10-Q 1 form10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended OCTOBER 31, 2001 ------------------------ [ ] TRANSITION REPORT UNDER SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ---------------- Commission file number -------------------------------------- DIPPY FOODS, INC. ---------------------------------------------------------- (Name of Small Business Issuer in its charter) Incorporated in the State of Nevada 33-076348 -------------------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 10554 Progress Way, Unit K, Cypress, California 90630 ----------------------------------------------- ---------- (Address of principal executive offices) (Zip Code)

Issuer's telephone number (714) 816-0150 -------------- Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. CLASS OUTSTANDING AT DECEMBER 26, 2001 ----- -------------------------------- Common Stock - $0.001 par value 30,245,002 Transitional Small Business Disclosure Format (Check one): YES [ X ] NO [ ] DIPPY FOODS, INC. FORM 10-QSB PAGE 2 OF 8 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. See unaudited financial statements for the period ended October 31, 2001 attached to this Form 10-QSB. ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. THE FOLLOWING PRESENTATION OF MANAGEMENT'S DISCUSSION AND ANALYSIS OF DIPPY FOODS, INC. SHOULD BE READ IN CONJUNCTION WITH DIPPY FOODS, INC. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION INCLUDED HEREIN. Dippy has targeted the school food-services market, with which it intends to take advantage of the National School Lunch Program offered by the United States Department of Agriculture. Dippy is intending to expand into the National School Breakfast and After School Snack Programs. Dippy's initial school lunch product "Dippers" consists of four combinations of corn chips and various dips. Dippers can be eaten without utensils, are packaged in single-serving, heat-sealed, recyclable trays, are shelf-stable for sixty days and require no freezing, refrigeration, heating or preparation. Each lunch meal combined with a single serving of milk meets the nutritional requirements of the Food and Drug Administration. Dippy has designed three new types of dippers to meet the standards of the National School Breakfast program. Acquisition ----------- On May 25, 2001, the Company entered into a stock purchase agreement whereby the Company received all the outstanding common stock of Americas Favorite Foods Corp ("AFFC") in exchange for 8,000,000 shares of the Company's restricted common stock. AFFC had no assets, (except two distribution agreements, see below), liabilities or operations. The 8,000,000 shares were issued as to one third immediately. The remainder were issued and are held in trust and are to be released over two years based on service requirements of AFFC shareholders. Accordingly, the 2,666,667 shares that were issued immediately were recorded at a fair value of $0.18 per share, based on the market price for the Company's common stock at the date of acquisition, and recognized as Distribution Rights to be amortized over five years. The remaining 5,333,333 shares to be earned over a two-year period were recorded at the date of acquisition as deferred compensation to be expensed as the services are rendered. Distribution Rights ------------------- AFFC owns Korean distribution rights to numerous US branded food products. There has been no revenue associated with these distribution rights. There is inherent uncertainty that the Company will realize its carrying value of such distribution rights from future operations. During 2001 Dippy introduced several new products as a result of its acquisition of AFFC. The new line of products includes bagels (plain, cinnamon/raisin, blueberry, whole wheat, bagel & cream cheese, scones (chocolate chip, white chocolate chip, orange cranberry, blueberry, focaccia breads (pesto/onion, tomato herb), bagel sandwiches (ham & cheese, turkey & cheese, roast beef & cheese), bagel breakfast sandwiches (sausage & egg, sausage and cheese, egg & cheese), and sandwiches (ham & cheese, turkey & cheese, roast beef & cheese). For the school lunch program, the sandwiches must be made pursuant to the Food Buying Guide for Child Nutrition Programs. The Company's new product line has allowed it to expand the products it offers to its existing customers, primarily the school food market, and opened opportunities in new markets such as the military. With the new and expanded product line, the Company is not solely