<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 September 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)
- -------------------------------------------------------------------------------
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 September 30, 1997, 4,465,878 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
September 30, 1997
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1997 and December 31, 1996............................ 3.
Condensed Statements of Operations for the three months ended September 30, 1997, and 1996, the
nine months ended September 30, 1997, the period from inception (January 11, 1996) to September 30,
1996, and the cumulative development stage period from inception (January 11, 1996) to September
30, 1997........................................................................................... 4.
Condensed Statements of Cash Flows for the nine months ended September 30, 1997, the period from
inception (January 11, 1996) to September 30, 1996, and the cumulative development stage period
from inception (January 11, 1996) to September 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>
Sep 30, 1997 Dec 31, 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash ........................................ $ 214,079 $ 4,614,312
Accounts receivable ......................... 1,662,238 219,011
Inventories ................................. 1,488,160 1,058,108
Prepaid expenses and other current assets ... 938,460 445,445
------------ ------------
Total current assets ...................... 4,302,937 6,336,876
------------ ------------
Property and equipment, net .................... 407,340 105,978
------------ ------------
Intangible Assets:
Deferred slotting fees, net of accumulated
amortization .............................. 407,501 496,367
Product formulae acquisition costs, net of
accumulated amortization ................. 230,821 251,413
Non-compete agreement, net of accumulated
amortization .............................. 135,905 212,351
Total intangible assets ................... 774,227 960,131
------------ ------------
Other Assets ................................... 69,234 153,728
------------ ------------
Total Assets ................................... $ 5,553,738 $ 7,556,713
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable:
Trade ..................................... $ 2,018,694 $ 578,330
Slotting fees ............................. 499,391 551,325
Accrued expenses & other payables ......... 267,592 169,640
InnoPet Inc. .............................. 788,334 724,394
Notes Payable, net of original issue
discount ................................ 1,271,434 --
Interest payable .......................... 47,753 --
Current portion of long-term debt due to
InnoPet Inc. .............................. 200,000 200,000
------------ ------------
Total current liabilities ............. 5,093,198 2,223,689
Long-Term Debt:
Note payable to InnoPet, Inc., net of current
portion ................................... 600,000 800,000
------------ ------------
Total Liabilities ..................... 5,693,198 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
4,465,878 and 4,465,878 shares .............. 44,658 44,658
Additional paid-in capital ................... 13,158,213 13,164,859
Deficit accumulated during the development
stage ....................................... (13,594,376) (6,518,304)
Notes and interest receivable on sale of
common stock ................................ (2,244,719) (2,158,189)
Treasury stock at cost ....................... (3,236) --
------------ ------------
Total Stockholders' Equity ..................... (139,460) 4,533,024
------------ ------------
Total Liabilities and Stockholders' Equity ..... $ 5,553,738 $ 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
Nine Months (January 11, (January 11,
Three Months Ended Ended 1996) to 1996) to
Sep 30, 1997 Sep 30, 1996 Sep 30, 1997 Sep 30, 1996 Sep 30, 1997
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net Sales ........................... $ 1,525,602 $ 1,229,315 $ 2,632,414 $ 1,382,376 $ 4,492,350
------------ ------------ ------------ ------------ ------------
Cost of Goods Sold .................. 1,026,642 1,090,990 1,788,804 1,223,766 3,423,278
------------ ------------ ------------ ------------ ------------
Gross Profit ........................ 498,960 138,325 843,610 158,610 1,069,072
------------ ------------ ------------ ------------ ------------
Operating Expenses:
Sales expenses ................. 191,055 164,157 520,071 399,157 1,033,071
Slotting allowances ............ 171,275 439,520 841,921 483,520 1,936,766
Marketing expenses ............. 1,218,421 549,054 3,418,713 876,984 4,814,995
Product development ............ 76,761 106,134 320,951 505,692 905,927
General and administrative ..... 1,245,181 445,128 3,174,870 1,331,180 4,957,665
------------ ------------ ------------ ------------ ------------
Total operating expenses ............ 2,902,693 1,703,993 8,276,526 3,596,533 13,648,424
------------ ------------ ------------ ------------ ------------
Loss from operations ................ (2,403,733) (1,565,668) (7,432,916) (3,437,923) (12,579,352)
------------ ------------ ------------ ------------ ------------
Other Income (Expenses):
Interest income ................ 8,379 -- 63,786 -- 85,356
Interest expense and financing
costs.......................... (258,077) (607,000) (303,947) (855,703) (1,647,909)
Other income (expense) ......... 603,217 -- 597,005 -- 547,529
------------ ------------ ------------ ------------ ------------
Total other income (expense) ........ 353,519 (607,000) 356,844 (855,703) (1,015,024)
------------ ------------ ------------ ------------ ------------
Net loss ............................ $ (2,050,214) $ (2,172,668) $ (7,076,072) $ (4,293,626) $(13,594,376)
