Attached files
file | filename |
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EX-32.1 - Latteno Food Corp | v203484_ex32-1.htm |
EX-31.2 - Latteno Food Corp | v203484_ex31-2.htm |
EX-32.2 - Latteno Food Corp | v203484_ex32-2.htm |
EX-31.1 - Latteno Food Corp | v203484_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
FORM
10-Q
x
|
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the quarterly period ended
September 30,
2010
|
¨
|
TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE EXCHANGE
ACT
|
|
For the transition period from
_______________ to
____________________
|
Commission
File Number: 000-21247
LATTENO
FOOD CORP.
(FORMERLY
B&D FOOD CORP.)
(Exact
Name of Small Business Issuer as Specified in Its Charter)
Delaware
|
13-2622429
|
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
(IRS
Employer
Identification
No.)
|
8953
Woodbine Avenue
Markham,
Ontario, Canada L3R 0J9
(Address
of Principal Executive Offices)
(905)
474-5593 Ext. 111
(Registrant’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 period that the registrant
as required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
|
Non-accelerated
filer
|
o
|
Smaller
reporting company
|
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
As of
September 30, 2010, there were 34,418,840 shares of Common Stock, par value
$0.001 per share issued and outstanding.
TABLE
OF CONTENTS
Page
|
|||||
PART
I
|
|||||
Item
1.
|
Financial
Statements
|
2
|
|||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
|||
Item
4.
|
Controls
and Procedures
|
27
|
|||
PART
II
|
|||||
Item
1.
|
Legal
Proceedings
|
28
|
|||
Item
1A.
|
Risk
Factors
|
28
|
|||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
28
|
|||
Item
3.
|
Defaults
Upon Senior Securities
|
28
|
|||
Item
4.
|
Submission
of Matters to a Vote of Securities Holders
|
28
|
|||
Item
5.
|
Other
Information
|
28
|
|||
Item
6.
|
Exhibits
|
28
|
1
PART
I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
2
LATTENO
FOOD CORP. AND SUBSIDIARY
SEPTEMBER
30, 2010
CONTENTS
Page
|
||
CONSOLIDATED
FINANCIAL STATEMENTS
|
||
Consolidated
Balance Sheets as at September 30, 2010 and December 31,
2009
|
4 -
5
|
|
Consolidated
Statements of Loss and Comprehensive Loss for the Three and Nine Months
Ended
|
6 -
7
|
|
Consolidated
Statements of Cash Flows for the Nine Months Ended
|
8
|
|
Notes
to the Consolidated Financial Statements
|
9 -
15
|
3
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
AS
AT
(Expressed
in United States Dollars)
September 30,
2010
(Unaudited)
|
December 31,
2009
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 3,902 | $ | 64,409 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $Nil (2009 -
$Nil)
|
833,926 | 612,606 | ||||||
Inventory
(Note 4)
|
27,179 | - | ||||||
Note
receivable-current portion (Note 5)
|
159,910 | 148,491 | ||||||
Total
Current Assets
|
1,024,917 | 825,506 | ||||||
Long-Term
Assets
|
||||||||
Note
receivable (Note 5)
|
5,328,823 | 5,450,224 | ||||||
Property,
plant and equipment, net (Note 6)
|
8,818,818 | 6,542 | ||||||
Total
Long-Term Assets
|
14,147,641 | 5,456,766 | ||||||
Other
Assets
|
||||||||
Intangible
assets
|
8,581,600 | 9,987,200 | ||||||
Total
Other Assets
|
8,581,600 | 9,987,200 | ||||||
Total
Assets
|
$ | 23,754,158 | $ | 16,269,472 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS (Continued)
AS
AT
(Expressed
in United States Dollars)
September 30,
2010
(Unaudited)
|
December 31,
2009
(Audited)
|
||||||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||||||
Current
Liabilities
|
|||||||||||
Accounts
payable (Note 7)
|
$ | 1,364,068 | $ | 1,315,266 | |||||||
Due
on acquisition of intangible assets
|
3,778,639 | 12,108,600 | |||||||||
Accrued
liabilities and other payables (Note 8)
|
1,457,232 | 1,244,961 | |||||||||
Convertible
debentures and promissory notes - current portion (Note 9)
|
837,736 | 3,043,182 | |||||||||
Total
Current Liabilities
|
7,437,675 | 17,712,009 | |||||||||
Long-Term
Liabilities
|
|||||||||||
Convertible
debentures and promissory notes (Note 9)
|
10,060,687 | 912,048 | |||||||||
Total
Liabilities
|
17,498,362 | 18,624,057 | |||||||||
Commitments
and Contingencies, note 10
|
|||||||||||
Going
Concern, note 2
|
|||||||||||
Stockholders'
Equity (Deficit)
|
11
|
||||||||||
Common
shares of $0.001 par value; Authorized: 400,000,000 shares; Issued and
outstanding: 34,418,840 (2009 - 28,222,524)
|
34,419 | 28,222 | |||||||||
Additional
paid-in capital
|
29,337,278 | 18,666,131 | |||||||||
Stock
to be issued
|
110,000 | 110,000 | |||||||||
Deferred
stock based compensation
|
(195,878 | ) | (247,727 | ) | |||||||
Accumulated
other comprehensive loss
|
522,813 | (908,225 | ) | ||||||||
Noncontrolling
interest in subsidiary
|
- | 121,381 | |||||||||
Accumulated
deficit
|
(23,552,836 | ) | (20,124,367 | ) | |||||||
Total
Stockholders' Equity (Deficit)
|
6,255,796 | (2,354,585 | ) | ||||||||
Total
Liabilities and Stockholders' Equity (Deficit)
|
$ | 23,754,158 | $ | 16,269,472 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR
THE THREE MONTH PERIOD ENDED SEPTEMBER 30
(Expressed
in United States Dollars)
2010
(Unaudited)
|
2009
(Unaudited)
|
|||||||
REVENUES
|
$ | 16,143 | $ | 1,035,380 | ||||
COST
OF GOODS SOLD
|
16,490 | 957,039 | ||||||
GROSS
LOSS
|
(347 | ) | 78,341 | |||||
ROYALTIES
|
- | 195,052 | ||||||
EXPENSES
|
||||||||
General
and administrative
|
147,927 | 249,551 | ||||||
Rent
and occupancy costs
|
205,891 | 205,970 | ||||||
Management
and directors fees
|
32,500 | 70,671 | ||||||
Stock-based
compensation
|
17,283 | - | ||||||
Depreciation
|
302 | 57 | ||||||
TOTAL
OPERATING EXPENSES
|
403,903 | 526,249 | ||||||
LOSS
FROM OPERATIONS
|
(404,250 | ) | (252,856 | ) | ||||
Interets,
net
|
(118,612 | ) | (97,805 | ) | ||||
Foreign
exchange
|
(107,431 | ) | (7,730 | ) | ||||
Other
income, net
|
138,158 | 144,121 | ||||||
NET
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
(492,135 | ) | (214,270 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
NET
LOSS INCOME FROM OPERATIONS BEFORE MINORITY INTEREST
|
(492,135 | ) | (214,270 | ) | ||||
Minority
interest in income of subsidiaries
|
- | (93,486 | ) | |||||
NET
LOSS
|
$ | (492,135 | ) | $ | (307,756 | ) | ||
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
580,617 | (788,451 | ) | |||||
COMPREHENSIVE
INCOME (LOSS)
|
$ | 88,482 | $ | (1,096,207 | ) | |||
LOSS
PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND
DILUTED
|
$ | (0.02 | ) | $ | (0.04 | ) | ||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
30,265,265 | 8,427,228 |
The
accompanying notes are an integral part of these consolidated financial
statements.
