Attached files
file | filename |
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EX-31.2 - DRINKS AMERICAS HOLDINGS, LTD | v177959_ex31-2.htm |
EX-32.1 - DRINKS AMERICAS HOLDINGS, LTD | v177959_ex32-1.htm |
EX-31.1 - DRINKS AMERICAS HOLDINGS, LTD | v177959_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
For
the quarterly period ended January 31, 2010
|
|
OR
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the transition period from _______________ to
____________
|
Commission File Number:
33-55254-10
Drinks
Americas Holdings, Ltd.
(Exact
name of registrant as specified in its charter)
Delaware
|
87-0438825
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
372
Danbury Road
|
|
Wilton,
CT
|
06897
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(203)
762-7000
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No o
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 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
|
¨
Accelerated filer
|
¨
Non-accelerated filer
|
x
Smaller reporting company
|
|
|
(Do not check if smaller reporting
company)
|
|
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
March 18, 2010, the number of shares outstanding of the registrant’s common
stock, $0.001 par value, was 223,199,551.
DRINKS
AMERICAS HOLDINGS, LTD
AND
AFFILIATES
FORM
10-Q
FOR THE
PERIOD ENDED JANUARY 31, 2010
TABLE OF
CONTENTS
Page
|
||
PART
I
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
Consolidated
Balance Sheets
|
1
|
|
Consolidated
Statements of Operations
|
2
|
|
Consolidated
Statements of Cash Flows
|
3
|
|
Notes
to Consolidated Financial Statements
|
4
|
|
Item
2.
|
Management
Discussion and Analysis of Financial Condition And Results of
Operations
|
21
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
27
|
Item
4
|
Controls
and Procedures
|
27
|
PART
II
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
28
|
Item
1A.
|
Risk
Factors
|
29
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
Item
4.
|
(Removed
and Reserved)
|
30
|
Item
5.
|
Other
Information
|
30
|
Item
6.
|
Exhibits
|
30
|
EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Report on Form 10-Q to "we", "us", "our" and the “Company” are to Drinks
Americas Holdings, Ltd., a Delaware corporation and formerly Gourmet Group,
Inc., a Nevada corporation, and its majority owned subsidiaries Drinks Americas,
Inc., Drinks Global Imports, LLC, and D.T. Drinks, LLC, and
Maxmillian Mixers, LLC, and Maxmillian Partners, LLC and Olifant,
USA.
Cautionary
Notice Regarding Forward Looking Statements
The
disclosure and analysis in this Report contains some forward-looking statements.
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance and financial condition, in
particular, future sales, product demand, competition and the effect of economic
conditions include forward-looking statements within the meaning of section 27A
of the Securities Act of 1933, referred to herein as the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, referred to herein as the
Exchange Act.
Statements
that are predictive in nature, that depend upon or refer to future events or
conditions or that include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates" and similar expressions, are forward-looking
statements. Although we believe that these statements are based upon reasonable
assumptions, including projections of orders, sales, operating margins,
earnings, cash flow, research and development costs, working capital, capital
expenditures, distribution channels, profitability, new products, adequacy of
funds from operations and other projections, and statements expressing general
optimism about future operating results, and non-historical information, they
are subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Readers
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As for
the forward-looking statements that relate to future financial results and other
projections, actual results will be different due to the inherent uncertainty of
estimates, forecasts and projections and may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent our
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and the
estimates and assumptions associated with them, after the date of this filing to
reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events.
We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our Company's historical
experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described in Part II, "Item
1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form
10-K for the year ended April 30, 2009, and those described from time to time in
our future reports filed with the Securities and Exchange
Commission. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
PART
1 - FINANCIAL INFORMATION
Item
1. Financial Statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
BALANCE SHEETS
JANUARY 31,
2010
|
APRIL 30,
2009
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and equivalents
|
$
|
27,433
|
$
|
30,169
|
||||
Accounts
receivable, net of allowances of $111,876 and $128,751,
respectively
|
199,101
|
41,796
|
||||||
Due
from factors
|
—
|
31,786
|
||||||
Inventories,
net of allowance
|
764,119
|
1,204,266
|
||||||
Other
current assets
|
311,161
|
374,671
|
||||||
Total
current assets
|
1,301,814
|
1,682,688
|
||||||
Property
and equipment, at cost less accumulated depreciation and
amortization
|
29,689
|
58,900
|
||||||
Investment
in equity investees
|
73,593
|
73,916
|
||||||
Intangible
assets, net of accumulated amortization of $370,714 and $245,678,
respectively
|
1,768,014
|
1,892,650
|
||||||
Deferred
loan costs, net of accumulated amortization of $391,956 and $335,452,
respectively
|
642,387
|
—
|
||||||
Note
receivable, net
|
190,026
|
—
|
||||||
Other
assets
|
51,340
|
467,912
|
||||||
$
|
4,056,863
|
$
|
4,176,066
|
|||||
Liabilities
and Shareholders' Deficiency
|
||||||||
Notes
and loans payable
|
$
|
630,814
|
$
|
799,329
|
||||
Loan
Payable – related party
|
280,845
|
305,935
|
||||||
Accounts
payable
|
2,394,130
|
2,746,181
|
||||||
Accrued
expenses
|
3,763,642
|
2,900,425
|
||||||
Total
current liabilities
|
7,069,431
|
6,751,870
|
||||||
Long-term
debt, less current maturities
|
400,000
|
600,000
|
||||||
7,469,431
|
7,351,870
|
|||||||
Commitments
and Contingencies (Note 16)
|
||||||||
Shareholders'
deficiency:
|
||||||||
Preferred stock,
$0.001 par value; 1,000,000 shares authorized; issued and outstanding
11,000 and 10,644 Series A shares, respectively (redemption
value $11,000,000 and $10,664,000, respectively). 13.8370 Series B
Preferred shares, $10,000 per share issued and outstanding) See
– Note 11)
|
138,381
|
11
|
||||||
Common
stock, $0.001 par value; 500,000,000 and 100,000,000, respectively,
authorized; issued and outstanding 174,679,869 shares and 87,662,383
shares, respectively
|
174,680
|
87,662
|
||||||
Treasury
stock, 26,075,000 and 0 shares held, respectively
|
—
|
|||||||
Additional
paid-in capital
|
38,171,644
|
34,206,433
|
||||||
Accumulated
deficit
|
(42,015,466
|
)
|
(37,600,854
|
)
|
||||
Shareholders' deficiency – controlling interest |
(3,530,761
|
)
|
(3,306,748
|
)
|
||||
Non-controlling
Interests
|
118,193
|
130,944
|
||||||
$
|
4,056,863
|
$
|
4,176,066
|
See notes
to unaudited consolidated financial statements
1
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Nine months ended
|
Three months ended
|
|||||||||||||||
January 31,
|
January 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$
|
846,020
|
$
|
2,214,710
|
$
|
396,742
|
$
|
565,153
|
||||||||
Cost
of sales
|
609,256
|
1,689,835
|
287,547
|
419,802
|
||||||||||||
Gross
margin
|
236,764
|
524,875
|
109,195
|
145,351
|
||||||||||||
Selling,
general & administrative expenses
|
3,840,716
|
4,366,544
|
630,659
|
1,659,960
|
||||||||||||
Loss
from Operations
|
(3,603,952
|
)
|
(3,841669
|
)
|
(521,464
|
)
|
(1,514,609
|
)
|
||||||||
Other
income (expense):
|
||||||||||||||||
Interest
|
(906,888
|
)
|
(122,515
|
)
|
(389,404
|
)
|
34,629
|
|||||||||
Other
|
96,228
|
409,000
|
12,751
|
409,000
|
||||||||||||
Net
Other Expense
|
(810,660
|
)
|
286,485
|
(376,653
|
)
|
443,629
|
||||||||||
Net
Loss
|
$
|
(4,414,612
|
)
|
$
|
(3,555,184
|
)
|
$
|
(898,117
|
)
|
$
|
(1,070,980
|
)
|
||||
Net
loss per share (basic and diluted)
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
||||
Weighted
average number of common shares (basic
and diluted)
|
110,322,344
|
82,924616
|
138,832,992
|
85,747,065
|
See notes to unaudited
consolidated financial statements
2
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine
months ended January 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
loss
|
$
|
(4,414,612
|
)
|
$
|
(3,555,184
|
)
|
||
Adjustments
to reconcile net loss to net cash used in
operating
activities:
|
|
|
|
|
|
|
||
Depreciation
and amortization
|
545,803
|
313,376
|
||||||
Addition
to inventory allowance
|
271,116
|
—
|
||||||
Stock
and warrants issued for services of vendors, promotions, directors and
interest payments
|
1,157,805
|
167,356
|
||||||
Noncontrolling
interest in net loss of consolidated subsidiary
|
(12,751 | ) | ||||||
Reduction
in note receivable
|
828,547
|
|||||||
Accounts
payable settlements
|
270,298
|
|||||||
Gain
on extinguishment of debt
|
—
|
(409,000
|
) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(157,305
|
)
|
179,038
|
|||||
Due
from factor
|
31,786
|
—
|
||||||
Inventories
|
169,031
|
671,520
|
||||||
Other
current assets
|
62,075
|
92,125
|
||||||
Other
assets
|
353,569
|
—
|
||||||
Accounts
payable
|
(431,029
|
)
|
443,315
|
|||||
Accrued
expenses
|
1,051,467
|
1,392,447
|
||||||
Net
cash used in operating activities
|
(274,200
|
)
|
(705,007
|
)
|
||||
Cash
Flows From Investing Activities:
|
||||||||
Cash
assumed of acquired business - Net cash provided by investing
activities
|
—
|
17,150
|
||||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from issuance of common stock
|
—
|
717,926
|
||||||
Proceeds
from issuance of preferred stock
|
138,370
|
|||||||
Proceeds
from issuance of debt
|
674,408
|
152,555
|
||||||
Repayment
of debt
|
(541,314
|
)
|
(89,923
|
)
|
||||
Decrease
in working capital facility
|
—
|
(179,437
|
)
|
|||||
Payments
for loan costs
|
(25,000
|
) | ||||||
Net
cash provided by financing activities
|
271,464
|
576,121
|
||||||
Net
decrease in cash and equivalents
|
(2,736
|
)
|
(111,736
|
)
|
||||
Cash
and equivalents - beginning
|
30,169
|
133,402
|
||||||
Cash
and equivalents - ending
|
$
|
27,433
|
$
|
21,666
|
||||
Supplemental
disclosure of non-cash investing and financing
transactions:
|
||||||||
Increase
in other current assets, other assets and additional paid in
capital equal to the value of stock and warrants
issued
|
$
|
210,000
|
$
|
124,000
|
||||
Increase
in other current assts equal to increase in notes payable
|
$
|
100,000
|
$
|
—
|
||||
Increase
in notes receivable equal to increase in notes payable
|
$
|
2,400,000
|
$
|
—
|
||||
Increase
in deferred charges equal to decrease in notes receivable,
net
|
$
|
1,316,908
|
$
|
—
|
||||
Accrued
interest capitalized to debt principal
|
$
|
204,293
|
$
|
—
|
||||
Satisfaction
of note payable by issuance of common stock
|
$
|
1,278547
|
$
|
—
|
||||
Payment
of accounts payable and accrued expenses with shares of common
stock
|
$
|
700,302
|
$
|
153,000
|
||||
Interest
paid
|
$
|
503
|
$
|
49,666
|
||||
Income
taxes paid
|
$
|
|
$
|
—
|
||||
Acquisition
of business:
|
||||||||
Current
assets less current liabilities
|
$ | (138,237 | ) | |||||
Intangible
assets
|
1,333,333 | |||||||
Minority
interest
|
(133,333 | ) | ||||||
Payable
to sellers
|
(1,061,763 | ) | ||||||
$ | — | |||||||
See notes
to unaudited consolidated financial statements
3
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation and
Nature of Business
Basis
of Presentation
On March
9, 2005 the shareholders of Drinks Americas, Inc. ("Drinks") a company engaged
in the business of importing and distributing unique, premium alcoholic and
non-alcoholic beverages associated with icon entertainers, sports figures,
celebrities and destinations, to beverage wholesalers throughout the United
States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings").