dependent upon the dipper product line. The dippers are a unique, creative, and specialized product the Company will continue to promote, produce, and market in the school food market. Dippy has two full-time employees and does not expect significant changes in the number of its employees. The accompanying unaudited consolidated financial statements have been assuming that the Company will continue as a going concern which contemplates the realization of the assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. However, the Company has had substantial operating losses and limited operating history resulting in an accumulated deficit of $2,276,450 since inception, negative working capital of $867,627, and a stockholder's deficit of $345,628 at October 31, 2001. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of those uncertainties. CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED OCTOBER 31, 2001 AND 2000 DIPPY FOODS, INC. FORM 10-QSB PAGE 3 OF 8 Actual Results For October 31, 2001 Compared to October 31, 2000 October 31 October 31 Percentage 2001 2000 change $ $ % -------------------------------------------------------------------------------- Revenues 143,320 15,289 837 Costs of goods sold 138,382 13,760 906 Gross Profit 4,938 1,529 223 Selling, general, & administrative expenses 191,675 142,340 35 Interest expense 6,701 15,255 (56) Net loss (193,438) (156,066) 24 -------------------------------------------------------------------------------- REVENUES Revenue increased $128,031 or 837% from $15,289 for the three month period ended October 31, 2000 to $143,320 for the same period ended October 31, 2001 primarily due to Dippy's new product line. The increase in sales was attributable to the sale of sandwiches and bagels. Revenue is expected to increase during fiscal 2002 due to the acquisition of AFFC and the introduction of the new product line which includes bagels, bagel sandwiches, scones, focaccia breads, bagel breakfast sandwiches, and sandwiches. The new product line has been well received and as also opened additional markets, primarily the military. COST OF SALES Cost of sales increased $124,622 or 906% from $13,760 for the three month period ended October 31, 2000 to $138,382 for the three month period ended October 31, 2001. As a percent of revenue, the gross margin decreased from 10% for the three month period ended October 31, 2000 to 3% for the same period ended October 31, 2001. These changes were primarily due to the increase in sales that required the purchase of more ingredients. Dippy also used a new co-packer for the production of its bagels and sandwiches. As a result the Company experienced a higher cost with respect to certain ingredients (specifically cream cheese) that the Company decided to absorb in order to develop and retain its new customer base. The Company is evaluating other vendors and alternatives for the higher priced ingredients. The ingredients must be acceptable to the customer base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses increased during the three month period ended October 31, 2001 from the three month period ended October 31, 2000 by $49,334 or 35% due primarily to an increase of (1) $24,445 in compensation for Advisory Board, (2) $12,000 in consulting, (3) $24,000 in amortization of distribution rights attributable to AFFC acquisition, (4) $2,384 in legal fees, and (5) $6,556 in rent offset by a decrease in (i) equipment purchases of $4,736, (ii) loan interest of $8,554, (iii) payroll of $9,650, (iv) office supplies of $1,491, (v) other expenses of $6,227, and (vi) travel and lodging of $1,391. With the exception of an increase in advertising expense for the launch of the new breakfast program, Dippy believes that its selling, general and administrative costs can remain fairly static and will decrease as a percentage of revenue as its sales volume grows. INTEREST EXPENSE Interest expense decreased from the three month period ended October 31, 2000 to the same period ended October 31, 2001 by $8,554 or 44% due primarily to a reduction in notes payable that have been converted to the Company's common stock. DIPPY FOODS, INC. FORM 10-QSB PAGE 4 OF 8 CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED OCTOBER 31, 2001 AND 2000 Actual Results For October 31, 2001 Compared to October 31, 2000 -------------------------------------------------------------------------------- October 31 October 31 Percentage 2001 2000 change $ $ % -------------------------------------------------------------------------------- Revenues 