<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-28912
INNOPET BRANDS CORP.
-----------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 65-0639984
- --------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1 East Broward Blvd., Suite 1100
Fort Lauderdale, Florida 33301
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(954) 453-2400
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
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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
--- ---
As of August 1, 1997, 4,465,443 shares of common stock of the issuer were
outstanding.
Transitional small business disclosure format (check one): Yes No X
----- -----
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<PAGE>
INNOPET BRANDS CORP.
Index To Financial Statements and Financial Schedules
June 30, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1997 and December 31, 1996................................. 3.
Condensed Statements of Operations for the three months ended June 30, 1997, and 1996,
the six months ended June 30, 1997, the period from inception (January 11, 1996)
to June 30, 1996, and the cumulative development stage period from inception
(January 11, 1996) to June 30, 1997................................................................ 4.
Condensed Statements of Cash Flows for the six months ended June 30, 1997, the period from
inception (January 11, 1996) to June 30, 1996, and the cumulative development stage period from
inception (January 11, 1996) to June 30, 1997...................................................... 5.
Notes to Condensed Financial Statements............................................................ 7.
Item 2. Management's discussion and analysis of financial condition and results of operation................... 9.
Part II. OTHER INFORMATION
Other Information...................................................................................... 14.
Signature.............................................................................................. 15.
</TABLE>
2
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
(Unaudited)
Assets
<S> <C> <C>
Current Assets:
Cash .......................................... $ 632,084 $ 4,614,312
Accounts receivable ........................... 389,661 219,011
Inventories ................................... 2,700,061 1,058,108
Prepaid expenses and other current assets ..... 320,831 445,445
------------ ------------
Total current assets ........................ 4,042,637 6,336,876
------------ ------------
Property and equipment, net ...................... 416,948 105,978
------------ ------------
Intangible Assets:
Deferred slotting fees, net of accumulated
amortization .................................. 153,578 496,367
Product formulae acquisition costs, net of
accumulated amortization ..................... 237,770 251,413
Non-compete agreement, net of accumulated
amortization .................................. 161,387 212,351
------------ ------------
Total intangible assets ..................... 552,735 960,131
------------ ------------
Other Assets ..................................... 301,037 153,728
------------ ------------
Total Assets ..................................... $ 5,313,357 $ 7,556,713
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable:
Trade ....................................... $ 1,786,332 $ 760,200
Slotting fees ............................... 421,717 539,095
InnoPet Inc. ................................ 810,129 724,394
Current portion of long-term debt due to
InnoPet Inc. ................................ 200,000 200,000
------------ ------------
Total current liabilities ............... 3,218,178 2,223,689
Long-Term Debt:
Note payable to InnoPet, Inc., net of current
portion ....................................... 600,000 800,000
------------ ------------
Total Liabilities ....................... 3,818,178 3,023,689
Stockholders' Equity:
Preferred stock 4% convertible, $.01 par value;
authorized 5,000,000 shares; issued and
outstanding 625,000 and 0 shares; stated at
liquidation value .............................. 2,500,000 --
Common stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
4,465,443 and 4,465,878 shares ................. 44,658 44,658
Additional paid-in capital ..................... 12,712,380 13,164,859
Deficit accumulated during the development stage (11,544,162) (6,518,304)
Notes and interest receivable on sale of common
stock ......................................... (2,216,243) (2,158,189)
Treasury stock at cost ......................... (1,454) --
------------ ------------
Total Stockholders' Equity ....................... 1,495,179 4,533,024
------------ ------------
Total Liabilities and Stockholders' Equity ....... $ 5,313,357 $ 7,556,713
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Cumulative
Development
Stage Period
Inception from Inception
Six Months (January 11, to (January 11,
Three Months Ended Ended 1996) to 1996) to
June 30, 1997 June 30 1996 June 30,1997 June 30,1996 June 30, 1997
------------- ------------ ------------- ------------ -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales ............................... $ 531,784 $ 153,061 $ 1,106,812 $ 153,061 $ 2,966,748