Holdings and Drinks was incorporated in the state of Delaware on February 14,
2005 and September 24, 2002, respectively. On March 9, 2005 Holdings merged with
Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which
resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in
exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were
considered "shell" corporations, as Gourmet had no operating business on the
date of the share exchange, or for the previous three years. Pursuant to the
June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the
Drinks' shareholders, Holdings, with approximately 4,058,000 shares of
outstanding common stock, issued approximately 45,164,000 of additional shares
of its common stock on March 9, 2005 (the "Acquisition Date") to the common
shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers,
LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and
Mixers' membership units, respectively. As a result Maxmillian Partners, LLC
("Partners") a holding company which owned 99% of Drinks' outstanding common
stock and approximately 55% of Mixers' outstanding membership units, became
Holdings' controlling shareholder with approximately 87% of Holdings'
outstanding common stock. For financial accounting purposes this business
combination has been treated as a reverse acquisition, or a recapitalization of
Partners' subsidiaries (Drinks and Mixers).
Subsequent
to the Acquisition Date, Partners, which was organized as a Delaware limited
liability company on January 1, 2002 and incorporated Drinks in Delaware on
September 24, 2002, transferred all its shares of holdings to its members as
part of a plan of liquidation.
On March
11, 2005 Holdings and an individual organized Drinks Global, LLC ("DGI").
Holdings own 90% of the membership units and the individual, who is the
president of DGI, owns 10%. DGI's business is to import wines from various parts
of the world and sell them to distributors throughout the United States. In May
2006 Holdings organized D.T. Drinks, LLC ("DT Drinks") a New York limited
liability company for the purpose of selling certain alcoholic
beverages.
On
January 15, 2009 Drinks acquired 90% of Olifant U.S.A Inc. (“Olifant”), a
Connecticut corporation, which owns the trademark and brand names and holds the
worldwide distribution rights (excluding Europe) to Olifant Vodka and
Gin.
Our
license agreement with respect to Kid Rock’s BadAss Beer and related trademarks
currently requires payments to Drinks Americas based upon volume through the
term of the agreement.
The
accompanying consolidated balance sheets as of January 31,2010 and
April 30, 2009, the consolidated cash flows for the nine months ended January
31, 2010 and 2009 and the consolidated results of operations for the nine and
three months ended January 31, 2010 and 2009 reflect Holdings majority-owned
subsidiaries and Partners (collectively, the "Company"). All intercompany
transactions and balances in these financial statements have been eliminated in
consolidation. The amount of common and preferred shares authorized, issued and
outstanding as of January 31, 2010 and April 30, 2009 are those of
Holdings.
The
accompanying unaudited consolidated financial statements have been prepared on a
basis that assumes the Company will continue as a going concern. As
of January 31, 2010, the Company has a shareholders' deficiency
of $3,530,761 and has incurred significant operating losses and
negative cash flows since inception. For the nine months ended January 31, 2010,
the Company sustained a net loss of $4,414,612 and used $274,200 in
operating activities. We will need additional financing which may take the form
of equity or debt and we will seek to convert liabilities into
equity. We anticipate that increased sales revenues will help to some
extent. In the event we are not able to increase our working capital, we will
not be able to implement or may be required to delay all or part of our business
plan, and our ability to attain profitable operations, generate positive cash
flows from operating and investing activities and materially expand the business
will be materially adversely affected. The accompanying unaudited consolidated
financial statements do not include any adjustments relating to the
classification of recorded asset amounts or amounts and classification of
liabilities that might be necessary should the company be unable to continue in
existence.
4
In the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position of the Company as of January
31, 2010 and April 30, 2009, its results of operations for the nine
and three months ended January 31, 2010 and 2009 and its cash flows for the nine
months ended January 31, 2010 and 2009. Pursuant to the rules and regulations of
the SEC for the interim financial statement, certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
from these financial statements unless significant changes have taken place
since the end of the most recent fiscal year. Accordingly, these unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the other information in the Form
10-K.
Nature
of Business
Through
our majority-owned subsidiaries, Drinks, DGI, DT Drinks and Olifant we
import, distribute and market unique premium wine and spirits and alcoholic
beverages associated with icon entertainers, celebrities and destinations,
to beverage wholesalers throughout the United States and
internationally.
On
February 11, 2010, the Company signed an agreement with Mexcor, Inc., an
importer and distributor for hundreds of high quality brands nationally and
internationally. Mexcor has agreed to manage the sourcing, importing and
distribution of our portfolio of brands nationally. Our Company will continue to
focus its efforts on its core business of marketing and building a portfolio of
iconic brands as well as developing, coordinating and executing marketing and
promotional strategies for its icon brands. We anticipate that the agreement
with Mexcor will rapidly drive additional royalty revenues and substantially
reduce our overhead costs.
Under the
terms of the agreement, the parties have agreed to a 15-year term. Additionally,
the Company has agreed to issue the principal of the business 12 million shares
of Company common stock in exchange for consulting services. Mexcor is
eligible to receive financial incentives provided the parties deliver and attain
certain minimum performance requirements. Mexcor has agreed to
deliver additional new brands to the Company’s brand portfolio, which the
companies plan to jointly acquire, develop and market.
The
overhead reductions we put in place in our second quarter, through decreased
administrative support staff and the resulting lower payroll and payroll related
and travel expenses were mostly realized in the three months ended January
31, 2010 and we expect they will continue to be realized into the fourth quarter
and beyond as we continue to refine and restructure our operating business
model.
2. Critical Accounting
Policies and Estimates
Significant
Accounting Policies
We
believe the following significant accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of the consolidated financial statements:
Revenue
Recognition
The
Company recognizes revenues when title passes to the customer, which is
generally when products are shipped. The Company recognizes royalty revenue
based on its license agreements with its distributors which typically is the
greater of either the guaranteed minimum royalties payable under our license
agreement or a royalty rate computed on the net sales of the distributor
shipments to its customers.
The
Company recognizes revenue dilution from items such as product returns,
inventory credits, discounts and other allowances in the period that such items
are first expected to occur. The Company does not offer its clients the
opportunity to return products for any reason other than manufacturing defects.
In addition, the Company does not offer incentives to its customers to either
acquire more products or maintain higher inventory levels of products than they
would in ordinary course of business. The Company assesses levels of inventory
maintained by its customers through communications with them. Furthermore, it is
the Company's policy to accrue for material post shipment obligations and
customer incentives in the period the related revenue is
recognized.
Accounts
Receivable
Accounts
receivable are recorded at original invoice amount less an allowance for
uncollectible accounts that management believes will be adequate to absorb
estimated losses on existing balances. Management estimates the allowance based
on collectability of accounts receivable and prior bad debt experience. Accounts
receivable balances are written off upon management's determination that such
accounts are uncollectible. Recoveries of accounts receivable previously written
off are recorded when received. Management believes that credit risks on
accounts receivable will not be material to the financial position of the
Company or results of operations at January 31, 2009 and April 30, 2009 the
allowance for doubtful accounts was $ 111,876 and $128,751,
respectively.
Inventories
Inventories
are valued at the lower of cost or market, using the first-in first-out cost
method. The Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of the
Company’s forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analysis and
assumptions including, but not limited to, historical usage, expected future
demand and market requirements. A change to the carrying value of inventories is
recorded to cost of goods sold.
5
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amounts of such assets may not be
recoverable. The Company's policy is to record an impairment loss at each
balance sheet date when it is determined that the carrying amount may not be
recoverable. Recoverability of these assets is based on undiscounted future cash
flows of the related asset. The Company concluded that there were no impairments
for the nine months ended January 31, 2010 and for the year ended
April 30, 2009, respectively.
Deferred
Charges and Intangible Assets
The costs
of intangible assets with determinable useful lives are amortized over their
respectful useful lives and reviewed for impairment when circumstances warrant.
