SEC Company Response from JAVO BEVERAGE CO INC (CIK 0001092302) — Jul 27, 2005
JAVO BEVERAGE CO INC (CIK 0001092302)
Date: July 27, 2005 · CIK: 0001092302 · Accession: 0001019687-05-002058
AI Filing Summary & Sentiment
Letter
<PAGE>
JAVO BEVERAGE COMPANY, INC. 1311 Specialty Drive Vista, CA 92081
July 26 2005
Securities and Exchange Commission Washington, D.C. 20549
Attn: George Ohsiek Jr., Branch Chief Fax: 202-772-9203
Mr. Ohsiek:
This is in response to your letter of June 9, 2005 concerning the annual Report on Form 10-KSB for the year ended December 31, 2004, and the Quarterly Report on Form 10-QSB for the period ended March 31, 2005. We are concurrently amending each of the filings.
Our responses are set forth in the order of your letter:
1. Non-cash loan costs:
Regarding the non-cash loan costs recorded in 2004 and 2003 as described in Item 5 and again in footnote 8, the accounting is as follows:
The Company sold instruments with both loan and common stock elements. In 2003 the stock discount of $1,800,000 was included in the financing activities in the cash flow statement. In 2004 we adopted a different treatment of the stock discount of $664,500, which was reflected in the net cash used in operating activities. This change in the 2004 cash flow statement was made to better reflect the net cash used in operating activities in 2004. Because the stock discount expense was incurred as part of a financing transaction and was reflected as such in our 2003 filings, management did not believe the differences between the 2003 presentation and the 2004 presentation significantly affected the overall cash flow statements and are not material enough to require revision of the 2003 cash flow statement.
<PAGE>
2. The fourth quarter adjustments were as follows:
One adjustment decreased 2004 depreciation expense by $19,000 and recognized a 2004 gain of $2,000 on the sale of assets. These year-end adjustments were not significant and were the result of corrections in estimated useful lives of the assets during the year. The Company does not anticipate similar corrections in the future.
The second adjustment decreased non-cash consulting costs by $56,000, a reversal of an expense recorded twice. The posting error was due to a misunderstanding related to recording of the expense related to the exercise of a warrant where an expense had previously been recorded for the issuance of the warrant. The incorrect posting increased marketing expense and increased equity. The transaction was originally posted in the first quarter and was determined to be incorrect during the year-end audit. The adjustment was not significant and the amount was less than $0.0005 of earnings per share in any quarter. The Company does not anticipate needing to make similar corrections in the future.
The last adjustment posted was to increase interest expense by $1,000 as part of the review of the accrued interest expense at year end. The amount had accrued over the course of the year and was not material in any period. The entry was made strictly to facilitate reconciliation between amortization tables and the general ledger.
Management is striving to prepare financial statements that will need no year-end adjustments. The above adjustments were noted, so a reader could assess the level of the adjustments. However, Management believes that these adjustments were not material either individually or collectively. The issues that arose were from being overcautious about accruing expenses or simple good faith mis-estimations. None are quantitatively or qualitatively significant for any quarter or for the year.
3. Property and equipment impairment:
While the Company has had significant losses, Management and key investors are very optimistic about the future prospects. All of the fixed assets are being utilized in our processes or our offices and the expectation is that the Company will reach profitability soon. The market capitalization of the Company stock at all times relevant to these filings exceeded $20,000,000, far above the total assets on the Company's balance sheet of approximately $4,500,000. The Company is one business and reporting unit, and it makes sense to us to look at our total market capitalization as the best indication of value of our business. Companies like us frequently incur losses for several years and someday become profitable. We discuss impairment of assets and inventory on a quarterly basis and found that our property and equipment is being used as an integral part of the production of our growing revenue stream. In addition, we calculated our projected revenues, expenses and net cash flows over the upcoming four years and determined that the property equipment and inventories were not impaired and that we were confident in our ability to continue as a going concern. We tested impairment in December of 2004 and March of 2005.
