademark expenditures, warrants issued to H.P. Hood and Organic Valley, in connection with manufacturing and licensing agreements, and a $2.7 million payment to Jasper Products, LLC for securing additional capacity. The useful lives of these assets range from three to ten years. The following table summarizes the components of the Company’s intangible assets as of December 31, 2006 and 2005:

   
2006
 
2005
 
CCE Distribution agreement
 
$
15,960,531
 
$
15,960,531
 
Manufacturing agreement - Jasper
   
2,700,000
   
2,700,000
 
Manufacturing agreement - H.P. Hood
   
2,384,055
   
-
 
Licensing agreement - Organic Valley
   
104,299
   
-
 
Trademark costs and other licenses
   
237,916
   
1,370,958
 
Less accumulated amortization
   
(2,849,189
)
 
(1,437,929
)
Total Intangible Assets
 
$
18,537,612
 
$
18,593,560
 

Amortization expense amounted to $2,822,543 and $1,411,004 for the years ended December 31, 2006 and 2005, respectively.

Estimated future amortization of the Company’s intangible assets for each of the next five years and thereafter is as follows as of December 31, 2006:

December 31, 2007
 
$
2,637,651
 
December 31, 2008
 
$
2,637,651
 
December 31, 2009
 
$
2,637,154
 
December 31, 2010
 
$
2,484,598
 
December 31, 2011
 
$
2,038,943
 
Thereafter    $   6,101,615  

F-17


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
 
Note 4 - Other Assets

Other assets are comprised of the following as of December 31, 2006 and 2005:

   
2006
 
2005
 
Deferred financing costs
 
$
2,311,363
 
$
-
 
Deposits
   
1,021,493
   
15,231
 
Total Other Assets
 
$
3,332,856
 
$
15,231
 

During 2006, the Company sold $30 million four year convertible notes in a private sale. The costs associated with the sale are reflected as deferred financing costs and are being amortized over the term of the notes. Amortization expense for 2006 and accumulated amortization at December 31, 2006 totaled $400,802. Also included in the 2006 balance is a $1,000,000 escrow security deposit associated with the HP Hood manufacturing agreement. The deposit, contractually owed upon the signing of the agreement, and which will be paid once significant production commences, is to secure the Company’s obligations to purchase or pay for products or make any required penalty payments.

Note 5 - Accrued Liabilities

Accrued liabilities consist of the following as of December 31, 2006 and 2005:

   
2006
 
2005
 
Investor relations liability (a)
 
$
-
 
$
1,545,565
 
Production processor liability (b)
   
850,628
   
1,893,547
 
Accrued payroll and related taxes
   
542,741
   
636,757
 
Accrued interest
   
893,706
   
376,198
 
Liquidated damages due to late registration (c)
   
3,397,419
   
303,750
 
Radio advertising and promotion costs
   
716,944
   
-
 
Other (d)
   
612,825
   
116,460
 
Total Accrued Liabilities
 
$
7,014,263
 
$
4,872,277
 

(a) The Company entered into a contract with an investor relations firm during 2005 that required payment in its equity securities. The liability at December 31, 2005 represents the value of the shares, which were not issued until 2006.

(b) Represents accruals for certain amounts owed to Jasper, the Company’s 3rd party production processor.

(c) Certain of the Company’s financing arrangements provide for penalties in the event of non-registration of securities underlying the financial instruments. Generally, these penalties are calculated as a percentage of the financing proceeds, usually between 1.0% and 3.0% each month. The Company records these liquidated damages when they are probable and estimable pursuant to FAS 5, “Accounting for Contingencies.”

(d) Represents primarily accruals for marketing, legal, and accounting fees.

F-18


BRAVO! BRANDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

Note 6 - Notes Payable

Notes payable consist of the following as of December 31, 2006 and 2005:

   
2006
 
2005
 
Mid-Am Capital Note Payable (a)
 
$
0
 
$
750,000