============ ============ ============ ============ ============
Net loss per common share ........... $ (.46) $ (1.16) $ (1.58) $ (2.29)
============ ============ ============ ============
Shares used in per share calculations 4,465,095 1,878,378 4,465,472 1,878,378
============ ============ ============ ============
</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
Inception Period from
(January 11, Inception (January
Nine Months Ended 1996) to 11, 1996) to
Sep 30, 1997 Sep 30, 1996 Sep 30, 1997
------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ........................................ $ (7,076,072) $ (4,293,626) $(13,594,376)
Adjustments to reconcile net loss to net cash
used in operating activities:
Costs and expenses paid on behalf of Company
by InnoPet Inc. .............................. -- 1,462,315
1,580,327
Depreciation ................................. 84,438 11,937 111,792
Amortization:
Slotting fees ............................. 841,921 451,487 1,936,766
Financing costs ........................... 187,009 337,164 1,059,768
Other ..................................... 97,039 229,281 217,048
Offsets against accounts receivable for
slotting fees ............................... (753,055) -- (1,634,172)
Interest paid from proceeds of public offering -- -- 61,944
Changes in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts receivable .......................... (1,443,227) (625,393) (1,662,238)
Inventory .................................... (430,052) (964,093) (984,129)
Prepaid expenses and other current assets .... (493,015) (103,463) (1,444,025)
Other assets ................................. 84,494 -- (59,234)
Increase (Decrease) in:
Accounts payable, trade ...................... 1,440,364 1,648,954 2,018,694
Accrued expenses and other payables .......... 97,952 107,287 267,592
Accounts payable slotting fees ............... (51,934) (327,000) 499,391
Accounts payable, InnoPet Inc. ............... 63,940 884,048 788,334
Accrued Interest ............................. 47,753 22,740 47,753
------------ ------------ ------------
Net cash used in operating activities ...... (7,302,445) (1,158,362) (10,788,765)
------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of property and equipment ........... (385,802) (28,456) (470,342)
------------ ------------ ------------
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 1,672,236
Offering costs .................................. -- (233,116) (472,641)
Deferred financing costs ........................ -- (96,565) (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
Proceeds from short-term loan ................... 1,500,000 -- 1,500,000
------------ ------------ ------------
Net cash provided by financing activities .... 3,288,014 1,544,569 11,473,186
------------ ------------ ------------
Net Increase (Decrease) in Cash ..................... (4,400,233) 357,751 214,079
Cash, Beginning ..................................... 4,614,312 -- --
------------ ------------ ------------
Cash, Ending ........................................ $ 214,079 $ 357,751 $ 214,079
============ ============ ============
</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)
Nine Months Ended 1996) to to Sep
Sep 30, 1997 Sep 30, 1996 30, 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 ................................. $ -- $ 1,072,772 $1,072,772
================== ================== ==========
Deferred financing costs ................. $ -- $ 227,071 $ 227,071
================== ================== ==========
Deferred slotting fees ................... $ -- $ 291,957 $ 291,957
================== ================== ==========
Property and equipment and other
assets ................................... $ -- $ 33,039 $ 195,732
================== ================== ==========
Deferred financing costs paid from proceeds
of private placement financing .............. $ -- $ 327,764 $ 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
================== ================== ==========
Non-cash financing costs associated with
notes payable ............................... $ 415,575 $ -- $ --
================== ================== ==========
</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
$13,845,746 for the period from inception (January 11, 1996) through
September 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
September 30, 1997, the Company is selling product in the following
markets: New England, the Greater Metropolitan New York and Albany,
New York areas; Philadelphia and other areas of Pennsylvania; the
Baltimore/Washington, DC area; Virginia; North Carolina; South
Carolina; Georgia; and Florida.
As of September 30, 1997, the Company has increased its distribution
in existing markets through initial deliveries to A&P Foodmart, Big
Y, Farm Fresh, UKROP'S and Bozzuto's Wholesalers. 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 in the first quarter of 1998.
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 dogs and recommended to adopters by both of these
not-for-profit humane organizations which promote the well-being of
dogs and cats through their efforts to unite more than 6,000 humane
organizations world-wide. In addition, adopters will be provided with
product samples, literature and coupons, and will be able to purchase
the products in retail stores of participating adoption centers.
In connection with the above partnerships, the Company is currently
participating in a holiday promotion program which includes a
donation toward the exclusive cause of pet adoption based on the
number of bags of product sold between November 1 and December 31,
1997. Funds raised through this promotion will be administered
through the Pet Savers Foundation.
Additional Financing
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.
