10-Q 1 global_10q-093006.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: SEPTEMBER 30, 2006 Commission File Number: 000-28027 GLOBAL BEVERAGE SOLUTIONS, INC. ------------------------------- (Exact name of registrant as specified in its charter) NEVADA 90-0093439 ------ ---------- (State or Jurisdiction of (IRS Employer ID No) Incorporation or Organization) 7633 EAST 63RD PLACE, SUITE 220, TULSA, OK 74133 ------------------------------------------------ (Address of principal executive office) (zip code) (918) 459-8469 -------------- (Issuer's telephone number) 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 periods as 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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]. The number of shares outstanding of registrant's common stock, par value $.001 per share, as of September 30, 2006 was 43,661,515 shares. GLOBAL BEVERAGE SOLUTIONS, INC. INDEX Page No. --- Part I Financial Information Item 1: Condensed Financial Statements Statements of Net Assets as of September 30, 2006 and December 31, 2005 3 Statements of Operations - For the Three Months Ended September 30, 2006 and 2005 4 Statements of Operations - For the Nine Months Ended September 30, 2006 and 2005 5 Statements of Cash Flows - For the Nine Months Ended September 30, 2006 and 2005 6 Statements of Changes in Net Assets - For the Nine Months Ended September 30, 2006 and 2005 7 Financial Highlights for the Nine Months Ended September 30, 2006 and 2005 8 Schedule of Investments as of September 30, 2006 and December 31, 2005 9-10 Notes to Financial Statements 11-19 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations 20-29 Item 3: Quantitative and Qualitative Disclosure about Market Risk 30 Item 4: Controls and Procedures 30 Part II Other Information 31-32 Item 1: Legal Proceedings Item 1A: Risk Factors Item 2: Unregistered Sales of Equity Securities and Use of Proceeds Item 3: Defaults Upon Senior Securities Item 4: Submission of Matters to a Vote of Security Holders Item 5: Other Information Item 6: Exhibits Signatures Exhibits 33-36 2
PART 1: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS GLOBAL BEVERAGE SOLUTIONS, INC. Condensed Statements of Net Assets September 30, 2006 and December 31, 2005 2006 2005 ---- ---- (Unaudited) ASSETS Investments in controlled portfolio companies (cost $7,398,869 at September 30, 2006 and $5,715,000 at December 31, 2005) $ 6,387,369 $ 5,715,000 Investments in non-afilliated portfolio companies (cost $200,000 at September 30, 2006 and December 31, 2005) - - ------------- ------------- Total investments 6,387,369 5,715,000 Cash and cash equivalents 215,314 245,370 Interest and fees receivable from controlled portfolio companies 53,798 13,889 Deposits and prepaid expenses 9,387 13,072 ------------- ------------- TOTAL ASSETS 6,665,868 5,987,331 ------------- ------------- LIABILITIES Secured convertible promissory notes payable (Note 3) 1,185,000 - Accounts payable 93,423 25,857 Accrued expenses 22,838 134,350 ------------- ------------- TOTAL LIABILITIES 1,301,261 160,207 ------------- ------------- NET ASSETS $ 5,364,607 $ 5,827,124 ============= ============= Commitments and contingencies (Note 6) Composition of net assets: Preferred stock, $.001 par value; 50,000,000 shares authorized; no shares issued and outstanding $ - $ - Common stock, $.0001 par value, authorized 950,000,000 shares; 43,661,515 and 41,312,391 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively 43,661 41,312 Additional paid in capital 16,965,284 15,443,102 Accumulated deficit: Accumulated net operating loss (8,554,423) (7,578,875) Net realized loss on investments (1,878,415) (1,878,415) Net unrealized depreciation of investments (1,211,500) (200,000) ------------- ------------- Net assets $ 5,364,607 $ 5,827,124 ============= ============= Net asset value per share $ 0.1229 $ 0.1411 ============= ============= See accompanying notes to condensed financial statements. 3 GLOBAL BEVERAGE SOLUTIONS, INC. Condensed Statements of Operations Three Months Ended September 30, 2006 and 2005 (Unaudited) 2006 2005 ---- ---- INCOME FROM OPERATIONS: Interest income from portfolio companies $ 36,312 $ - Management income from portfolio companies 6,000 - ------------- ------------- 42,312 - EXPENSES: Officer and employee compensation 36,500 54,407 Director fees - 4,500 Professional fees 35,073 14,517 Shareholder services and communications 17,378 12,528 Interest expense (Note 3) 552,875 - Bad debt expense - portfolio company 50,369 - Other general and administrative expense 6,484 24,130 Loss on sale of furniture and fixtures - 12,874 ------------- ------------- 698,679 122,956 ------------- ------------- LOSS BEFORE INCOME TAXES (656,367) (122,956) INCOME TAXES - - ------------- ------------- NET LOSS FROM OPERATIONS (656,367) (122,956) ------------- ------------- NET REALIZED AND UNREALIZED LOSSES: Net realized loss on investments, net of income tax benefit of $0 - - Change in unrealized depreciation of controlled affiliate investments, net of deferred tax benefit of -0- (1,011,500) (405,177) ------------- ------------- Net realized and unrealized losses (1,011,500) (405,177) ------------- ------------- NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,667,867) $ (528,133) ============= ============= NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE, BASIC AND DILUTED $ (0.0382) $ (0.0188) ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 43,638,996 28,074,230 ============= ============= See accompanying notes to condensed financial statements. 4 GLOBAL BEVERAGE SOLUTIONS, INC. Condensed Statements of Operations Nine Months Ended September 30, 2006 and 2005 (Unaudited) 2006 2005 ---- ---- INCOME FROM OPERATIONS: Interest income from portfolio companies $ 72,278 $ - Management income from portfolio companies 18,000 - ------------- ------------- 90,278 - EXPENSES: Officer and employee compensation 113,000 166,498 Director fees 1,500 13,800 Professional fees 185,322 314,052 Shareholder services and communications 66,183 19,040 Lawsuit settlement 78,000 - Bad debt expense - portfolio company 50,369 - Interest expense (Note 3) 552,875 306,500 Other general and administrative expense 18,577 94,540 Loss on sale of furniture and fixtures - 12,874 ------------- ------------- 1,065,826 927,304 ------------- ------------- LOSS BEFORE INCOME TAXES (975,548) (927,304) INCOME TAXES - - ------------- ------------- NET LOSS FROM OPERATIONS (975,548) (927,304) ------------- ------------- NET REALIZED AND UNREALIZED LOSSES: Net realized loss on investments, net of income tax benefit of $0 for 2005 - (69,825) Change in unrealized depreciation of controlled affiliate investments, net of deferred tax benefit of -0- (1,011,500) (405,177) ------------- ------------- Net realized and unrealized losses (1,011,500) (475,002) ------------- ------------- NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,987,048) $ (1,402,306) ============= ============= NET DECREASE IN NET ASSETS FROM OPERATIONS PER SHARE, BASIC AND DILUTED $ (0.0464) $ (0.1184) ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 42,847,225 11,848,650 ============= ============= See accompanying notes to condensed financial statements. 