<PAGE>
4. The allocation of value between stock and debt:
In order to raise funds, the Company determined that its best option was to place its debt privately. Due to its continued operating losses, the Company had to "sweeten" the offer by issuing its debt at 10% interest per annum plus 3 shares of common stock for each $1 of debt.
Between October and December 2004, the Company issued $2,250,000 in promissory notes at 10% interest per annum, with all interest and principal due at the end of five years, and the Company concurrently issued a total of 6,750,000 shares of its common stock to the same persons who were issued the promissory notes.
The Company determined that the fair market value of the 6,750,000 shares issued in connection with the debt offering was $1,744,500. The fair market value of the stock issued was determined by applying a 30% discount to the monthly average closing stock price during the month the stock was issued. Management determined that the 30% discount was appropriate to apply to the monthly average closing stock price for various reasons including that the shares were not registered under the Securities Act of 1933, the Rule 144 restrictions on sale of the shares, a minority interest discount, and a large block discount due to issuance of a large number of shares relative to a thinly traded market for Company stock. The market value of our stock is overstated because it does not yet reflect the existence of the restricted shares we issued, and there are many of these restricted shares outstanding and all of them will become available for public resale at some later time. When the supply of shares grows, the price can go down. Our stock is also rather volatile, and is fairly thinly traded, so additional supply of shares could have a large adverse effect on the market price.
To account for the transaction, the Company is following the guidance of APB 14 and SFAS 84. APB instructs us to allocate the proceeds between the debt and equity portions of the transaction. As such, the Company allocated the fair market value of the shares issued of $1,744,500 between a discount for the debt issued of $2,250,000 ($1,080,000 debt discount) and a stock discount expense for the issuance of the 6,750,000 shares of common stock ($644,500 stock discount).
The Company determined that the debt holders loaned the Company the $2,250,000 not only because of the stated interest rate, but also because of receiving the stock that was issued at the time the notes were executed. The Company determined that 48% of the amount of the debt issued, or $1,080,000, would be the portion of the fair market value of the stock issued that would be capitalized as a contra debt account, amortized straight line over the 60 month life of the promissory notes. The "net debt" at the time of issuance was $1,170,000, implying approximately a 20% per annum cost of funds.
Following the guidance of SFAS 84, which instructs us to expense any discount of stock price to market price as a inducement to convert or purchase, the remaining $664,500 of our estimate of the total value of the stock issued was expensed as a period expense for stock issued.
<PAGE>
For the first quarter of fiscal 2005, the Company used the same methodology for recording the additional $375,000 received from its debt private offering. We determined the fair market value of the 1,125,000 shares of our common stock issued on account of the offering in the first quarter of the fiscal year using a 30% discount of the monthly average closing prices, and that is how we arrive at $296,250, or $0.26333 per share issued. The $296,250 was allocated as follows: $180,000 (or 48% of $375,000) was capitalized to a contra debt account and $116,250 was charged to a current period stock issuance expense. The capitalized $180,000 is being amortized straight line over the 60 month life of the promissory notes. The "net debt" at the time of issuance was $195,000, implying approximately a 20% per annum cost of funds.