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 September 30, 1997, the Company is
selling product in the following markets: New England; the Greater
Metropolitan New York and Albany, New York areas; Philadelphia and other areas
of Pennsylvania; the Baltimore/Washington, DC area; Virginia; North Carolina;
South Carolina; Georgia; 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 September 30, 1997, the Company has increased its distribution in
existing markets through initial deliveries to A&P Foodmart, Big Y, Farm
Fresh, UKROP'S and Bozzuto's Wholesalers. 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 in the
first quarter of 1998.
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 dogs and
recommended to adopters by both of these not-for-profit humane organizations
which promote the well-being of dogs and cats through their efforts to unite
more than 6,000 humane organizations world-wide. In addition, adopters will be
provided with product samples, literature and coupons, and will be able to
purchase the products in retail stores of participating adoption centers.
9
<PAGE>
In connection with the above partnerships, the Company is currently
participating in a holiday promotion program which includes a donation toward
the exclusive cause of pet adoption based on the number of bags of product
sold between November 1 and December 31, 1997. Funds raised through this
promotion will be administered through the Pet Savers Foundation.
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 fourth
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 September 30, 1997 compared to the three months ended
September 30,1996.
Revenues. Revenues increased $296,287 or 24% to $1,525,602 during the third
quarter of 1997 from $1,229,315 for the comparable period in 1996.
Cost and Expenses. Cost of goods sold decreased $64,348 or 6% to $1,026,642
during the third quarter of 1997 from $1,090,990 for the comparable period in
1996. Cost of goods sold for the third quarter of 1997 were 67% of sales,
providing a gross margin of 33% for the period, an improvement of 22
percentage points over the third quarter of 1996. The improved margin was the
result of increased volume and improved manufacturing efficiencies during the
third quarter of 1997 over the comparable period of 1996.
Sales expenses increased $26,898 or 16% to $191,055 during the third quarter
of 1997 from $164,157 for the comparable period in 1996. The increase
reflected an expanded sales force and increased commission expenses for
brokers. Sales expenses for the third quarter of 1997 totaled 13% of sales.
These costs consist of broker commissions (5% of sales), and the Company's
in-house sales force.
Slotting expenses decreased $268,245 or 61% to $171,275 during the third
quarter of 1997 from $439,520 for the comparable period in 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 $669,367 or 122% to $1,218,421 during the third
quarter of 1997 from $549,054 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, floorminder displays, direct sampling programs,
in-store demonstrations and cause-related programs.
Product development costs decreased $29,373 or 28% to $76,761 during the third
quarter of 1997 from $106,134 for the comparable period in 1996. The third
quarter 1997 expense level reflected expenses associated with the ongoing
management of manufacturers and co-packers, and ongoing research and
development. During the third 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 $800,053 or 180% to $1,245,181
during the third quarter of 1997 from $445,128 for the comparable period in
1996. The increase resulted from increased logistics costs (approximately
$270,000); a reserve for bad debts against chargebacks to customers
(approximately $200,000); obsolete product associated with reformulation
(approximately $200,000) and increased costs associated with SEC compliance
and other general office expenses.
Total Other Income increased $960,519 or 158% to $353,519 during the third
quarter of 1997 from a net expense of $607,000 during the comparable period in
1996. The third quarter of 1997 includes other income of $603,217 recognizing
slotting fee rebates due the Company, interest expense of $258,077 in
amortization of original issue discount on the Entrepreneurial Investors Ltd.
borrowing, and including $71,068 of other net interest expense. The third
quarter of 1996 includes amortization of financing costs associated with the
start up of the business, which were fully amortized during 1996.
Net Loss. Net loss decreased $122,454 or 6% to $2,050,214 during the third
quarter of 1997 from $2,172,668 for the comparable period in 1996. The
decrease was due primarily to third quarter 1997 recognition of slotting fee
rebates due the Company. The Company expects to continue to incur losses at
least through the fourth 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 September 30, 1997 compared to the period from
inception (January 11, 1996) through September 30, 1996.
Revenues. Revenues increased $1,250,038 or 90% to $2,632,414 during the year
to date period ended September 30, 1997 from $1,382,376 during the period from
inception through September 30, 1996.
Cost and Expenses. Cost of goods sold increased $565,038 or 46% to $1,788,804
during the year to date period ended September 30, 1997 from $1,223,766 during
the period from inception through September 30, 1996. Cost of goods sold for
the year to date period ended September 30, 1997 were 68% of sales, providing
a gross margin of 32% for the period, an improvement of 21 percentage points
over the period from inception through September 30, 1996. The improved margin
was the result of increased volume and improved manufacturing efficiencies
during the year to date period ended September 30, 1997 over the period from
inception through September 30, 1996.
Sales expenses increased $120,914 or 30% to $520,071 during the year to date
period ended September 30, 1997 from $399,157 during the period from inception
through September 30, 1996. Sales expenses for the year to date period ended
September 30, 1997 totaled 20% of sales. These costs consist of broker
commissions (5% of sales), and the Company's in-house sales force.