------------ ------------ ------------- ------------ ------------
Cost of Goods Sold..................... 378,588 132,776 762,162 132,776 2,396,636
------------ ------------ ------------- ------------ ------------
Gross Profit............................. 153,196 20,285 344,650 20,285 570,112
------------ ------------ ------------- ------------ ------------
Operating Expenses:
Sales expenses...................... 168,116 132,297 329,016 235,000 329,016
Slotting allowances................. 231,211 44,000 670,646 44,000 670,646
Marketing expenses.................. 1,395,213 184,230 2,200,292 332,130 5,204,419
Product development................. 140,407 184,613 244,190 399,542 829,166
General and administrative.......... 1,033,402 351,035 1,929,689 915,929 3,712,484
------------ ------------ ------------- ------------ ------------
Total operating expenses................. 2,968,349 896,175 5,373,833 1,926,601 10,745,731
------------ ------------ ------------- ------------ ------------
Loss from operations..................... (2,815,153) (875,890) (5,029,183) (1,906,316) (10,175,619)
------------ ------------ ------------- ------------ ------------
Other Income (Expenses):
Interest income..................... 18,477 -- 55,407 -- 76,977
Interest expense and financing
costs............................... (23,062) (80,511) (45,870) (218,841) (1,228,543)
Costs in connection with
unsuccessful financing.............. -- -- -- -- (161,289)
Other expenses...................... (6,212) -- (6,212) -- (55,688)
------------ ------------ ------------- ------------ ------------
Total other income (expense)............. (10,797) (80,511) 3,325 (218,841) (1,368,543)
------------ ------------ ------------- ------------ ------------
Net loss................................. $(2,825,950) $ (956,401) $(5,025,858) $(2,125,157) $(11,544,162)
============ ============= ============ ============ =============
Net loss per common share................ $ (0.63) $ (0.51) $ (1.13) $ (1.13) $ (4.00)
============ ============= ============ ============ =============
Shares used in per share calculations.... 4,465,443 1,878,378 4,465,661 1,878,378 2,884,554
============ ============= ============ ============ =============
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Cumulative
Development Stage
Period from
Inception Inception (January
(January 11, 11, 1996)
Six Months Ended 1996) to to June 30,
June 30, 1997 June 30, 1996 1997
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .............................................. $ (5,025,858) $ (2,125,157) $(11,544,162)
Adjustments to reconcile net loss to net cash
used in operating activities:
Costs and expenses paid on behalf of Company
by InnoPet Inc. .................................... -- 1,301,026 1,580,327
Depreciation ....................................... 57,736 31,278 85,090
Amortization:
Slotting fees ................................... 670,646 44,000 1,765,491
Financing costs ................................. -- -- 872,759
Other ........................................... 64,607 55,115 184,616
Offsets against accounts receivable for
slotting fees ...................................... (445,235) -- (1,326,352)
Interest paid from proceeds of public
offering ........................................... -- -- 61,944
Changes in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts receivable ................................ (170,661) (114,657) (389,672)
Inventory .......................................... (1,641,961) (229,398) (2,196,038)
Prepaid expenses ................................... 124,569 -- (826,441)
Other assets ....................................... (147,337) -- (291,065)
Increase (Decrease) in:
Accounts payable, trade ............................ 1,026,185 190,959 1,786,385
Accounts payable slotting fees ..................... 75 -- 539,170
Accounts payable, InnoPet Inc. ..................... 85,729 846,824 810,123
------------ ------------ ------------
Net cash used in operating activities ............ (5,401,505) (10) (8,887,825)
------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of property and equipment ................. (368,737) -- (453,277)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from initial public offering ................. -- -- 6,851,487
Proceeds of long-term financing from InnoPet
Inc., net ............................................. -- 202,014 202,014
Proceeds from private placement financing ............. -- -- 1,672,236
Offering costs ........................................ -- -- (472,641)
Deferred financing costs .............................. -- -- (67,924)
Principal payment on note to InnoPet Inc. ............. (200,000) -- (200,000)
Proceeds from private placement of preferred
stock ................................................. 1,988,014 -- 1,988,014
------------ ------------ ------------
Net cash provided by financing activities .......... 1,788,014 202,014 9,973,186
------------ ------------ ------------
Net Increase (Decrease) in Cash ........................... (3,982,228) 202,004 632,084
Cash, Beginning ........................................... 4,614,312 -- --
------------ ------------ ------------
Cash, Ending .............................................. $ 632,084 $ 202,004 $ 632,084