See detail schedule below:
<TABLE> ----------------------------------------------------------------------------------------------------------------------------- Monthly Average Restriction Debt # of Stock & FMV of Discount - Stock Amount Share Closing Blockage Stock Stock Contra Discount Period # Investors Debt Issued Price Discount Issued FMV $ Debt Expense ----------------------------------------------------------------------------------------------------------------------------- Factors 30.0% 48.0% ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> FISCAL YEAR 2004 Oct-04 4 150,000 450,000 $ 0.340 $ 0.24 108,000 72,000 36,000 Nov-04 31 2,050,000 6,150,000 $ 0.378 $ 0.26 1,599,000 984,000 615,000 Dec-04 2 50,000 150,000 $ 0.361 $ 0.25 37,500 24,000 13,500 ------------------------------------- ------------------------------------ 2004 37 2,250,000 6,750,000 1,744,500 1,080,000 664,500 ------------------------------------- ------------------------------------ 1ST QUARTER 2005 Jan-05 3 125,000 375,000 $0.378 $ 0.26 97,500 60,000 37,500 Feb-05 6 187,500 562,500 $0.388 $ 0.27 151,875 90,000 61,875 Mar-05 2 62,500 187,500 $0.360 $ 0.25 46,875 30,000 16,875 ------------------------------------- ------------------------------------ 1st Qtr 2005 11 375,000 1,125,000 296,250 180,000 116,250 ------------------------------------- ------------------------------------ Cumulative 48 2,625,000 7,875,000 2,040,750 1,260,000 780,750 ===================================== ====================================
Notes: ---------------------------------------------------------------------------------------------------------- FMV of stock issued was determine by averaging the closing price of the stock for the month the investor advanced debt funds and applying a 30% discount due to the factors that include Rule 144 restriction and the fact that Javo stock is thinly trade and an significant block of stock being sold would place downward pressure on the stock price. ----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------- Debt Discount was calculated at 48% of the amount of the loan advanced by the investor. The terms of the loans are 10% simple interest with both principal and interest due at then end of 5 years. With Javo's negative net worth and continued loss it was management's opinion that a significant discount was appropriate to reflect the interest rate and terms that would be demanded by a market lender. A forty-eight percent discount (48%) was concluded to be an appropriate discount for the note. The discount was capitalized as a contra account to the debt and is being amortized over the 60 months of the loan. ---------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- </TABLE>
<PAGE>
5. The stock discount costs represent
The restricted shares issued in connection with the Company's debt did not include detachable warrants, so there is no portion of the proceeds to be allocated for warrants. The Company recorded the stock and debt as follows:
Cash (actual amount received) 2,250,000 Discount (48% of $2,250,000 debt) 1,080,000 Loan cost recognized 664,500 Debt(actual amount to be repaid) 2,250,000 C/S (6,750,000 shares at par of $0.001) 6,750 APIC (6,750,000 shares at FMV less Par) 1,737,750
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>
JAVO BEVERAGE COMPANY, INC.
1311 Specialty Drive
Vista, CA 92081
July 26 2005
Securities and Exchange Commission
Washington, D.C. 20549
Attn: George Ohsiek Jr., Branch Chief
Fax: 202-772-9203
Mr. Ohsiek:
This is in response to your letter of June 9, 2005 concerning the annual Report
on Form 10-KSB for the year ended December 31, 2004, and the Quarterly Report on
Form 10-QSB for the period ended March 31, 2005. We are concurrently amending
each of the filings.
Our responses are set forth in the order of your letter:
1. Non-cash loan costs:
Regarding the non-cash loan costs recorded in 2004 and 2003 as
described in Item 5 and again in footnote 8, the accounting is as
follows:
The Company sold instruments with both loan and common stock elements.
In 2003 the stock discount of $1,800,000 was included in the financing
activities in the cash flow statement. In 2004 we adopted a different
treatment of the stock discount of $664,500, which was reflected in
the net cash used in operating activities. This change in the 2004
cash flow statement was made to better reflect the net cash used in
operating activities in 2004. Because the stock discount expense was
incurred as part of a financing transaction and was reflected as such
in our 2003 filings, management did not believe the differences
between the 2003 presentation and the 2004 presentation significantly
affected the overall cash flow statements and are not material enough
to require revision of the 2003 cash flow statement.
1
<PAGE>
2. The fourth quarter adjustments were as follows:
One adjustment decreased 2004 depreciation expense by $19,000 and
recognized a 2004 gain of $2,000 on the sale of assets. These year-end
adjustments were not significant and were the result of corrections in
estimated useful lives of the assets during the year. The Company does
not anticipate similar corrections in the future.