5 GLOBAL BEVERAGE SOLUTIONS, INC. Condensed Statements of Cash Flows Nine Months Ended September 30, 2006 and 2005 (Unaudited) 2006 2005 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net decrease in net assets from operations $ (1,987,048) $ (1,402,306) Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities: Change in unrealized depreciation of investments 1,011,500 405,177 Bad debt expense - portfolio company 50,369 - Depreciation - 12,546 Amortization of deferred financing costs - 28,125 Interest expense for intrinsic value of beneficial conversion feature on secured convertible promissory notes 538,000 - Beneficial conversion feature on convertible debentures - 234,926 Loss on sale of furniture and fixtures - 12,874 Changes in operating assets and liabilities: Interest and fees receivable from portfolio companies (90,278) - Deposits and prepaid expenses 3,684 47,368 Accounts payable and accrued expenses 117,586 67,409 ------------- ------------- Net cash used in operating activities (356,187) (593,881) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments in and advances to portfolio investment companies (1,683,869) (627,699) ------------- ------------- Net cash used in investing activities (1,683,869) (627,699) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issued for cash 825,000 1,105,000 Proceeds from secured convertible promissory notes 1,185,000 - Proceeds from convertible debenture - 50,000 Advance from related party - 11,500 Proceeds from sale of common stock - 91,019 ------------- ------------- Net cash provided by financing activities 2,010,000 1,257,519 ------------- ------------- Net increase (decrease) in cash and cash equivalents (30,056) 35,939 Cash and cash equivalents, beginning of period 245,370 43,466 ------------- ------------- Cash and cash equivalents, end of period $ 215,314 $ 79,405 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION CASH PAID FOR INTEREST AND INCOME TAXES: Interest $ - $ - Income taxes - - NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of preferred series B to common stock $ - $ 57 Common stock issued upon conversion of convertible debentures - 293,750 Common stock issued for notes and other debts 161,531 - See accompanying notes to condensed financial statements. 6 GLOBAL BEVERAGE SOLUTIONS, INC. Condensed Statements of Changes in Net Assets Nine Months Ended September 30, 2006 and 2005 (Unaudited) 2006 2005 ---- ---- CHANGES IN NET ASSETS FROM OPERATIONS: Net loss from operations $ (975,548) $ (927,304) Net realized loss on sale of investments, net - (69,825) Change in net unrealized depreciation of investments, net (1,011,500) (405,177) ------------- ------------- Net decrease in net assets from operations (1,987,048) (1,402,306) ------------- ------------- CAPITAL STOCK TRANSACTIONS: Common stock issued for cash 825,000 1,196,019 Common stock issued for liabilities 161,531 - Interest expense for intrinsic value of beneficial conversion feature on secured convertible promissory notes 538,000 - Conversion of convertible debentures - 293,751 ------------- ------------- Net increase in net assets from stock transactions 1,524,531 1,489,770 ------------- ------------- Net increase in net assets (462,517) 87,464 Net assets, beginning of period 5,827,124 396,001 ------------- ------------- Net assets, end of period $ 5,364,607 $ 483,465 ============= ============= See accompanying notes to condensed financial statements. 7 GLOBAL BEVERAGE SOLUTIONS, INC. Financial Highlights Nine Months Ended September 30, 2006 and 2005 (Unaudited) 2006 2005 ---- ---- PER SHARE INFORMATION Net asset value, beginning of period $ 0.1411 $ 2.1302 Net decrease from operations (0.0228) (0.0783) Net change in realized losses and unrealized depreciation of investments, net (0.0236) (0.0401) Net increase from stock transactions 0.0282 (1.9967) ------------- ------------- Net asset value, end of period $ 0.1229 $ 0.0151 ============= ============= Per share market value: Beginning of period $ 1.67 $ 13.00 End of period 0.60 0.69 Investment return, based on market price at end of period (1) -64.1% -94.7% RATIOS/SUPPLEMENTAL DATA Net assets, end of period $ 5,364,607 $ 483,465 Average net assets 6,311,920 404,882 Annualized ratio of expenses to average net assets 23% 305% Annualized ratio of net decrease in net assets from operations to average net assets 42% 462% Shares outstanding at end of period 44,784,750 31,975,969 Weighted average shares outstanding during period 42,847,225 11,848,650 (1) Periods of less than one year are not annualized See accompanying notes to condensed financial statements. 8 GLOBAL BEVERAGE SOLUTIONS, INC. SCHEDULE OF INVESTMENTS September 30, 2006 (Unaudited) DATE OF HISTORICAL FAIR % NET SHARES ACQUISITION COST VALUE ASSETS COMMON STOCK IN PORTFOLIO COMPANIES CONTROLLED 44% Jul-05 EON Beverage Group, Inc., privately held; Mar-06 manufactures structured water pursuant to proprietary process $ 1,011,500 $ - 0% 80% Nov-05 Rudy Beverage, Inc., privately held; manufactures and sells beverages higher in nutritional value and lower in sugar than existing brands 6,387,369 6,387,369 119% ------------ ------------ ------- 7,398,869 6,387,369 119% ------------ ------------ ------- NON-AFFILIATED Investments with $0 value - see schedule below 200,000 - ------------ ------------ ------- Total investments at September 30, 2006 $ 7,598,869 6,387,369 119% =========== Cash and other assets, less liabilities (1,022,762) -19% ------------ ------- Net assets at September 30, 2006 $ 5,364,607 100% ============ ======= SCHEDULE OF INVESTMENTS WITH $0 VALUE 8% Jun-05 Titanium Design Studio, Inc., privately held; a titanium jewelry manufacturer $ 200,000 $ - ----------- ------------ $ 200,000 $ - =========== ============ See accompanying notes to condensed financial statements 9 GLOBAL BEVERAGE SOLUTIONS, INC. Schedule of Investments December 31, 2005 DATE OF HISTORICAL FAIR % NET SHARES ACQUISITION COST VALUE ASSETS COMMON STOCK IN PORTFOLIO COMPANIES CONTROLLED 9% Jul-05 EON Beverage Group, Inc., privately held; 10% of net assets; manufactures structured water pursuant to proprietary process $ 585,000 $ 585,000 10% 80% Nov-05 Rudy Beverage, Inc., privately held; 85% of net assets; manufactures and sells beverages higher in nutritional value and lower in sugar than existing brands 5,130,000 5,130,000 88% ------------ ------------ ------- 5,715,000 5,715,000 98% ------------ ------------ ------- NON-AFFILIATED Investments with $0 value - see schedule below 200,000 - 0% ------------ ------------ ------- Total investments at December 31, 2005 $ 5,915,000 5,715,000 98% ============ Cash and other assets, less liabilities 112,124 2% ------------ ------- Net assets at December 31, 2005 $ 5,827,124 100% ============ ======= SCHEDULE OF INVESTMENTS WITH $0 VALUE 8% Jun-05 Titanium Design Studio, Inc., privately held; a titanium jewelry manufacturer $ 200,000 $ - 51% Aug-04 Island Tribe, Inc., privately held; 0% of net assets; distributor of extreme sports apparel 396,777 - 100% Costs associated with previously discontinued - - businesses, Unboxed Distribution, Inc. and Total Sports Distribution, Inc. 69,826 - Discontinued investments (466,603) ----------- ------------ $ 200,000 $ - =========== ============ See accompanying notes to condensed financial statements. 10
GLOBAL BEVERAGE SOLUTIONS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) DESCRIPTION OF BUSINESS (A) ORGANIZATION AND BUSINESS The condensed financial statements include the accounts of Global Beverage Solutions, Inc. ("Global" or the "Company"). Pursuant to Regulation S-X Rule 6, the Company will operate on a non-consolidated basis. Operations of the portfolio companies will be reported at the subsidiary level and only the appreciation or impairment of these investments in portfolio companies will be included in the Company's financial statements. On June 19, 2003, the Company became a business development company ("BDC") pursuant to applicable provisions of the Investment Company Act of 1940. Until June 19, 2003 the Company was a development stage enterprise under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises." Upon commencing their operations as a BDC, the Company no longer qualified under the guidelines of SFAS No. 7. Mercury Software, a Nevada corporation, was incorporated on January 29, 1997 and its name was changed to MedEx Corp. on June 24, 2002. Aussie Apparel Group, Ltd. ("Aussie Apparel" or the "Company"), a Nevada corporation, was incorporated on August 26, 2002. In October 2002, MedEx Corp. issued an aggregate of 2,600 shares of its common stock to the shareholders of the Company in connection with the merger of the Company with MedEx Corp., whose name was then changed to Aussie Apparel Group, Ltd. on October 21, 2002. Since the shareholders of the Company became the controlling shareholders of MedEx after the exchange, the Company was treated as the acquirer for accounting purposes. Accordingly, the financial statements, as presented here, are the historical financial statements of the Company and include the transactions of MedEx only from the date of acquisition, using reverse merger accounting. The Company's name was changed to Bluetorch Inc. ("Bluetorch") effective November 3, 2003. On April 25, 2005, the Company changed its name to Pacific Crest Investments and as a result of a conflict in name with an existing company again changed its name to Pacific Peak Investments on May 5, 2005. On October 10, 2005, the Company changed its name to Global Beverage Solutions, Inc. and began trading on the OTC Bulletin Board under the symbol GBVS.OB. On April 18, 2005, the Company completed a 2,500-to-1 reverse stock split. The accompanying financial statements have been restated to reflect this stock split for all periods presented. 