Attached files
file | filename |
---|---|
EX-31 - AFH HOLDING II, INC. | v206367_ex31.htm |
EX-32 - AFH HOLDING II, INC. | v206367_ex32.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q/A
Amendment
No. 1
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2010
or
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number: 000-52685
FIRST
BLUSH BRANDS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
26-1364883
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
9595 Wilshire Blvd., Suite 900
Beverly Hills, CA
|
90212
|
|
(Address
of principal executive office)
|
(Zip
Code)
|
(310)
717-8942
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 ¨
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files.) Yes
¨
No ¨
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer ¨
|
Accelerated
Filer ¨
|
Non-Accelerated
Filer ¨
|
Smaller
Reporting Company x
|
(Do
not check if a smaller reporting company )
|
Indicated
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No x
As of
November 22, 2010, the Company had outstanding 9,246,000 shares of Common
Stock.
FIRST
BLUSH BRANDS, INC.
FORM
10-Q
Page
|
||
Explanatory
note
|
2
|
|
PART
I FINANCIAL INFORMATION
|
3
|
|
ITEM
1 Financial Statements
|
3
|
|
ITEM
2 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
17
|
|
ITEM
3 Legal Proceedings
|
24
|
|
ITEM
4 Quantitative and Qualitative Disclosures About Market
Risk
|
24
|
|
ITEM
5 Controls and Procedures
|
24
|
|
PART
II OTHER INFORMATION
|
25
|
|
ITEM
6 Exhibits
|
25
|
|
SIGNATURES
|
26
|
Explanatory
Note
This
Amendment No. 1(this “Amendment”) to Current Report on Form 10-Q amends and
restates the Current Report on Form 10-Q filed by First Blush Brands, Inc.,
formally known as AFH Holding II, Inc., (the “Company”) on November 22, 2010
(the “Initial 10-Q”). This Amendment amends and supplements the Initial
10-Q by providing additional information regarding our liquidity and capital
resources in Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
2
Item
1. Financial Statements
First
Blush Brands, Inc.
(Formerly
Known as AFH Holding II, Inc.)
FINANCIAL
STATEMENTS
INDEX
·
Financial Statements:
|
||
Balance
Sheets, September 30, 2010, unaudited, and December 31,
2009
|
4
|
|
Statements
of Profit and Loss, unaudited, for the three and nine months ended
September 30, 2010 and 2009
|
5
|
|
Statements
of Cash Flows, unaudited, for the nine months ended September 30, 2010 and
2009
|
6
|
|
Notes
to Financial Statements
|
7
|
First
Blush Brands, Inc.
(Formerly
Known as AFH Holding II, Inc.)
Balance
Sheets
(Unaudited)
|
||||||||
At September 30,
|
At December 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
|
$
|
3,619
|
$
|
-
|
||||
Accounts
receivable, net of allowance for doubtful accounts of $21,000 at September
30, 2010 and December 31, 2009
|
64,788
|
37,065
|
||||||
Inventory
|
235,105
|
293,135
|
||||||
Prepaids
& other
|
5,112
|
-
|
||||||
Total
current assets
|
308,624
|
330,200
|
||||||
Deferred
income taxes
|
47,921
|
19,534
|
||||||
Equipment,
net
|
8,765
|
-
|
||||||
Intangible
assets, net
|
1,400
|
55,786
|
||||||
Total
assets
|
$
|
366,710
|
$
|
405,520
|
||||
Liabilities
& Equity (Deficit)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
755,380
|
$
|
344,968
|
||||
Liability
due to related party consultant
|
245,000
|
-
|
||||||
Promotional
liability
|
89,172
|
27,194
|
||||||
Other
accrued liabilities
|
154,452
|
160,557
|
||||||
Derivative
liabilities
|
126,680
|
-
|
||||||
Notes
payable - RHG
|
208,360
|
927,191
|
||||||
Notes
payable - related party
|
-
|
100,000
|
||||||
Total
current liabilities
|
1,579,044
|
1,559,910
|
||||||
Notes
Payable
|
1,055,454
|
-
|
||||||
Commitments
and contingencies
|
||||||||
Equity:
|
||||||||
Preferred
stock, par value $0.001, 20,000,000 shares authorized, 0 outstanding at
September 30, 2010 and December 31, 2009
|
-
|
-
|
||||||
Common
stock, par value $0.001, 100,000,000 authorized, 9,246,000 and
7,125,000 outstanding at September 30, 2010 and December 31, 2009,
respectively
|
9,246
|
7,125
|
||||||
Additional
paid in capital
|
(8,029
|
)
|
(250,841
|
)
|
||||
Retained
loss
|
(2,269,005
|
)
|
(910,674
|
)
|
||||
Total
equity (deficit)
|
(2,267,788
|
)
|
(1,154,390
|
)
|
||||
Total
liabilities and equity (deficit)
|
$
|
366,710
|
$
|
405,520
|
The
accompanying notes are an integral part of these financial
statements.
4
(Formerly
Known as AFH Holding II, Inc.)
Statements
of Profit and Loss
Unaudited
|
Unaudited
|
|||||||||||||||
For the Three Months Ended
|
For the Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Gross
revenue
|
$
|
59,091
|
$
|
252,411
|
$
|
273,089
|
$
|
622,155
|
||||||||
Promotion
allowance
|
(47,236
|
)
|
(126,891
|
)
|
(121,407
|
)
|
(162,422
|
)
|
||||||||
Net
revenue
|
11,855
|
125,520
|
151,682
|
459,733
|
||||||||||||
Cost
of goods sold
|
24,845
|
99,804
|
122,613
|
299,086
|
||||||||||||
Gross
profit (loss)
|
(12,990
|
)
|
25,716
|
29,069
|
160,647
|
|||||||||||
Selling,
general and administrative expense
|
439,252
|
77,278
|
1,197,213
|
549,929
|
||||||||||||
Loss
on derivative liabilities
|
3,953
|
-
|
3,953
|
-
|
||||||||||||
Abnormal
production costs
|
21,213
|
-
|
21,213
|
28,415
|
||||||||||||
Write-off
of intangible asset
|
51,071
|
-
|
51,071
|
-
|
||||||||||||
Write-off
of inventory
|
-
|
131,213
|
28,613
|
131,213
|
||||||||||||
Operating
loss
|
(528,479
|
)
|
(182,775
|
)
|
(1,272,994
|
)
|
(548,910
|
)
|
||||||||
Interest
expense
|
37,459
|
35,762
|
112,922
|
96,197
|
||||||||||||
Pre-tax
loss
|
(565,938
|
)
|
(218,537
|
)
|
(1,385,916
|
)
|
(645,107
|
)
|
||||||||
Tax
benefit
|
(11,200
|
)
|
(4,871
|
)
|
(27,585
|
)
|
(13,023
|
)
|
||||||||
Net
loss
|
$
|
(554,738
|
)
|
$
|
(213,666
|
)
|
$
|
(1,358,331
|
)
|
$
|
(632,084
|
)
|
||||
Basic
loss per share
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
||||
Diluted
loss per share
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
The
accompanying notes are an integral part of these financial
statements.
5
(Formerly
Known as AFH Holding II, Inc.)