231,760 51,437 351 Costs of goods sold 204,882 41,146 398 Gross Profit 26,878 10,291 161 Selling, general, & administrative expenses 455,027 253,468 80 Interest expense 14,064 33,390 (42) Net loss (442,211) (276,567) 60 -------------------------------------------------------------------------------- REVENUES Revenue increased $180,323 or 351% from $51,437 for the six month period ended October 31, 2000 to $231,760 for the same period ended October 31, 2001 primarily due to Dippy's new product line. The increase in sales was attributable to the sale of sandwiches and bagels. Revenue is expected to increase during fiscal 2002 due to the acquisition of AFFC and the introduction of the new product line which includes bagels, bagel sandwiches, scones, focaccia breads, bagel breakfast sandwiches, and sandwiches. The new product line has been well received and as also opened additional markets, primarily the military. COST OF SALES Cost of sales increased $163,736 or 398% from $41,146 for the six month period ended October 31, 2000 to $204,882 for the six month period ended October 31, 2001. As a percent of revenue, the gross margin decreased from 20% for the six month period ended October 31, 2000 to 12% for the same period ended October 31, 2001. These changes were primarily due to the increase in sales that required the purchase of more ingredients. Dippy also used a new co-packer for the production of its bagels and sandwiches. As a result the Company experienced a higher cost with respect to certain ingredients (specifically cream cheese) that the Company decided to absorb in order to develop retain its customer base. The Company is evaluating other vendors and alternatives for the higher priced ingredients. The ingredients must be acceptable to the customer base. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses increased during the six month period ended October 31, 2001 from the six month period ended October 31, 2000 by $201,559 or 80% due primarily to an increase of (1) $77,778 in compensation for Advisory Board, (2) $34,000 in consulting, (3) $40,000 in amortization of distribution rights attributable to AFFC acquisition, and (4) $60,409 in legal fees, offset by a decrease in (i) rent of $7,695, (ii) loan interest of $19,355, (iii) equipment rental of $11,868, (iv) office supplies of $7,616, (v) repairs of $7,581, (vi) travel and lodging of $3,119 and (vii) cash discounts of $4,702. With the exception of an increase in advertising expense for the launch of the new breakfast program, Dippy believes that its selling, general and administrative costs can remain fairly static and will decrease as a percentage of revenue as its sales volume grows. INTEREST EXPENSE Interest expense decreased from the six month period ended October 31, 2000 to the same period ended October 31, 2001 by $19,326 or 42% due primarily to a reduction in notes payable that have been converted to the Company's common stock. DEFERRED TAX ASSETS Dippy has deferred tax assets of approximately $732,000 at October 31, 2001. Management has established a valuation allowance equal to the full amount of the deferred tax assets because Dippy's ability to use these losses is uncertain. The net operating losses incurred by the parent Dippy Foods, Inc. (Dippy Nevada) before the reverse merger on September 17, 1998, are limited annually due to the change of ownership (as defined in Section 382 of the Internal Revenue Code) that resulted from the reverse merger. The Issuer's unused annual limitations may be carried over to future years until the net operating losses expire. LIQUIDITY AND CAPITAL RESOURCES At October 31, 2001, Dippy had $0 cash, $431 bank overdraft, and a working capital deficit of $867,627. During the DIPPY FOODS, INC. FORM 10-QSB PAGE 5 OF 8 six-month period ended October 31, 2001, cash decreased by $553 and Dippy used $63,289 in operations, primarily due to the operating loss of Dippy of $492,211 and an increase in accounts payable and accruals of $125,270. A decrease in working capital of $106,970 was primarily due to a $7,909 decrease in inventory, and a $44,6460 increase in accounts receivable. Dippy generated $62,736 in financing activities, primarily due to net proceeds from the issuance of convertible notes payable of $53,960. Dippy has accumulated a deficit of $2,276,450 since inception and has a stockholders' deficit of $345,629 at October 31,2001. Dippy anticipates funding its working capital needs for the next twelve months through (1) the equity capital