11 (B) CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2006, and the results of operations and cash flows for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2005 audited financial statements on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the operating results for the full years. (C) RECLASSIFICATIONS Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. (D) GOING CONCERN The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2006, the Company has an accumulated deficit of $11,644,338 and had net losses totaling $1,987,048 for the nine months ended September 30, 2006. Additionally, as of September 30, 2006, the Company had a working capital deficit of $1,022,762. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through debt and equity financing arrangements which management believes should be sufficient to fund its capital expenditures, working capital and other cash requirements for the next twelve months. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. As of September 30, 2006, the Company estimates it will require approximately $100,000 to meet its operating cash flow requirements and approximately $350,000 to meet its currently committed follow-on investments for the balance of 2006. The Company has cash of $215,314 at September 30, 2006, and management expects to continue to raise funds as needed to meet its requirements. Management plans to take the following additional steps in response to these issues: It has been determined that, as an investment company, the Company will only invest in/acquire businesses which are cash flow positive and profitable or businesses which projections indicate can become cash flow positive and profitable within a reasonable period. These entities will have good growth potential as a result of access to additional capital and/or additional management acumen. 12 As part of this strategic process, the Company has decided to concentrate its efforts in the beverage industry. It is believed that this new direction will both reduce the risk for the Company and its shareholders as well as provide the best opportunity for long-term shareholder value. On March 14, 2006, the Company filed a new Offering Circular that authorized the Company to raise up to $1,500,000 via sale of its common stock with a minimum share price of $.90. As of September 30, 2006, the Company had sold 841,000 shares and raised $859,000 against this limit (which includes cash in the amount of $781,000 and notes and other debts of the Company in the amount of $78,000). During the first quarter of 2006, the Company completed a prior Offering Circular and sold 1,485,714 shares for $104,000, which included $44,000 in cash and $60,000 in other debts of the Company. The Company has also issued 22,410 restricted shares for $23,531 in debts of Rudy. Whereas the Company believes it will be successful with its plans, due to market factors and economic conditions, no assurance can be given that financing will be available on favorable terms or at all. The financial statements do not include any adjustments related to recoverability and classification of assets carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. (2) INVESTMENTS RUDY BEVERAGE, INC. On November 17, 2005, the Company executed a Stock Purchase Agreement with the shareholders ("Sellers") of Rudy Beverage, Inc. ("Rudy"), a Nevada corporation, whereby the Company exchanged 6,000,000 shares of its common stock for 80% of the issued and outstanding common stock of Rudy. The Company's investment was valued at $4,860,000 based upon the trading price of the Company's common stock on the date of the transaction. The Sellers can receive up to 10,000,000 additional shares of the Company's common stock if Rudy achieves certain sales and net revenue goals by the twelve month periods ended June 30, 2007 and 2008. Rudy was founded by Rudy Ruettiger and Drew Carver to create a unique line of beverages higher in nutritional value but lower in sugar than existing brands. Rudy currently has developed two distinct products: Rudy Flying Colors, catering to children K1 through 8; and Rudy Revolution, a sport drink aimed at athletes across the board. The goal of the Rudy line of beverages is to create flavorful juice blends, some of which may incorporate the hydration capabilities of EON Structured Water (see below regarding discontinuance of support to EON by the Company). Rudy began sales during the quarter ended June 30, 2006, of its 55oz size drink and is currently expanding its production capability to include an 8oz size, a 16oz size, a 20oz size and a 32oz size. The Company has made follow-on investments in the form of loans in the total amount of $1,527,369 as of September 30, 2006, to Rudy. 13 EON BEVERAGE GROUP, INC. On July 8, 2005, the Company consummated the transactions contemplated by the Share Purchase Agreement (dated June 28, 2005) with EON Beverage Group, Inc. ("EON") and, as a result, the Company invested $400,000 in exchange for 9% of the issued and outstanding common stock of EON. EON manufactures structured water through a proprietary process (patent pending) which alters the molecular structure of purified water. Structured water is a relatively new concept which is generally defined as water molecules organized through hydrogen bonding into distinct molecular structures. This allows the users of EON water to achieve enhanced intra-cellular hydration through significant absorption capability that is crucial for maximum biological activity and improved athletic performance, based on the representations of EON. The Company had made follow-on investments in the form of loans in the total amount of $611,500 as of September 30, 2006, to EON. These amounts were fully reserved at September 30, 2006, as discussed below. During the first quarter of 2006, shareholders of the Company contributed their 35% ownership of EON to the Company, which increased the Company's ownership to 44%. No value was attributed to the increased interest based on the Company's valuation at the time. During September 2006, the Company determined that, without substantial additional capital, EON had little chance of becoming successful. With current capital committed to Rudy, the Company elected to discontinue funding EON and fully reserved its investment. This amounted to $1,011,500 which is included in change in unrealized depreciation of controlled affiliate investments and $50,369 in bad debt expense. TITANIUM DESIGN STUDIO, INC. On June 6, 2005, the Company signed a Share Purchase Agreement with Titanium Design Studio, Inc. ("TDS"), a Nevada corporation, whereby the Company invested $200,000 in cash in exchange for 8% of the issued and outstanding common stock of TDS. TDS has a proprietary manufacturing process which allows it to cast precision titanium jewelry resulting in a level of detail not obtainable by milling titanium. TDS can economically produce and supply jewelry in shapes and patterns which were previously considered to be impossible or uneconomical to manufacture. TDS believes its technology has applications in other industries, including aerospace, dentistry, sporting goods (fishing rods) and commemorative coins. Early in 2006, TDS relocated its operations to Thailand in order to access cheaper labor. The Board of Directors of the Company recorded a reserve in the amount of $200,000 relating to this investment at December 31, 2005. INVESTMENTS DISCONTINUED IN 2004 AND 2005 UNBOXED DISTRIBUTION, INC. On August 21, 2003, the Company formed Unboxed Distribution, Inc. ("Unboxed") for the purpose of owning and operating the Bluetorch license agreement. On March 12, 2005, the Company and its wholly-owned subsidiary, Unboxed Distribution, Inc., signed a Mutual Settlement and Release Agreement with Gotcha Brands Inc., the Bluetorch licensor, and this agreement required the Company's subsidiary, Unboxed Distribution, Inc., to cease the selling and marketing of Bluetorch apparel. In keeping with this agreement, the Company also agreed to change its corporate name by April 20, 2005. 