Statements
of Cash Flows
Unaudited
|
||||||||
For
the Nine Months Ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flow used by operating activities:
|
||||||||
Cash
collected from customers
|
$
|
165,113
|
$
|
324,020
|
||||
Cash
paid to suppliers
|
(206,852
|
)
|
(126,280
|
)
|
||||
Cash
paid to employees & contractors
|
(22,583
|
)
|
(374,914
|
)
|
||||
Cash
paid for other selling, general & administrative costs
|
(237,147
|
)
|
(256,208
|
)
|
||||
Cash
paid for interest
|
(288,951
|
)
|
-
|
|||||
Net
cash used by operating activities
|
(590,420
|
)
|
(433,382
|
)
|
||||
Cash
flow from financing activities:
|
||||||||
Payments
on notes payable
|
(818,831
|
)
|
-
|
|||||
Proceeds
from issuing notes payable
|
1,055,454
|
157,646
|
||||||
Proceeds
from the sale of common stock and warrants
|
293,462
|
274,989
|
||||||
Proceeds
from recapitalization
|
74,199
|
-
|
||||||
Net
cash from financing activities
|
604,284
|
432,635
|
||||||
Cash
flow used by investing activities:
|
||||||||
Purchase
of long-lived assets
|
(10,245
|
)
|
-
|
|||||
Net
cash used by investing activities
|
(10,245
|
)
|
-
|
|||||
Increase/(decrease)
in cash
|
3,619
|
(747
|
)
|
|||||
Cash
at the start of the period
|
-
|
874
|
||||||
Cash
at the end of the period
|
$
|
3,619
|
$
|
127
|
Reconciliation
of net loss to cash used by operating activities:
Unaudited
|
||||||||
For
the Nine Months Ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Net
loss
|
$
|
(1,358,331
|
)
|
$
|
(632,085
|
)
|
||
Amortization
& depreciation expense
|
4,794
|
7,072
|
||||||
Increase
in A/R
|
(27,723
|
)
|
(52,856
|
)
|
||||
Decrease
in inventory
|
58,030
|
232,530
|
||||||
Increase
in prepaids
|
(5,112
|
)
|
-
|
|||||
Increase
in deferred tax asset
|
(28,387
|
)
|
(13,023
|
)
|
||||
Increase/(decrease)
in accounts payable & promotional liability
|
472,390
|
(42,353
|
)
|
|||||
Increase
in liability to related party consultant
|
245,000
|
-
|
||||||
(Decrease)/increase
in other accrued liabilities
|
(6,105
|
)
|
67,333
|
|||||
Write
off of intangible asset
|
51,071
|
-
|
||||||
Change
in derivative liability
|
3,953
|
-
|
||||||
Net
cash flows used by operating activity
|
$
|
(590,420
|
)
|
$
|
(433,382
|
)
|
The
accompanying notes are an integral part of these financial
statements.
6
(Formerly
Known as AFH Holding II, Inc.)
Notes
to Financial Statements
1.
The Company
As used
herein, “we” and “our” refers to First Blush, Inc. prior to the Exchange (See
footnote #3 History and
Recapitlization) and to First Blush Brands, Inc. and its consolidated
subsidiary after the Exchange. First Blush, Inc. and First Blush Brands,
Inc., are each a Delaware corporations and are based in Beverly Hills,
California. Currently, we produce and market two product
lines:
|
1.
|
An all natural, premium grape
juice crafted from 100% pure, fine wine grapes. We currently offer four
juices: Cabernet, Merlot, Syrah and Chardonnay juice under the name “First
Blush.”
|
|
2.
|
An all natural ready-to-drink tea
crafted from 50% of our premium grape juice and 50% brewed organic white
tea. We currently offer two teas: Cabernet White Tea and Chardonnay White
Tea, also under the name “First
Blush.”
|
We flash
pasteurize all of our products for safety and product quality. The result
is that our products have a 24-month shelf life.
We sell
our products in over 1,500 retail outlets in the United States, primarily
through grocery stores.
We
purchase all of our grape juice concentrate from third-party suppliers and
outsource all production, warehousing and distribution. As well, we
utilize brokers to help us initiate new sales and service existing
customers.
2.
Basis of Presentation
We have
prepared our accompanying unaudited financial statements in accordance with
generally accepted accounting principles in the United States (“GAAP”) for
interim financial information and in accordance with the rules and regulations
of the United States Securities and Exchange Commission (“SEC”). Accordingly,
the financial statements do not include all of the information and notes
required by GAAP for annual financial statements as permitted under applicable
rules and regulations. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been included. The
results of operations for the three and nine months ended September 30, 2010 are
not necessarily indicative of the results to be expected for the full year
ending December 31, 2010. For further information, refer to our
financial statements and notes thereto included with our 8-K filed with the
Securities and Exchange Commission on May 13, 2010, as amended.
Except
for the authorized and outstanding capital stock appearing on the balance sheet
the financial statements as of and for the year ended December 31, 2009 are for
First Blush, Inc. and have been audited. The financial statements for the
three and nine months ended September 30, 2009 are also for First Blush,
Inc. Financial statements post the Exchange represent the consolidated
results of First Blush Brands, Inc. and its subsidiary First Blush, Inc.
The information on the balance sheet for the authorized and outstanding capital
stock at December 31, 2009 is restated to show the effect of the Exchange as a
recapitalization.
3.
History and Recapitalization
First
Blush Brands, Inc. (“FBBI”), formerly known as AFH Holding II, Inc. (“AFH”), was
incorporated as a Delaware corporation on April 16, 2007 as a development stage
company with no assets and no business operations. AFH was organized
to provide a method for a foreign or domestic private company to become a
reporting (“public”) company. FBBI registered its shares of common
stock under Section 12(g) of the Exchange Act. FBBI was what is commonly known
as a “shell” company. At the time of the Exchange, AFH Holding and
Advisory, LLC was the sole shareholder of FBBI.
On May
12, 2010, FBBI and its sole shareholder entered into a share exchange agreement
with First Blush, Inc. and its security holders (the “Exchange
Agreement”). Pursuant to the terms of the Exchange Agreement, each
outstanding share of common stock and Series A Preferred Stock of First Blush,
Inc. was transferred to FBBI in exchange for shares of the common stock, $0.001
par value per share, of FBBI. Upon consummation of the Exchange Agreement
(the “Exchange” or “reorganization”), First Blush, Inc. became a wholly owned
subsidiary of FBBI, and the security holders of First Blush became our
shareholders, owning approximately 89.06% of our outstanding common stock.
On September 8, 2010, AFH Holding II, Inc. changed its name to First Blush
Brands, Inc.
7
The
proceeds of $74,199 from recapitalization consist of the following:
|
1)
|
We agreed to pay a fee to AFH
Holding and Advisory, LLC in the amount of $250,000, subject to
satisfaction of certain conditions. Our CEO Mr. Tony Roth paid
$75,000 of that amount. We issued to Mr. Roth 75,000 shares of our
common stock in satisfaction of this indebtedness. We consider the
$75,000 to be cash proceeds to
us.
|
|
2)
|
We issued 800,000 shares to AFH
Holding and Advisory, LLC as part of the recapitalization at a par value
of $0.001 per share. We consider the aggregate $800 to be cash
proceeds to us.
|
|
3)
|
We reduced Additional Paid in
Capital by $1,601 as a reduction of cash flow from the recapitalization as
part of our recapitalization accounting and the roll forward of Additional
Paid in Capital.
|
In
January 2007, First Blush business operations were commenced by Victoria Briggs
and her husband, Christopher Bagdasarian, through Rose Hill Gardens LLC (“RHG”)
which is 100% owned by Ms. Briggs. On August 1, 2008 First Blush, Inc. was
formed as a Delaware corporation.
On
December 31, 2008 the assets related to First Blush were transferred from RHG to
First Blush, Inc. In exchange First Blush, Inc. issued a promissory note
to RHG for $828,698. RHG also extended to us the option to borrow
additional funds up to a combined aggregate borrowing of $1,000,000.
The promissory note accrues annual interest at 12%.
The
transfer of the assets by RHG into First Blush, Inc. was between entities under
common control pursuant to Accounting Standards Codification 805, Business
Combinations. The transfer of the assets also constituted a set of activities
and assets to be a business in accordance with FASB ASC 805. For a
transferred set of activities and assets to be a business, it must contain all
of the inputs and processes necessary for it to continue to conduct normal
operations after the transferred set of assets is separated from the transferor,
which include the ability to sustain a revenue stream by providing its outputs
to customers. First Blush, Inc. obtained the inputs and processes necessary for
normal operations. The transaction has been accounted for as a
recapitalization of RHG. Accordingly, the assets were carried over to
First Blush, Inc. at the historical carrying values and the historical
operations of those assets by RHG are presented in the accompanying financial
statements as the historical operations of First Blush, Inc. for all periods
presented.