Intangible assets that have an indefinite useful life are not amortized until
such useful life is determined to be no longer indefinite. Evaluation of the
remaining useful life of an intangible asset that is not being amortized must be
completed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. Indefinite-lived intangible
assets must be tested for impairment at least annually, or more frequently if
warranted. Intangible assets with finite lives are generally amortized on a
straight line bases over the estimated period benefited. The costs of trademarks
and product distribution rights are amortized over their related useful lives of
between 15 to 40 years. We review our intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable, in which case an impairment charge is recognized
currently.
Deferred
financing costs are amortized ratably over the life of the related debt. If debt
is retired early, the related unamortized deferred financing costs are written
off in the period debt is retired.
Income
Taxes
The
Company the asset and liability method of deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax laws is
recognized in the results of operations in the period the new laws are
enacted. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless, it is more likely than not,
that such assets will be realized.
Stock
Based Compensation
The
Company accounts for stock-based compensation using the modified prospective
approach. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity based compensation issued to
employees and non employees.
Earnings
Per Share
The
Company computes earnings per share whereby basic earnings per share is computed
by dividing net income (loss) attributable to all classes of common shareholders
by the weighted average number of shares of all classes of common stock
outstanding during the applicable period. Diluted earnings per share is
determined in the same manner as basic earnings per share except that the number
of shares is increased to assume exercise of potentially dilutive and
contingently issuable shares using the treasury stock method, unless the effect
of such increase would be anti-dilutive. For the nine months ended January 31,
2010 and 2009, the diluted earnings per share amounts equal basic earnings per
share because the Company had net losses and the impact of the assumed exercise
of contingently issuable shares would have been anti-dilutive.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent
accounting pronouncements
Accounting Standards
Codification and GAAP Hierarchy (“ASC”) ASC 105-10. Effective for interim and annual
periods ending after September 15, 2009, the Accounting Standards
Codification and related disclosure requirements issued by the FASB became the
single official source of authoritative, nongovernmental GAAP. The ASC
simplifies GAAP, without change, by consolidating the numerous, predecessor
accounting standards and requirements into logically organized topics. All other
literature not included in the ASC is non-authoritative. We adopted the ASC as
of September 30, 2009, which did not have any impact on our results of
operations, financial condition or cash flows as it does not represent new
accounting literature or requirements. All references to pre-codified
U.S. GAAP have been removed from this Form 10Q.
6
Determining Fair Value in Inactive
Markets (ASC 820); Effective for interim and annual periods
beginning after June 15, 2009, GAAP established new accounting standards for
determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and the identifying transactions are not
orderly. The new standards apply to all fair value measurements when
appropriate. Among other things, the new standards:
•
|
affirm
that the objective of fair value, when the market for an asset is not
active, is the price that would be received in a sale of the asset in an
orderly transaction;
|
•
|
clarify
certain factors and provide additional factors for determining whether
there has been a significant decrease in market activity for an asset when
the market for that asset is not
active;
|
•
|
provide
that a transaction for an asset or liability may not be presumed to be
distressed (not orderly) simply because there has been a significant
decrease in the volume and level of activity for the asset or liability,
rather, a company must determine whether a transaction is not orderly
based on the weight of the evidence, and provide a non-exclusive list of
the evidence that may indicate that a transaction is not orderly;
and
|
•
|
require
disclosure in interim and annual periods of the inputs and valuation
techniques used to measure fair value and any change in valuation
technique (and the related inputs) resulting from the application of the
standard, including quantification of its effects, if
practicable.
|
These new
accounting standards must be applied prospectively and retrospective application
is not permitted. See Note __ for disclosure of our fair value
measurements.
Financial
Instruments (ASC 825-10); Effective for interim and annual
periods ending after June 15, 2009, GAAP established new disclosure
requirements for the fair value of financial instruments in both interim and
annual financial statements. Previously, the disclosure was only required
annually. We adopted the new requirements as of September 30, 2009, which
resulted in no change to our accounting policies, and had no effect on our
results of operations, cash flows or financial position, but did result in the
addition of interim disclosure of the fair values of our financial instruments.
See Note 4 for disclosure of the fair value of our debt.
Subsequent Events (ASC
855-10); Effective for interim and annual periods ending after
June 15, 2009, GAAP established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The new
requirements do not change the accounting for subsequent events; however, they
do require disclosure, on a prospective basis, of the date an entity has
evaluated subsequent events. We adopted these new requirements as of September
30, 2009, which had no impact on our results of operations, financial condition
or cash flows.
Consolidation (ASC 810
Effective for interim and annual periods beginning after November 15, 2009,
with earlier application prohibited, GAAP amends the current accounting
standards for determining which enterprise has a controlling financial interest
in a Variable Interest Entity (“VIE”) and amends guidance for determining
whether an entity is a VIE. The new standards will also add reconsideration
events for determining whether an entity is a VIE and will require ongoing
reassessment of which entity is determined to be the VIE’s primary beneficiary
as well as enhanced disclosures about the enterprise’s involvement with a VIE.
We are currently assessing the future impact these new standards will have on
our results of operations, financial position or cash flows.
Transfers and
Servicing — Effective for interim and annual periods beginning after
November 15, 2009, GAAP eliminates the concept of a qualifying special
purpose entity, changes the requirements for derecognizing financial assets and
requires additional disclosures. We are currently assessing the future impact
these new standards will have on our results of operations, financial position
or cash flows.
3. Due From
Factors
As
of January 31, 2010 and April 30, 2009, Due From Factors consist of the
following:
January 31,
|
April 30,
|
|||||||
2010
|
2009
|
|||||||
Accounts
receivable
|
$
|
—
|
$
|
153,444
|
||||
Advances
|
—
|
(118,191
|
)
|
|||||
Allowances
|
—
|
3,467
|
||||||
|
$
|
—
|
$
|
31,786
|
7
The Company has an agreement with
a factor entered into April 2009, pursuant to which a substantial
portion of the Company’s accounts receivable is sold to the factor with recourse
to bad debts and other customer claims. The Company receives a
cash advance equal to 80% of the invoice amount and is paid the balance of the
invoice less fees incurred at the time the factor receives the final payment
from the customer. The factor fee is 1.75% for the first 30 days the invoice
remains unpaid and 0.07% for each day thereafter. The facility shall remain open
until a 30 day notice by either party of termination of the
agreement. The facility is collateralized
by all assets of the Company. The Company also had an agreement
with a second factor which was terminated in August 2009.
4.
Inventories
As
of January 31, 2010 and April 30, 2009, Inventories consist
of the following:
|
|
January 31, 2010
|
|
|
April 30, 2009
|
|||
Finished
goods
|
$
|
189,551
|
$
|
518,489
|
||||
Raw
materials
|
574,569
|
685,777
|
||||||
$
|
764,119
|
$
|
1,204,266
|
All raw
materials used in the production of the Company's inventories are purchased by
the Company and delivered to independent production contractors.
5. Other Current
Assets
As of
January 31, 2010 and April 30, 2009, Other Current Assets consist of the
following:
|
January 31, 2010
|
April 30, 2009
|
||||||
Prepaid
inventory purchases
|
$
|
250,359
|
$
|
315,592
|
||||
Other
|
60,801
|
59,079
|
||||||
$
|
311,160
|
$
|
374,671
|
6. Note
receivable
On June
19, 2009, (the "Closing Date") we sold to one investor (the “Investor”) a
$4,000,000 non-interest bearing debenture with a 25% ($1,000,000) original issue
discount, that matures in 48 months from the Closing Date (the Drink’s
Debenture) for $3,000,000, consisting of $375,000 paid in cash at closing and
eleven secured promissory notes, aggregating $2,625,000, bearing interest at the
rate of 5% per annum, each maturing 50 months after the Closing Date (the
“Investor Notes”). The Investor Notes, the first ten of which are in
the principal amount of $250,000 and the last of which is in the principal
amount of $125,000, are mandatorily pre-payable, in sequence, at the rate
of one note per month commencing on January 19, 2010, subject to certain
contingencies. If the prepayment occurs, the entire aggregate
principal balance of the Investor Notes in the amount of $2,625,000 (less the
$200,000 August prepayment) together with the interest outstanding thereon,
will be paid in eleven monthly installments (ten in the amount of $230,000 and
one the amount of $125,000) such that the entire amount would be paid to us by
November 26, 2010. As a practical matter, the interest rate on the
Investor Notes serves to lessen the interest cost inherent in the original issue
discount element of the Drinks Debenture. For the mandatory prepayment to occur,
no Event of Default or Triggering Event as defined under the Drinks Debenture
shall have occurred and be continuing and the outstanding balance due under the
Drinks Debenture must have been reduced to $3,500,000 on January 19, 2009 and be
reduced at the rate of $333,334 per month thereafter. Due to the uncertainty of
the mandatory prepayments by the Investor, the note receivable has been
classified as a long term asset as of January 31, 2010.
One of
the Triggering Events includes the failure of the Company to maintain an average
daily dollar volume of common stock traded per day for any consecutive 10-day
period of at least $10,000 or if the average value of the shares pledged to
secure the Company’s obligation under the Drinks Debenture (as subsequently
described) falls below $1,600,000.
Under the
Drinks Debenture, commencing six months after the Closing Date, the Investor may
request the Company to repay all or a portion of the Drinks Debenture by issuing
the Company’s common stock, $0.001 par value, in satisfaction of all or part of
the Drinks Debenture, valued at the Market Price,(as defined in the Drinks
Debenture), of Drink’s common stock at the time the request is made
(collectively, the “Share Repayment Requests”). The Investor’s may
not request repayment in common stock if, at the time of the request, the amount
requested would be higher than the difference between the outstanding balance
owed under the Drinks Debenture and 125% of the aggregate amount owed under the
Investor Note.
8
The
Company may prepay all or part of the Drinks Debenture upon 10-days prior
written notice and are entitled to satisfy a portion of the amount outstanding
under the debenture by offset of an amount equal to 125% of the amount owed
under the Investor Notes, which amount will satisfy a corresponding portion of
the Drinks Debenture.