14 TOTAL SPORTS DISTRIBUTION, INC. On October 21, 2003, the Company formed Total Sports Distribution, Inc. ("Total Sports") for the purpose of owning and operating the True Skate Apparel brand ("TSABrand)". Furthermore, on February 19, 2004 Total Sports signed a definitive agreement with Collective Licensing International, LLC to license the Airwalk brand for apparel in the United States market. On March 22, 2005, the Company and its wholly-owned subsidiary, Total Sports Distribution, Inc., signed a Mutual Settlement and Release Agreement with Collective Licensing International, LLC, the licensor of the Airwalk apparel brand, and this agreement required the Company's subsidiary, Total Sports Distribution, Inc., to cease the selling and marketing of Airwalk apparel. ISLAND TRIBE, INC. Effective August 1, 2004, the Company acquired a 51% interest in Island Tribe, Inc., ("Island Tribe") a surf apparel company in exchange for 12,000 shares of the restricted common stock of the Company, which was valued at $372,000, based on the trading price of the Company's common stock on that date. Over the next 4 years, this purchase agreement provided for the Company to receive an additional 24% ownership of Island Tribe, Inc. Effective November 20, 2005, the Company exchanged its 51% ownership in Island Tribe for the 12,000 restricted common shares originally issued to acquire Island Tribe. VALUATION OF INVESTMENTS As required by the SEC's Accounting Series Release ("ASR") 118, the investment committee of the Company is required to assign a fair value to all investments. To comply with Section 2(a) (41) of the Investment Company Act and Rule 2a-4 under the Investment Company Act, it is incumbent upon the board of directors to satisfy themselves that all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered and to determine the method of arriving at the fair value of each such security. To the extent considered necessary, the board may appoint persons to assist them in the determination of such value and to make the actual calculations pursuant to the board's direction. The board must also, consistent with this responsibility, continuously review the appropriateness of the method used in valuing each issue of security in the Company's portfolio. The directors must recognize their responsibilities in this matter and whenever technical assistance is requested from individuals who are not directors, the findings of such individuals must be carefully reviewed by the directors in order to satisfy themselves that the resulting valuations are fair. No single standard for determining "fair value in good faith" can be laid down, since fair value depends upon the circumstances of each individual case. As a general principle, the current "fair value" of an issue of securities being valued by the board of directors would appear to be the amount that the owner might reasonably expect to receive for them upon their current sale. Methods that are in accord with this principle may, for example, be based on a multiple of earnings, or a discount from market of a similar freely traded security, or yield to maturity with respect to debt issues, or a combination of these and other methods. Some of the general factors that the directors should consider in determining a valuation method for an individual issue of securities include: 15 1) the fundamental analytical data relating to the investment, 2) the nature and duration of restrictions on disposition of the securities, and 3) an evaluation of the forces which influence the market in which these securities are purchased and sold. Among the more specific factors which are to be considered are: type of security, financial statements, cost at date of purchase, size of holding, discount from market value of unrestricted securities of the same class at time of purchase, special reports prepared by analysts, information as to any transactions or offers with respect to the security, existence of merger proposals or tender offers affecting the securities, price and extent of public trading in similar securities of the issuer or comparable companies and other relevant matters. The board has arrived at the following valuation method for its investments. Where there is not a readily available source for determining the market value of any investment, either because the investment is not publicly traded or is thinly traded and in absence of a recent appraisal, the value of the investment shall be based on the following criteria: 1. Total amount of the Company's actual investment ("AI"). This amount shall include all loans, purchase price of securities and fair value of securities given at the time of exchange. 2. Total revenues for the preceding twelve months ("R"). 3. Earnings before interest, taxes and depreciation ("EBITD") 4. Estimate of likely sale price of investment ("ESP") 5. Net assets of investment ("NA") 6. Likelihood of investment generating positive returns (going concern). The estimated value of each investment shall be determined as follows: - Where no or limited revenues or earnings are present, then the value shall be the greater of the investment's a) net assets, b) estimated sales price, or c) total amount of actual investment. - Where revenues and/or earnings are present, then the value shall be the greater of one-time (1x) revenues or three times (3x) earnings, plus the greater of the net assets of the investment or the total amount of the actual investment. - Under both scenarios, the value of the investment shall be adjusted down if there is a reasonable expectation that the Company will not be able to recoup the investment or if there is reasonable doubt about the investment's ability to continue as a going concern. Based on the previous methodology, the Company determined that its investments should be valued at September 30, 2006 as follows: o RUDY BEVERAGE, INC. Rudy began its initial sales during the quarter ended June 30, 2006, of its 55oz bottle size in a number of flavors. Rudy completed an initial production run of its 8oz size in July and has plans to also produce 16oz, 20oz and 32oz sizes to meet its market needs. Accordingly, based upon the established valuation method, the investment in Rudy is valued at its cost of $4,860,000 plus loans of $1,527,369 at September 30, 2006. 16 o EON BEVERAGE GROUP, INC. EON has been involved in test marketing its structured water and has had limited revenues during this testing phase. During the first quarter of 2006, shareholders of the Company contributed their stock in EON to the Company, which increased the Company's ownership to 44%. While EON expected to sell a substantial volume of its structured water to Rudy for use in certain of its drinks, the Board of Directors has determined that EON will not achieve profitability without substantial additional investment, which the Company is unwilling to provide. Accordingly, the Company fully reserved its investment of $400,000 and fully reserved its advances of $611,500 for a total unrealized depreciation expense of $1,011,500 at September 30, 2006. Accounts receivable in the amount of $50,369 for interest charges and management fees were also fully reserved at September 30, 2006. o TITANIUM DESIGN STUDIO, INC. Early in 2006, TDS relocated its operations to Thailand in order to access cheaper labor. As a result, the Company fully reserved its investment of $200,000 at December 31, 2005. INVESTMENTS DISCONTINUED IN 2004 AND 2005 o ISLAND TRIBE, INC. As noted above, the Company sold its interest in Island Tribe on November 20, 2005. o UNBOXED DISTRIBUTION, INC. AND TOTAL SPORTS DISTRIBUTION, INC. Unboxed and Total Sports were fully reserved at December 31, 2004. the Company realized an additional loss of $69,825 during the three month period ended March 31, 2005, relating to liquidating these businesses. (3) SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE Secured convertible promissory notes payable at September 30, 2006 consist of the following: Principal balance of notes $ 1,185,000 =============== During the three months ended September 30, 2006, the Company issued 8%, one-year secured convertible promissory notes payable ("Secured Notes") to a group of investors in the aggregate amount of $1,185,000. The notes are convertible into restricted common shares at an initial rate of $.50 per share. Management has determined that these notes qualify as conventional convertible debt pursuant to APB No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants" and EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," accordingly the embedded conversion option is not a derivative. The Company computed an intrinsic value of the beneficial conversion of $538,000 based on the quoted stock price on the grant dates. The beneficial conversion feature was credited to additional paid-in capital and charged to interest expense when the agreement commenced since the Secured Notes can be converted when issued. 