============ ============ ============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Condensed Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Cumulative
Development Stage
Period from
Inception Inception (January
(January 11, 11, 1996)
Six Months Ended 1996) to to June 30,
June 30, 1997 June 30, 1996 1997
-------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Non-Cash Investing and Financing Activities:
Expenditures for various assets paid on
behalf of Company by InnoPet Inc.:
Product formulae, non-compete agreement and
inventory................................... $ $ 958,366 $ 1,072,772
============== ============= ============
Deferred financing costs................... $ -- $ 227,071 $ 227,071
============== ============= ============
Deferred slotting fees..................... $ -- $ 291,957 $ 291,957
============== ============= =============
Property and equipment and other
assets..................................... $ -- $ 179,979 $ 195,732
============== ============= ============
Deferred financing costs paid from proceeds
of private placement financing................ $ -- $ -- $ 327,764
============== ============= ============
Offering costs paid from proceeds of initial
public offering............................... $ -- $ -- $ 1,436,611
============== ============= ============
Notes payable paid from proceeds of initial
public offering............................... $ -- $ -- $ 2,000,000
============== ============= ============
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Notes to Condensed Financial Statements
(Unaudited)
1. These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB. The financial statements should be read in
conjunction with the audited financial statements of the Company from
inception (January 11, 1996) to December 31, 1996 for a description of the
significant accounting policies, which have continued without change, and
other footnote information.
2. All adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operation and cash flow
have been included. For purposes of interim financial reporting, the
Company uses the standard cost method in determining the estimate of the
lower of cost or market for inventory valuation. The results of the interim
period are not necessarily indicative of the results for the full year.
3. The Company was incorporated on January 11, 1996, and, since that time, has
been primarily involved in organizational activities, developing a
strategic plan for the marketing and distribution of its pet food products,
and raising capital. Planned Operations, as described above, have
commenced, but revenue therefrom generated to date is not considered
significant in relation to the Company's strategic plan. Accordingly, the
Company is considered to be in the development stage, and the accompanying
interim financial statements represent those of a development stage
enterprise.
The accompanying interim financial statements have been presented in
accordance with generally accepted accounting principles, which assume the
continuity of the Company as a going concern. However, as discussed above,
the Company is in the development stage and, therefore has generated little
revenue to date. As reflected in the accompanying interim financial
statements, the Company has incurred a net loss and reflects a deficit
accumulated during the development stage of $11,544,162 for the period from
inception (January 11, 1996) through June 30, 1997. This condition raises
substantial doubt as to the ability of the Company to continue as a going
concern.
Management's plans with regard to this matter encompass the following
actions:
Business Plan
The Company has adopted, and is in the process of implementing, a
business plan intended to define the Company's strategy for growth. In
June 1996, the Company commenced sales of its beef formula dog food to
supermarkets in the Greater Metropolitan New York area. As of June 30,
1997, the Company is selling product in the following markets: the
Greater Metropolitan New York area; Philadelphia and other areas of
Pennsylvania; the Baltimore/Washington, DC area; Virginia; North
Carolina; South Carolina; Georgia; Alabama and Florida.
As of August 8, 1997, the Company has increased its distribution in
existing markets through initial deliveries to the Stop & Shop, Price
Chopper, Winn Dixie/Atlanta Division, and BiLo chains. During the next
twelve months, the Company anticipates it will continue implementation
of its national distribution rollout.
Beginning in June 1997, the Company began expansion of its line of dog
foods with the introduction of Lamb and Rice with Barley formula in
its existing markets. The Company also plans to introduce a line of
dry cat foods within the next twelve months.
7
<PAGE>
The Company is in the process of implementing its overall marketing
strategy. Programs include: radio and newspaper advertising;
free-standing inserts; in-store couponing, shopping cart signage and
floorminders; trial size displays; store feature adds and circulars;
direct mail sampling programs to targeted consumers, veterinarians and
breeders; newspaper sample pouches; and extensive in-store
demonstrations with sampling.