4.
Summary of Significant Accounting Policies
a.
Use of estimates in preparation of financial statements
The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at the date of our
financial statements and our reported amounts of revenue and expense during the
reporting period. Actual results could differ from our
estimates.
8
Our
inventory consists of raw materials and finished goods as follows:
At
September
30,
|
At
December
31,
|
|||||||
2010
|
2009
|
|||||||
Finished
goods
|
||||||||
First
Blush Juice
|
$
|
11,318
|
$
|
57,782
|
||||
First
Blush Tea
|
-
|
34,003
|
||||||
Total
finished goods
|
$
|
11,318
|
$
|
91,785
|
||||
Raw
materials
|
||||||||
Concentrate
|
$
|
153,924
|
$
|
172,737
|
||||
Other
|
69,863
|
28,613
|
||||||
Total
raw materials
|
$
|
223,787
|
$
|
201,350
|
||||
Total
Inventory
|
$
|
235,105
|
$
|
293,135
|
Finished
goods include all of the costs to produce cases of completed juice and tea
bottles that are ready to sell. These costs include: 1) cost of physical
inputs such as the cost of the juice and tea, the bottle, the cap, etc. and 2)
cost of service inputs such as cost to mix the juice, fill the bottles, shipping
raw materials to the bottler and storage of the finished goods. In
addition, we include in the cost of finished goods the cost of normal production
losses expected to be incurred during the bottling process. We use the
industry norm of 5% of total production cost to calculate the loss factor to
include in our inventory. We expense any losses above 5% of total
production cost in the period of production and report it separate from cost of
goods sold in our statement of profit and loss.
During
the nine months ended September 30, 2010 we wrote off $28,613 of raw materials
(labels and trays) that were unsuitable for future production due to our switch
to boxes instead of trays and our change to a new UPC codes that specifically
identifies First Blush Brands. During the quarter ended September
30, 2010 we had $21,213 of abnormal production costs related to shipping raw
materials from our old bottler to our new bottler, air freight costs and
performing non-routine testing on our bottlers’ equipment in preparation for
production.
In 2009
we had abnormal production losses in excess of the 5% norm equating to $28,415
due to issues with our bottler. These were expensed as part of
operating income separate from cost of goods sold in our statement of profit and
loss for the nine months ended September 30, 2009.
In 2009
we also switched from using glass bottles to PET (Polethylene terephthalate)
bottles and as a result disposed of $131,213 of finished inventory in glass
bottles.
We value
our inventory using a first-in first-out cost flow assumption adjusted for lower
of cost or market valuation, if needed. To date, no lower of cost or
market valuation adjustments have been necessary. In addition, our
finished goods have a two year shelf-life; to date we have not had a loss
related to expiration of our inventory’s shelf-life.
c.
Revenue and related cost recognition
We
recognize revenue when the following revenue recognition criteria are
met:
|
•
|
We have persuasive evidence of a
sales arrangement;
|
|
•
|
We have evidence that delivery of
goods has occurred;
|
9
|
•
|
We have a sales price that is
fixed or
determinable; and
|
|
•
|
We have reasonable assurance of
collectability.
|
We
generally sell our product FOB destination and therefore transfer title and the
related risks of ownership when the customer accepts the product at their
receiving dock.
We report
revenue net of any state imposed redemption requirements, which we collect from
the purchaser and remit to the respective state. We are not required
to collect sales taxes as we sell to retailers, who are responsible for
collecting sales taxes from the ultimate consumer.
Consistent
with our revenue recognition practices, we recognize related cost of goods sold
when our product is received by our customers.
d.
Allowance for Doubtful Trade Accounts Receivable
The
Company establishes an allowance for doubtful or uncollectible trade accounts
receivable based on the age of outstanding invoices and management ’ s
evaluation of collectability of outstanding balances.
e.
Promotional liability
Many of
our promotional programs are based on discounts given to the ultimate consumer
at the point of purchase. For these programs we generally reduce our cost
to the retailer for all product sold under promotion so there is no, or limited,
impact on the retailer’s gross profit. Because we do not know the ultimate
amount of product that will be sold under promotional programs and because
retailers pay us 100% of the purchase price upon purchase of our product, we
accrue an estimated liability for the amount we expect we will have to refund to
the retailers due to these programs. As a result we have an accrual for
promotional programs of $89,172 and $27,194 at September 30, 2010 and December
31, 2009, respectively.
We treat
promotional allowance as contra revenue and recorded promotional allowance of
$47,236 and $126,891for the three months ended September, 30 2010 and 2009,
respectively and $121,407and $162,422 for the nine months ended September, 30
2010 and 2009, respectively. For the quarter ended September 30, 2010
expect a promotional allowance of 50% or $29,546 for our new promotional
program. The additional promotional allowance of $17,690 is an adjustment
to our promotional liability for first and second quarters of 2010 promotional
activity at Safeway where our product was still being sold under
promotion.
f.
Income Taxes
We
account for income taxes under the Financial Accounting Standards Board’s, FASB,
accounting guidance for income taxes. In accordance with FASB’s accounting
guidance, we recorded a deferred tax asset for the net operating loss, NOL,
carry forward resulting from losses. The asset is a result of our ability
to utilize the NOL in future periods to offset future taxable income and
therefore reduce our taxes payable in the future. At September 30, 2010
and December 31, 2009 we had an asset for the NOL of $958,418 and $390,687,
respectively. However, given our current going concern issues we determined that
this asset may not be realized as it is dependent on us generating sufficient
future operating income and accordingly we created a valuation allowance of
$910,497 and $371,153 at the respective dates based on our judgment and
estimates. In the future, we may determine that we will be able to realize
all or most of this asset and we will adjust our valuation allowance
accordingly, which will result in a reduction in income tax expense reported in
our financial statements in the period of change.
g.
Recent accounting pronouncements
There
have been no recent accounting pronouncements that will directly and materially
impact us in the future.
10
On May
26, 2010 we commenced an offering to certain “accredited investors” (as such
term is defined in Regulation D promulgated under the Securities Act of 1933, as
amended) for the right to purchase, at $2 per unit, units consisting
of:
|
o
|
Two shares of our common
stock.
|
|
o
|
A base warrant (“Base Warrant”)
to purchase one share of our common stock at the value per share of our
common stock in our next qualified financing, as defined in the Base
Warrant.
|
|
o
|
A par value warrant (“Par
Warrant”) to purchase additional shares of our common stock at its par
value ($0.001 per share) in the event its value per share in the next
qualified financing is less than
$1.00.
|
During
the quarter ended September 30, 2010 we raised $246,000 under this offering
issuing 246,000 shares of our common stock and 123,000 base warrants. The
units were sold to investors pursuant to the terms of a securities purchase
agreement between the Company and the investors. We granted to purchasers
of units “piggyback” registration rights with respect to their shares of common
stock.
6.
Notes Payable
On August
17, 2010, we completed a private placement of $1,100,000 principal amount of
promissory notes (the “Notes”) and 1,000,000 shares of common stock to
“accredited investors” (the “Private Placement”). The securities were sold to
investors pursuant to the terms of a securities purchase agreement (the
“Purchase Agreement”) between the Company and the investors. We received
gross proceeds from the Private Placement of $1,100,000 which we used to pay
down our existing senior debt (see below).
The
principal amount of the Notes is due in 12 equal monthly payments of an
aggregate of $91,667 each, commencing on January 1, 2012. The Notes bear
interest at a rate of 10% per annum. Interest is payable quarterly in arrears
commencing on September 30, 2010. Pursuant to the terms of the Notes, we
have agreed, among other things, not to (i) pay dividends on our common stock,
other than solely in the form of common stock, (ii) repurchase our common stock
or other securities, (iii) sell or dispose of all or a substantial portion of
our assets unless the proceeds of such sale are used to pay off the Notes, or
(iv) make future loans or advances or guarantee debt other than in the ordinary
course of business.