markets, (2) increased sales particularly with the addition of the breakfast line, (3) further reductions in overhead and cost of sales. Although the foregoing actions are expected to cover Dippy's anticipated cash needs for working capital and capital expenditures for at least the next twelve months, no assurance can be given that Dippy will be able to raise sufficient cash to meet these cash requirements. If unsucessful, the Company may be forced to curtail or cease its operations. Management plans to improve its cash flow and operating results by raising additional capital through private placements of stock and by increasing sales to a number of new school districts. Dippy cannot ensure, however, that these plans will be successful. Dippy is involved in two separate matters of litigation or potential litigation. Dippy believes that it will prevail in these matters. Dippy's lawyers estimate the potential costs associated with the litigation to be $35,000. Included in the cost of litigation is the settlement agreement with a former director. If Dippy does not prevail in this matter, cash flow will be immediately impaired by $100,000. See Item 1. Legal proceedings for more information. INTERNAL AND EXTERNAL SOURCES OF LIQUIDITY Dippy has funded its operations principally from borrowings secured by notes payable. DEBT INSTRUMENTS Dippy borrowed $265,940 from the lenders set out in the table below. Promissory Notes Payee Date Principal Sum ----------------------------------------------------------------------- Money Layer Ltd. May 18, 2000 $ 35,000 Money Layer Ltd. June 5, 2000 15,000 Money Layer Ltd. June 22, 2000 60,000 LeafPro Technology, Inc. November 17, 2000 25,000 Silverado Farms, Inc. November 24, 2000 25,000 Silverado Farms, Inc. December 22, 2000 6,000 Silverado Farms, Inc. January 12, 2001 5,000 Silverado Farms, Inc. January 24, 2001 8,000 Silverado Farms, Inc. January 31, 2001 8,000 Advance Resource Technologies March 27, 2001 24,980 Advance Resource Technologies May 7, 2001 10,980 Advance Resource Technologies May 17, 2001 7,980 Advance Resource Technologies July 25, 2001 10,000 Advance Resource Technologies August 3, 2001 19,000 Advance Resource Technologies September 4, 2001 6,000 -------- $265,940 Dippy gave a promissory note to each of the payees as evidence of the debt. The principal sum is due in 12 months from the date of the loan together with interest accrued on the outstanding principal balance at rates between 10% and 12% per annum. Dippy may pay the interest on the first day of the following month or may accrue the interest and pay it with the principal sum on the maturity date. Dippy may repay the principal sum and any accrued interest in whole or in part at any time without penalty. With any payment made, the funds will be applied first to unpaid interest. If Dippy becomes bankrupt or insolvent, or sells all its assets, or if a corporate event occurs (as defined in the promissory note) the debt is due and payable without demand. The lender may convert any portion of the outstanding debt or any portion of accrued interest into shares of Dippy at a price per share that is equal to the average closing price of Dippy's common stock from the date of the promissory note to the date of conversion. DIPPY FOODS, INC. FORM 10-QSB PAGE 6 OF 8 The following debt has been converted into shares of the Company's common stock: Lender Amount Accrued Interest Shares -------------------------------------------------------------------------------- Bellevue Investments, Ltd. $200,000 $25,385 360,615 Silverado Farms, Inc. $283,381 $47,950 710,631 Money Layer Ltd. $100,000 $12,621 270,074 LeafPro Technology, Inc. $ 47,486 $ 4,973 313,723* *LeafPro has requested that the debt and accrued interest be converted to shares. The shares were not issued as October 31, 2001. The shares were subsequently issued December 6, 2001. Jon Stevenson advanced the Company $30,426 by selling his personal shares in order to provide the Company working capital. INFLATION Dippy does not believe that inflation will have a material impact on its future operations. UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS This Form 10-QSB - Quarterly Report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by their use of words like "plans", "expect", "aim", "believe", ""projects", "anticipate", "intend", "estimate", "will", "should", "could" and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about Dippy's strategy for growth, product development, market position, expenditures