In June 1997, the Company entered into long-term agreements with the
North Shore Animal League and the Pet Savers Foundation, whereby
InnoPet Veterinarian Formula pet foods will be exclusively fed to
in-house animals and recommended to adopters by both of these
not-for-profit humane organizations which adopt out more than one
million animals per year. In addition, adopters will be provided with
product samples, literature and coupons, and will be able to purchase
the products exclusively in retail stores of participating adoption
centers.
In connection with the above partnerships, the Company is currently
participating in a cross-promotion program with Warner Home Video that
includes a consumer cash rebate and donation to the Pet Savers
Foundation for the combined purchase of InnoPet products and the
"Shiloh" home video cassette.
Additional Financing
On July 9, 1997, the Company borrowed $1,500,000 from Entrepreneurial
Investors, Ltd., a Bahamian Company. The Note has a stated interest
rate of 14%, matures on January 15, 1998 and is collateralized with
600,000 shares of the Company's Common Stock. The principal amount of
the Note may be converted into Common Stock of the Company at $4.50
per share. Additionally, in connection with the loan, the loan
agreement provides that the Company shall issue 225,000 Warrants to
purchase shares of the Company's Common Stock at $6.00 per share.
These warrants are subject to the same terms and conditions as the
warrants currently publicly traded.
In order to achieve its financial plan, the Company is seeking
additional financing, which may consist of debt, equity or a
combination thereof. If the Company is unable to obtain additional
financing the Company will be required to modify its current business
plan. There can be no assurance that the Company will be able to
obtain such additional financing.
The eventual outcome or success of management's plans cannot be
ascertained with any degree of certainty. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, including in this quarterly report on Form 10-QSB, InnoPet
Brands Corp. (the "Company") may publish forward-looking statements relating to
such matters as anticipated financial performance, business prospects, future
operations, new products, research and development activities, and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for such forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include the following: the ability to
obtain additional financing; changes in the pet food industry; the Company's
ability to manage growth effectively; the Company's ability to sell premium pet
foods through supermarkets and grocery stores; the entrance into the supermarket
distribution channel of an existing or new premium pet food; the ability of the
Company's manufacturers and other suppliers to meet the Company's performance
and quality specifications; and the ability of the Company to control the cost
of raw materials, manufacturing, packaging, warehousing and distribution.
General
The Company produces, markets and sells premium dog food through supermarkets
and grocery stores under the name InnoPet Veterinarian Formula(TM) Dog Food
("InnoPet Foods"). The Company has adopted, and is in the process of
implementing, a business plan intended to define the Company's strategy for
growth. In June 1996, the Company commenced sales of its beef formula dog food
to supermarkets in the Greater Metropolitan New York area. As of June 30, 1997,
the Company is selling product in the following markets: the Greater
Metropolitan New York area; Philadelphia and other areas of Pennsylvania; the
Baltimore/Washington, DC area; Virginia; North Carolina; South Carolina;
Georgia; Alabama and Florida. The Company's objective is to become a national
provider of premium pet foods through supermarket and grocery store retail
outlets.
As of August 8, 1997, the Company has increased its distribution in existing
markets through initial deliveries to the Stop & Shop, Price Chopper, Winn
Dixie/Atlanta Division, and BiLo chains. During the next twelve months, the
Company anticipates it will continue implementation of its national distribution
rollout.
Beginning in June 1997, the Company began expansion of its line of dog foods
with the introduction of Lamb and Rice with Barley formula in its existing
markets. The Company also plans to introduce a line of dry cat foods within the
next twelve months.
The Company is in the process of implementing its overall marketing strategy.
Programs include: radio and newspaper advertising; free-standing inserts;
in-store couponing, shopping cart signage and floorminders; trial size displays;
store feature adds and circulars; direct mail sampling programs to targeted
consumers, veterinarians and breeders; newspaper sample pouches; and extensive
in-store demonstrations with sampling.