17 The Secured Notes are collateralized by the Company's common stock investment in Rudy Beverage, Inc. The Secured Notes include certain anti-dilutive provisions, such as an adjustment for stock splits and business combinations, adjustment for common stock dividends and distributions, adjustment for issuance of additional shares of common stock at a price per share less than the initial conversion price, and issuance of common stock equivalents at a price per share less than the initial conversion price. (4) EQUITY COMMON STOCK: Effective April 18, 2005, the Company implemented a 2500-to-1 reverse split of its common stock. Immediately following this reverse stock split, there were 218,500 issued and outstanding common shares of the Company. During the nine months ended September 30, 2006, the Company issued a total of 2,349,124 shares of its common stock for cash in the amount of $825,000 and notes and other debts of the Company in the amount of $161,531. At September 30, 2006, there are 43,661,515 shares issued and outstanding. PREFERRED STOCK: The Company is authorized to issue up to 50,000,000 shares of preferred stock at $0.001 par value. At September 30, 2006, there are no preferred shares issued or outstanding. (5) STOCK SUBSCRIPTIONS CONVERTED TO SECURED CONVERTIBLE PROMISSORY NOTES During the second quarter, the Company received $350,000 pursuant to common stock subscription agreements. The common stock was recorded as issued, based on state law, at June 30, 2006. Subsequent to the issuance of the second quarter Form 10Q, the Company mutually agreed with the investors to exchange these stock subscriptions for the Secured Notes described in Note 3. The Secured Notes are convertible into common shares at the rate of $.50 per share. (6) COMMITMENTS AND CONTINGENCIES GENERAL - The Company's commitments and contingencies include the usual obligations of a BDC in the normal course of business. In the opinion of management, these matters are not expected to have a material adverse effect on the Company's financial position and results of operations. In addition, whereas the Company may be indirectly impacted by claims and other obligations that arise at its portfolio companies, management is not aware of any such claims. 18 REGULATORY COMPLIANCE - As a BDC, the Company operates in a highly regulated environment and must comply with the requirements of the 1940 Act. The Company endeavors to be in compliance with the requirements of the Act as part of its investment strategy and oversight functions. Whereas compliance with such laws and regulations requires interpretation, the Company believes it is in compliance with such requirements at September 30, 2006. However, no assurances can be given that such requirements will not change or that differing interpretations could result in non-compliance or that such matters, if they arise, will be insignificant to the Company's financial position or results of operations. LEGAL - On September 23, 2005, Golden Gate Investors, Inc. filed a complaint for breach of contract and specific performance of contract, Case No. GIC 854356 in the Superior Court of the State of California, County of San Diego, Central Division, against the Company. Plaintiff claims that they are owed $53,768 in actual losses and has further claimed they had damages in the amount of $24,851 as a result of an alleged breach of contract by the Company. Plaintiff has been granted a judgment in the amount of approximately $60,000, which amount was included in accrued expenses on the statements of net assets at December 31, 2005. The $60,000 liability was retired in exchange for 60,000 shares of the Company's common stock on May 10, 2006. In addition, the Company agreed to settle a lawsuit in which they were a potential third party defendant. The Company accrued the $78,000 settlement amount in May 2006. On May 10, 2006, the Company issued 60,000 shares of its common stock in exchange for this liability. OTHER ITEMS - The Company has a month-to-month agreement with its chief executive officer which provides for payment of compensation of $10,000 per month, commencing in January 2006. Effective September 1, 2006, this amount was reduced to $6,000 per month. The Company leases its office facility on a month-to-month basis at the rate of $1,000 per month. As of September 30, 2006, the Company has advanced Rudy $1,527,369. Based on current projections, the Company expects it will provide an additional $700,000 until Rudy reaches break-even. Of this amount, approximately $350,000 is expected to be required during the balance of 2006. 19 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information statement contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. There are a number of factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of such forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this information statement to conform such statements to actual results. Management's discussion and analysis should be read in conjunction with our financial statements and the notes herein. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we will evaluate our estimates and judgments, including those related to revenue recognition, valuation of investments in portfolio companies, accrued expenses, financing operations, contingencies and litigation. We will base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources, such as the investments in portfolio companies. These accounting policies are described at relevant sections in this discussion and analysis and in the "Notes to Financial Statements" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005. 20 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005 - o During the 2006 period we recognized revenue in the amount of $36,312 in interest income from portfolio companies and $6,000 in management fees from portfolio companies. We had no revenue during the 2005 period. o During the three months ended September 30, 2006, total expenses increased $575,723 (468%) to $698,679 from $122,956 in the prior year period. 1. During the 2006 period, professional fees were $35,073 (142%) higher than in the 2005 period. The increase is primarily due to reversing previously accrued consulting fees associated with our investments in 2005 in the amount of $25,000. 2. Officer and employee compensation declined $17,907 (33%) in 2006 from the amount in 2005. The decline includes a smaller staff and use of a part-time consultant for CFO in 2006. 3. Other general and administrative expense declined $17,646 (73%) in 2006 as compared to 2005. This decline is primarily due to lower costs for insurance, rent, communications and travel in 2006 than experienced in 2005. 4. The Company accrued $14,875 in interest expense on its new debt during the quarter ended September 30, 2006 and recorded the intrinsic value of the beneficial conversion feature relating to its secured convertible promissory notes payable ("Secured Notes") in the amount of $538,000. 