6
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30
(Expressed
in United States Dollars)
2010
(Unaudited)
|
2009
(Unaudited)
|
|||||||
REVENUES
|
$ | 19,183 | $ | 1,035,380 | ||||
COST
OF GOODS SOLD
|
41,474 | 957,039 | ||||||
GROSS
LOSS
|
(22,291 | ) | 78,341 | |||||
ROYALTIES
|
- | 309,971 | ||||||
EXPENSES
|
||||||||
Rent
and occupancy costs
|
610,709 | 607,425 | ||||||
Management
and directors fees
|
167,500 | 155,416 | ||||||
General
and administrative
|
511,015 | 277,504 | ||||||
Stock
based compensation
|
2,521,849 | - | ||||||
Depreciation
|
631 | 57 | ||||||
TOTAL
OPERATING EXPENSES
|
3,811,704 | 1,040,402 | ||||||
LOSS
FROM OPERATIONS
|
(3,833,995 | ) | (652,090 | ) | ||||
Interest,
net
|
(418,340 | ) | (245,974 | ) | ||||
Foreign
exchange
|
352,934 | (395,573 | ) | |||||
Other
income, net
|
417,199 | 432,364 | ||||||
NET
LOSS FROM OPERATIONS BEFORE INCOME TAXES
|
(3,482,202 | ) | (861,273 | ) | ||||
Provision
for income taxes
|
- | - | ||||||
NET
LOSS FROM OPERATIONS BEFORE MINORITY INTEREST
|
(3,482,202 | ) | (861,273 | ) | ||||
Minority
interest in loss of subsidiaries
|
53,733 | (136,710 | ) | |||||
NET
LOSS
|
$ | (3,428,469 | ) | $ | (997,983 | ) | ||
FOREIGN
CURRENCY TRANSLATION ADJUSTMENT
|
850,422 | (781,290 | ) | |||||
COMPREHENSIVE
LOSS
|
$ | (2,578,047 | ) | $ | (1,779,273 | ) | ||
LOSS
PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND
DILUTED
|
$ | (0.12 | ) | $ | (0.13 | ) | ||
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED
|
29,249,537 | 7,822,150 |
The
accompanying notes are an integral part of these consolidated financial
statements.
7
LATTENO
FOOD CORP. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTH PERIOD ENDED SEPTEMBER 30
(Expressed
in United States Dollars)
2010
(Unaudited)
|
2009
(Unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (3,428,469 | ) | $ | (997,983 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities
|
||||||||
Depreciation
|
631 | (57 | ) | |||||
Minority
interest
|
(53,733 | ) | 136,710 | |||||
Interest
due to convertible notes and bank debts
|
462,707 | 242,422 | ||||||
Stock
based compensation
|
2,521,849 | - | ||||||
Loss
from disposition of property, plant and equipment
|
- | 2,017 | ||||||
Interest
on note receivable
|
(417,199 | ) | (432,364 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(221,320 | ) | (940,835 | ) | ||||
Inventory
|
(27,179 | ) | - | |||||
Prepaid
and sundry assets
|
- | 12,885 | ||||||
Note
receivable
|
527,182 | 94,819 | ||||||
Accounts
payable
|
212,002 | 1,724,456 | ||||||
Due
on acquisition of subsidiary
|
- | 1,192,460 | ||||||
Accrued
liabilities and other payables
|
212,271 | (788,316 | ) | |||||
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
(211,258 | ) | 246,328 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Advances
to related party
|
- | 442,800 | ||||||
Acquisition
of property, plant and equipment
|
- | (5,876 | ) | |||||
NET
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
|
- | 436,924 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Repayment
of bank loans
|
- | (669 | ) | |||||
Proceeds
from (repayment of) convertible debentures
|
466,524 | (27,386 | ) | |||||
Proceeds
from the issuance of common stock
|
- | 185,000 | ||||||
NET
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
466,524 | 156,945 | ||||||
EFFECT
OF FOREIGN CURRENCY TRANSLATION
|
(315,773 | ) | (781,290 | ) | ||||
NET
(DECREASE) INCREASE IN CASH
|
(60,507 | ) | 58,907 | |||||
CASH,
BEGINNING OF PERIOD
|
64,409 | - | ||||||
CASH,
END OF PERIOD
|
$ | 3,902 | $ | 58,907 |
The
accompanying notes are an integral part of these consolidated financial
statements.
8
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
1.
|
NATURE
OF OPERATIONS AND BUSINESS
COMBINATION
|
Latteno
Food Corp. (formerly B&D Food Corp.) (“Latteno” or “the Company”) is a US
corporation that concentrates in acquiring, organizing, developing and upgrading
companies in the food industry, and more specifically in the dairy and coffee
industry. Currently the Company operates through its subsidiary in
Brazil and is developing a plan of operations for its leased facilities in
Brazil.
The
Company was incorporated on August 24, 1994 under the laws of the state of
Delaware. Until October 2004, the principal business activity of the
Company was ownership, management, and sale of residential real estate. This
activity was carried on through the wholly owned subsidiary Rickets Enterprises
International, Inc. In October 2004, the Company sold all of its remaining
revenue producing assets and in December 2004 ceased all its active
operations.
On July
11, 2005, the Company entered into a Share Purchase Agreement (the “Agreement”)
with BDFC Brasil Alimentos LTDA., a company formed pursuant to the laws of
Brazil (“BDFC”) and the stockholders of BDFC (the “BDFC stockholders”) dated as
July 8, 2005. Pursuant to the Agreement, the Company acquired effectively 100%
of the outstanding equity stock of BDFC from the BDFC
stockholders. As consideration for the acquisition of BDFC, the
Company agreed to issue 4,767,234 shares of the Company’s common stock to the
BDFC stockholders. As additional consideration, the Company issued an
8% convertible promissory note, in the amount of $10,000,000 to the BDFC
stockholders in consideration for the entire preferred stock of
BDFC. The note is payable (principal plus accumulated interest) on
July 8, 2008 and may be converted, at the option of the holder, at any time,
prior to or at the time of repayment by the Company, to the Company’s common
stock at the rate of $4.00 per share. At the date of the agreement,
BDFC stockholders were also the controlling shareholder of the
Company.
BDFC was
originally incorporated under the name Eastco Corporation do Brasil Ltda
(“Eastco), under the laws of Brazil on June 2, 1995. In May 2004, the
name of Eastco was changed to Eastco de Alimentos Ltda., as registered with the
Junta Comercial de Sao Paolo (Commercial Council) and on June 28, 2005 the name
was changed to BDFC Brasil Alimentos Ltda. BDFC has been in the coffee
manufacturing business since 1997. The Company manufactures and
purchases coffee grains, toasted and milled coffee, soluble coffee and related
products, for sale, import and export.