Also as
part of this financing, the Investor acquired warrants to purchase 2,500,000
shares of our common stock at an exercise price of $0.35 per share (the
“Investor Warrants”). The Investor Warrants contain full ratchet
anti-dilution provisions, as to the exercise price and are exercisable for a
five year period. Management has determined that the aggregate value of the
warrants was $142,500 based on the market price per share of the Company’s
common stock on the date of the agreement.
In order
to secure waivers which the investors in our December 2007 placement
of our Series A Preferred stock claimed were required for the
Company to consummate this financing , we allowed, and the three December
investors elected, to convert an aggregate of $335,800 (335.8 shares)
of our preferred stock into 3,358,000 shares of our common stock.. In
addition, in August 2009 we allowed the two other holders of our
Series A Preferred Stock to convert an aggregate of $134,625 (134.6
shares) of our Series A Preferred Stock into 1,200,000 shares of our common
stock. The book value of the preferred stock converted exceeded the
par value of the common stock received on the date of conversions. It was
subsequently agreed with the lead investor that the Company would not be
required to issue shares of our common stock for debt or employee
compensation.
Out of
the gross proceeds of this Offering, the Company paid the placement agent
$37,500 in commissions and we are obligated to pay the placement agent 10% of
the principal balance of the Investor Notes when each note is paid. We will also
issue to the Placement Agent, warrants to acquire 5% of the shares of our Common
Stock which we deliver in response to Share Repayment Requests, at an exercise
price equal to the Market Price related to the shares delivered in response to
the Share Repayment Request (the "Placement Agent Warrants"), which warrants are
exercisable for a five year period, will contain cashless exercise provisions as
well as anti-dilution provisions in the case of stock splits and similar
matters. (See Note 17. - Subsequent Events)
In March
2010, the Company delivered to the Placement Agent, in aggregate, 4,674,126
Placement Agent Warrants as follows: effective February 24, 2010, a warrant to
purchase 425,000 shares of Company common stock at an exercise price of
$0.01594; effective February 11, 2010, a warrant to purchase 2,000,000 shares of
Company common stock at an exercise price of $0.001; effective January 15, 2010,
a warrant to purchase 1,000,000 shares of Company common stock at an exercise
price of $0.00625; effective December 30, 2009, a warrant to purchase 681,818
shares of Company common stock at an exercise price of $0.01375; effective
August 28, 2009, a warrant to purchase 192,308 shares of Company common stock at
an exercise price of $0.065; effective June 19, 2009, a warrant to purchase
250,000 shares of Company common stock at an exercise price of $0.09375; and,
effective June 19, 2009, a warrant to purchase 125,000 shares of Company common
stock at an exercise price of $0.4375.
Our CEO
has guaranteed our obligations under the Drinks Debenture in an amount not to
exceed the lesser of (i) $375,000 or (ii) the outstanding balance owed under the
Drinks Debenture. In addition, the Company, our CEO, COO, and three
other members of our Board of Directors, either directly, or through entities
they control, pledged an aggregate of 12,003,720 shares of our common stock (of
which 3,000,000 was pledged by the Company) to secure our obligations under the
Drinks Debenture (the “Pledged Shares”). As a direct result of the guarantees
and shares of common stock provided by the above individuals, the Company agreed
to issue shares of common stock totaling 4,501,860 with an estimated fair value
totaling $675,279. The estimated fair value of the stock commitment
was accounted for as a deferred loan cost and a contribution to capital (due to
shareholders), with deferred loan costs being amortized ratably over 48
months.
On July
14, 2009, the value of the Pledged Shares fell below the required amount and
consequently the Investor delivered a notice of default to the
Company. On August 31, 2009, the Investor and the Company agreed to the First
Amendment to the Drink’s Debenture which waived the default. Pursuant to the
First Amendment, the outstanding balance of the debenture was increased by
$400,000 and the debenture will carry an interest rate of 12% per
annum. Also, a member of the Company’s board of directors pledged
1,263,235 shares of our common stock as security for our obligations under the
debenture, which increased the total number of shares pledged for this
purpose. In return, the investor has prepaid $200,000 of the notes it
issued to the Company in partial payment for the debenture and agreed that the
provisions of the debenture relating to a 10% premium and the imposition of
default interest will not apply in the event a “Triggering Event”, as defined in
the debenture, was to occur in the future.
In
response to the default, the Investor transferred 2,523,645 shares of the
non-Company Pledged Shares into its own name in order to commence sale thereof
to satisfy payment of the Drinks Debenture. Accordingly and upon the Company’s
request, the Investor agreed to waive its right under an Event of Default. The
value of the 2,523,645 shares on the date
transferred to the Investor aggregated $378,547 which when sold by the Investor
will reduce the balance of the Drinks Debenture. The aggregate value
of $378,547 of the shares transferred has been accounted for as a reduction of
the Drinks Debenture with a corresponding increase to additional paid-in
capital..
In
addition, as a result of the default, 3,000,0000 of
the Company shares having an aggregate value of $450,000 that were
issued in July 2009 were transferred to the Investor
9
On
October 27, 2009, the Investor declared a second default under our $4,400,000
debenture as a result of the failure of the Pleged shares, to legally secure the
debenture that had been acquired by St. George. The Company has
secured an agreement from the Investor not to enforce the default based on any
decline in value of the pledge shares that has occurred in the past or that may
occur prior to December 31, 2006. Under the terms of such agreement,
the Investor received title to 3,209,997 of non-Company pledged
shares having a fair market value on that date of $160,500. The fair
value of these shares totaled $160,500 and has been reflected as a reduction of
the Debenture payable and an addition to additional paid-in
capital.
As a
result of the depletion of the non-Company pledged shares, the Company agreed to
issue and did issue in November 2009 and January 2010 an aggregate
18,005,590 shares of Company common stock to the individuals at a
fair market value of $720,224, or $0.04 per share. Included in
the total shares is 4,501,860 shares which represents satisfaction of the
original share commitment to the individuals at the inception of the Debenture
agreement (see paragraph above). The difference in the fair value of
the 4,501,860 issued shares and the original estimated fair value of these
shares in July 2009, reduced, as of November 2009 deferred loan costs
as originally recorded, additional paid-in capital, and the related accumulated
loan cost amortization
At
January 31, 2010, the offsetting of the Drinks Debentures of $3,410,953 unamortized Debenture debt
discount of $1,319,938, and Investor notes receivable of $2,281,040 results in a
net notes receivable balance of $190,025. This balance has been
reflected as a non-current asset in the accompanying consolidated balance
sheet.
7. Other long term
assets
In
January 2009, in accordance with an employment agreement executed with an
Olifant employee the Company issued 100,000 shares of its common stock (see
Note 8). The value of the stock on the date of grant aggregated $26,000 which is
being amortized over the five year life of the un-extended term of the
agreement. At January 31, 2010 and April 30, 2009, the unamortized balance
of the stock was $0 and $24,505, respectively.
In August
2008, the Company entered into a three year agreement with an unrelated entity
which is to provide marketing and promotional services for the
Company. Under the terms of the agreement, as consideration for the
services to be provided, the Company is to issue warrants to purchase an
aggregate of 350,000 shares of Company stock at an exercise price
of $.50. The Company determined, as of the grant date the warrants had
an aggregate value of $6,730 which is being amortized over the three
year benefit period. At January 31, 2010 and April 30, 2009, the
unamortized balance of the warrants was $0 and $5,666,
respectively. As of January 31, 2010, a warrant to purchase an aggregate of
275,000 shares of Company stock was issued and the balance of 75,000 remains to
be issued.
In August
2006, in connection with an agreement with one of its sales consultants the
Company issued warrants to purchase 100,000 shares of Holdings common stock at
an exercise price of $0.60 per share. The agreement which was for three
years, expiring in June 30, 2009, was
automatically extended for a one year renewal term with an optional
renewal term of one year remaining . The warrants may be exercised at any time
up to five years from the date of the agreement. The Company determined, as of
the grant date of the warrants, that the warrants had a value of $18,000 which
was amortized over the one year benefit period of such warrants. In addition,
under the terms of the agreement, the consultant received 175,000 shares of
Holdings common stock which were valued at $107,000 based on the market price of
the stock at the date of the agreement. The value of stock issued is being
amortized over the five year life of the consulting agreement. On August 28,
2008, the Company granted the consultant warrants to purchase an additional
200,000 shares of the Company’s common stock at an exercise price of $0.50 per
share. This issuance satisfies the Company’s requirements for the contract years
ending June 30, 2008 and 2009. Management has determined that the aggregate
value of the warrants was $4,000 based on a market price of $0.28 per share of
the Company stock on the date of grant. The warrants expire five years from the
date of grant. The unamortized value of the aggregate stock and warrants
issued to the consultant under the agreement at January 31,
2010 and April 30, 2009 was $0 and $53,478,
respectively. On August 28, 2008 the consultant and the
Company agreed to convert $153,000 of past due consulting fees into 306,000
shares of common stock at a value of $0.50 per share which was at a
premium to the market price on date of grant. Also, in August 2009, the
consultant converted $ 307,981 of past due and future consideration into
2,053,210 shares of Company stock.
In
February 2007, the Company entered into a five year agreement with a consulting
company to provide certain financial advisory services. The Company prepaid
$300,000 for such services. This amount is carried as a long-term asset and was
being amortized over the five year life of the agreement. The Company determined
that the services no remaining value and fully amortized the remaining
unamortized balance. At October 31, 2009 and April 30, 2009 the
unamortized balance of the agreement was $0 and $165,370
respectively.
On June
14, 2007, in connection with an endorsement agreement, the Company issued
warrants to purchase 801,000 shares of the Company’s common stock at a price of
$1.284 per share. The warrants may be exercised at any time up to June 14, 2017.
The Company determined that the warrants had a value of $416,500, as of the date
the warrants were granted, which is being amortized over the three year term of
the endorsement agreement. The warrants have cashless exercise provisions.
At January 31, 2010 and April 30, 2009, the unamortized balance of these
warrants was $51,203 and $155,856, respectively. In
addition, the Company has agreed to issue, as partial consideration for monthly
consulting services, to a principal of one of the entities involved in the
endorsement agreement, warrants to purchase 3,000 shares of the Company’s common
stock per month at the monthly average market price. As
of January 31, 2010, warrants to purchase 108,000 shares of the Company’s
stock have been earned under this agreement of which a warrant for 54,000
shares was issued at exercise prices ranging from $0.19 to $2.12 per share of
common stock and
the balance of 54,000 remain to be issued. Each warrant issuance has an exercise
period of 5 years from date of issuance
10
8 .