5. The Company recognized $50,369 in bad debt expense in 2006 related to its investment in EON which was fully reserved in September 2006. NINE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO SEPTEMBER 30, 2005 - o During the 2006 period we recognized revenue in the amount of $77,278 in interest income from portfolio companies and $18,000 in management fees from portfolio companies. We had no revenue during the 2005 period. o Total expense amounted to $1,065,826 in 2006 as compared to $927,304 in 2005, an increase of $138,522 (15%). 1. Officer and employee compensation declined $53,498 (32%) due to a smaller staff in 2006 and use of a part-time consultant for CFO. 2. Professional fees declined $128,730 (41%) in 2006 from the amount in 2005, primarily due to elimination of the consulting fees associated with our investments in 2005 in the amount of $121,578. 3. Other general and administrative expenses declined $75,963 (80%) in the 2006 period primarily due to lower insurance, rent, communications and travel costs. 4. We had interest expense of $306,500 in 2005 relating to the beneficial conversion feature of convertible debentures which were all retired in 2005 and interest expense of $552,875 in 2006 on the Secured Notes added during the quarter ended September 30, 2006 (including the intrinsic value of the beneficial conversion feature on the Secured Notes in the amount of $538,000). 5. The Company recognized $50,369 in bad debt expense in 2006 related to its investment in EON which was fully reserved in September 2006. 6. As more fully discussed in the notes to the condensed financial statements, we recorded a lawsuit settlement expense of $78,000 during the second quarter of the 2006 period. 21 LIQUIDITY AND CAPITAL RESOURCES o At September 30, 2006, we had net assets of $5,364,607 as compared to net assets of $5,827,124 at December 31, 2005. During the 2006 period, cash decreased $30,056 to $215,314, interest and fees receivable from controlled portfolio companies increased from $13,889 to $53,798 (our income during the period, less bad debt expense of $50,369) and our investments in portfolio companies increased $672,369 ($1,683,869 increase less reserve on EON of $1,011,500) net, from $5,715,000 to $6,387,369. Liabilities have increased $1,141,054 during 2006, primarily due to issuing $1,185,000 in Secured Notes during the three months ended September 30, 2006. Accordingly, the total asset increase of $678,537, when reduced by the increase in liabilities of $1,141,054 resulted in a decrease in net assets of $462,517. o As of September 30, 2006, the Company had limited revenues and had an accumulated deficit totaling $11,644,338. Additionally, as of September 30, 2006, the Company had a working capital deficit of $1,022,762. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company intends to fund operations through debt and equity financing arrangements which management believes should be sufficient to fund its capital expenditures, working capital and other cash requirements for the next twelve months. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, the Company will have sufficient funds to execute its intended business plan or generate positive operating results. NET ASSET VALUE As a BDC, certain of our activities and disclosures are made in reference to Net Asset Value ("NAV") which is the value of our portfolio assets less debt and preferred stock. This may be viewed, simply and generalized, as the value of our assets available to our common stock holders. As of the date of the financial information in this report, the value of our portfolio of assets including investments and securities in portfolio companies and cash is $6,665,868 and from this, are subtracted liabilities and debts of $1,301,261. There are no shares of preferred stock outstanding but the rights of preferred stockholders would be included if there were. The NAV is therefore $5,364,607. The Net Asset Value per Share ("NAV/S") is calculated by dividing the NAV by the number of common shares outstanding (43,661,515). The NAV/S is $.1229. 22 OUR PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS MANAGEMENT'S ANALYSIS OF BUSINESS We will have significant relative flexibility in selecting and structuring our investments. We will not be subject to many of the regulatory limitations that govern traditional lending institutions such as banks. We will seek to structure our investments so as to take into account the uncertain and potentially variable financial performance of our portfolio companies. This should enable our portfolio companies to retain access to committed capital at different stages in their development and eliminate some of the uncertainty surrounding their capital allocation decisions. We will calculate rates of return on invested capital based on a combination of up-front commitment fees, current and deferred interest rates and residual values, which may take the form of common stock, warrants, equity appreciation rights or future contract payments. We believe that this flexible approach to structuring investments will facilitate positive, long-term relationships with our portfolio companies and enable us to become a preferred source of capital to them. We also believe our approach should enable debt financing to develop into a viable alternative capital source for funding the growth of target companies that wish to avoid the dilutive effects of equity financings for existing equity holders. Longer Investment Horizon - We will not be subject to periodic capital return requirements. These requirements, which are standard for most private equity and venture capital funds, typically require that these funds return to investors the initial capital investment after a pre-agreed time, together with any capital gains on such capital investment. These provisions often force such funds to seek the return of their investments in portfolio companies through mergers, public equity offerings or other liquidity events more quickly than they otherwise might, which can result in a lower overall return to investors and adversely affect the ultimate viability of the affected portfolio companies. Because we may invest in the same portfolio companies as these funds, we are subject to these risks if these funds demand a return on their investments in the portfolio companies. We believe that our flexibility to take a longer-term view should help us to maximize returns on our invested capital while still meeting the needs of our portfolio companies. Established Deal Sourcing Network - We believe that, through our management and directors, we have solid contacts and sources from which to generate investment opportunities. These contacts and sources include: o public and private companies, o investment bankers, o attorneys, o accountants, o consultants, and o commercial bankers. However, we cannot assure you that such relationships will lead to the origination of debt or other investments. 23 INVESTMENT CRITERIA As a matter of policy, we will not purchase or sell real estate or interests in real estate or real estate investment trusts except that we may: o purchase and sell real estate or interests in real estate in connection with the orderly liquidation of investments, or in connection with foreclosure on collateral; o own the securities of companies that are in the business of buying, selling or developing real estate; or o finance the purchase of real estate by our portfolio companies. We will limit our investments in more traditional securities (stock and debt instruments) and will not, as a matter of policy: o sell securities short except with regard to managing the risks associated with publicly-traded securities issued by our portfolio companies; o purchase securities on margin (except to the extent that we may purchase securities with borrowed money); or o engage in the purchase or sale of commodities or commodity contracts, including futures contracts except where necessary in working out a distressed loan; or in those investment situations where hedging the risks associated with interest rate fluctuations is appropriate, and, in such cases, only after all necessary registrations or exemptions from registration with the