In June 1997, the Company entered into long-term agreements with the North Shore
Animal League and the Pet Savers Foundation, whereby InnoPet Veterinarian
Formula pet foods will be exclusively fed to in-house animals and recommended to
adopters by both of these not-for-profit humane organizations which adopt out
more than one million animals per year. In addition, adopters will be provided
with product samples, literature and coupons, and will be able to purchase the
products exclusively in retail stores of participating adoption centers.
In connection with the above partnerships, the Company is currently
participating in a cross-promotion program with Warner Home Video that includes
a consumer cash rebate and donation to the Pet Savers Foundation for the
combined purchase of InnoPet products and the "Shiloh" home video cassette.
9
<PAGE>
In order to achieve its financial plan, the Company is seeking additional
financing, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional financing the Company will be required to
modify its current business plan. There can be no assurance that the Company
will be able to obtain such additional financing.
The Company expects to continue to incur losses at least through the third
quarter of 1997. The Company's ability to achieve a profitable level of
operations will depend in large part on the market acceptance of its products,
and the Company's ability to obtain additional financing. There can be no
assurance that the Company will achieve profitable operations.
Results of Operations
The three months ended June 30, 1997 compared to the three months ended June
30,1996.
Revenues. Revenues increased $378,723 or 247% to $531,784 during the second
quarter of 1997 from $153,061 for the comparable period in 1996.
Cost and Expenses. Cost of goods sold increased $245,812 or 185% to $378,588
during the second quarter of 1997 from $132,776 for the comparable period in
1996. Cost of goods sold for the second quarter of 1997 were 71% of sales,
providing a gross margin of 29% for the period, an improvement of 16 percentage
points over the second quarter of 1996. The improved margin was the result of
increased volume during the second quarter of 1997 over the comparable period of
1996.
Sales expenses increased $35,819 or 27% to $168,116 during the second quarter of
1997 from $132,297 for the comparable period in 1996. The increase reflected an
expanded sales force and increased commission expenses for brokers. Sales
expenses for the second quarter of 1997 totaled 32% of sales. These costs
consist of broker commissions (5% of sales), and the Company's in-house sales
force.
Slotting allowances increased $187,211 or 425% to $231,211 during the second
quarter of 1997 from $44,000 for the comparable period in 1996. The increase
reflected expanded distribution in 1997 over 1996. Slotting fees are fees
charged manufacturers by retailers in order to facilitate the introduction of
new products. The fees represent charges for warehouse space (slots) to be used
to store a manufacturer's products, charges for retail shelf space and related
shelf sets to make room for the products and reimbursement of retailer expenses
(entering new items into their computer systems and in some cases marketing
support provided by the retailer). The practice by retailers of charging
slotting fees is a standard industry practice. The Company expects to continue
to incur slotting fees as it expands its geographic territory and as new
products are introduced.
Marketing expenses increased $1,210,983 or 657% to $1,395,213 during the second
quarter of 1997 from $184,230 for the comparable period in 1996. The increase
reflected implementation of the Company's marketing programs. During the
quarter, the Company's marketing programs included radio and newspaper
advertising, in-store coupons, floor walker displays, direct sampling programs,
in-store demonstrations and cause-related programs.
Product development costs decreased $44,206 or 24% to $140,407 during the second
quarter of 1997 from $184,613 for the comparable period in 1996. The second
quarter 1997 expense level reflected expenses associated with the ongoing
management of manufacturers and co-packers, and ongoing research and
development. During the second quarter of 1996 much of the product development
costs were costs associated with testing of newly acquired formulations (e.g.,
palatability and bioavailability), expenses associated with locating
manufacturers and certifying their facilities and processes.
10
<PAGE>
General and Administrative expenses increased $682,367 or 194% to $1,033,402
during the second quarter of 1997 from $351,035 for the comparable period in
1996. The increase resulted from increased logistics costs (approximately
$270,000); increased legal, accounting and professional fees (approximately
$109,000) associated with strategic planning, SEC compliance and other matters;
increased rent (approximately $17,000); increased amortization costs; and
increases in general office expenses.