On
November 1, 2000, due to adverse financial conditions, BDFC filed a Judicial
Creditor’s Agreement called “Concordata Preventiva”. This agreement
consolidates the Company’s debts and postpones all obligations to suppliers and
banks for a period of time. The creditor’s agreement under
“Concordata Preventiva” provided for payment in two installments, the first
installment of 40% to be paid in one year and the remaining 60% to be paid in
two years. BDFC made the full payments of $144,000 and $216,000 on October 30,
2001 and November 25, 2002, respectively. On March 8, 2005, BDFC paid
an additional $15,562 as required by the courts. To generate
sufficient cash flows, in January 21, 2003 management leased its manufacturing
facility and equipment to Comercio e Industrias Brasileiras Coimbre S/A
(“Coimbra”), an unrelated party. Rents received from the lease were used by BDFC
to pay its debts.
On July
1, 2008, the Company completed execution of a stock purchase agreement with SBKF
Investments, Ltd. (the “Purchaser”) for the sale of 100% of the issued and
outstanding common stock of BDFC Brasil Alimentos LTDA. a subsidiary of the
Latteno. The purchase price was $5,764,847 and in consideration the
Company received a note bearing annual interest of 10% repayable in equal annual
payments of principal and interest of $702,909. The net liabilities
of BDFC at the time of the sale was $6,204,539, resulting in a gain on sale of
$11,969,386.
9
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
1.
|
NATURE
OF OPERATIONS AND BUSINESS COMBINATION
(Continued)
|
On May
13, 2009, the Company entered into a purchase and sale agreement to purchase 60%
of the outstanding shares of Global Milk Businesses and Administration of
Private Properties LTDA. ("Global Milk"), a limited liability company,
incorporated in the State of Sao Paulo, Brazil. Global Milk holds the
rights of certain intellectual property of the brand name products manufactured
and sold under the brand name Teixeira.
Pursuant
to the agreement, Latteno acquired 300 common shares of Global Milk from
Castrol, LLC ("Castrol"), a Delaware corporation, representing 60% of the
outstanding shares of Global Milk, for consideration of 13,000,000 Brazilian
Reals ($6,312,800). Latteno and Castrol are then required to
contribute 20,000,000 Brazilian Reals to the company based on their
ownership. Latteno must make the capital contribution of 12,000,000
Brazilian Reals ($5,880,000) and complete payment for the acquired shares of
13,000,000 Brazilian Reals ($6,312,800) by December 10, 2009 or the shares
issued will be cancelled. On October 22, 2009 the deadline for
completing the purchase payments was agreed by both parties to be extended to
February 10, 2010. Latteno funded the purchase and
contribution requirements on February 10, 2010.
Latteno
has determined that it is the accounting acquirer and has obtained control of
Global Milk. Latteno has therefore consolidated 100% of Global Milks
assets and liabilities. The net assets of Global Milk on the date of
acquisition consisted of trademarks and patents valued at $9,987,200 and
liabilities of $3,674,400.
On
September 1, 2009, our Board of Directors approved, subject to receiving the
approval of the holder of a majority of our outstanding capital stock, an
amendment and restatement of our Articles of Incorporation (the “Restated
Articles”), to change our name to “Latteno Food Corp.” to more accurately
reflect our business operations. The majority stockholders approved
the Restated Articles pursuant to a written consent dated as of September 1,
2009.
On
February 10, 2010 Latteno completed the payment and capital contributions
required of the acquisition of Global Milk. Latteno first acquired
land located in Brazil from AES Comercial Ltda through the issuance of a
convertible debenture totalling $8,446,421 (15,000,000 Reals). The
note bears interest at 2.27% per annum and matures on February 9,
2015. This land was then transferred to Global Milk, as part of the
required capital contribution. Latteno issued an additional
convertible debenture to Global Milk for $2,815,474 (5,000,000
Reals). The note bears interest at 2.27% per annum and matures on
February 9, 2015.
In
February 2010, Castrol, the 40% non-controlling interest of Global Milk, was
notified by Latteno that they were in violation of the shareholders agreement,
due to breach of the non-compete clause. The remaining 5,000,000
Reals ($2,815,474) payable to Castrol for the GM shares acquired was therefore
no longer payable.
The above
transactions completed the 25,000,000 Reals requirements of Latteno’s
acquisition of Global Milk.
On March
11, 2010, as a result of the non-compete and other violations by Castrol, a
special meeting of the shareholders of Global Milk was held and majority
shareholders voted to exclude the partner, Castrol. As a result,
Global Milk effectively became a wholly-owned subsidiary of the
Company. The transaction was accounted for as a change in the
ownership interests of the Company with an entity under common control, in
accordance with ASC 810-10-65-1, Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51. As
a result, the value of the shares transferred to consummate the exclusion of the
partner was $4,767,249, which represented the historical cost basis of the
balance of the net assets transferred. The following disclosure
provides details regarding the change in the noncontrolling ownership interests
of the Company’s subsidiaries, in accordance with ASC
810-10-55-4.
10
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
For the Nine
Months Ended
September 30,
2010
|
For the Nine
Months Ended
September 30,
2009
|
|||||||
Net
loss Attributable to Latteno Food Corp.
|
$ | (53,733 | ) | $ | (136,710 | ) | ||
Increase
in Latteno’s Additional Paid in Capital for the exclusion of the
Shareholders of the Noncontrolling Interest
|
4,767,249 | - | ||||||
Change
from Net Income Attributable to Latteno and Transfers (to) from the
Noncontrolling Interest
|
$ | 4,713,516 | $ | (136,710 | ) |
2.
|
GOING
CONCERN
|
The
Company's consolidated financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company has raised
capital and financing to cover all of its losses from operations since inception
but the Company's ability to continue as a going concern is contingent upon its
ability to attain and sustain profitable operations and to generate sufficient
capital and financing from external investors and lenders. For the
nine months ended September 30 2010 the Company experienced a net loss of
$3,428,469 (September 30, 2009 - $997,983) and has a working capital deficiency
of $6,412,758 (December 31, 2009 - $16,886,503).
Management
has recently completed the final payments of the joint venture agreement, where
Latteno acquired 100% of Global Milk, a Brazilian Company which owns certain
rights to the trademarks, customer lists and distribution of food
products. Management believes that the Global Milk subsidiary will
begin to create positive cash flows from operations in fiscal
2011. In addition, the Company has secured various supplier credit
lines and is continuing to seek financing to fund the ongoing overhead expenses
of Latteno.
In the
opinion of the management, the anticipated growth of operations and the
financing with potential new investors in the future, will permit the Company to
continue as a going concern in the coming year, until such time that the Company
obtains profitable operations.
The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern.
11
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
3.
|
BASIS
OF PRESENTATION
|
These
interim consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America (“US
GAAP”).