Our
obligations under the Notes are guaranteed by RHG.
We
granted to the purchasers in the Private Placement “piggyback” registration
rights with respect to their shares of common stock substantially similar to the
registration rights that we have granted to the purchasers in our previous
private placements.
We used
the proceeds of the Private Placement to repay (i) all amounts outstanding under
our $100,000 Senior Secured Promissory Note, dated September 26, 2009, due to
Michael D. Bagdasarian (the “MDB Note”), and (ii) $1,000,000 of the outstanding
principal and accrued interest under our Senior Secured Credit Facility from RHG
(the “RHG Note”). Following this repayment, the MDB Note has been paid in full
and terminated and the outstanding balance of the RHG Note was $192,876
increasing to $208,360 at September 30, 2010. We may make additional
borrowings under the RHG Note in the future.
We
discounted the notes by $47,461, which was allocated to the shares issued with
the notes. This discount produces an effective interest rate of
12.67%.
7.
Warrants and Fair Value of Financial Instruments
We have
adopted the provisions of Accounting Standards Codification (“ASC”) 820-10’s
guidance on fair value measurements, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements related to financial instruments.
Fair
value as defined by the guidance is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value estimates of financial
instruments are not necessarily indicative of the amounts we might pay or
receive in actual market transactions. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
11
|
·
|
Level 1. Observable inputs such
as quoted prices in active
markets;
|
|
·
|
Level 2. Inputs, other than
quoted prices, that are observable for the asset or liability, either
directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not
active; and
|
|
·
|
Level 3. Unobservable inputs in
which there is little or no market data, which require the reporting
entity to develop its own
assumptions.
|
To the
extent that multiple inputs are used to determine the fair value of an asset or
a liability, that asset or liability will be classified in its entirety based on
the lowest level of input that is significant to the fair value measurement,
with level 3 being the lowest.
The
Financial Accounting Standards Board’s accounting guidance requires disclosure
of fair value information about financial instruments, whether or not those
instruments are recognized at fair value in the accompanying balance
sheets.
We have
the following three types of financial instruments:
I.
Base Warrants and Par Warrants
We issued
the Base Warrants and Par Warrants in our May 26, 2010 offering, as discussed
above. We have determined that these warrants qualify as derivative
financial instruments under the provisions of ASC 815-40 “Derivatives and
Hedging – Contracts in an Entity’s Own Stock.” These warrant
agreements include provisions designed to protect holders from a decline in our
stock price (“down-round” provision) because: 1) Base Warrants — the exercise
price of the Base Warrants will be reduced in the event that we issue equity
shares at a price lower than the current $1 exercise price of the warrants, and
2) Par Warrants — the number of shares the Par Warrant converts into increases
if we issue equity shares at a price lower than $1 per share. As a
result of these provisions, these warrants are not considered “fixed-for-fixed”
options as defined under ASC 815-40, and consequently these warrants must be
treated as a liability and recorded at fair value at each reporting date with
changes in fair value reflected in earnings.
The Base
Warrants and the Par Warrants are considered Level 3 financial liabilities
because there is no current market for these securities and therefore the
determination of fair value requires significant judgment and use of
unobservable inputs. We have estimated the fair value of these warrants
using the Black-Scholes option pricing model, and in the case of the Par
Warrants an estimate of the number of shares that the Par Warrant would convert
into given various possible future share prices.
For the
Black-Scholes model we used the following assumptions:
Issuance
|
9/30/2010
|
|||||||
Expected
volatility (A)
|
116
|
%
|
115
|
%
|
||||
Expected
dividend yield
|
0.00
|
%
|
0.00
|
%
|
||||
Risk-free
rate (B)
|
1.01
|
%
|
0.64
|
%
|
||||
Expected
term, years
|
3
|
3
|
(A)
Because our company did not have its shares traded on a public stock exchange we
had to use a proxy to calculate volatility. We used share price data for
three historical years for small publically traded beverage companies with
market capitalization of less than $35 million.
(B) We
used the rate on U.S. federal government bonds with a three-year term found at
http://www.federalreserve.gov/releases/h15/data.htm.
We
disclose these warrants on our balance sheet under “Derivative liabilities” and
report change in fair value in income from operations under “Loss on derivative
liabilities” summarize as follows:
12
At September 30, 2010
|
||||||||||||||||||||
Fair Value Measurements
Using
|
||||||||||||||||||||
Carrying
Value
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
Derivative
liabilities
|
$
|
126,680
|
$
|
-
|
$
|
-
|
$
|
126,680
|
$
|
126,680
|
||||||||||
Total
derivative liabilities
|
$
|
126,680
|
$
|
-
|
$
|
-
|
$
|
126,680
|
$
|
126,680
|
Fair Value Measurements
Using Level 3 Inputs
|
||||||||
Derivative
Liabilities
|
Totals
|
|||||||
Beginning
balance as of June 30, 2010
|
$
|
-
|
$
|
-
|
||||
Issuance
of derivative liabilities
|
122,727
|
122,727
|
||||||
Total
loss on derivative liabilities
|
3,953
|
3,953
|
||||||
Ending
balance as of September, 30, 2010
|
$
|
126,680
|
$
|
126,680
|
II.
Notes payable
The
following table reflects the carrying value and fair value of our notes
payable:
At September 30,
|
At December 31,
|
|||||||||||||||
2010
|
2009
|
|||||||||||||||
Carrying
Value
|
Fair Value
|
Carrying
Value
|
Fair Value
|
|||||||||||||
Notes
payable
|
$
|
1,263,814
|
$
|
1,263,471
|
$
|
1,027,191
|
$
|
1,025,499
|
We
believe the carrying value of our RHG Note is not euqual to its a reasonable
estimate of its fair value due recent changes in the credit markets. We
have estimated the fair value of our fixed rate debt using discounted cash flow
techniques based on level 3 inputs, as discussed above. Specifically we
estimated the fair market discount rate for our debt considering the credit
markets, our credit risk and the terms of our debt including call provisions and
collateral.
We
believe the carrying value of our new Notes is a reasonable estimate of their
fair value as those notes were issued during the quarter ended September, 30,
2010.
III.
Receivables, Accounts Payable and Certain Other Accrued Liabilities
Due to
their short-term nature, fair value approximates carrying value
8.
Related Party Indebtedness
We have
transactions with related parties as follows:
|
·
|
Rose Hill Gardens,
LLC
|
We had a
secured note payable with a balance of $208,360 and $927,191 at September 30,
2010 and December 31, 2009, respectively, to Rose Hill Gardens, LLC. Rose
Hill Gardens, LLC owned 72.22% and 97.4% at September 30, 2010 and December 31,
2009, respectively. At September 30, 2010 Victoria Briggs, was a
member of our board of directors. At December 31, 2009 Victoria Briggs,
was our acting president at the time and member of our board of directors, and
is the sole owner of Rose Hill Gardens, LLC.
13
On July
1, 2010 we increased the monthly consulting fee paid to RHG to $20,000 per
month, however, on August 16, 2010, we modified the contract again changing the
fee to $10,000 per month, extending it for one year and defining its scope to
provide support in the following areas:
|
1.
|
Sales and marketing
support
|
|
2.
|
Fulfillment
|
|
3.
|
Production
management
|
|
4.
|
Customer
Service
|
|
5.
|
Strategic
Planning
|
|
6.
|
Acquisition
targeting
|
|
7.
|
Advice concerning structure and
negotiations of acquisitions and financing
transactions
|
At any
time, we may reduce the scope of any service or terminate all of the services
under the agreement and accordingly renegotiate the fee paid.
|
·
|
Michael D. Bagdasarian,
Trustee
|
At
December 31, 2009, we had a secured note payable of $100,000 to Michael D.