Commodity Futures Trading Commission have been obtained. Prospective Portfolio Company Characteristics - We have identified several criteria that we believe will prove important in seeking our investment objective with respect to target companies. These criteria will provide general guidelines for our investment decisions; however, we caution readers that not all of these criteria will be met by each prospective portfolio company in which we choose to invest. Experienced Management - We will generally require that our portfolio companies have an experienced president or management team. We will also require the portfolio companies to have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, including having significant equity interests. We intend to provide assistance in this area either supervising management or providing management for our portfolio companies. Products or Services - We will seek companies that are involved in products or services that do not require significant additional capital or research expenditures. In general, we will seek target companies that make innovative use of proven technologies or methods. Proprietary Advantage - We expect to favor companies that can demonstrate some kind of proprietary sustainable advantage with respect to their competition. Proprietary advantages include, but are not limited to: o patents or trade secrets with respect to owning or manufacturing its products, and o a demonstrable and sustainable marketing advantage over its competition 24 Marketing strategies impose unusual burdens on management to be continuously ahead of its competition, either through some kind of technological advantage or by being continuously more creative than its competition. Profitable or Nearly Profitable Operations Based on Cash Flow from Operations - We will focus on target companies that are profitable or nearly profitable on an operating cash flow basis. Typically, we would not expect to invest in start-up companies unless there is a clear exit strategy in place. Potential for Future Growth - We will generally require that a prospective target company, in addition to generating sufficient cash flow to cover its operating costs and service its debt, demonstrate an ability to increase its revenues and operating cash flow over time. The anticipated growth rate of a prospective target company will be a key factor in determining the value that we ascribe to any warrants or other equity securities that we may acquire in connection with an investment in debt securities. Exit Strategy - Prior to making an investment in a portfolio company, we will analyze the potential for that company to increase the liquidity of its common equity through a future event that would enable us to realize appreciation, if any, in the value of our equity interest. Liquidity events may include: o an initial public offering, o a private sale of our equity interest to a third party, o a merger or an acquisition of the portfolio company, or o a purchase of our equity position by the portfolio company or one of its stockholders. We may acquire warrants to purchase equity securities and/or convertible preferred stock of the eligible portfolio companies in connection with providing financing. The terms of the warrants, including the expiration date, exercise price and terms of the equity security for which the warrant may be exercised, will be negotiated individually with each eligible portfolio company, and will likely be affected by the price and terms of securities issued by the eligible portfolio company to other venture capitalists and other holders. We anticipate that most warrants will be for a term of five to ten years, and will have an exercise price based upon the price at which the eligible portfolio company most recently issued its equity securities or, if a new equity offering is imminent, the price at which such new equity securities will be offered. The equity securities for which the warrant will be exercised generally will be common stock of which there may be one or more classes or convertible preferred stock. Substantially all the warrants and underlying equity securities will be restricted securities under the 1933 Act at the time of the issuance. We will generally negotiate for registration rights with the issuer that may provide: o "piggyback" registration rights, which will permit us under certain circumstances, to include some or all of the securities owned by us in a registration statement filed by the eligible portfolio company, or 25 o in circumstances, "demand" registration rights permitting us under certain circumstances, to require the eligible portfolio company to register the securities under the 1933 Act, in some cases at our expense. We will generally negotiate net issuance provisions in the warrants, which will allow us to receive upon exercise of the warrant without payment of any cash a net amount of shares determined by the increase in the value of the issuer's stock above the exercise price stated in the warrant. Liquidation Value of Assets - Although we do not intend to operate as an asset-based lender, the prospective liquidation value of the assets, if any, collateralizing any debt securities that we hold will be an important factor in our credit analysis. We will emphasize both tangible assets, such as: o accounts receivable, o inventory, and o equipment, and intangible assets, such as: o intellectual property, o customer lists, o networks, and o databases. INVESTMENT PROCESS Due Diligence - If a target company generally meets the characteristics described above, we will perform initial due diligence, including: o company and technology assessments, o evaluation of existing management team, o market analysis, o competitive analysis, o evaluation of management, risk analysis and transaction size, o pricing, and o structure analysis. Much of this work will be done by management and professionals who are well known by management. The criteria delineated above provide general parameters for our investment decisions. We intend to pursue an investment strategy by further imposing such criteria and reviews that best insures the value of our investments. As unique circumstances may arise or be uncovered, not all of such criteria will be followed in each instance but the process provides a guideline by which investments can be prudently made and managed. Upon successful completion of the preliminary evaluation, we will decide whether to deliver a non-binding letter of intent and move forward towards the completion of a transaction. 26 In our review of the management team, we look at the following: o Interviews with management and significant shareholders, including any financial or strategic sponsor; o Review of financing history; o Review of management's track record with respect to: o product development and marketing, o mergers and acquisitions, o alliances, o collaborations, o research and development outsourcing and other strategic activities; o Assessment of competition; and o Review of exit strategies. In our review of the financial conditions, we look at the following: o Evaluation of future financing needs and plans; o Detailed analysis of financial performance; o Development of pro forma financial projections; and o Review of assets and liabilities, including contingent liabilities, if any, and legal and regulatory risks. In our review of the products and services of the portfolio company, we look at the following: o Evaluation of intellectual property position; o Review of existing customer or similar agreements and arrangements; o Analysis of core technology; o Assessment of collaborations; o Review of sales and marketing procedures; and o Assessment of market and growth potential. Upon completion of these analyses, we will conduct on-site visits with the target company's management team. Also, in cases in which a target company is at a mature stage of development and if other matters that warrant such an evaluation, we will obtain an independent appraisal of the target company. ONGOING RELATIONSHIPS WITH PORTFOLIO COMPANIES Monitoring - We will continuously monitor our portfolio companies in order to determine whether they are meeting our financing criteria and their respective business plans. We may decline to make additional investments in portfolio companies that do not continue to meet our financing criteria. However, we may choose to make additional investments in portfolio companies that do not do so, but we believe that we will nevertheless perform well in the future. We will monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality. Our management team and consulting professionals, who are well known by our management team, will closely monitor the status and performance of each individual company on at least a quarterly and, in some cases, a monthly basis. 