The
interim results of operations are not necessarily indicative of the results to
be expected for the fiscal year ending December 31, 2010. The Company’s
financial statements contained herein are unaudited and, in the opinion of
management, contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows for the period presented. The Company’s
accounting policies and certain other disclosures are set forth in the notes to
the consolidated financial statements contained in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2009. These financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements and notes thereto. The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and its effectively wholly owned
subsidiary, Global Milk. All significant inter-company accounts and
transactions are eliminated on consolidation.
4.
|
INVENTORY
|
Inventory
is comprised of purchased food products for resale and are stated at the lower
of weighted average cost or net realizable value.
5.
|
NOTE
RECEIVABLE
|
On July
1, 2008, the Company completed execution of a stock purchase agreement with SBKF
Investments, Ltd. (the “Purchaser”) for the sale of 100% of the issued and
outstanding common stock of BDFC Brasil Alimentos LTDA. a subsidiary of the
Latteno. The purchase price totalled $5,764,847 and in consideration
the Company received a note bearing annual interest of 10% repayable in equal
annual payments of principal and interest of $702,909. The balance payable at
September 30, 2010 including accrued interest is $5,488,733.
12
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
6.
|
PROPERTY
AND EQUIPMENT
|
The
components of property, plant and equipment were as follows:
September 30,
2010
|
December 31,
2009
|
|||||||
Land
|
$ | 8,806,500 | $ | - | ||||
Computers,
machinery & equipment
|
11,085 | 5,357 | ||||||
Furniture
& fixtures
|
2,122 | 1,416 | ||||||
8,819,707 | 6,773 | |||||||
Accumulated
depreciation
|
(889 | ) | (231 | ) | ||||
Net
book value
|
$ | 8,818,818 | $ | 6,542 |
7.
|
ACCOUNTS
PAYABLE
|
September 30,
2010
|
December 31,
2009
|
|||||||
Trade
payable
|
$ | 1,164,068 | $ | 1,190,266 | ||||
Rent
payable
|
200,000 | 125,000 | ||||||
$ | 1,364,068 | $ | 1,315,266 |
8.
|
ACCRUED
LIABILITIES AND OTHER
PAYABLES
|
September 30,
2010
|
December 31,
2009
|
|||||||
Employees
and related institutions
|
$ | 240,265 | $ | 65,403 | ||||
Amounts
payable to stockholders of the Company, unsecured, non interest bearing
and payable on demand
|
1,204,967 | 1,169,558 | ||||||
Other
accrued liabilities
|
12,000 | 10,000 | ||||||
$ | 1,457,232 | $ | 1,244,961 |
13
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
9.
|
CONVERTIBLE
DEBENTURES AND PROMISSORY
NOTES
|
Composed
of:
September 30,
2010
|
December 31,
2009
|
|||||||
Convertible
debentures
|
$ | 9,944,694 | $ | 2,614,256 | ||||
Promissory
notes
|
953,729 | 1,340,974 | ||||||
$ | 10,898,423 | $ | 3,955,230 |
The
convertible debentures and promissory notes are unsecured and mature and become
due as follows:
September 30,
2010
|
December 31,
2009
|
|||||||
Amount
due in 2010
|
837,736 | 2,712,572 | ||||||
Amount
due in 2011
|
1,465,866 | 330,611 | ||||||
Amount
due in 2013
|
- | 912,047 | ||||||
Amount
due in 2015
|
8,594,821 | - | ||||||
$ | 10,898,423 | $ | 3,955,230 |
On May
31, 2010 the Company, after receipt of signed conversion notices from its
debtors, completed the conversion of 12 debentures, with principal and interest
owing of $2,403,461, into 2,577,254 common shares.
On May
31, 2010 the Company renegotiated with certain convertible debenture holders to
amend the maturity dates of debentures totalling $1,440,000, to July and August
2011, with interest at 7% and with conversion rights at the option of the holder
at $1.00 per common share.
On August
31, 2010 the Company renegotiated with certain convertible debenture holders to
amend the maturity dates of debentures totalling $40,000, to September 2011,
with interest at 10% and with conversion rights at the option of the holder at
$0.30 per common share.
During
the nine months ended September 30, 2010, the Company issued various debentures
totalling $496,900, convertible into common shares at prices ranging from $0.30
to $1.00 per share. The debentures bear interest at 4% to10% and
mature in April, May and July 2011.
14
LATTENO
FOOD CORP. AND SUBSIDIARY
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010 and 2009
(Expressed
in United States Dollars)
10.
|
COMMITMENTS
AND CONTINGENCIES
|
On
September 26, 2008, the Company entered into a lease agreement with SBKF
Investments, Ltd for a term of 18 years, whereby they would leaseback all of the
land building and factory that was sold to them, as described in Note
1. The Company's remaining lease obligations, with future minimum
annual payments (exclusive of taxes, insurance and maintenance costs)
are as follows:
Year
One
|
802,909 | |||
Year
Two
|
802,909 | |||
Year
Three
|
802,909 | |||
Year
Four
|
802,909 | |||
Year
Five and thereafter
|
10,237,090 | |||
$ | 13,448,726 |
As at
September 30, 2010, the Company is currently a party to litigition relating to
claims the Company commenced in January 2010 against the predecessor owners of
the Teixeira brand name, for breach of non-compete terms of the purchase
agreement and for theft of company property and records.
11.
|
CAPITAL
STOCK AND WARRANTS
|
On May
31, 2010 the Company, after receipt of signed conversion notices from its
debtors, completed the conversion of 12 debentures, with principal and interest
owing of $2,403,461, into 2,577,254 common shares.
On May
31, 2010 the Company paid for $163,200 outstanding payables, with the issuance
of 203,200 shares of common stock.
On May
31, 2010 the Company issued 2,718,862 common shares for services rendered and to
be rendered in the future. The issuances were to several individuals
as payment for services relating to commissions on business transactions,
guarantee fees, legal services and other professional services. Total
compensation related to these services for the six months ended June 30, 2010
was $2,504,566.
On May
31, 2010 the Company issued 697,000 as payment for supplier debts which the
Company had assumed as partial consideration for acquisition of the Teixiera
brand.
On May
31, 2010 the Company agreed to extend the maturity date on warrants for 925,000
common stock, exercisable at $2.00, to June 30, 2012.
15
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INFORMATION
REGARDING FORWARD LOOKING STATEMENTS
The
following discussion should be read in conjunction with the financial statements
and notes thereto set forth in Item 1 of this Report. In addition to historical
information, this discussion and analysis contains forward-looking statements
that relate to future events and expectations and, as such, constitute
forward-looking statements. Forward-looking statements include those containing
such words as "anticipates," "believes," "estimates," "expects," "hopes,"
"targets," "should," “will," "will likely result," "forecast," "outlook,"
"projects" or similar expressions. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company to be materially different
from those expressed or implied in the forward-looking statements.
OVERVIEW
Company
Vision
To
utilize the Company’s assets and human expertise in order to enhance its current
operations and acquire additional operations in order to become one of the
world's largest "breakfast item" food and beverage manufacturing and
distribution companies.