Interest expense and financing costs net of interest income decreased $69,714 or
87% to $10,797 during the second quarter of 1997 from $80,511 for the comparable
period in 1996. The expense during the prior year period reflected amortization
of financing costs associated with the start up of the business. These costs
were fully amortized during 1996 and are non-reoccurring.
Net Loss. Net loss increased $1,869,549 or 195% to $2,825,950 during the second
quarter of 1997 from $956,401 for the comparable period in 1996. The increase
was due primarily to initial expenditures associated with the implementation of
the Company's marketing plans combined with slotting fees. The Company expects
to continue to incur losses at least through the third quarter of 1997. The
Company's ability to achieve a profitable level of operations will depend in
large part on the market acceptance of its products, and the Company's ability
to obtain additional financing. There can be no assurance that the Company will
achieve profitable operations.
Year to date period ended June 30, 1997 compared to the period from inception
(January 11, 1996) through June 30, 1996.
Revenues. Revenues increased $953,751 or 623% to $1,106,812 during the year to
date period ended June 30, 1997 from $153,061 during the period from inception
through June 30, 1996.
Cost and Expenses. Cost of goods sold increased $629,386 or 474% to $762,162
during the year to date period ended June 30, 1997 from $132,776 during the
period from inception through June 30, 1996. Cost of goods sold for the year to
date period ended June 30, 1997 were 69% of sales, providing a gross margin of
31% for the period, an improvement of 18 percentage points over the period from
inception through June 30, 1996. The improved margin was the result of increased
volume during the year to date period ended June 30, 1997 over the period from
inception through June 30, 1996.
Sales expenses increased $94,016 or 40% to $329,016 during the year to date
period ended June 30, 1997 from $235,000 during the period from inception
through June 30, 1996. Sales expenses for the year to date period ended June 30,
1997 totaled 30% of sales. These costs consist of broker commissions (5% of
sales), and the Company's in-house sales force.
Slotting allowances increased $626,646 to $670,646 during the year to date
period ended June 30, 1997 from $44,000 during the period from inception through
June 30, 1996, reflecting expanding distribution. Slotting fees are fees charged
manufacturers by retailers in order to facilitate the introduction of new
products. The fees represent charges for warehouse space (slots) to be used to
store a manufacturer's products, charges for retail shelf space and related
shelf sets to make room for the products and reimbursement of retailer expenses
(entering new items into their computer systems and in some cases marketing
support provided by the retailer). The practice by retailers of charging
slotting fees is a standard industry practice. The Company expects to continue
to incur slotting fees as it expands its geographic territory and as new
products are introduced.
Marketing expenses increased $1,868,162 or 562% to $2,200,292 during the year to
date period ended June 30, 1997 from $332,130 during the period from inception
through June 30, 1996. Marketing expenses for the year to date period ended June
30, 1997 reflected initial implementation of the Company's marketing program,
and included items such as advertising (approximately $332,000), directed
sampling programs via direct mail and delivery with newspapers (approximately
$425,000), and in store demonstrations (approximately $691,000).
11
<PAGE>
Product development costs decreased $155,352 or 39% to $244,190 during the year
to date period ended June 30, 1997 from $399,542 during the period from
inception through June 30, 1996. The expense level for the year to date period
ended June 30, 1997 reflects expenses associated with the ongoing management of
manufacturers and co-packers, and ongoing research and development. During the
period from inception through June 30, 1996, much of the product development
costs were costs associated with testing of newly acquired formulations (e.g.,
palatability and bioavailability), expenses associated with locating
manufacturers and certifying their facilities and processes.
General and Administrative expenses increased $1,013,760 or 111% to $1,929,689
during the year to date period ended June 30, 1997 from $915,929 during the
period from inception through June 30, 1996. The increase resulted from
increased logistics costs (approximately $420,000); increased legal, accounting
and professional fees (approximately $209,000) associated with strategic
planning, SEC compliance and other matters; increased rent (approximately
$38,000); increased amortization costs; and increases in general office
expenses.
Interest income net of interest expense and financing costs increased $222,166
to $3,325 during the year to date period ended June 30, 1997 from a net expense
of $218,841 during the period from inception through June 30, 1996. The expense
during the prior year period reflected amortization of financing costs
associated with the start up of the business. These costs were fully amortized
during 1996 and are non-reoccurring.