and financial results are forward-looking statements. Forward-looking statements in this Form 10-QSB include statements regarding (1) expansion into the National School Breakfast and After School Snack Programs; (2) an expectation that revenue will increase during fiscal 2001; (3) the purchase, installation and operation of new processing equipment; (4) a reduction in cost of sales; (5) an expectation that selling, general and administrative costs will remain fairly static or decrease, with the exception of an expected increase in advertising; (6) the uncertainty of using deferred tax assets; (7) the outcome of pending litigation; and (8) inflation is not expected to have a material impact on future operations. All forward - looking statements are made as of the date of filing of this Form 10 -QSB and Dippy disclaims any duty to update such statements. Forward - looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including but not limited to, failure to obtain new processing equipment; general economic conditions particularly related to demand for Dippy's products; changes in business strategy; competitive factors (including the introduction or enhancement of competitive products); pricing pressures; changes in operating expenses; inability to attract or retain consulting, sales and/or development talent; changes in customer requirements; and/or evolving industry standards. Additional information concerning factors that could cause actual results to differ from those in the forward - looking statements is contained from time to time in Dippy's annual report on Form 10 -KSB for the 2001 fiscal year. Certain parts of this Form 10-QSB may contain "forward-looking statements" within the meaning of the Securities Exchange Act of 1934 based on current management expectations. Actual results could differ materially from those in the forward-looking statements due to a number of uncertainties, including, but not limited to, those discussed in this section. Factors that could cause future results to differ from these expectations include general economic conditions particularly related to demand for Dippy's services; changes in business strategy; competitive factors (including the introduction or enhancement of competitive services); pricing pressures; changes in operating expenses; inability to attract or retain consulting, sales and/or development talent; changes in customer requirements; and/or evolving industry standards. DIPPY FOODS, INC. FORM 10-QSB PAGE 7 OF 8 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Dippy is not a party to any pending legal proceedings, and to the best of Dippy's knowledge, none of Dippy's property or assets are the subject of any pending legal proceedings, except for the following: (a) Feedback Foundation, Inc. A dispute has arisen between Dippy and its former co-packer, Feedback Foundation, Inc., regarding two invoices totalling $49,620. The dispute arises from the spoilage of salsa used in the production of Nacho Dippers. Dippy's investigation revealed that the spoilage occurred while the salsa was being prepared for production. As a result of the quality control standards of Dippy, there was no consumption of the defective product. In the opinion of management, the preparation of the ingredients and the production of product are within the scope of the co-packer's control and responsibility. On March 16, 2001, the Company reached a settlement agreement with Feedback at no financial cost to the Company. (b) Al Diamond Dippy believes Mr. Diamond failed to perform his obligations under the Settlement Agreement and has taken the position that the Settlement Agreement with Mr. Diamond is null and void. Management has advised Mr. Diamond that no further payments will be forthcoming. Management is awaiting a response from Mr. Diamond. (c) Payroll Taxes Dippy owes payroll taxes in the amount of $10,821 including $1,277 in penalties and $213 in interest for the second and third quarters of 2001. The Internal Revenue Service has granted the Company an extension to January 5, 2002. ITEM 2. CHANGES IN SECURITIES. During the second quarter of the fiscal year covered by this report, (i) Dippy did not modify the instruments defining the rights of its shareholders, (ii) no rights of any shareholders were limited or qualified by any other class of securities, and (iii) Dippy did not sell any unregistered equity securities. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. During the second quarter of the fiscal year covered by this report, no material default has occurred with respect to any indebtedness of Dippy. Also during this quarter, there are no material dividend payments in arrears. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the second quarter of the fiscal year covered by this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K (a) EXHIBITS All Exhibits required have been filed with the Form 10-QSB and are incorporated by reference to Dippy's previously filed Form 10-SB and Form 10-KSB. (b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed by Dippy during the quarter ended October 31, 2001. DIPPY FOODS, INC. FORM 10-QSB PAGE 8 OF 8 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, Dippy has caused this report to be signed on its behalf by the undersigned, which are duly authorized. DIPPY FOODS, INC. By: /s/ Jon Stevenson ------------------------------------ Name: JON STEVENSON ------------------------------------ Title: DIRECTOR AND PRESIDENT ------------------------------------ Dated: DECEMBER 26, 2001 ------------------------------------ By: /s/ Munjit Johal ------------------------------------ Name: MUNJIT JOHAL ------------------------------------ Title: DIRECTOR AND CHIEF FINANCIAL OFFICER ------------------------------------ Date: DECEMBER 26, 2001 ------------------------------------ DIPPY FOODS, INC. CONSOLIDATED BALANCE SHEETS AS AT ASSETS October 31, 2001 April 30, 2001 ---------------- -------------- (Unaudited) (Audited) Current Assets: Cash $ -- $ 77 Restricted Cash -- $ 10,000 Accounts Receivable $ 46,004 $ 1,358 Inventory $ 48,778 $ 56,687 Prepaid Expenses $ 442 $ 2,042 ----------- ----------- Total Current $ 95,224 $ 70,164 Assets Fixed Assets, Net $ 10,787 $ 38,883 Deposits $ 77,526 $ 96,398 Distribution Rights, Net $ 440,000 $ -- ----------- ----------- Total Assets $ 623,537 $ 205,445 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Bank Overdraft $ 431 $ -- Accounts Payable $ 143,620 $ 98,173 Accrued Interest, related parties $ 22,031 $ 18,125 Accrued Expenses $ 202,829 $ 123,006 Convertible Notes Payable, related parties $ 187,000 $ 234,485 Convertible Notes Payable $ 78,940 $ 24,980 Current portion notes payable banks $ -- $ 4,053 Current portion settlement payable $ 328,000 $ 328,000 ----------- ----------- Total Current Liabilities $ 962,851 $ 830,822 Note payable bank, less current portion $ -- $ 21,605 Security Deposit, Sublease $ 6,314 $ -- ----------- ----------- Total Liabilities $ 969,165 $ 852,427 ----------- ----------- Stockholders' Deficit: Common stock authorized 200,000,000 shares, at $0.001 par value, 29,734,004 and 21,399,171 common shares issued and outstanding $ 29,734 $ 20,650 Additional paid-in capital $ 2,101,112 $ 1,166,607 Deferred compensation $ (295,555) $ -- Common stock subscribed $ 95,531 $ -- Accumulated deficit $(2,276,450) $(1,834,239) ----------- ----------- Total stockholders' deficit $ (345,628) $ (646,982) ----------- ----------- Total liabilities & total stockholders' deficit $ 623,537 $ 205,445 =========== ===========

DIPPY FOODS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended (Unaudited) (Unaudited) October 31, 2001 October 31, 2000 October 31, 2001 October 31, 2000 ---------------- ---------------- ---------------- ---------------- Revenues $ 143,320 $ 15,289 $ 231,760 $ 51,437 Cost of Goods Sold $ 138,382 $ 13,760 $ 204,882 $ 41,146 ------------ ------------ ------------ ------------ Gross Profit $ 4,938 $ 1,529 $ 26,878 $ 10,291 Selling, general and administrative expenses $ 191,675 $ 142,340 $ 455,027 $ 253,468 ------------ ------------ ------------ ------------ Loss from operations $ (186,737) $ (140,811) $ (428,147) $ (243,177) Interest Expense $ (6,701) $ (15,255) $ (14,064) $ (33,390) ------------ ------------ ------------ ------------ Net Loss $ (193,438) $ (156,066) $ (442,211) $ (276,567) ============ ============ ============ ============ Basic and diluted weighted average shares outstanding 27,559,700 19,579,266 27,559,700 19,579,266 ============ ============ ============ ============ Basic and diluted loss per share $ (0.01) $ (0.01) $ (0.02) $ (0.01) ============ ============ ============ ============