Business
Summary
Latteno
Food Corp. (OTC BB: LATF) is a Delaware corporation that concentrates on
acquiring, organizing, developing and upgrading companies in the international
food and beverage market. Currently, Latteno Food Corp. (“Latteno” or “the
Company”) is specializing in the dairy industry and, as a second phase, the
coffee industry. The Company’s management plans to integrate the operations of
manufacturing and distribution of acquired entities in order to achieve maximum
return on capital for its investors. Currently the Company operates through its
subsidiary in Brazil.
Latteno’s
business model is simple and efficient – Acquisition of a key brand name and
distribution system, an "Engine," that will be able to carry the group's
products to existing customers in various locations.
The
Company is continuing to apply its strategy and seeks growth through the
acquisition of plantations, processing and distribution companies across the
world.
Unless
otherwise stated, currencies are stated in US Dollars throughout this
document.
History
and Nature of Operations
The
Company was formed as a holding company through a reverse merger in 2005, in
order to acquire companies that will manufacture, process and distribute
high-quality coffee products from various companies on a worldwide basis. The
Company began its operations under the name B&D Food Corp. as a Brazilian
coffee trader, producer and distributor. The Company’s founders share 30 years
of experience in the soft commodity business and have managed every aspect of
its chain: trading; manufacturing; distribution; and branding.
In 2005,
the Company obtained a manufacturing arm by acquiring BDFC Brasil Alimentos LTDA
(“BDFC”), which owns and operates a coffee manufacturing plant. BDFC had the
ability to manufacture and pack roasted and ground coffee, instant coffee and
several mixtures of coffee and tea like cappuccino and others.
16
In the
summer of 2008, the Company ceased operations in the coffee division and began
to restructure its debt and equity in an effort to position itself for strategic
acquisitions. The first phase of this restructuring involved the sale of the
BDFC subsidiary and the leasing back of the land and building where the coffee
plant operations were located. This eliminated much of the debt that
was associated with the BDFC subsidiary, but still enabled the Company to enter
back into the coffee industry at the appropriate time in the future. This phase
of restructuring is further described in the Financing section
below.
On May
13, 2009, the Company entered into a purchase and sale agreement to purchase 60%
of the outstanding shares of Global Milk Businesses and Administration of
Private Properties LTDA. ("Global Milk"), a limited liability company,
incorporated in the State of Sao Paulo, Brazil. Global Milk holds the rights of
certain intellectual property of the brand name products manufactured and sold
under the brand name “Teixeira,” a very strong dairy product brand name and
distribution system throughout Brazil. On March 11, 2010, as a result of
the non-compete and other violations by Castrol, a special meeting of the
shareholders of Global Milk was held and majority shareholders voted to exclude
the partner, Castrol. As a result, Global Milk effectively became a
wholly owned subsidiary of the Company.
On
February 10, 2010, the company fulfilled its obligation towards the
capitalization of it Global Milk Subsidiary in Brazil and informed Castrol Inc.
(Global Milks 40% shareholders) of their breach of several clause of the
contract. On March 23, 2010, the majority shareholders of Global Milk
(Latteno’s subsidiary in Brazil) decided to exclude Castrol from its
shareholding, leaving Latteno as 100% owner (shareholder) of Global
Milk.
The
acquisition of the Teixeira brand, has given Latteno the key branding and
manufacturing components that it required to now seek out further strategic
acquisitions, re-enter the coffee industry and expand operations internationally
using proven distribution lines and well-known brand names.
On June
19, 2009, Spence Walker was appointed as Chief Financial Officer and a member of
the Board of Directors of the Company. At this time the head offices of Latteno
Food Corp. were moved to Markham, Ontario, Canada.
Keys
to Success
Establishing a strong management
team - The right
acquisitions are the foundation upon which the Latteno business plan is built. A
strong acquisition team is mission critical as this is where the revenue and
profitability of our product offerings will be generated. The food industry
space generally has low costs of entry and competitors can be easily spawned.
However, the Company will be able to create a larger profit due to its broader
scope and vast sources of revenues and sales opportunities and therefore can
offer its employees a better deal and rewards. A critical component of our plan
is that our acquisition team will have ownership in Latteno, thus maximizing the
commitment to our mutual success.
17
Offering a broader range of
products - Latteno shall continue to grow and expand product lines. Size
and a functional distribution of our product lines will give us an immediate
competitive advantage and will allow all new products to lever their sales and
marketing campaigns off the existing and expanding brands. The greater our
brands, the more new products we are able to effectively introduce.
Keeping costs low - Latteno
is committed to a common sense, frugal start up, controlled growth and
innovative management processes. Our initial staff/management team will be busy
filling many roles until such time as the organization can profitably expand and
then fill the roles needed by an expanding profitable organization.
Be properly capitalized - It
is possible to invest less into this business model however our plan includes
budgets and forecasts and we will come across many opportunities for which
immediate action is necessary to take advantage of the opportunity. Thus we have
addressed this with real costs and real expectations and adequate
capital.
Securing high volume clients
- We plan to pursue direct strategic relationships based on our mass and product
lines with high volume clients. The Latteno marketing strategy will target
clients’ concerns in four specific areas: product, product accountability,
financial return and internal client costs for distribution.
Mergers, acquisitions and
expansion - are
the primary key to the success of Latteno’s revenue stream. It will be
imperative to maintain tight managerial control of the acquisition marketing
strategies while at the same time allowing these strategies to be fluid enough
to adapt immediately to fit Latteno’s needs ensuring no disruption of incoming
inventories from contracted clients.
18
PLAN
OF OPERATIONS
Summary
of Current Operations
Latteno
has current and potential operations in two divisions and is a holder of two
options:
Global Milk Ltd. – A
100% owned Brazilian company that owns one of Brazil's most recognized dairy
product brands. It operates a wide spread and efficient distribution system
throughout Brazil.
Brazil Coffee Plant –
Lease agreement for a non-operational factory in need of refurbishment, that
produces instant and ground coffee.
Maricota Alimentos –
An option to acquire the brand Maricota, one of the largest readymade dairy
products in Brazil.
Giarolla - An option
to acquire the brand Giarrolla, a brand of fine cheese in Brazil.
Dairy
Latteno
has acquired 100% of the common stock of Global Milk, a private Brazilian
Company that owns the Teixeira brand name, distribution system and sales system.
Latteno plans to exclusively out-source all of the production of the Teixeira
products. This acquisition was made in order to utilize the Teixeira
distribution system and extensive brand recognition as its Brazilian "engine"
that will promote the group’s products.
About
Teixeira
Solon
Teixeira de Rezende, started operations of Dairy Teixeira Ltda. with his father,
Jerome Tan and his brothers Joseph and Juarez in 1950 in Sao Paulo and southern
Minas Gerais. In ten years they opened two new factories and then launched the
first grated Parmesan cheese in the Brazilian market.
In 1967,
Tan acquired more factories and prospered in the 1970’s which got them ready for
a period of great growth in the 1980's. With the opening of production
facilities in Sao Paulo and Minas Gerais, they were able to expand with several
new points of delivery of milk in these states. The results could not be better:
it rode to 220 million liters per year approaching the end of the
decade.