Bagdasarian, Trustee. Michael Bagdasarian is the father of Chris
Bagdasarian who is Victoria Briggs’ husband.
|
·
|
AFH Holding and Advisory,
LLC
|
The
consideration given to AFH Holding and Advisory, LLC for the Exchange consisted
of 800,000 shares of our common stock and $250,000, $75,000 of which was paid by
Tony Roth. As of September 30, 2010 we have accrued the remaining $175,000
as a liability along with an additional $70,000 for expenses associated with the
Exchange reimbursable to AFH Holding and Advisory, LLC. At September
30, 2010 AFH Holding and Advisory, LLC owns approximately 8.7% of our common
stock.
|
·
|
Barrett Carrere, CFO and
Principal Executive Officer
|
As of
September 30, 2010 we owe Barrett Carrere, our CFO and Principal Executive
Officer, an aggregate total of $106,701 consisting of: $92,882 for accrued
compensation expenses, reported in other accrued liabilities on balance our
sheet, and $13,819 for expenses incurred on behalf of the Company, recorded in
accounts payable on our balance sheet.
9.
Intangibles
We have
the following amortizable intangible asset:
At December 31,
|
||||||||||||
2009
|
||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||
Exclusive
right to use bottle production mold
|
$
|
66,000
|
$
|
(10,214
|
)
|
$
|
55,786
|
We wrote
this asset off on July 1, 2010 as we are no longer using this mold and do not
anticipate use of it in the future. The write-off resulted in a
charge to income of $51,071.
14
10.
Calculation of Earnings per Share
Basic
earnings per share is calculated by dividing net income by the weighted-average
number of shares outstanding during the period. Diluted earnings per share is
calculated by dividing net income by the weighted-average number of common
shares outstanding after giving effect to all potentially dilutive common shares
outstanding during the period. Basic and diluted earnings per share were
calculated as follows :
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
loss
|
$
|
(554,738
|
)
|
$
|
(213,666
|
)
|
$
|
(1,358,331
|
)
|
$
|
(632,084
|
)
|
||||
Weighted
average common shares outstanding:
|
||||||||||||||||
Basic
|
8,707,278
|
8,976,563
|
7,506,593
|
8,976,563
|
||||||||||||
Effect
of dilutive potential common stock:
|
||||||||||||||||
Stock
options
|
-
|
-
|
-
|
-
|
||||||||||||
Non-vested
shares
|
-
|
-
|
-
|
-
|
||||||||||||
Warrants
|
-
|
-
|
-
|
-
|
||||||||||||
Diluted
|
8,707,278
|
8,976,563
|
7,506,593
|
8,976,563
|
||||||||||||
Basic
loss per share
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
||||
Diluted
loss per share
|
$
|
(0.06
|
)
|
$
|
(0.02
|
)
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
Because
their inclusion would have had an anti-dilutive effect, we excluded from share
count, and our weighted-average share count calculations, potential common
shares of 641,954 and 114,750 for the nine and three months ended September 30,
2010, respectively and potential common shares of for the nine and three months
ended September 30, 2009, consisting of shares issuable upon exercise of
warrants.
11.
CEO Termination
On August
13, 2010, our CEO and Chairman of the board, Tony Roth, terminated his
employment with us and stepped down from our board of directors. He owns
75,000 shares of our common stock.
In
addition to his responsibilities as CFO, Barrett Carrere has assumed the
responsibilities of our principal executive officer until we hire a new
CEO.
15
We had
concentrations in gross revenue and accounts receivable as follows:
% of Gross Revenue
|
||||||||||||||||
For the Three Months
Ended
|
For the Nine Months
Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Safeway
|
96
|
%
|
84
|
%
|
95
|
%
|
70
|
%
|
||||||||
UNFI
|
-
|
-
|
1
|
%
|
10
|
%
|
||||||||||
Palmentere
|
-
|
-
|
-
|
8
|
%
|
|||||||||||
New
Age
|
-
|
-
|
-
|
3
|
%
|
|||||||||||
City
Super
|
4
|
%
|
7
|
%
|
3
|
%
|
3
|
%
|
% of Accounts Receivable
|
|||||||||
At
|
At
|
||||||||
September
30,
|
December
31,
|
||||||||
2010
|
2009
|
||||||||
Safeway
|
72
|
%
|
76
|
%
|
|||||
UNFI
|
28
|
%
|
-
|
||||||
New
Age
|
-
|
24
|
%
|
Our
payment terms generally require payment within 30 days, however, as of September
30, 2010, we had approximately $24,000 in accounts receivable for UNFI the
majority of which was greater than 90 days old. We have an allowance of
approximately $21,000 for the balances over 90 days old.
We do not
require collateral for receivables from our customers; however, we do evaluate
new customers for credit worthiness.
13.
Going Concern
We began
operations in January 2007 and have incurred costs in formulating our products
and establishing a market for them. We incurred net losses of
$554,738 and $213,666 for the three months ended September 30, 2010 and 2009,
respectively and net losses of $1,358,331 and $632,084 for the nine months ended
September 30, 2010 and 2009, respectively. In addition, at September 30,
2010 our current liabilities of $1,579,044 are considerably in excess of our
current assets of $308,624. As a result of these factors, there is
substantial doubt about our ability to continue as a going concern and our
ability to pay off our current liabilities. We are attempting to
obtain additional capital through either debt or equity financing sources, or a
combination of the two, however, we have had difficulties doing so and if we are
unable to obtain additional capital we may need to declare bankruptcy,
discontinue operations or both. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
14.
Subsequent Events
On
October 5, 2010 one of our vendors, Zuckerman-Honickman, Inc. (“Zuckerman”)
filed an action against First Blush, Inc. and First Blush Brands Inc. in Los
Angeles Superior Court, case name Zuckerman-Honickman, Inc. v. First Blush,
Inc., case number BC446875. Zuckerman is seeking recovery of $122,678 for
past due invoices and 10% interest and legal costs. The $122,678 is part
of our accounts payable balance at September 30, 2010 and December 31,
2009. We have reached a settlement calling for monthly payments of
$10,000, the first of which has already been made.
16
Forward-looking
Information
The
following discussion should be read in conjunction with our Consolidated
Financial Statements and Notes thereto, included elsewhere within this report.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, including
statements using terminology such as “can,” “may,” “believe,” “designed to,”
“expect,” “intend to,” “plan,” “anticipate,” “estimate,” “potential,” or
“continue,” or the negative thereof or other comparable terminology regarding
beliefs, plans, expectations or intentions regarding the future. You should read
statements that contain these words carefully because they:
·
|
discuss our future
expectations;
|
·
|
contain projections of our future
results of operations or of our financial condition;
and
|
·
|
state other “forward-looking”
information.
|
We
believe it is important to communicate our expectations. However,
forward-looking statements involve risks and uncertainties and our actual
results and the timing of certain events could differ materially from those
discussed in or implied by forward-looking statements as a result of certain
factors, including those set forth in our Current Report on Form 8-K filed on
May 13, 2010, as amended. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on information
available to us as of the date thereof, and we assume no obligations to update
any forward-looking statement or risk factor, unless we are required to do so by
law.
Introduction
We
produce and market two product lines:
1.
|
An all natural, premium grape
juice crafted from 100% pure, fine wine grapes. We currently offer four
juices: Cabernet, Merlot, Syrah and Chardonnay juice under the name “First
Blush.”
|
2.
|
An all natural ready-to-drink tea
crafted from 50% of our premium grape juice and 50% brewed organic white
tea. We currently offer two teas: Cabernet White Tea and Chardonnay White
Tea, also under the name “First
Blush.”
|
We sell
our products in over 1,500 retail outlets in the United States, primarily
through grocery stores.
We
purchase all of our grape juice concentrate from third-party suppliers and
outsource all production, warehousing and distribution. As well, we
utilize brokers to help us initiate new sales and service existing
customers.