27 We will use several methods of evaluating and monitoring the performance and fair value of our debt and equity positions, including but not limited to the following: o Assessment of business development success, including product development, financings, profitability and the portfolio company's overall adherence to its business plan; o Periodic and regular contact with portfolio company management to discuss financial position, requirements and accomplishments; o Periodic and regular formal update interviews with portfolio company management and, if appropriate, the financial or strategic sponsor; o Attendance at and participation in board meetings; o Review of monthly and quarterly financial statements and financial projections for portfolio companies. Managerial Assistance - As a business development company, we will offer, and in many cases may provide, significant managerial assistance to our portfolio companies. This assistance will typically involve: o monitoring the operations of our portfolio companies, o participating in their board and management meetings, o consulting with and advising their officers, and o providing other organizational and financial guidance. INVESTMENT AMOUNTS The amount of funds committed to a portfolio company and the ownership percentage received will vary depending on the maturity of the portfolio company, the quality and completeness of the portfolio company's management team, the perceived business opportunity, the capital required compared to existing capital, and the potential return. Although investment amounts will vary considerably, we expect that the average investment, including follow-on investments, will be between $25,000 and $5,000,000. COMPETITION Our primary competitors to provide financing to target companies will include private equity and venture capital funds, other equity and non-equity based investment funds and investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of these entities have substantially greater financial and managerial resources than we will have. We believe that our competitive advantage with regard to quality target companies relates to our ability to negotiate flexible terms and to complete our review process on a timely basis. We cannot assure you that we will be successful in implementing our strategies. 28 CURRENT PORTFOLIO COMPANIES o RUDY BEVERAGE, INC. Rudy began its initial sales during the quarter ended June 30, 2006, of its 55oz bottle size in a number of flavors. Rudy completed an initial production run of its 8oz size in July and has plans to also produce 16oz, 20oz and 32oz sizes to meet its market needs. Rudy is now completing its full product line and is establishing itself for a potentially significant expansion in sales. o EON BEVERAGE GROUP, INC. EON has been involved in test marketing its structured water and has had limited revenues during this testing phase. While EON expected to sell a substantial volume of its structured water to Rudy for use in certain of its drinks, the Board of Directors has determined that EON will not achieve profitability without substantial additional investment, which the Company is unwilling to provide. Accordingly, the Company fully reserved its investment of $400,000 and fully reserved its advances of $611,500 for a total unrealized depreciation expense of $1,011,500 at September 30, 2006. Accounts receivable in the amount of $50,369 for interest charges and management fees was also fully reserved at September 30, 2006. o TITANIUM DESIGN STUDIO, INC. Early in 2006, TDS relocated its operations to Thailand in order to access cheaper labor. As a result, the Company fully reserved its investment of $200,000 at December 31, 2005. OFF BALANCE SHEET ARRANGEMENTS o None. CONTRACTUAL OBLIGATIONS o None. 29 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from changes in market rates and prices. We are primarily exposed to equity price risk, which arises from exposure to securities that represent an ownership interest in our portfolio companies. The value of our equity securities and our other investments are based on quoted market prices or our Board of Directors' good faith determination of their fair value (which is based, in part, on quoted market prices). Market prices of common equity securities, in general, are subject to fluctuations, which could cause the amount to be realized upon the sale or exercise of the instruments to differ significantly from the current reported value. The fluctuations may result from perceived changes in the underlying economic characteristics of our portfolio companies, the relative price of alternative investments, general market conditions and supply and demand imbalances for a particular security. ITEM 4: CONTROLS AND PROCEDURES Evaluation of Controls and Procedures The Company's board of directors and management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rule 13(a)-15(e) and 15(d)-15(e) of the Exchange Act. Based upon that evaluation, the Company's board of directors and management, including the CEO and CFO, concluded that, as of September 30, 2006, the Company's disclosure controls and procedures were effective in alerting management on a timely basis to material Company information that would be required to be included in our periodic filings with the SEC. Based on their most recent evaluation as of the Evaluation Date, the CEO and the CFO have also concluded that the other controls and procedures, that are designed to ensure that information required to be disclosed in our periodic filings with the SEC, are adequate. Changes in Internal Control The Company updated its internal controls as of December 31, 2005, at which time they were adopted by the Board of Directors. There were no significant changes made in the Company's internal controls over financial reporting since that time that have materially affected, or are reasonably likely to materially affect, these internal controls. Thus, no corrective actions, with regard to significant deficiencies or material weaknesses, were necessary. The Company designated its Chief Executive Officer with the added responsibility of its Chief Compliance Officer. 30 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS Not applicable. ITEM 1A: RISK FACTORS Not applicable. ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the three months ended September 30, 2006, we issued a total of 24,685 shares of our common stock. Pursuant to our current offering circular, we issued 10,000 shares for $10,000 in cash and we issued 14,685 shares in exchange for notes and other debts of Rudy in the amount of $15,419. In addition, stock subscription agreements for $350,000, which were reported in the second quarter as a sale of 350,000 shares of common stock, were exchanged during the third quarter for secured convertible promissory notes. All of the shares issued were sold pursuant to an exemption from registration under Section 4(2) promulgated under the Securities Act of 1933, as amended. ITEM 3: DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5: OTHER INFORMATION Not applicable. ITEM 6: EXHIBITS The following exhibits are filed with this report on Form 10-Q. Exhibit 31 Certifications pursuant to 18 U.S.C. Section 1350 Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32 Certifications pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002 31 SIGNATURE 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. GLOBAL BEVERAGE SOLUTIONS, INC. Date: November 17, 2006 By: /s/ Richard T. Clark --------------------------- Richard T. Clark, Chief Executive Officer 32