In 1989
Teixeira revised its corporate base and reorganized its operations in
preparation for the global economy that it envisioned. This effort spawned S.
Teixeira Food Products Ltda.
19
Teixeira
has outsourced certain stages of production, specializing in the areas of:
finishing, packaging, sales and marketing, distribution, logistics, customer
service, delivery and quality control. Teixeira aimed to meet the diverse needs
of the market and consumer, consistent with an international market approach.
The Teixeira brand received numerous national and international awards for the
quality of their products.
To
maintain the brand at this level, we plan to maintain a consistent philosophy,
following three keys to success:
1.
|
Selling products at reasonable
prices utilizing a maximum quality of production and services to its
customers;
|
2.
|
Seed continuous partnership and
trust among its employees, employees and suppliers;
and
|
3.
|
Increasing the recognition of
Teixeira, its main asset.
|
Found in
outlets throughout Brazil for 50 years, the products of the Teixeira brand are
living proof of success.
Current
Plans for the Teixeira Brand Name
The
Company is currently in litigation with previous owners of Teixiera brand,
Castrol Inc. Latteno took action against the previous owners for breach of the
terms of the joint venture agreement and the result was to exclude Castrol as a
partner. Castrol filed a counter claim against Latteno. Although
Latteno has received favourable results in the court proceeding up to this time,
due to the current litigation, the Company has suspended use of the Teixiera
brand in its product sales. The recent strikes of the courts in
Brazil have delayed the closing of this litigation, however Latteno still
controls the sales force, customer lists and distribution chain acquired from
Teixiera and therefore management has decided to recommence operations in August
2010.
Current
Plans for Other Brand Names
Management
has negotiated with two other food producers of dairy and cheese products,
whereby it has received certain exclusive distribution rights. In
addition, the Company has supplier lines of credit secured for these
products. Management plans to continue with these brands and add the
Teixiera brand back into the product mix, once litigation is
settled. The Company also has an option to buy these brands if
certain targets are met in the future.
As a
component of the launch of these new branded products, on July 28, 2010, the
Company held its first sales convention in Alphaville, Sao
Paulo. More than 40 sales teams attended from the Sao Paulo Area, to
introduce the new brands and products. The convention was a success, with sales
starting the next day and receiving positive customer feedback.
Coffee
Brazil
Latteno
is currently leasing an instant and roasted coffee factory located in Cruzeiro,
Sao-Paulo, which was property the Company previously owned under its BDFC
subsidiary. The factory has, in the past, produced large amounts of spray-dried
and roasted coffee but is currently in need of a massive refurbishment and
system upgrade.
In
addition to the lease, the Company has maintained ownership of four brand names:
"Samba Café," "Vivenda," "Torino" and "Brazilian Best", used in the past by
Latteno to sell its instant and roasted coffee across the
world.
20
Distribution
Latteno
plans to use Teixeira's brand recognition and distribution system (see dairy
business in previous section) in order to carry its coffee and other breakfast
products to markets throughout Brazil.
In the
future, Latteno plans to acquire additional "engines" in target markets
throughout US, Europe and Asia that will distribute the group's products to
customers worldwide.
Competition
The
coffee industry is extremely competitive and includes several companies, which
have achieved substantially greater market shares than we have and have longer
operating histories, larger customer bases and substantially greater financial,
development and marketing resources than we do. Our proprietary brand coffees
may compete with many other branded coffees which are sold in supermarkets and
specialty stores, primarily in Brazil and the United States. Examples of
companies we may compete with include, but are not limited to Nestle, Companhia
Cacique de Cafe Soluvel, Cafe Soluvel Brasilia and Companhia lguacu de Cafe
Soluvel.
Beside
the Company’s experienced management, Latteno’s main advantage over any newcomer
to this volatile market is its ability to distribute its products to Brazil’s
largest consumer markets from day one of production, with minimal overhead
expenses through the Teixeira distribution system.
Milestones
In the
first twelve months of operations, commencing after the first stage of the
internal restructuring and the acquisition of Global Milk (July 2009), the
Company has completed or plans to complete the following
milestones:
·
|
Commenced sales of Teixeira
products during the 2nd half of July,
2009.
|
·
|
Commenced sales of Maricota and
Gilarolla during the 2nd half of July,
2010.
|
·
|
Established initial working
capital through supplier credit
lines
|
·
|
Established funding for overhead
and head office costs
|
·
|
Transition the operation of
Teixeira sales and distribution to the Global milk subsidiary, such that
distribution, customer service and sales are all processed and managed
under the Global Milk
|
·
|
Increase Global Milk’s customer
base and sales on a weekly
basis
|
21
|
·
|
Completed private placements and
other forms of financing in the amount of approximately $1.5 million to
facilitate certain working capital requirements of Global Milk and head
office costs of the Latteno reporting entity, until Global Milk reaches
cash positive operations
|
|
·
|
Completed financing in the amount
of $14 million in February 2010 to facilitate payment of the acquisition
cost of Global Milk and to meet the capital contribution requirements into
Global Milk, as per the acquisition
agreement
|
In the
second year of operations the Company plans to complete the following
milestones:
|
·
|
Increase overall performance and
profitability of Global Milk such that it reaches a self-sustaining status
as well as reach a profitable status for the Latteno group as a
whole
|
|
·
|
Achieve a favourable outcome with
the arbitration in progress relating to the Teixeira brand, enabling us to
recommence sales of this
brand
|
|
·
|
Delete
|
|
·
|
Introduce key individuals to
create a sound management team and board of directors that add to industry
experience to the Latteno
team
|
|
·
|
Increase annual gross revenues to
$80 million and annual net operating cash flow to $12 million for
2011
|
|
·
|
Commence a second strategic
acquisition of a food
company
|
|
·
|
Begin selling Latteno coffee
products through Teixeira distribution
lines
|
|
·
|
Expand geographically to become
an exporter to markets with a high demand for coffee and other related
breakfast products, i.e. U.S., China and
Europe
|
|
·
|
Review existing OTCBB listing and
AMEX listing and devise a plan for entering NASDAQ or equivalent
exchange
|
In the
third and subsequent years of operation the Company plans to complete the
following milestones:
|
·
|
Continue expansion by completing
3rd and 4th acquisitions by year
four
|
|
·
|
Acquisitions and expansion will
be established in all US, European, Asian and South American markets where
opportunities exist
|
|
·
|
At the end of year four net cash
from operations averages $3 million per
month
|
|
·
|
At the end of year four gross
revenues averages $20 million per
month
|
|
·
|
We can develop vertically defined
markets and alliances
|
22
Results
of Operations for the Nine Months Ended September 30, 2010
During
the first quarter of
2010, we discovered that the supplier of our Teixeira products, who we have
purchased exclusive rights to the brand name, breached the non-compete clause of
the purchase agreement. The purchase price, in accordance with the payment
terms, was reduced by 5,000,000 Brazilian Reals. This led to our further
investigation which discovered further violations by our Global Milk partner and
their relationship with the previous owners of Teixeira. We therefore
filed with the Brazilian courts and the exclusion of them as a partner was
approved. As a result of this ongoing dispute, we were forced to suspend
operations, as we were no longer on terms necessary to purchase our goods for
sale from the Teixeira supplier.