Executive
Overview
We, First
Blush Brands, Inc., formerly known as AFH Holding II, Inc., were incorporated as
a Delaware corporation on April 16, 2007 as a development stage company with no
assets and no business operations. We were organized to provide a
method for a foreign or domestic private company to become a reporting
(“public”) company. We registered its shares of common stock under
Section 12(g) of the Exchange Act. We were what is commonly known as a
“shell” company. At the time of the exchange, AFH Holding and Advisory,
LLC was our sole shareholder.
On May
12, 2010, we entered into a share exchange agreement with First Blush, Inc. and
its security holders whereby each outstanding share of common stock and Series A
Preferred Stock of First Blush, Inc. was transferred to us in exchange for
shares of our common stock. Upon consummation of the exchange agreement,
First Blush, Inc. became a wholly owned subsidiary of ours, and the security
holders of First Blush became our shareholders, owning approximately 89.06% of
our outstanding common stock. On June 8, 2010, we changed our name to
First Blush Brands, Inc.
During
the first quarter of 2010 we made a strategic decision to delay production of
additional finished goods in anticipation of the share exchange and the related
reorganization of our Company. As a result of this decision we depleted
our finished goods inventory by March 31, 2010. During the three months
ended September 30, 2010 we reinitiated production of our product and made the
first initial restocking sales to Safeway. We expect the restocking
process with Safeway to continue through the fourth quarter 2010 and the first
quarter of 2011. Our relationship with Safeway has not been impaired even
though there was a delay in restocking its store shelves.
As a
result of our strategic decision, revenue for the nine months ended September
30, 2010 was $151,682, and revenue for the three months ended September 30, 2010
was $11,855, both of which were considerably less than the comparable periods
last year. We expect a spike in revenue for fourth quarter 2010 as
we restock Safeway stores; however we expect that revenue for the year ending
December 31, 2010 will be less than revenue for the year ending December 31,
2009. We have started a very aggressive promotional campaign for the
fourth quarter alternating between buy-one-get-one-free promotions and
buy-10-get-10 free promotions resulting in a promotional allowance approximating
50%. The initial results of these programs have been favorable, and we
expect they will contribute to the spike in fourth quarter revenue as Safeway
purchases additional product to keep up with demand.
17
In 2011
we expect our revenues fluctuation to be more consistent with 2009 as typical
reorder patterns at Safeway are established. We also expect that our gross
revenue from Safeway, and therefore our total gross revenue, will increase due
to the following: 1) we expect to continue with our aggressive promotional
campaign resulting in promotional allowances approximating 40-50%, 2) we expect
to manage our brand more effectively by taking steps to ensure that stores are
adequately stocked, 3) we expect to replace racks in stores where they have been
damaged and therefore removed from the floor and ensure that in the future racks
are reordered on a timely basis if damaged, and 4) we expect to work closer with
Safeway management to ensure that product is reordered on a timely basis and
that we are optimizing our promotional programs.
We have
obtained approval from The Kroger Co. to launch our products in certain
Kroger locations; however, we will not proceed with the launch unless we are
adequately capitalized to support its success. As of right now, due to
difficulties obtaining additional capital, we do not anticipate the launch to
occur in the near future. We are not considering launching in any other
stores right now.
During
the quarter we completed a private placement of $1,100,000 principal amount of
promissory notes and 1,000,000 shares of common stock. We received gross
proceeds from the placement of $1,100,000, which we used to pay down our
existing senior debt.
During
the quarter we also completed an offering consisting of equity and warrants for
which we received $246,000. We used these proceeds for production and for
other working capital requirements; however, efforts to raise additional capital
necessary to meet our obligations have not been successful. We are
considering various strategies to raise the cash necessary to pay our
obligations and continue the growth of our brand, including sales of equity,
borrowing additional debt, entering into strategic partnerships and merging or
selling the Company.
18
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require us to
make significant judgments and estimates. For a summary of all our accounting
policies, including the accounting policies discussed below, see Note 4, Summary of Significant Accounting
Policies in our financial statements included this filing.
·
|
Promotional
allowance
|
Many of
our promotional programs are based on discounts given to the ultimate consumer
at the point of purchase. For these programs we generally reduce our cost
to the retailer for all product sold under promotion so there is no, or limited,
impact on the retailer’s gross profit. Because we do not know the ultimate
amount of product that will be sold under promotional programs and because
retailers pay us 100% of the purchase price upon purchase of our product, we
accrue an estimated liability for the amount we expect we will have to refund to
the retailers due to these programs. As a result we have an accrual for
promotional programs of $89,172 and $27,194 at September 30, 2010 and December
31, 2009, respectively.
We treat
promotional allowance as contra revenue and recorded promotional allowance of
$47,236 and $126,891for the three months ended September, 30 2010 and 2009,
respectively and $121,407and $162,422 for the nine months ended September, 30
2010 and 2009, respectively. For the quarter ended September 30, 2010
expect a promotional allowance of 50% or $29,546 for our new promotional
program. The additional promotional allowance of $17,690 is an adjustment
to our promotional liability for first and second quarters of 2010 promotional
activity at Safeway where our product was still be sold under
promotion.
·
|
Income
Taxes
|
We
account for income taxes under the Financial Accounting Standards Board’s, FASB,
accounting guidance for income taxes. In accordance with FASB’s accounting
guidance, we recorded a deferred tax asset for the net operating loss, NOL,
carry forward resulting from losses in our year ended December 31, 2009.
The asset is a result of our ability to utilize the NOL in future periods to
offset future taxable income and therefore reduce our taxes payable in the
future. At September 30, 2010 and December 31, 2009 we had an asset for
the NOL of $958,418 and $390,687, respectively. However, given our current going
concern issues we determined that this asset may not be realized as it is
dependent on us generating sufficient future operating income and accordingly we
created a valuation allowance of $910,497 and $371,153 at the respective dates
based on our judgment and estimates. In the future, we may determine that
we will be able to realize all or most of this asset and we will adjust our
valuation allowance accordingly, which will result in a reduction in income tax
expense reported in our financial statements in the period of
change.