Acquisition
On
January 15, 2009 (the “Closing”), the Company acquired 90% of the capital
stock of Olifant U.S.A, Inc. (“Olifant”) , pursuant to a Stock
Purchase Agreement (the “Agreement”). Olifant has the worldwide
distribution rights (other than Europe) to Olifant Vodka and Olifant Gin
which are both produced in Holland. The transaction was accounted for
as a business combination using the purchase method of
accounting.
The
Company agreed to pay the sellers $1,200,000 for its 90% interest: $300,000 in
cash and Company common stock valued at $100,000 to be paid 90 days from the
Closing date. At closing the initial cash payment of $300,000 was
reduced by $138,000 because Olifant’s liabilities exceeded the amount provided
for in the Purchase Agreement. In August 2009, upon final settlement of the
consideration to be paid by the Company, the parties agreed to additional
offsets aggregating $13,000 which resulted in the Company paying the sellers
$149,000 and issuing $100,000 (555,556 shares) of Company stock
which were released from escrow to the sellers. At Closing, the Company issued a
promissory note for the $800,000 balance. The promissory note is payable in four
annual installments, the first payment is due one year from Closing. Each
$200,000 installment is payable $100,000 in cash and $100,000 in Company common
stock, with the stock value based on the 30 trading days immediately prior to
the installment date. The cash portion of the note accrues interest at a rate of
5% per annum. The Company will also pay contingent consideration to the sellers
based on the financial performance of Olifant. The contingent consideration
terminates at the later of (i) full payment of the promissory note or (ii)
second year following Closing. The Agreement also provides for “piggyback”
registration rights relating to the shares issuable.
The
Company has tentatively assigned the excess of cost over investment
to trademarks. As of January 31, 2010, our review does not indicate any
diminution in the carrying value assets acquired.
The cost
of the acquisition was allocated based on management’s estimates as
follows:
Cash
|
$
|
17,150
|
||
Accounts
receivable
|
87,850
|
|||
Inventory
|
217,770
|
|||
Other
current assets
|
27,070
|
|||
Trademarks
and brand names
|
1,333,333
|
|||
Total
assets
|
1,683,173
|
|||
Accounts
payable
|
483,173
|
|||
Net
assets acquired
|
$
|
1,200,000
|
The
operating results of Olifant are reflected in the accompanying consolidated
financial statements from the date of acquisition.
In
connection with the acquisition the Company entered into an employment agreement
with one of the sellers. The agreement is for five years with two automatic
one year extensions. The annual base compensation under the employment agreement
is $132,000 with additional compensation due based on the financial performance
of Olifant. In accordance with the employment agreement the Company
issued to the seller 100,000 shares of its common stock in May 2009. This
agreement terminated upon the closure of the Olifant purchase.
9. Notes and Loans
Payable
As
of January 31, 2010 and April 30, 2009, Notes and Loans Payable
consisted of the following:
|
January 31, 2010
|
April 30, 2009
|
||||||
Convertible
notes(a)
|
$
|
253,617
|
$
|
286,623
|
||||
Purchase
order facility(b)
|
—
|
1,223
|
||||||
Olifant
note(c)
|
695,260
|
1,061,763
|
||||||
Other
(d)
|
81,937
|
49,720
|
||||||
1,030,814
|
1,399,329
|
|||||||
Less
current portion
|
630,814
|
799,329
|
||||||
Long-term
portion
|
$
|
400,000
|
$
|
600,000
|
11
(a)
|
In
October 2006, the Company borrowed $250,000 and issued a convertible
promissory note in like amount. The due date of the loan was originally
extended by the Company to October 2008 from October 2007 in accordance
with the terms of the original note agreement. On March 1, 2009 the note
was amended to extend the due date to October 18, 2009. As of March 1,
2009, the principal amount of the amended note is $286,623, which includes
the original $250,000 of principal plus accrued and unpaid interest of
36,623 as of March 1, 2009. The amended note is convertible into shares of
our common stock at $0.35 per share, a decrease from the $0.60 price under
the original note but at a premium to the market price on the date of the
amended agreement, with certain anti-dilution provisions. The note bears
interest at 12% per annum which is payable quarterly. At the option of the
lender, interest can be paid in shares of Company common stock. Under the
terms of the amended note monthly principal payments of $20,000 were to
commence June 1, 2009 with the balance paid at maturity. As of
September 2009 the Company had not made any payments under the
amended note and has reached an informal agreement with the note-holder,
to issue 50,000 shares of the Company’s common stock for each week of
nonpayment. As of January 31, 2010, the Company has issued the
note-holder 600,000 shares of its stock as payment of interest on the
note. In addition, as consideration for extending the note the Company
issued the lender 286,623 shares of Company common stock which had a value
of $42,992 on March 1, 2009. As of the January 31, 2010, and April 30,
2009 the unamortized balance of the 286,623 shares issued was $-0-
and $30,710, respectively, which is included in Other current assets on
the accompanying balance sheets.
|
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. As of January 31, 2010, interest expense of $2,882 was
accrued. At the option of the note holder, interest can be paid in either cash
or shares of Company common stock based on the convertible note’s $0.06
conversion price. As additional consideration, the Company granted the note
holder 250,000 shares of the Company’s common stock and agreed to register the
shares by January 8, 2010 or pay to the note holder as damages additional shares
of the Company’s common stock equal to 2.0% of the common shares issuable upon
conversion of the convertible note. The Company also granted the note
holder piggyback registration rights. On November 9, 2009, the Company
issued the 250,000 shares valued at $10,000 which the Company deemed a loan
origination fee. As of January 31, 2010, $7,694 has been recorded as a deferred
charge on the balance sheet and $3,306 has been amortized to interest expense.
On November 23 2009, the Company issued 400,000 shares of common stock in
satisfaction of interest payable on the note described above in Note 9
(a).
On
November 9, 2009, an investor purchased a $309,839 past due Company Note. On
November 13, 2009, the Company exchanged the past due Company Note for a new
$447,500 Convertible Promissory Note. The new convertible promissory note is
convertible at the note holder’s option using a conversion price based on the
prevailing market prices. As of January 31, 2010, the Company issued the
note holder a total of 16,162,687 shares of Company common stock in satisfaction
of conversions of note principal leaving a balance of $153,618 in note principal
available for conversion. Subsequent to January 31, 2010, the Company issued the
note holder a total of 13,688,679 shares of Company common stock in satisfaction
of conversions of the remaining note principal. (See Note 17 - Subsequent
Events.)
(b)
|
As of April 30, 2009, balances on borrowings under
purchase order financing facility with Hartsko Financial Services, LLC
(“Hartsko”). Advances under the facility are subject to a 3% fee for the
first 30 days they remain outstanding and 1% for each 10 days they remain
unpaid. Hartsko has a first security interest in the assets of
the Company to the extent of this
advance.
|
(c)
|
On January 15, 2009, (the
“Closing”), the Company acquired 90% of the capital stock of Olifant
U.S.A, Inc. (“Olifant”), pursuant to a Stock Purchase Agreement
(the “Agreement. The Company has agreed to pay the sellers $1,200,000 for
its 90% interest: $300,000 in cash and common stock valued at $100,000 to
be paid 90 days from the Closing date. The initial cash payment of
$300,000 which was due 90 days from Closing, was reduced to $149,633,
which was paid to the sellers in August 2009 together with Company common
stock having an aggregate value of $100,000 based on the date of the
Agreement. The Company issued a promissory note for the
$800,000 balance. The promissory note is payable in four annual
installments, the first payment is due one year from Closing. Each
$200,000 installment is payable $100,000 in cash and Company stock valued
at $100,000 with the stock value based on the 30 trading days immediately
prior to the installment date. The cash portion of the note accrues
interest at a rate of 5% per annum. On January 15, 2010, the Company paid the first
loan installment in the amount of $200,000 and $5,000 in interest. The
Company issued
4,950,496 shares as payment for the stock portion of the installment, and
at the election of the sellers, $63,000 in cash and 2,079,208 in common
stock as payment of the cash and interest portion on the first
installment.
|
(d)
|
As
of January 31, 2010 and April 30, 2009, $40,000 is owed to a
shareholder of the Company in return for financial consulting services. On
March 4, 2010, the Company issued the shareholder 2,000,000 shares of its
common stock with a fair value of $40,000 in payment for the loan. (See
Note 17.- Subsequent Events.)
|
On
November 5, 2009, the Company borrowed $37,500 from an investor under an
informal agreement for working capital purposes. The loan is payable on demand
and is classified under notes and loans payable as a current liability on the
balance sheet as of January 31, 2010.
12
At April
30, 2009, an additional $9,720 was owed to a member of the Company’s board
of directors under an informal agreement with the Company for amounts advanced
to the Company for working capital purposes. Amounts owed to the shareholder
accrues interest at a rate of 18% per annum. In June 2009, the
director was repaid $11,220 which included interest of $1,500.
10. Accrued
expenses
Accrued
expenses consist of the following at January 31, 2010 and April 30,
2009:
January 31, 2010
|
April 30, 2009
|
|||||||
Payroll,
board compensation, and consulting fees owed to officers, directors and
shareholders
|
$ | 2,117,213 | $ | 1,565,964 | ||||
All
other payroll and consulting fees
|
635,968 | 470,061 | ||||||
Interest
|
281,409 | 17,465 | ||||||
Others
|
729,052 | 846,935 | ||||||
$ | 3,763,642 | $ | 2,900,425 |
On
October 20, 2009, the Company reached agreements with its Chief Executive
Officer and members of its Board of Directors to satisfy obligations owed to
them, in the aggregate amount of $1,002,450 for salary, director fees,
consulting fees and for satisfaction of a portion of an outstanding loan and the
interest accrued thereon, by issuing to them 1,763,607 shares of our common
stock and warrants to acquire 9,838,793 shares of our common stock. Under
this arrangement, the valuation of the common stock and the exercise price of
the warrants was $0.15 a share, representing a 250% premium to the current
market price of our shares. Fifty percent of the warrants can be exercised at
anytime during the ten-year term and the other 50 percent will only be
exercisable when the Company has achieved positive EBITDA for two successive
quarters. If this profitably standard is not realized during the term
of the warrants, 50 percent of the warrants will be
forfeited. While the Company has not yet issued the shares or
warrants as of January 31, 2010, it expects to do so in the fourth
quarter.