We spent
the remainder of our efforts negotiating directly with the suppliers who our
partner had previously acted as a go between. To date, we have been
successful in doing so and will continue to re-structure our supplier chain over
the coming months. Although this has put a damper on our first and second
quarter results, the continued effect of these circumstances is very positive
for Latteno. We now have full ownership of the equity of Global Milk and
will be able to reduce our product costs and cost of delivery, from being free
to negotiate directly with suppliers. Our customer base that we have
acquired and developed over the past year still exists and they have indicated
their willingness to continue, once our operations recommence.
In
addition, we feel our risk of losing any customers or suppliers to our old
partner is limited, due to contract terms prohibiting them from utilizing the
Teixeira brand name. This is evident also, by our successful negotiations
with suppliers and customers.
Hiring
of Management and Other Professionals
As a
result of conflicts of interest we believe existed with Javier Tano Feijo, we
have terminated the contract with him as the President of Global Milk. We
have engaged the services of Mr. Arnaldo Segal as the legal representative of
Latteno Food Corp in Brazil and he became the new President of Global Milk,
replacing Javier Tano Feijo in February 2010. Mr. Javier Tano Feijo
continues as Head of Commercial Operations, through a consulting agreement with
Global Milk. We have also retained Mrs. Juliana Carrilo Vieira as the legal
counsel for Global Milk.
In July
2010 we hired a sales manager and other administrative staff for our Global Milk
division.
Royalties
Earned and Receivable
According
to the agreement for use of the trade name we are owed royalties on any sales of
the trade name by Teixiera, until such time as the operations have been
transferred. Since commencement of operations in June 2009, we have earned
and have royalties receivable from S.Teixeira Industria de Laticinios Ltda
(“Teixeira”) in excess of $600.000. The amount refers to the percentage on
Teixeira gross sales in excess $12,000,000 in the period from May 15, 2009 to
March 31st, 2010. The Company received these royalties on sales of
Teixeira products as a transitional remedy until such time as Global Milk was
transacting the purchase and sales directly. If there is any remaining
balance owing after the resolution of the current dispute, this will be offset
against the final payment of the balance owing to Teixeira for the acquisition
of their intangible assets, once settled by the courts.
Customers
and Sales
Due to
the need to suspend operations as discussed above, we have had minimal sales
activity. However, we continue to discuss terms with new customers who
have indicated their desire to purchase from us in the future.
In August
2010, we commenced sales and operations with 40 sales reps covering the state of
Sao Paulo (46% of Brazilian GDP). Sales are gradually increasing as
we introduce these brands to our existing customer base.
By
September 2010, we plan to start sales in three other states (Rio de Janeiro,
Bahia and Pernambuco ) which represent another 25% of Brazilian
GDP.
Structure
During
the second quarter, we moved the Global Milk offices to Rua Jaragua 90 ,Bom
Retiro ,Sao Paulo and reduced our rent payments, these offices will be used as a
temporary location, until our full operations are ready to commence at which
time we will move to offices closer to our logistic distributor.
Inflation
Our
results of operations have not been affected by inflation and management does
not expect that inflation risk would cause material impact on its operations in
the future.
Seasonality
Our
results of operations are not materially affected by seasonality and we do not
expect seasonality to cause any material impact on our operations in the near
future.
23
FINANCIAL
CONDITION AND LIQUIDITY
Financing
Latteno
has mapped out a strong, consistent and achievable growth plan that is aimed at
achieving a self-sustaining status within its first year of operations under the
Global Milk subsidiary.
On
February 10, 2010 Latteno completed the payment and capital contributions
required of the acquisition of Global Milk. Latteno first acquired land
located in Brazil from AES Comercial Ltda through the issuance of a convertible
debenture totalling US$8,446,421 (15,000,000 Reals). The note bears
interest at 2.75% per annum and matures on February 9, 2015. This land was
then transferred to Global Milk, as part of the required capital
contribution. Latteno issued an additional convertible debenture to Global
Milk for US$2,711,497 (5,000,000 Reals). The note bears interest at 2.75%
per annum and matures on February 9, 2015.
Latteno’s
partner, the 40% non-controlling interest of Global Milk was notified by Latteno
that they were in violation of the shareholders agreement, due to breach of the
non-compete clause. The remaining US$2,815,474 (5,000,000 Reals) payable
to Castrol for the GM shares acquired was therefore no longer
payable.
The above
transactions completed the 25,000,000 Reals requirements of Latteno’s
acquisition of Global Milk.
We have
negotiated working capital funding for our purchases in the amount of 1,000,000
Reals and continuing to negotiate credit terms with suppliers as our operations
mature.
This
fiscal year to date, we have raised over US$200,000 in the form of loans and
convertible debentures to provide necessary working capital funding. We
are continuing to seek similar financing until such time as our Global Milk
operations reach a profitable stage. This is expected to be in
the fourth quarter of 2010.
Capital
Restructuring
In the
summer of 2008, the Company ceased operations in the coffee division and began
to restructure its debt and equity in an effort to position itself for strategic
acquisitions. The first phase of this restructuring involved the sale of the
BDFC subsidiary and the leasing back of the land and building where the coffee
plant operations were located. This eliminated much of the debt that was
associated with the BDFC subsidiary, but still enabled the Company to enter back
into the coffee industry at the appropriate time in the future. Concurrent with
the sale and leaseback transaction, senior management agreed to convert all
existing convertible debentures into preferred shares, thus further reducing the
overall debt requirements.
As the
second phase of the Company’s efforts to restructure itself, the Company filed
an information statement with the SEC on September 14, 2009 to notify its
stockholders of the following:
On or
about September 1, 2009, the Company received written consents in lieu of a
meeting of Stockholders from holders of 72,654,538 shares representing
approximately 46% of the 154,986,955 shares of the total issued and outstanding
shares of voting stock of the Company and shareholders holding 3,373,956 Series
A Convertible Preferred shares which represent 337,395,600 voting shares of
common stock. The holders of the Series A Convertible Preferred shares, have the
right to vote 100 times the number of shares of common stock that the Series A
Convertible Preferred is convertible into on all matters submitted to the
shareholders. The Series A Convertible Preferred shares are each convertible
into one hundred shares of common stock. Therefore the 3,373,956 Series A
Convertible Preferred shares are convertible into 337,395,600 common shares and
the shareholders have the right to vote one hundred times the number of shares
pursuant to the rights designated to the Series A Convertible Preferred Shares
and has voted such amount in favor of approving of the Company (the “Majority
Stockholders”) to effect a 20-for-1 reverse stock split (pro-rata reduction of
outstanding shares) of our issued and outstanding shares of Common Stock (the
“Reverse Stock Split”) authorizing the Company's Board of Directors, to effect a
reverse split of the Company’s common stock of 20:1 (pursuant to which the
number of authorized shares of common stock will remain 400,000,000 following
such reverse stock split); any fractional shares post-split will be rounded up
to the next whole share. Additionally the Reverse Stock Split will affect the
conversion ratio for all instruments convertible into shares of the Company’s
Common Stock including its convertible notes, warrants and outstanding preferred
stock.