Slotting expenses increased $358,401 or 74% to $841,921 during the year to
date period ended September 30, 1997 from $483,520 during the period from
inception through September 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.
11
<PAGE>
Marketing expenses increased $2,541,729 or 290% to $3,418,713 during the year
to date period ended September 30, 1997 from $876,984 during the period from
inception through September 30, 1996. Marketing expenses for the year to date
period ended September 30, 1997 reflected initial implementation of the
Company's marketing program, and included items such as advertising
(approximately $597,000), directed sampling programs via direct mail and
delivery with newspapers (approximately $460,000), chain based promotions and
in store demonstration programs (approximately $970,000), and cause-based
programs (approximately $385,000).
Product development costs decreased $184,741 or 37% to $320,951 during the
year to date period ended September 30, 1997 from $505,692 during the period
from inception through September 30, 1996. The expense level for the year to
date period ended September 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 September 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 $1,843,690 or 139% to $3,174,870
during the year to date period ended September 30, 1997 from $1,331,180 during
the period from inception through September 30, 1996. The increase resulted
from increased logistics costs (approximately $674,000); bad debts resulting
from a reserve against slotting fee rebates due the Company and other
chargebacks to customers (approximately $200,000); product withdrawn from the
marketplace (approximately $308,000); increased legal and professional costs
(approximately $82,000); increased insurance costs (approximately $104,000);
increased rent (approximately $123,000); and other increases in general office
expenses.
Total Other Income increased $1,212,547 or 142% to $356,844 during the year to
date period ended September 30, 1997 from a net expense of $855,703 during the
period from inception through September 30, 1996. The current year to date
period includes Other Income of $597,005 recognizing slotting fee rebates due
the Company, interest expense of $303,947 consisting of $187,009 in
amortization of original issue discount on the Entrepreneurial Investors Ltd.
borrowing, and $118,176 of other net interest expense. The prior year to date
period includes amortization of financing costs associated with the start up
of the business, which were fully amortized during 1996.
Net Loss. Net loss increased $2,782,446 or 65% to $7,076,072 during the year
to date period ended September 30, 1997 from $4,293,626 during the period from
inception through September 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 fourth 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 September 30, 1997 the Company had working capital deficit
of $790,261, 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 4% Cumulative
Convertible Preferred Stock on April 29, 1997.
Cash Flow. During the year to date period ended September 30, 1997, the
Company had net cash used by operating activities of $7,302,445. 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 $385,802 for the year
to date period ended September 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.
12
<PAGE>
During the year to date period ended September 30, 1997, the Company had net
cash provided by financing activities of $3,288,014, 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. and a short-term
loan. 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 at $4.00 per share. The net proceeds from this sale totaled
$1,988,014. The short-term loan carries an interest rate of 14%, and matures
on January 15, 1998.
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.
Subsequent Events
On October 24, 1997, Michael L. Winer was appointed Chief Financial Officer
and Corporate Secretary, by unanimous consent of the Board of Directors.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. a) Changes in Securities: None.
b) Use of Proceeds:
In December 1996, the Company raised additional capital through an
initial public offering of its Securities. The public offering
consisted of 2,225,000 Units, each Unit consisting of one share of
Common Stock and one Redeemable Warrant. In addition, there was an
overallotment option for 337,500 Units which was exercised by the
underwriter, resulting in a total of 2,587,500 Units being sold.
Gross proceeds to the Company totaled $10,350,022. Offering expenses
approximated $1,793,596 and consisted of the following: (a)
underwriting discounts, non-accountable expenses allowance and
reimbursable expenses of $1,436,612 and (b) legal, accounting,
printing and other fees incurred in connection with the initial
public offering of $356,984. The net proceeds of $8,556,426 were
utilized as follows: (a) $91,500 for the purchase and installation of
machinery and equipment, (b) $2,061,944 for the repayment of
indebtedness, (c) $2,759,430 for inventory, (d) $1,400,373 on
marketing, (e) $997,667 for distribution expansion, (f) $83,324 for
product development and (g) $1,162,188 working capital and general
corporate purposes. All proceeds from this offering have been
expended.
The above information updates the Form SR filed by the Company for
the period ended March 31, 1997 pursuant to former Rule 463.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of matters to a Vote of Security Holders.
None.
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: November 13, 1997 By: /s/ Marc Duke
-------------
Marc Duke, Chairman of the Board and CEO
Date: November 13, 1997 By: /s/ Michael L. Winer
--------------------
Michael L. Winer, Vice President and CFO
(Chief Accounting Officer)
15
<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-QSB
FOR THE PERIOD ENDING SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 1,662
<ALLOWANCES> 0
<INVENTORY> 1,488
<CURRENT-ASSETS> 4,303
<PP&E> 519
<DEPRECIATION> 112
<TOTAL-ASSETS> 5,554
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