The second adjustment decreased non-cash consulting costs by $56,000,
a reversal of an expense recorded twice. The posting error was due to
a misunderstanding related to recording of the expense related to the
exercise of a warrant where an expense had previously been recorded
for the issuance of the warrant. The incorrect posting increased
marketing expense and increased equity. The transaction was originally
posted in the first quarter and was determined to be incorrect during
the year-end audit. The adjustment was not significant and the amount
was less than $0.0005 of earnings per share in any quarter. The
Company does not anticipate needing to make similar corrections in the
future.
The last adjustment posted was to increase interest expense by $1,000
as part of the review of the accrued interest expense at year end. The
amount had accrued over the course of the year and was not material in
any period. The entry was made strictly to facilitate reconciliation
between amortization tables and the general ledger.
Management is striving to prepare financial statements that will need
no year-end adjustments. The above adjustments were noted, so a reader
could assess the level of the adjustments. However, Management
believes that these adjustments were not material either individually
or collectively. The issues that arose were from being overcautious
about accruing expenses or simple good faith mis-estimations. None are
quantitatively or qualitatively significant for any quarter or for the
year.
3. Property and equipment impairment:
While the Company has had significant losses, Management and key
investors are very optimistic about the future prospects. All of the
fixed assets are being utilized in our processes or our offices and
the expectation is that the Company will reach profitability soon. The
market capitalization of the Company stock at all times relevant to
these filings exceeded $20,000,000, far above the total assets on the
Company's balance sheet of approximately $4,500,000. The Company is
one business and reporting unit, and it makes sense to us to look at
our total market capitalization as the best indication of value of our
business. Companies like us frequently incur losses for several years
and someday become profitable. We discuss impairment of assets and
inventory on a quarterly basis and found that our property and
equipment is being used as an integral part of the production of our
growing revenue stream. In addition, we calculated our projected
revenues, expenses and net cash flows over the upcoming four years and
determined that the property equipment and inventories were not
impaired and that we were confident in our ability to continue as a
going concern. We tested impairment in December of 2004 and March of
2005.
2
<PAGE>
4. The allocation of value between stock and debt:
In order to raise funds, the Company determined that its best option
was to place its debt privately. Due to its continued operating
losses, the Company had to "sweeten" the offer by issuing its debt at
10% interest per annum plus 3 shares of common stock for each $1 of
debt.
Between October and December 2004, the Company issued $2,250,000 in
promissory notes at 10% interest per annum, with all interest and
principal due at the end of five years, and the Company concurrently
issued a total of 6,750,000 shares of its common stock to the same
persons who were issued the promissory notes.
The Company determined that the fair market value of the 6,750,000
shares issued in connection with the debt offering was $1,744,500. The
fair market value of the stock issued was determined by applying a 30%
discount to the monthly average closing stock price during the month
the stock was issued. Management determined that the 30% discount was
appropriate to apply to the monthly average closing stock price for
various reasons including that the shares were not registered under
the Securities Act of 1933, the Rule 144 restrictions on sale of the
shares, a minority interest discount, and a large block discount due
to issuance of a large number of shares relative to a thinly traded
market for Company stock. The market value of our stock is overstated
because it does not yet reflect the existence of the restricted shares
we issued, and there are many of these restricted shares outstanding
and all of them will become available for public resale at some later
time. When the supply of shares grows, the price can go down. Our
stock is also rather volatile, and is fairly thinly traded, so
additional supply of shares could have a large adverse effect on the
market price.
To account for the transaction, the Company is following the guidance
of APB 14 and SFAS 84. APB instructs us to allocate the proceeds
between the debt and equity portions of the transaction. As such, the
Company allocated the fair market value of the shares issued of
$1,744,500 between a discount for the debt issued of $2,250,000
($1,080,000 debt discount) and a stock discount expense for the
issuance of the 6,750,000 shares of common stock ($644,500 stock
discount).
The Company determined that the debt holders loaned the Company the
$2,250,000 not only because of the stated interest rate, but also
because of receiving the stock that was issued at the time the notes
were executed. The Company determined that 48% of the amount of the
debt issued, or $1,080,000, would be the portion of the fair market
value of the stock issued that would be capitalized as a contra debt
account, amortized straight line over the 60 month life of the
promissory notes. The "net debt" at the time of issuance was
$1,170,000, implying approximately a 20% per annum cost of funds.