24
On
September 1, 2009, the Board of Directors of the Company approved the
above-mentioned actions, subject to stockholder approval. The Majority
Stockholders approved the actions by written consent in lieu of a meeting on
September 1, 2009, in accordance with the Delaware Business Corporation Act
(“DBCA”).
The Board
of Directors believes that, among other reasons, the number of outstanding
shares of our Common Stock have contributed to a lack of investor interest in
the Company and has made it difficult to attract new investors and potential
business candidates. The Board of Directors has proposed the Reverse Stock Split
as one method to attract business opportunities in the Company.
We
believe that the reverse stock split may improve the price level of our Common
Stock and that the higher share price could help generate interest in the
Company among investors and other business opportunities. However, the effect of
the reverse split upon the market price for our Common Stock cannot be
predicted, and the history of similar stock split combinations for companies in
like circumstances is varied. There can be no assurance that the market price
per share of our Common Stock after the reverse split will rise in proportion to
the reduction in the number of shares of Common Stock outstanding resulting from
the reverse split. The market price of our Common Stock may also be based on our
performance and other factors, some of which may be unrelated to the number of
shares outstanding.
The
advantage of the Reverse Stock Split will be to permit the Company to pursue
financing from investors and issue shares of common stock in exchange for the
financing. This is the main purpose for the Reverse Stock Split and if the
Reverse Stock Split is not completed, the Company would not be able to issue
additional shares sufficient to complete a financing. The main disadvantage to
the Reverse Stock Split is that it may have an anti-takeover effect and
discourage any potential mergers or tender offers.
On
September 1, 2009, the Company's Board of Directors and persons owning a
majority of the Company’s voting securities approved a resolution authorizing
the Company to amend the Articles of Incorporation to change the Company’s name
to “Latteno Food Corp.” The Board believes that the name change better reflects
the nature of the Company’s current and anticipated operations. The Company had
operated under the name B&D Food Corp. which reflected the Company’s prior
business operations.
The final
phase of restructuring was completed on May 31, 2010, whereby the company
converted US$3,470,000 into common stock. In addition the Global Milk
subsidiary has negotiated the necessary supplier lines of credit for its
Brazilian dairy division.
The board
of directors believe these actions have structured the debt and equity of the
Company to enable the effective implementation of its plan of operations in
Brazil.
25
MARKET
RISK AND CONTINGENT LIABILITIES
The
Company is seeking to operate primarily in Brazil, making it susceptible to
changes in the economic, political, and social conditions in Brazil. Brazil has
experienced political, economic, and social uncertainty in recent years,
including an economic crisis characterized by exchange rate instability and
Brazilian Real devaluation, increased inflation, high domestic interest rates,
negative economic growth, reduced consumer purchasing power and high
unemployment. Under its current leadership, the Brazilian government has been
pursuing economic stabilization policies, including the encouragement of foreign
trade and investment and an exchange rate policy of free market flotation. In
the last year, there was an improvement in the Brazilian economic environment.
Nevertheless, no assurance can be given that the Brazilian government will
continue to pursue these policies, that these policies will be successful if
pursued or that these policies will not be significantly altered. In case of a
decline in the Brazilian economy, political or social problems or a reversal of
Brazil's foreign investment policy it is likely that any such change will have
an adverse effect on the Company's results of operations and financial
condition. Additionally, inflation in Brazil may lead to higher wages and
salaries for employees and increases in the cost of raw materials, which would
adversely affect the Company's profitability.
Risks
inherent in foreign operations include nationalization, war, terrorism, and
other political risks and risks of increases in foreign taxes or changes in U.S.
tax treatment of foreign taxes paid and the imposition of foreign government
royalties and fees.
26
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
Based on
our management’s evaluation, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of September 30, 2010, the end of the
period covered by this report, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rule 13a-15(e) under the Exchange Act) were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the rules and forms of the SEC and is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal
Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2009, management concluded that
our internal control over financial reporting was effective as of
December 31, 2009.
Changes
in Internal Controls
There was
no change in our internal control over financial reporting that occurred during
the quarter ended September 30, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
The
design of any system of controls and procedures is based in part upon certain
assumptions about the likelihood of future events. There can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
27
PART
II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
As at
September 30, 2010, the Company is currently a party to litigation relating to
claims the Company commenced in January 2010 against the predecessor owners of
the Teixeira brand name for breach of non-compete terms of the purchase
agreement and for theft of company property and records. The Brazilian Court of
Appeals suspended the use of the trademark by Global Milk on a temporary basis
until the situation between the parties is settled. The decision in not yet
final. The Company intends to move to suspend the Court of Appeals’ decision
regarding the use of the Teixeira trademark.
ITEM
1A. RISK FACTORS.
As a
smaller reporting company, we are not required to provide the information
required by this item.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On May
31, 2010 the Company, after receipt of signed conversion notices from its
debtors, completed the conversion of 12 debentures, with principal and interest
owing of $2,403,461, into 2,577,254 common shares.
On May
31, 2010 the Company paid for $163,200 outstanding payables, with the issuance
of 203,200 shares of common stock.
On May
31, 2010 the Company issued 2,718,862 common shares for services rendered and to
be rendered in the future. The issuances were to several individuals
as payment for services relating to commissions on business transactions,
guarantee fees, legal services and other professional services. Total
compensation related to these services for the six months ended June 30, 2010
was $2,504,566.
On May
31, 2010 the Company issued 697,000 as payment for supplier debts which the
Company had assumed as partial consideration for acquisition of the Teixiera
brand.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES.
The
Company has not defaulted on any senior securities.
ITEM 4. (REMOVED
AND RESERVED)
Not
applicable.
ITEM 5. OTHER
INFORMATION.
Not
applicable.
ITEM 6. EXHIBITS.
2.1
|
Share Purchase and Sale
Agreement**
|
10.1
|
8-K Report re Entry into a
Material Definitive Agreement, September 28, 2008
*
|
10.2
|
First Amendment to the Series A
Preferred Shares Subscription Agreement
*
|
10.3
|
BDFC Leaseback Agreement
*
|
10.4
|
Shareholders Agreement of Global
Milk Businesses and Administration of Private Properties LTDA.
**
|
10.5
|
Agreement for the Surrender and
Transfer of Trademarks**
|
10.6
|
Alteration of Social Contract of
Global Milk Businesses and Administration of Private Properties LTDA.
**
|
31.1
|
Certification by Daniel Ollech,
Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
31.2
|
Certification by Spence Walker,
Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
32.1
|
Certification by Daniel Ollech,
Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
32.2
|
Certification by Spence Walker,
Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
*
|
incorporated by reference from
our Form 10-Q Current Report, filed November 19,
2008
|
|
|
**
|
incorporated by reference from
our Form 10-Q Current Report, filed May 20,
2009
|
28
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Markham, Ontario, on
the 19th of
November 2010.
LATTENO
FOOD CORP
|
|||
By: |
/s/
Daniel Ollech
|
||
Daniel
Ollech
|
|||
Chief
Executive
Officer
|
29