19
The
following table sets forth our statement of results of operation data as a
percentage of net sales from continuing operations for the periods
indicated:
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||
$
|
% of
Gross
|
$
|
% of
Gross
|
%
Change
|
$
|
% of
Gross
|
$
|
% of
Gross
|
%
Change
|
|||||||||||||||||||||||||||||||
Revenue:
|
||||||||||||||||||||||||||||||||||||||||
Gross
revenue
|
$
|
59,091
|
$
|
252,411
|
76.6
|
%
|
$
|
273,089
|
$
|
622,155
|
56.1
|
%
|
||||||||||||||||||||||||||||
Promotion
allowance
|
(47,236
|
)
|
-80
|
%
|
(126,891
|
)
|
-50
|
%
|
62.8
|
%
|
(121,407
|
)
|
-44
|
%
|
(162,422
|
)
|
-26
|
%
|
25.3
|
%
|
||||||||||||||||||||
Net
revenue
|
$
|
11,855
|
$
|
125,520
|
90.6
|
%
|
$
|
151,682
|
$
|
459,733
|
67.0
|
%
|
For the Three Months Ended September 30,
|
For the Nine Months Ended September 30,
|
|||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||
$
|
% of Net
Rev
|
$
|
% of
Net
Rev
|
%
Change
|
$
|
% of Net
Rev
|
$
|
% of Net
Rev
|
%
Change
|
|||||||||||||||||||||||||||||||
Gross
Profit:
|
||||||||||||||||||||||||||||||||||||||||
Net
revenue
|
$
|
11,855
|
$
|
125,520
|
90.6
|
%
|
$
|
151,682
|
$
|
459,733
|
67.0
|
%
|
||||||||||||||||||||||||||||
Cost
of goods sold
|
24,845
|
210
|
%
|
99,804
|
79.5
|
%
|
75.1
|
%
|
122,613
|
81
|
%
|
299,086
|
65.1
|
%
|
59.0
|
%
|
||||||||||||||||||||||||
Gross
profit (loss)
|
$
|
(12,990
|
)
|
-110
|
%
|
$
|
25,716
|
20.5
|
%
|
150.5
|
%
|
$
|
29,069
|
19
|
%
|
$
|
160,647
|
34.9
|
%
|
81.9
|
%
|
|||||||||||||||||||
Selling,
general and administrative expense
|
439,252
|
3705
|
%
|
77,278
|
62
|
%
|
-468.4
|
%
|
1,197,213
|
789
|
%
|
549,929
|
119.6
|
%
|
-117.7
|
%
|
||||||||||||||||||||||||
Loss
on derivative liabilities
|
3,953
|
-
|
3,953
|
-
|
||||||||||||||||||||||||||||||||||||
Abnormal
production costs
|
21,213
|
-
|
21,213
|
28,415
|
||||||||||||||||||||||||||||||||||||
Write-off
of intangible asset
|
51,071
|
-
|
51,071
|
-
|
||||||||||||||||||||||||||||||||||||
Write-off
of inventory
|
-
|
131,213
|
28,613
|
131,213
|
||||||||||||||||||||||||||||||||||||
Operating
loss
|
$
|
(528,479
|
)
|
-4458
|
%
|
$
|
(182,775
|
)
|
-146
|
%
|
-189.1
|
%
|
$
|
(1,272,994
|
)
|
-839
|
%
|
$
|
(548,910
|
)
|
-119.4
|
%
|
-131.9
|
%
|
The
results of operations for three and nine months ended September 30, 2010 are
significantly less than the comparable periods in 2009 because of our strategic
decision to delay production of additional finished goods in anticipation of the
share exchange and the related reorganization of our company. During the
three months ended September 30, 2010 we reinitiated production of our product
and made the first initial restocking sales to Safeway. For the quarter
ended September 30, 2010, we expect a promotional allowance of approximately 50%
or $29,546 for our new promotional program. The additional promotional
allowance of $17,690, resulting in an aggregate promotional allowance of
$47,236, is an adjustment to our promotional liability for promotional activity
occurring during the first and second quarters of 2010 at Safeway where our
product was still sold under our promotional programs. Had we not had this
additional promotional adjustment, our gross profit margin would have been 16%
for the three months ended September 30, 2010 and 28% for the nine months ended
September 30, 2010. Given a promotional allowance of 50% we expect gross
profit margin to be approximately 20%, however, to the extent that we are not
generating significant revenue small unexpected expenses can have a large impact
on the gross profit margin.
We expect
a spike in revenue for fourth quarter 2010 as we restock Safeway stores; however
we expect that revenue for the year ending December 31, 2010 to be less than
revenue for the year ending December 31, 2009. We have started a very
aggressive promotional campaign for the fourth quarter alternating between
buy-one-get-one-free promotions and buy-10-get-10-free promotions resulting in a
promotional allowance approximating 50%. The initial results of these
programs have been favorable, and we expect they will contribute to the spike in
fourth quarter revenue as Safeway purchases additional product to keep up with
demand.
Selling,
general and administrative costs increased significantly for the three and nine
months ended September 30, 2010 relative to the comparable periods 2009 due to
costs incurred as part of our share exchange and financing efforts. For
the nine months ended September 30, 2010 we had the following specific increases
in selling, general and administrative costs relative to the comparable period
in 2009: 1) expenses related to consulting bankers and their advisors $330,000,
2) expenses related to legal services, $435,000, and 3) expenses related to
accounting services $67,000. The expenses related to the consulting banker
and their advisors as well as most of the legal services were incurred as part
of the share exchange and our subsequent financing efforts. On an ongoing
basis we expect to incur some level of legal and accounting expenses, and may
incur significant legal and accounting expenses depending on transactions that
we enter into. The increases for the nine months ended September 30, 2010
were offset by the following decreases relative to the comparable period in
2009: 1) expenses related to compensation $287,000 2) general selling costs and
commissions $109,000, and 3) research and development $51,000. We expect
expenses related to compensation and consulting for the year ending December 31,
2010 to be less than the same expenses for the year ended December 31, 2009 due
to the reductions in head count. We also expect that selling costs will be
less for the year ended December 31, 2010 relative to the year ended December
31, 2009 as it is our expectation that revenue will be less for the year ended
December 31, 2010.
20
In
addition:
·
|
During the nine months ended
September 30, 2010:
|
o
|
We wrote off $28,613 of raw
materials (labels and trays) that were unsuitable for future production
because of our switch to boxes instead of trays and our change
to new UPC codes that specifically identifying First Blush
Brands.
|
o
|
We incurred $21,213 of abnormal
production costs related to shipping raw materials from our old bottler to
our new bottler, abnormal air freight costs and performing additional and
non-routine testing on our bottlers’ equipment in preparation for our
initial production.
|
o
|
We wrote off our exclusive right
to use a bottle production mold as we are no longer using this mold and do
not anticipate to use it in the future. This write-off resulted in a
charge to income of $51,071.
|
·
|
During the nine months ended
September 30, 2009:
|
o
|
We had abnormal production losses
in excess of the 5% industry norm equating to $28,415 due to issues with
our bottler.
|
o
|
We switched from using glass
bottles to PET (Polyethylene terephthalate) bottles as part of a strategic
marketing decision. As a result of this decision, we wrote off
$131,213 of glass bottle finished
goods.
|
21
For the Nine Months Ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flow used by operating activities:
|
||||||||
Cash
collected from customers
|
$
|
165,113
|
$
|
324,020
|
||||
Cash
paid to suppliers
|
(206,852
|
)
|
(126,280
|
)
|
||||
Cash
paid for employees & management services
|
(22,583
|
)
|
(374,914
|
)
|
||||
Cash
paid for other selling, general & administrative costs
|
(237,147
|
)
|
(256,208
|
)
|
||||
Cash
paid for interest
|
(288,951
|
)
|
-
|
|||||
Net
cash used by operating activities
|
$
|
(590,420
|
)
|
$
|
(433,382
|
)
|
Activity
for the nine months ended September 30, 2010 relative to the nine months ended
September 30, 2009 is as follows:
·
|
Cash collected from customers –
We collected more cash from customers in 2009 because net revenue was
greater for the nine months ended September 30, 2009 than the comparable
period 2010.
|
·
|
Cash paid to suppliers – We paid
less to suppliers in 2010 as we had less revenue and therefore less
production.
|
·
|
Cash paid for management services
– We paid less cash for management services in 2010 as we terminated
consultants in 2009 in response to the economic crisis and paid for other
management and administrative services by increasing our notes
payable. In addition, we have only paid our CFO for one month of his
employment and have accrued compensation expense owing to him of $92,882
at September 30, 2010.
|
As of
September 30, 2010, we had approximately $309,000 of current assets,
approximately $3,600 of which was cash and the rest of which was receivables,
inventory and pre-paid assets. On average, our receivables are collected in
approximately 30 days. Total current liabilities at September 30, 2010 totaled
approximately $1,579,000 of which approximately $755,000 are trade accounts. At
September 30, 2010, we had a net working capital deficiency of approximately
$1,270,000. Our operating cash needs during the nine months ended
September 30, 2010 were primarily funded through operations, borrowings and the
raising of $246,000 in an offering, discussed below.
On May
26, 2010 we commenced an offering to certain “accredited investors” (as such
term is defined in Regulation D promulgated under the Securities Act of 1933, as
amended for the right to purchase, at $2 per unit, units consisting
of:
o
|
Two shares of our common
stock.
|
o
|
A base warrant (“Base Warrant”)
to purchase one share of our common stock at the value per share of our
common stock in our next qualified financing, as defined in the Base
Warrant.
|
During
the quarter ended September 30, 2010, we raised $246,000 under this offering
issuing 246,000 shares of our common stock and 123,000 base warrants. The
units were sold to investors pursuant to the terms of a securities purchase
agreement between the Company and the investors. We granted to purchasers
of units “piggyback” registration rights with respect to their shares of common
stock.