Following the guidance of SFAS 84, which instructs us to expense any
discount of stock price to market price as a inducement to convert or
purchase, the remaining $664,500 of our estimate of the total value of
the stock issued was expensed as a period expense for stock issued.
3
<PAGE>
For the first quarter of fiscal 2005, the Company used the same
methodology for recording the additional $375,000 received from its
debt private offering. We determined the fair market value of the
1,125,000 shares of our common stock issued on account of the offering
in the first quarter of the fiscal year using a 30% discount of the
monthly average closing prices, and that is how we arrive at $296,250,
or $0.26333 per share issued. The $296,250 was allocated as follows:
$180,000 (or 48% of $375,000) was capitalized to a contra debt account
and $116,250 was charged to a current period stock issuance expense.
The capitalized $180,000 is being amortized straight line over the 60
month life of the promissory notes. The "net debt" at the time of
issuance was $195,000, implying approximately a 20% per annum cost of
funds.
See detail schedule below:
<TABLE>
-----------------------------------------------------------------------------------------------------------------------------
Monthly
Average Restriction Debt
# of Stock & FMV of Discount - Stock
Amount Share Closing Blockage Stock Stock Contra Discount
Period # Investors Debt Issued Price Discount Issued FMV $ Debt Expense
-----------------------------------------------------------------------------------------------------------------------------
Factors 30.0% 48.0%
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR 2004
Oct-04 4 150,000 450,000 $ 0.340 $ 0.24 108,000 72,000 36,000
Nov-04 31 2,050,000 6,150,000 $ 0.378 $ 0.26 1,599,000 984,000 615,000
Dec-04 2 50,000 150,000 $ 0.361 $ 0.25 37,500 24,000 13,500
------------------------------------- ------------------------------------
2004 37 2,250,000 6,750,000 1,744,500 1,080,000 664,500
------------------------------------- ------------------------------------
1ST QUARTER 2005
Jan-05 3 125,000 375,000 $0.378 $ 0.26 97,500 60,000 37,500
Feb-05 6 187,500 562,500 $0.388 $ 0.27 151,875 90,000 61,875
Mar-05 2 62,500 187,500 $0.360 $ 0.25 46,875 30,000 16,875
------------------------------------- ------------------------------------
1st Qtr 2005 11 375,000 1,125,000 296,250 180,000 116,250
------------------------------------- ------------------------------------
Cumulative 48 2,625,000 7,875,000 2,040,750 1,260,000 780,750
===================================== ====================================
Notes:
----------------------------------------------------------------------------------------------------------
FMV of stock issued was determine by averaging the closing price of the stock for the month the investor
advanced debt funds and applying a 30% discount due to the factors that include Rule 144 restriction and
the fact that Javo stock is thinly trade and an significant block of stock being sold would place downward
pressure on the stock price.
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Debt Discount was calculated at 48% of the amount of the loan advanced by the investor. The terms of the
loans are 10% simple interest with both principal and interest due at then end of 5 years. With Javo's
negative net worth and continued loss it was management's opinion that a significant discount was
appropriate to reflect the interest rate and terms that would be demanded by a market lender. A forty-eight
percent discount (48%) was concluded to be an appropriate discount for the note. The discount was
capitalized as a contra account to the debt and is being amortized over the 60 months of the loan.
----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
5. The stock discount costs represent
The restricted shares issued in connection with the Company's debt did
not include detachable warrants, so there is no portion of the
proceeds to be allocated for warrants. The Company recorded the stock
and debt as follows:
Cash (actual amount received) 2,250,000
Discount (48% of $2,250,000 debt) 1,080,000
Loan cost recognized 664,500
Debt(actual amount to be repaid) 2,250,000
C/S (6,750,000 shares at par of $0.001) 6,750
APIC (6,750,000 shares at FMV less Par) 1,737,750