DIPPY FOODS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended Six Months Ended October 31, 2001 October 31, 2000 (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(442,211) $(276,567) Adjustment to reconcile net loss to net cash used in operating activities: Depreciation and amortization $ 4,094 $ 4,151 Amortization of distribution rights $ 40,000 Amortization of deferred compensation $ 77,778 Common stock issued or subscribed for services $ 97,327 Options issued for services rendered $ 36,000 -- Increase (decrease) from changes in: Accounts receivable $ (44,646) $ (366) Inventory $ 7,909 $ 4,019 Prepaid expenses $ 1,600 $ (1,436) Deposits $ 18,872 $ (14,307) Accounts payable and accruals $ 125,272 $ 116,025 Accrued interest, related parties $ 14,760 $ -- Security deposit $ -- $ 6,314 --------- --------- Net cash used in operating activities $ (63,245) $(162,167) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment $ -- $ (7,479) --------- --------- Net cash used in investing activities $ -- $ (7,479) --------- --------- Cash flows from financing activities: Restricted cash $ 10,000 $ 50,000 Bank Overdraft $ 432 $ 3,233 Line of credit $ -- $ (44,500) Convertible notes payable $ 53,960 $ 157,465 Principal payments on notes payable $ (1,656) $ (1,187) --------- --------- Net cash provided by financing activities $ 62,736 $ 165,011 Decrease in cash $ (509) $ (4,635) Cash, beginning of period $ 77 $ 4,635 --------- --------- Cash, end of period $ (432) $ -- ========= ========= Supplemental disclosure for statement of cash flows Cash paid during the period for Interest $ 14,064 $ 33,390

DIPPY FOODS, INC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT OCTOBER 31, 2001, AND OCTOBER 31, 2000 (UNAUDITED) NOTE 1 - GENERAL MATTERS Principles of Consolidation --------------------------- The accompanying financial statements include accounts of the parent company Dippy Nevada subsequent to September 17, 1998, and its subsidiaries Dippy California and Americas Favorite Foods Corp for all periods presented. All significant inter-company accounts and transactions have been eliminated in consolidation. Acquisition ----------- On May 25, 2001, the Company entered into a stock purchase agreement whereby the Company received all the outstanding common stock of Americas Favorite Foods Corp ("AFFC") in exchange for 8,000,000 shares of the Company's restricted common stock. AFFC had no assets, (except two distribution agreements, see below), liabilities or operations. The 8,000,000 shares were issued as to one third immediately. The remainder were issued and are held in trust and are to be released over two years based on service requirements of AFFC shareholders. Accordingly, the 2,666,667 shares that were issued immediately were recorded at a fair value of $0.18 per share, based on the market price for the Company's common stock at the date of acquisition, and recognized as Distribution Rights to be amortized over five years. The remaining 5,333,333 shares to be earned over a two-year period were recorded at the date of acquisition as deferred compensation to be expensed as the services are rendered. Distribution Rights ------------------- AFFC owns Korean distribution rights to numerous US branded food products. There has been no revenue associated with these distribution rights. There is inherent uncertainty that the Company will realize its carrying value of such distribution rights from future operations. Going Concern ------------- The accompanying consolidated financial statements have been prepared assuming Dippy will continue as a going concern, which contemplates the realization of the assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to present realizable or settlement values. However, Dippy has limited operating history resulting in an accumulated deficit of $2,276,450 since inception, negative working capital of $867,628 and a stockholders' deficit of $345,628 at October 31, 2001. These conditions raise substantial doubt about Dippy's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of those uncertainties. Interim Financial Statements ---------------------------- The financial statements for the three-months and six-months ended October 31, 2001 and October 31, 2000 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operation for this interim period. The results of operations for the three-month period and six-month period ended October 31, 2001 are not necessarily indicative of the results to be expected for any other interim period or the entire year. NOTE 2 - CONVERTIBLE NOTES PAYABLE Convertible debt consists of $265,940 in notes payable bearing interest at rates between 10% and 12%, payable monthly, unsecured, due at various dates between May 18, 2001 and September 4, 2002 and convertible at the option of the payee into shares of the Company's common stock at a per share price equal to the average closing price of the