11. Shareholders' Equity
(Deficiency)
In
addition to those referred to in Notes 6, 7, 8, and 9, additional transactions
affecting the Company's equity for the nine months ended January 31, 2010 are as
follows:
On
November 9, 2009, the Company filed a registration statement on Form S-8 filed
to register 20,000,000 shares issuable pursuant to the Drinks Americas 2009
Incentive Stock Plan (the “2009 Plan”) under which the Company has issued a
total of 13,597,353 shares of common stock for legal and marketing
services.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. As of January 31, 2010, interest expense of $2,882 was
accrued. At the option of the note holder, interest can be paid in either cash
or shares of Company common stock based on the convertible note’s $0.06
conversion price. As additional consideration, the Company granted
the note holder 250,000 shares of Company’s common and agreed to register the
shares by January 8, 2010 or pay to the note holder as damages additional shares
of the Company’s common stock equal to 2.0% of the common shares issuable upon
conversion of the convertible note. The Company also granted the note
holder piggyback registration rights. On November 9, 2009, the
Company issued the 250,000 shares valued at $10,000 which the Company deemed a
loan origination fee. As of January 31, 2010, $7,694 has been recorded as a
deferred charge on the balance sheet and $3,306 has been amortized to interest
expense.
On
November 9, 2009, an investor purchased a $309,839 past due Company Note
described above in Note 9(a). On November 13, 2009, the Company
exchanged the past due Company Note for a new $447,500 Convertible Promissory
Note. The new convertible promissory note is convertible at the note holder’s
option using a conversion price based on the prevailing market
prices. As of January 31, 2010, the Company issued the
note holder a total of 16,162,687 shares of Company common stock in satisfaction
of conversions of note principal leaving a balance of $153,618 in note principal
available for conversion. On November 23, the Company issued 400,000 shares of
common stock in satisfaction of interest payable on the note described above in
Note 9 (a). Subsequent to January 31, 2010, the Company issued the note holder a
total of 13,688,679 shares of Company common stock in satisfaction of
conversions of the remaining note principal.
(See Note
17 – Subsequent Events.)
On
November 17, 2009, the Company issued a total of 12,003,720 shares of Company
common stock to certain officers and directors as a replacement for the shares
they pledged pursuant to a financing transaction (including 8,000,000 to our
CEO; 906,000 to our COO and an aggregate of 3,097,720 among our three
directors.) (See Note 6 – Note Receivable.)
13
On
January 11, 2010, pursuant to the previously noted financing transaction, the
Company issued to those individuals who pledged their
shares, 0.5 shares of Company stock for each share pledged, which
aggregated 6,001,860 shares (including 4,000,000 to our CEO; 453,000
to our COO and an aggregate of 1,548,860 to our three directors).
The 6,001,860 shares had an approximate fair value of $240,074 on January 11, 2010, the
issuance date, which amount is recorded in common stock and additional paid
in capital in the accompanying balance sheet as of January 31,
2010. (See Note 6 – Note Receivable.)
On
November 18, 2009, the Company retained a business advisory consultant and
agreed to issue 2,000,000 shares of Company Common Stock in exchange for
consulting services which shares the Company issued on March 10,
2010.
On
November 17, 2009, the Company issued 23,000,000 shares of Company common stock,
to be held in treasury, as they are pledged in lieu of prejudgment remedies on
two litigation matters. (See Note 16. Commitments and Contingencies –
Litigation).
On
November 25, 2009, pursuant to the August 17, 2009 Preferred Stock Purchase
Agreement (described below) with Optimus Capital Partners (the “investor”), the
Company received gross proceeds of $87,037 from the issuance to an investor of
8.7037 shares of Series B preferred stock at $10,000.00 per share and a warrant
for 4,701,167 shares of common stock with an exercise price based on prevailing
market prices. The warrant is exercisable upon the earlier of (a) May
25, 2010, or (b) the date a registration statement covering the warrant shares
is declared effective, but not after November 25, 2014, that number of duly
authorized, validly issued, fully paid and non-assessable shares of common stock
set forth above, provided; however, that this warrant may only be exercised for
warrant shares equal in value to not more than 135.0% of the initial $0.025
initial exercise price. We have determined the warrants to have a fair value of
$66,960 using Black-Scholes pricing model described below and we will amortize
the cost over five years or until exercised.
On
December 17, 2009, pursuant to the August 17, 2009 Preferred Stock Purchase
Agreement (described below) with Optimus Capital Partners (the “investor”), the
Company received gross proceeds of $51,333 from the issuance to an investor of
5.133333 shares of Series B preferred stock at $10,000.00 per share and a
warrant for 4,200,000 shares of common stock with an exercise price based on
prevailing market prices. The warrant is exercisable upon the earlier
of (a) June 17, 2010, or (b) the date a registration statement covering the
warrant shares is declared effective, but not after December 17, 2014, that
number of duly authorized, validly issued, fully paid and non-assessable shares
of common stock set forth above, provided; however, that this warrant may only
be exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.0165 initial exercise price. We have determined the
warrants to have a fair value of $53,922 using Black-Scholes pricing model
described below and we will amortize the cost over five years or until
exercised.
The fair
value of each warrant is estimated as of the respective transaction date using
the Black-Scholes pricing model and is affected by assumptions regarding a
number of highly complex and subjective variables including expected
volatility, risk-free interest rate, expected dividends and expected term.
Expected volatility is based on the historic volatility of the Company’s stock
over the expected life of the warrant. The expected term of the warrants
represents the estimated period of time until the exercise and is based on
management’s estimate and gives consideration to the contractual
term. The risk-free interest rate is based on the U.S .Treasury 5-year Treasury
Bills in effect at the transaction date for the expected term of the warrant.
The Company has not paid dividends in the past and does not plan to pay any
dividends in the near future.
On May 9,
2009, we issued a sales consultant 85,000 shares of our common stock with an
aggregate value of $11,900 for past due fees owed to him. The value of the
shares is included in selling, general and administrative expenses for the
six months ended October 31, 2009.
On July
1, 2009, we issued an aggregate of 333,333 shares of our common stock having an
aggregate value of $50,000 to a member of our board of directors for an advance
he made to a third, unrelated, entity for services they provided the
Company. The amount the Company was invoiced for these services by the third
party was equal to the value of the stock issued to the director.
On July
1, 2009, we issued 28,000 shares of our common stock having an aggregate value
of $3,600 to a company which provides freight services to the
company. The value of the shares is included in selling, general
and administrative expenses for the six months ended October 31,
2009.
On July
1, 2009, we issued 100,000 shares of our common stock having an aggregate
value of $13,000 to a sales consultant for the Company for services he has
provided to us. The value of the shares is included in selling, general and
administrative expenses for the six months ended October 31, 2009.
On July
22, 2009, we issued 2,325,000 shares of our common stock as treasury shares and
pledged the shares in lieu of a prejudgment remedy that the Plaintiff had sought
against the Company and its Chief Executive Officer. See Note
16.
On July
31, 2009, we issued 750,000 shares of our common stock as treasury shares and
pledged the shares as collateral against payment for legal services
rendered.
14
On July
29, 2009 we issued 71,500 shares of our common stock having an aggregate value
of $10,000 to a consultant for the Company for services he has
performed. The value of the shares is included in selling, general and
administrative expenses for the six months ended October 31, 2009.
On March
2009, the Company granted 1,175,000 shares of its common stock under its
2008 Stock Incentive Plan (the” Plan”) to several of its employees as
consideration for past services they have performed for the Company. The value
of the stock on the date of grant aggregated $188,000 which was included
in accrued expenses at April 30, 2009 as none
of these shares were issued as of that date. In July 2009 the Company
issued 750,000 of these shares (including 250,000 each to the
Company’s Chief Operating Officer and former Chief Financial
Officer).
As of
July 31, 2009, warrants to purchase 8,944,423 shares of Holdings common stock
were outstanding, including warrants previously disclosed in Note 9. The
warrants have exercises prices per share of Company common
stock ranging from $0.35 to $3.00.In August 2009, we issued a total of
2,124,710 shares of our common stock having an aggregate value of $193,389 to
vendors in satisfaction of amounts owed.
On August
1, 2009 and September 29, 2009, we issued 200,000 and 400,000 shares of our
common stock, respectively, having an aggregate value of $59,400 to a note
holder as interest payments.
On August
5, 2009, we issued 350,000 shares of our common stock having an aggregate value
of $45,150 as payment for legal services.
In August
2009, we issued 1,200,000 shares of our common stock in satisfaction of a
conversion request for 120 shares of our Series A Preferred Stock.
In
September 2009, we issued a total of 425,000 shares to employees as bonus
payments.
On
September 23, 2009, we issued 4,200,000 shares of our common stock having an
aggregate value of $373,800 as repayment of $100,000 borrowed and promotional
services rendered for Olifant marketing.
On
September 24, 2009, we issued 50,119 shares of our common stock having an
aggregate value of $3,959 to a vendor in satisfaction of amounts
owed.
As of
August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the “Fund”),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time
to time until August 16, 2011 and at our sole discretion, we may present the
Fund with a notice to purchase such Series B Preferred Stock (the
“Notice”). The Fund is obligated to purchase such Series B Preferred
Stock on the tenth trading day after the Notice date, subject to satisfaction of
certain closing conditions. The Fund will not be obligated to
purchase the Series B Preferred Stock (i) in the event the closing price of our
common stock during the nine trading days following delivery of a Notice falls
below 75% of the closing price on the trading day prior to the date such Notice
is delivered to the Fund, or (ii) to the extent such purchase would result in
the Fund and its affiliates beneficially owning more than 9.99% of our common
stock. Our ability to send a notice is also subject to certain
conditions. Therefore, the actual amount of the Fund’s investment is
not certain.