On August
17, 2010, we completed a private placement of $1,100,000 principal amount of
promissory notes (the “Notes”) and 1,000,000 shares of common stock to
“accredited investors” (as such term is defined in Regulation D promulgated
under the Securities Act of 1933, as amended (the “1933 Act”)) (the “Private
Placement”). The securities were sold to investors pursuant to the terms of a
securities purchase agreement (the “Purchase Agreement”) between the Company and
the investors. We received gross proceeds from the Private Placement of
$1,100,000 which we used to pay down our existing senior debt, discussed
below.
The
principal amount of the Notes is due in 12 equal monthly payments of an
aggregate of $91,667 each month, commencing on January 1, 2012. The Notes bear
interest at a rate of 10% per annum. Interest is payable quarterly in arrears
commencing on September 30, 2010.
22
Our
obligations under the Notes are guaranteed by RHG.
We used
the proceeds of the Private Placement to repay (i) all amounts outstanding under
our $100,000 Senior Secured Promissory Note, dated September 26, 2009, due to
Michael D. Bagdasarian (the “MDB Note”), and (ii) $1,000,000 of the outstanding
principal and accrued interest under our Senior Secured Credit Facility from RHG
(the “RHG Note”). Following this repayment, the MDB Note has been paid in full
and terminated and the outstanding balance of the RHG Note was $192,876 after
the repayment increasing to approximately $208,000 at September 30, 2010.
The note payable to RHG and all unpaid and accrued interest is due on the sooner
of 30 days demand notice or December 31, 2010. RHG intends to extend the
December 31, 2010 due date on the RHG Note keeping their right to call the note
and accrued interest with 30 days notice. RHG plans to continue to provide
additional funds under the RHG Note as needed to fund on-going operating and
working capital needs. If RHG does not extend the due date of the RHG Note
past December 31, 2010 or calls the note in the future, we intend to seek
additional financing to pay the RHG Note. We may not be successful in
obtaining this financing. If we are not successful, we would be in default
on the RHG Debt. Our new Notes have a cross-default provision that makes
us in default on the Notes if we are in default any indebtedness or obligation
exceeding $250,000. An event of default under the Notes would increase our
interest rate to 12%, however, it would not make the Notes immediately due nor
would it accelerate required payments.
We are
continuing our efforts to raise capital to fund operations, pay our remaining
current liabilities and provide capital for future expansion. We are
considering a variety of possibilities including the sale of equity, borrowing
additional debt, entering into strategic partnerships, and merging or selling
the Company. The ultimate strategy that we choose will determine our
cash source and needs for the next 12-24 months.
If we
were to support our expected sales to Safeway and increase our customer base to
other Key Accounts, we estimate that we will need between $3.6 million and $6.6
million of additional funds over the next two years. The primary use of
these funds will be for marketing expenses associated with attracting new
business as well as the build-up of inventory to meet customer demands.
With these additional funds, we expect that we can support and obtain sales
ranging from $2.5 million to $3.2 million over the next year and $8.0 million
and $12.2 million the year after. Without additional funds we may not even
be able to support the needs of our existing Key Account, Safeway. We have
funded working capital needs through product sales, management of working
capital components of our business, sales of preferred stock. We
anticipate that, in order to grow sales ranging from $2.5 million to $3.2
million over the next year and $8.0 million and $12.2 million the year after,
given an average operating margin of 8% on those sales, we will need between
$3.6 million and $6.6 million for manufacturing, research and development,
marketing, sales channel development, general and administrative expenses, short
and long-term debt repayments and interest expense, and approximately $2.5
million to establish a level of inventory and working capital necessary to
increase our growth in the years thereafter. We can offer no assurance
that we will be able to generate cash or obtain financing sufficient to meet
these needs. This cash need assumes the incurrence and repayment within
such two-year period of $3.0 million of debt at an average interest rate of 10%
and up to $3.0 million in capital contributions as well as the continued payment
of our accounts payable and collections on our accounts receivable in accordance
with our past experience.
Due to
the economic crisis sources of financing for companies like ours has become more
difficult to find. In the event that we are unable to obtain additional
financing we will not be able to expand our company as planned and become
profitable.
If we do
not continue with our current strategy and only focus on Safeway, we will
require approximately $2.6 million to payoff current debt and payables in
addition to on-going operating cash flow needs.
Currently
our projected on-going operating cash in-flows from sales to customers are
insufficient to meet our projected on-going operating cash out-flow needs,
which, in conjunction with our current lack of liquidity and minimal cash
balance, presents a significant risk to our ability to remain
solvent. In addition, we have recently entered into a settlement with
a supplier calling for 11 monthly payments of $10,000 starting January 2, 2011
and one additional payment of $7,668 on December 2, 2011 for a total of
$117,668. We plan to borrow additional funds from RHG to help us meet
our obligations as they become due as well as working with existing vendors to
whom we owe money to reach manageable payment solutions while we continue our
efforts to either raise additional capital or explore strategic alternatives,
which might include a sale of our business. During this period, we may
also issue our common stock to our vendors to satisfy our payables. We
believe that the value of Company is in excess of its liabilities because of our
customer relationships and the value of our trade name. These intangible
assets have been created internally and therefore are not reflected on our
balance sheet.
23
As of
September 30, 2010, we did not have any off-balance-sheet arrangements, as
defined in Item 303(a)(4) of Regulation S-K.
Recent
Accounting Pronouncements
See Note
4 to the financial statements included in Part I, Item 1 of this
report.
Item
3. Legal Proceedings
On
October 5, 2010 one of our vendors, Zuckerman-Honickman, Inc. (“Zuckerman”)
filed an action against First Blush, Inc. and First Blush Brands Inc. in Los
Angeles Superior Court, case name Zuckerman-Honickman, Inc. v. First Blush,
Inc., case number BC446875. Zuckerman is seeking recovery of $122,678 for
past due invoices and 10% interest and legal costs. The $122,678 is part
of our accounts payable balance at September 30, 2010 and December 31,
2009. We have reached a settlement calling for monthly payments of
$10,000, the first of which has already been made.
Item
4. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
5. Controls and Procedures.
Disclosure
Controls and Procedures
As of
September 30, 2010, Barrett Carrere, our Chief Financial Officer and Secretary
and principal executive officer evaluated the effectiveness of our "disclosure
controls and procedures" as defined in Rules 13a-15(e) and Rule 15d-15(e) of the
Securities Exchange Act of 1934 ("Disclosure Controls"). Based upon this
evaluation, Mr. Carrere concluded that the Disclosure Controls were effective,
as of the date of their evaluation, in reaching a reasonable level of assurance
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and that any information relating to us that is required to be disclosed
in the reports that we file or submit under the Securities Exchange Act of 1934
is accumulated and communicated to our management, including our principal
executive/financial officer, to allow timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting
During
the fiscal quarter ended September 30, 2010, there were no changes in our
"internal control over financial reporting" as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934 (“Internal Control”),
that have materially affected or are reasonably likely to
materially affect our Internal Control.
24
Item
6. Exhibits.
Exhibit
|
Description
|
|
31
|
Certification
of principal executive officer and Chief Financial Officer pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of
1934.
|
|
32
|
Certification
of principal executive officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
25
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: December
22, 2010
|
FIRST
BLUSH BRANDS, INC.
|
/s/
Barrett Carrere
|
|
Barrett
Carrere, Chief Financial Officer and
Secretary
(principal executive and financial
officer)
|
26
Exhibit
|
Description
|
|
31
|
Certification
of principal executive officer and Chief Financial Officer pursuant to
Rule 13a-14(a) promulgated under the Securities Exchange Act of
1934.
|
|
32
|
Certification
of pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of
2002.
|
27