Company's stock from the date of the note to the date of conversion. The debt holder of convertible notes payable maturing in November and December 2001 have informed the Company that they plan on converting the debt to common stock of the Company. During the period ending Oct. 31, 2001 $47,485 plus $4,973 of interest were converted to 313,723 shares of subscribed common stock. DIPPY FOODS INC NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 2001 AND 2000 (UNAUDITED) NOTE 3 - MAJOR CUSTOMERS AND SUPPLIERS The following table is a listing of all customers with sales exceeding 10% of total revenue. Six Months Ended Six Months Ended Customer October 31, 2001 October 31, 2000 ---------------------------------------------------- A -- 19% B -= 17% C 74% -- D 20% -- The following table is a listing of all vendors with purchases exceeding 10% of total cost of goods sold. Six Months Ended Six Months Ended Vendor October 31, 2001 October 31, 2000 ---------------------------------------------------- A -- 42% B -- 30% C -- 18% D 53% -- E 19% -- NOTE 4 - RELATED PARTY TRANSACTIONS One of the Company's stockholders immediate family is a member of the Company's outside legal firm. The Company incurred legal fees to that law firm during fiscal 2001 and 2000 totaling approximately $10,000 and $57,000, respectively. In April 2001, the outside law firm elected to convert approximately $72,000 of accrued amounts due from the Company into 478,585 shares of the Company's common stock. During fiscal 2001, the Company incurred $72,485 of convertible debt, this entire amount has subsequently been converted into the Company's common stock ($47,485 through October 31, 2001), from a firm owned by a family member of an officer of the Company and $162,000 of convertible debt from current stockholders. The convertible debt bears interest at 10% to 12%, payable monthly, is unsecured, due at various dates between May 2001 and January 2002, and is convertible at the option of the payee into shares of the Company's common stock at a per share price equal to the average closing price of the Company's stock from the date of the note to the date of conversion. The debt holders of the convertible debt maturing in May and June 2001 have informed the Company that they plan on converting the debt to common stock. NOTE 5 - PAYROLL TAXES Dippy owes payroll taxes in the amount of $10,821 including $1,277 in penalties and $212.55 in interest for the second and third quarters of 2001. The Internal Revenue Service has granted the Company an extension. NOTE 6 - EMPLOYMENT AGREEMENTS On May 2, 2001, the Company entered into employment agreements with three of its employees. The employment agreements include, among other things, minimum annual salaries, which may be paid or common stock at the election of the Company, with annual cost of living increases, agreement to issue common stock and immediate grants for options to purchase the Company's common stock at the then current market price. Additionally, the Company has agreed to 500,000 shares of common stock annually to the president and CEO if the Company increases gross sales by 20% from the previous year. The term of the employment agreements are three years before automatic one year renewals unless cancelled by either party. The options granted will vest in equal increments over a four-year period. Each option shall expire ten years from the grant date. The exercise price for each share of common stock is $0.15. The annual future minimum compensation, common stock and stock options granted and vesting under the employment agreements are as follows: Stock Options ------------- Common Fiscal Year Salaries Stock Granted Vesting ----------- -------- ------ ------- ------- 2002 $ 84,000 500,000 2,000,000 500,000 2003 $ 84,000 -- -- 500,000 2004 $ 84,000 -- -- 500,000 2005 -- -- -- 500,000 -------- ------- --------- --------- $252,000 500,000 2,000,000 2,000,000 ======== ======= ========= ========= NOTE 7 - COMMON STOCK ISSUED OR SUBSCRIBED FOR SERVICES RENDERED In October 2001, the Company has agreed to issue 957,163 shares of its common stock to a law firm for $43,072 of legal services accrued. NOTE 8 - OPTIONS During the six months ended October 31, 2001, the Company granted 800,000 options to purchase shares of the Company's stock to non-employees. The purchase price of the options are $0.06, have a term of three years and vest immediately. The Company recorded compensation expense in the amount of $36,000 relevant to these options.

DIPPY FOODS INC 10-Q