In
connection with the Purchaser Agreement, we also issued to the Fund five-year
warrants to purchase 6,750,000 shares of our common stock at an exercise price
equal to the closing price of our common stock on the trading day prior to the
execution of the Purchase Agreement. The number of shares exercisable
under the warrant will be equal in value to 135% of the purchase price of the
Series B Preferred Stock to be issued in respect of the related Notice and the
exercise price of a corresponding number of shares is subject to adjustment to
equal the closing bid price of our common stock on the trading day preceding the
Notice. Each warrant will be exercisable on the earlier of (i) the
date on which a registration statement registering for resale the shares of
common stock issuable upon exercise of such warrant becomes effective and (ii)
the date that is six months after the issuance date of such
warrant.
The
Series B Preferred Stock is redeemable at Registrant’s option on or after the
fifth anniversary of the date of its issuance. The Series B Preferred
Stock also has a liquidation preference per share equal to the original price
per share thereof plus all accrued dividends thereon, and is subject to
repurchase by us at the Fund’s election under certain circumstances, or
following the consummation of certain fundamental transactions by us, at the
option of a majority of the holders of the Series B Preferred
Stock.
Holders
of Series B Preferred Stock will be entitled to receive dividends, which will
accrue in shares of Series B Preferred Stock on an annual basis at a rate equal
to 10% per annum from the issuance date. Accrued dividends will be
payable upon redemption of the Series B Preferred Stock. The Series B
Preferred Stock ranks, with respect to dividend rights and rights upon
liquidation senior to our common stock and our Series A Convertible Preferred
Stock.
In a
concurrent transaction, the Fund will borrow up to 10,000,000 shares of our
common stock from certain of our non-affiliated stockholders.
15
The
Series B Preferred Stock and warrants, and the shares common stock issuable upon
exercise of the warrants have not been registered under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration or an applicable exemption from registration
requirements.
Out of
the gross proceeds of this Offering, we are obligated to pay Source Capital
Group (the "Placement Agent") 10% of the amount we realize on the sale of the
Series B Preferred Stock. We will also issue to the Placement Agent, warrants to
acquire 5% of the shares of our Common Stock which we deliver on exercise of the
Warrants with an exercise price equal to the exercise price of the Warrants that
were exercised. (the "Placement Agent Warrants"), which warrants are exercisable
for a five year period, will contain cashless exercise provisions as well as
anti-dilution provisions in the case of stock splits and similar
matters.
In order
to secure amendments to our Certificate of Designation with respect
our Series A Convertible Preferred Stock (“Series A Shares”) which were required
in order for us to enter into the Purchase Agreement, we agreed that that upon
any issuance by the Company of any Common Stock with an effective price per
share of Common Stock of less than $0.35 per share (“Triggering
Issuances”)(subject to adjustment for reverse and forward stock splits and the
like), the holders of the Series A Shares(the “Series A Holders”) may, in their
sole discretion, at any time thereafter, pursuant to the conversion terms set
forth in the Certificate of Designation of the Series A Preferred Stock, convert
at the per share price which applied to the Triggering Issuance, such number of
shares of Preferred Stock as will result, in the aggregate, in the issuance by
the Company of the same number of shares of Common Stock to the Series A Holders
as were issued in the Triggering Issuances, which rights will be exercisable by
the Series A Holders pro rata to the number of shares of Preferred Shares held
by each of them on the date the Triggering Issuances occur.
12. Stock Incentive
Plan
On
November 9, 2009, the Company filed a registration statement on Form S-8 and
registered 20,000,000 shares issuable under the 2009
Plan. The Company has issued a total of 13,597,353 shares of
Company common stock under the plan as compensation for legal and marketing
services.
In
January 2009, the Company’s shareholders approved the 2008 Stock Incentive Plan
(the “2008 Plan”) which provides for awards of incentives of non-qualified stock
options, stock, restricted stock and stock appreciation rights for its officers,
employees, consultants and directors in order to attract and retain such
individuals and to enable them to participate in the long-term success and
growth of the Company. Under the 2008 Plan, 10,000,000 common shares were
reserved for distribution, of which 9,275,000 have been issued and 725,000
remain available. Stock options granted under the Plan are granted with an
exercise price at or above the fair market value of the underlying common stock
at the date of grant, generally vest over a four year period and expire 5 years
after the grant date.
On
November 9, 2009, the Company granted 3,500,000 shares under the 2008 Plan at
fair value of $132,000 to several consultants, which vested immediately upon
grant, as compensation for legal and marketing services.
On March
12, 2009, the Company granted an aggregate of 5,775,000 options
under its 2008 Stock Incentive Plan to various employees, the
directors of the Company, and to two consultants to the
Company. The exercise price of the options granted to
employees and directors and one of the consultants was at the
market value (other than those issued to our CEO which was at a 10% premium to
the market value) of the underlying common stock at the date of grant. The
exercise price of the options granted to the other consultant, $0.35, was
above the fair market value of the underlying common stock at the date of grant.
The value of the options on the date of grant was calculated using the
Black-Scholes formula with the following assumptions: risk free frate-2%,
expected life of options –5 years, expected stock volatility -67%, expected
dividend yield -0%. The Company issued an aggregate of 4,175,000 options to
purchase shares of its common stock to its employees including 2,500,000 to its
CEO, 500,000 to its COO and 300,000 to its former CFO.
The
options granted to employees of the Company vest over a four year
period and expire five years after the grant date. The cost of the options,
$375,750, is expected to be recognized over the four year vesting period of the
non-vested options. The options awarded to the directors of the
Company (1,000,000) and the consultants (600,000) at fair value of $129,000
vested immediately on the grant date.
The fair
value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model and is affected by assumptions regarding
a number of highly complex and subjective variables including
expected volatility, risk-free interest rate, expected dividends and expected
term. Expected volatility is based on the historic volatility of the Company’s
stock over the expected life of the option. The expected term and vesting of the
option represents the estimated period of time until the exercise and is based
on management’s estimates, giving consideration to the contractual term, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S . Treasury yield curve in effect at the time of grant
for the expected term of the option. The Company has not paid dividends in the
past and does not plan to pay any dividends in the near future. SFAS 123R,
“Share Based Payment,” also requires the Company to estimate forfeitures at the
time of grant and revise these estimates, if necessary, in subsequent period if
actual forfeitures differ from those estimates. The Company estimates
forfeitures of future experience while considering its historical
experience.
16
13. Income
Taxes
No
provision for income taxes is included in the accompanying statements of
operations because of the net operating losses for the nine months ended January
31, 2010 and 2009. Holdings and Drinks previously filed income tax returns on a
June 30 and December 31 tax year, respectively; however, both companies applied
for and received a change in tax year to April 30 and file a federal income tax
return on a consolidated basis. Olifant files income tax returns on a
February 28 tax year. The consolidated net operating loss carry forward as of
January 31, 2010 available to offset future years' taxable income is
approximately $29,000,000, expiring in various years through 2029.
A
valuation allowance has been provided against the entire deferred tax asset due
to the uncertainty of future profitability of the Company. Management's position
with respect to the likelihood of recoverability of these deferred tax assets
will continue to be evaluated each reporting period.
14. Related Party
Transactions
Related
party transactions, in addition to those referred to in Notes 9, 10, 11 and
12 are as follows:
Consulting
and Marketing Fees
The
Company incurred fees for services rendered related to sales and marketing
payable to a limited liability company which was controlled by a member of the
Company’s board of directors and previous chairman of the board. As of
January 31, 2010 and April 30, 2009, unpaid fees owed to the former
chairman and his firm aggregated $175,550, respectively.
In fiscal
2003, we entered into a consulting agreement with a company wholly owned by a
member of the Company's board of directors. Under the agreement, the consulting
company is compensated at the rate of $100,000 per annum. For each of the nine
and three months ended January 31, 2010 and 2009, the Company incurred fees
aggregating $75,000 and $25,000 under this agreement. As of January 31,
2010 and April 30, 2009, we were indebted to the consulting company in
the amount of $331,243 and $256,248, respectively. In October 2009, the
Company and the Board member have agreed to settle the outstanding amount due at
January 31, 2010 by the Company issuing shares of our common stock and warrants
to acquire shares of our common stock. The Company plans to issue the shares and
associated warrants in our fiscal fourth quarter.
In
December 2002, the Company entered into a consulting agreement with one of its
shareholders which provided for $600,000 in fees payable in five fixed
increments over a period of 78 months. The agreement expired on June 9,
2009. For each of the nine and three months ended January 31, 2010 and 2009, the
Company incurred fees aggregating $13,151 and $90,000, respectively, under this
agreement. The Company has an informal agreement with the shareholder pursuant
to which he has the option of converting all or a portion of the consulting fees
owed him into shares of Holding's common stock at a conversion price to be
agreed upon. In March 2009, the consultant elected to convert
$120,000 due him for consulting fees into shares of Company stock at a
price of $0.35 per share resulting in the Company issuing 342,857 shares to
him. In February 2008, the consultant elected to convert $190,000 due
him for consulting fees into shares of Company common stock at a price of $0.50
per share resulting in the Company issuing 380,000 shares to him. Each of the
conversions were at a premium to the market price of the Company’s common
on the date of the elections to convert. As
of January 31, 2010 and April 30, 2009, amounts owed to this shareholder
aggregated $43,151 and $30,000,
respectively.
On
October 20, 2009, the Company reached agreements with its Chief Executive
Officer and members of its Board of Directors to satisfy obligations owed to
them, in the aggregate amount of $1,002,450 for salary, director fees,
consulting fees and for satisfaction of a portion of an outstanding loan and the
interest accrued thereon, by issuing to them 1,763,607 shares of our common
stock and warrants to acquire 9,838,793 shares of our common stock. Under
this arrangement, the valuation of the common stock and the exercise price of
the warrants was $0.15 a share. Fifty percent of the warrants can be
exercised at anytime during the ten-year term and the other 50 percent will only
be exercisable when the Company has achieved positive EBITDA for two successive
quarters. If this profitably standard is not realized during the term
of the warrants, 50 percent of the warrants will be
forfeited. While the Company has not yet issued the shares or
warrants as of January 31, 2010, it expects to do so in the fourth
quarter.