Net Loss. Net loss increased $2,900,701 or 136% to $5,025,858 during the year to
date period ended June 30, 1997 from $2,125,157 during the period from inception
through June 30, 1996. The increase was due primarily to initial expenditures
associated with the implementation of the Company's marketing plans, combined
with slotting fees. The Company expects to continue to incur losses at least
through the third quarter of 1997. The Company's ability to achieve a profitable
level of operations will depend in large part on the market acceptance of its
products, and the Company's ability to obtain additional financing. There can be
no assurance that the Company will achieve profitable operations.
Liquidity and Capital Resources
Working Capital. At June 30, 1997 the Company had working capital of $824,459,
compared to working capital of $4,113,187 at December 31, 1996. The change in
working capital was primarily due to the loss incurred in the current period,
partially offset by the sale of Series A Cumulative Preferred Stock on April 29,
1997.
Cash Flow. During the year to date period ended June 30, 1997, the Company had
net cash used by operating activities of $5,401,505. The primary uses of cash
were the net loss incurred for the period, combined with increased inventories
and accounts receivable.
The Company had net cash used in investing activities of $368,737 for the year
to date period ended June 30, 1997. The primary use of cash during this period
was for capital expenditures including meat-handling equipment to be used by one
of the Company's manufacturers, and plates used for printing the bags used for
the Company's finished product.
During the year to date period ended June 30, 1997, the Company had net cash
provided by financing activities of $1,788,014, reflecting the net proceeds of a
$2.5 million Private Placement (the "Private Placement") net of a $200,000
principal payment on a loan from InnoPet Inc. The Private Placement consisted of
the sale of 625,000 shares of the Company's Series A 4% Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Preferred Stock") at $4.00 per
share. The net proceeds from this sale totaled $1,988,014.
In order to achieve its financial plan, the Company is seeking additional
financing, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional financing the Company will be required to
modify its current business plan. There can be no assurance that the Company
will be able to obtain such additional financing.
12
<PAGE>
Subsequent Events
On July 9, 1997, the Company borrowed $1,500,000 from Entrepreneurial Investors,
Ltd., a Bahamian Company. The Note has a stated interest rate of 14%, matures on
January 15, 1998 and is collateralized with 600,000 shares of the Company's
Common Stock. The principal amount of the Note may be converted into Common
Stock of the Company at $4.50 per share. Additionally, in connection with the
loan, the loan agreement provides that the Company shall issue 225,000 Warrants
to purchase shares of the Company's Common Stock at $6.00 per share. These
warrants are subject to the same terms and conditions as the warrants currently
publicly traded.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities:
None.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of matters to a Vote of Security Holders.
On June 18, 1997, the Company held its Annual Meeting of Shareholders.
At the Meeting, the sole item of business was the election of Directors
to the Board of Directors of the Company. The persons elected as
Directors and the tabulation of the votes (both in person and by proxy)
were as follows:
Nominees for Directors For Withheld
---------------------- --- --------
Marc Duke 4,007,523 500
Daniel I. DeWolf 4,007,523 500
Curtis Granet 4,006,623 1,400
Richard P. Greene 4,006,623 1,400
Albert A. Masters 4,006,523 1,500
John Bieber 1,643,495 0
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit 27.
(b) Reports filed on Form 8-K: None.
14
<PAGE>
SIGNATURES
In accordance with 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.
InnoPet Brands Corp.
Date: August 14, 1997 By: /s/ Marc Duke
-------------
Marc Duke, Chairman of the Board and CEO
Date: August 14, 1997 By: /s/ Robin Hunter
----------------
Robin Hunter, Vice President and CFO
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 632
<SECURITIES> 0
<RECEIVABLES> 390
<ALLOWANCES> 0
<INVENTORY> 2,700
<CURRENT-ASSETS> 4,043
<PP&E> 502
<DEPRECIATION> 85
<TOTAL-ASSETS> 5,313
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<COMMON> 45
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<SALES> 1,107
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<INCOME-PRETAX> (5,026)
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