Royalty
Fees
In
connection with the Company's distribution and licensing agreements with its
equity investee the Company incurred royalty expenses for the nine months ended
January 31, 2010 and 2009, of approximately $53,682 and $29,000, respectively
and for the three months ended January 31, 2010 and 2009, of approximately
$42,912 and $11,0000, respectively. The operations and the net assets are
immaterial.
17
Loan
Payable
The
Company is obligated to issue shares of its common stock to several of its
shareholders in connection with its June 2009 debt financing (see Note
5).
From July
2007 through January 2010, the Company has borrowed and our CEO has loaned
various amounts up to $813,035 to the Company for working capital purposes at an
annual interest rate of 12%. As of January 31, 2010 and April 30,
2009, amounts owed to our CEO on these loans including accrued and unpaid
interest aggregated $280,845 and $305,935, respectively. For the nine months
ended January 31, 2010 and 2009, interest incurred on these loans
aggregated $27,983 and $29,179, respectively.
15. Customer
Concentration
For the
nine months ended January 31, 2010, our largest customer accounted for 19% of
our sales and two other customers accounted for 10% or more of our sales.
For the three months ended January 31, 2010, our largest customer accounted for
31.5% of our sales and two other customers accounted for 10% or more of our
sales.
For the
nine months ended January 31, 2009, our largest customer accounted for 13% of
our sales. For the three months ended January 31, 2009, our largest customer
accounted for 16% of our sales and three other customers accounted for 10% or
more of our sales.
16. Commitments and
Contingencies
Lease
The
Company leases office space under an operating lease, with minimum annual
rentals of $50,000 through September, 2009 which was renewed for a two year
period through September 2011 with minimum annual rentals of $36,000. The
Company leased additional office space under an operating lease, which expired
in March 2009 that required minimal annual rental payments of
$51,600.
Rent
expense for these leases aggregated approximately $15,000 and $79,000 for
the nine months ended January 31, 2010 and 2009, respectively. For the
three months ended January 31, 2010 and 2009, rent expense aggregated
approximately $15,000 and $28,000, respectively
Rent
expense for the three and nine months ended January 31, 2010 is net of a
landlord credit of approximately $13,000.
Future
minimum payments for all leases are approximately as follows:
Year Ending
|
|||||
April 30,
|
Amount
|
||||
2010
|
$
|
20,333
|
|||
2011
|
36,000
|
||||
2012
|
15,000
|
License
Agreement
In
November 2005, the Company entered into an eight-year license agreement for
sales of Trump Super Premium Vodka. Under the agreement the Company is required
to pay royalties on sales of the licensed product. The agreement requires
minimal royalty payments through November 2012 which if not paid could result in
termination of the license. The Company is currently in default under the terms
of its license agreement with Trump Marks LLC. The Company under a
non-documented arrangement with the licensor is continuing to sell the product
both domestically and internationally. The Company and licensor are currently
engaged in active discussion to both enhance the marketing of the brand and to
amend the agreement under mutually beneficial terms.
In
2008 the Company entered into a licensing agreement with Vetrerie Bruni
S.p.A. (“Bruni”), which has the patent to the Trump Vodka bottle design.
The agreement is retroactive to January 1, 2008, and calls for annual minimum
royalties of $150,000. Royalties are due on a per bottle basis on bottles
produced by another bottle supplier of approximately 18% of the cost of such
bottles. The agreement terminates upon the expiration of the patent
or the expiration of the Company’s license agreement with Trump Marks
LLC. Due to a dispute with respect to the pricing and quantities of glass
ordered and the source of readily available and more efficient alternative
producers the Company entered into a dispute with Bruni Glass resulting in
litigation which was resolved with a settlement. This settlement resulted in the
reduction of the Company’s annual glass royalty obligation and a settlement of
the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, the Company has accrued $150,000, payable in installments over
12 months from February 2010 forward which if paid in full by August 2010
reverts to the amount of $120,000 in satisfaction of the outstanding balance as
of January 31, 2010. The Company expects to pay in full by August 2010 and has
made two payments (February and March 2010) of $12,500. Additionally, the annual
going forward royalty has been lowered by as much as 75% depending on
utilization levels.
18
In
February 2008 we entered into a joint venture with Grammy Award-winning producer
and artist, Dr. Dre. The Company and Dr. Dre have formed the joint venture to
identify, develop, and market premium alcoholic beverages, The deal is under the
umbrella of the agreement between the Company and Interscope Geffen A&M
Records. Our Leyrat Cognac is the joint ventures’ first beverage. In
January 2009, the Company launched its Leyrat Estate Bottled Cognac which it
imports from a 200 year old distillery in Cognac, France. The Company granted
10% of its 50% interest in the brand to the producer of the product, leaving us
with a 45% interest, in return for the rights to distribute the product in the
United States. The Company has 5% of the rights for the brand in Europe. The
Company continues to work toward a major product launch agreeable between the
parties.
Our license with respect to the Kid Rock related trademarks currently requires
payments to Drinks Americas based upon volume through the term of the
agreement.
Other
Agreements
The
Company has modified its agreement with a foreign distributor, through December
2023, to distribute our products in their country. The agreement requires the
distributor to assume procurement of component parts, production, distribution
and funding for approved marketing and promotion for the term of the agreement.
The distributor is to pay the Company a quarterly fee no less than one fourth of
$150,000 and certain incremental payments for set volume levels. In return for
the fee and assumption of all financial support in the territory, the Company
will be the exclusive distributor in Israel over the term of the agreement with
the rights to be exclusive distributor in their country. The distributor is in
the process of purchasing component parts for its own production. It is also
anticipated that the Company may purchase up to five containers of product or
5,000 cases from the Company’s current inventory as a precursor to its own
production in order to accelerate market entry. The Company has received an
$82,000 prepayment for volume which it expects to recognize in the first quarter
of the next fiscal year.
Effective
February 15, 2010, the Company entered into an exclusive agreement with Mexcor,
Inc., to promote and distribute in the United States, the Company’s
portfolio of brands, as defined. The initial term of the agreement is for five
years, requires a minimum net sales performance by Mexcor, which when attained,
will automatically renew for an additional ten years. Under the
terms of the agreement, the Company has agreed to issue the principal of the
business 12 million shares of Company common stock in exchange for consulting
services.
Furthermore,
the Company shall earn and Mexcor shall pay, a royalty fee on a per case or case
equivalent basis on all Company products distributed by Mexcor which royalty fee
will increase by ten percent on August 12, 2011, with additional ten percent
increases (compounded) on August 15th of each successive year during the initial
term of the agreement. Additionally, the Company shall earn $10.00 for each case
of Damiana product, as defined, distributed by Mexcor. For the first full
twenty-one calendar months following the effective date, Mexcor will pay the
Company the greater of the per case royalty fees described above or the
following monthly minimum royalties; $20,000, for the first six months; $35,000,
for months 7-9 and $50,000 for months 10-21. The minimum monthly royalties are
payable on the 15th day of
that month.
Additionally,
the Company will issue to Mexcor, warrants to acquire 2,000,000 shares of the
Company’s common stock at such time Mexcor realizes the minimum net sales
requirements under the initial term. The Company has further agreed to issue
Mexcor a warrant to acquire an additional 2,000,000 shares of Company common
stock at such time Mexcor attains a second net sales performance level based on
a twelve-month look-back period provided such performance criteria are satisfied
during the initial term. Finally, the Company has agreed to issue Mexcor
additional financial incentives payable in cash or stock and warrants for the
attainment of certain volume or business metrics.
Litigation
In June
2009, Richard Shiekman, a former employee of the Company, filed an application
for prejudgment remedy against the Company and our chief Executive Officer in
Superior Court of Connecticut, Judicial District of Fairfield (Docket
Number CV 09 4028895 S). The plaintiff seeks $127,250 of unpaid wages and
commissions and, $1,500 for reimbursement of expenses. The maximum exposure to
the Company and our CEO is approximately $260,000 for double damages
plus attorneys’ fees and costs. The Company believes that the claims made by the
plaintiff are false and plans to vigorously defend this suit. In addition,
the Company plans to commence a countersuit for damage and theft of
services. As of November 30, 2009, we pledged 10,325,000 shares
of Company common stock in lieu of a prejudgment remedy that the Plaintiff had
sought against the Company and its Chief Executive Officer. At this time the
plaintiff has not commenced a suit. In 2009, as a matter of public record the
former employee was arrested and charged with alleged theft of Company
property.
In
October 2009, James Sokol, a former salesperson for the Company, filed suit
against the Company and its Chief Executive Officer in the Superior Court for
the Judicial District of Fairfield (Docket Number CV 09 5027925 S) claiming
unpaid compensation of $256,000.00. The maximum exposure to the Company
and our CEO is approximately $520,000.00 for double damages plus attorney's
fees and costs. The Company believes that the claims made by the plaintiff
are false and plans to vigorously defend this suit. As of November
30, 2009, we pledged 15,000,000 shares of Company common stock in lieu of a
prejudgment remedy that the Plaintiff had sought against the Company and its
Chief Executive Officer. The Company believes this matter should be resolved
with Mr. Sokal and is working to meet with him to do so.
19
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company that has the patent to
the Trump Vodka bottle design filed a complaint against us in the U.S. District
Court, Southern District of New York for alleged breach of contract and sought
$225,000 for alleged past due invoices and royalties. The Company filed a
counterclaim. In October 2009, the case was settled, whereby we agreed to pay
Bruni $150,000 in settlement of all claims. The settlement amount was to be paid
in monthly installments of $12,500 beginning February 15, 2010, and $12,500 on
15th
of each succeeding month through January 15th, 2011.
The February 15, 2010 and March 15, 2010 payments were made. The Company
has accrued $150,000 as of January 31, 2010, which if paid in full by August
2010 reverts to $120,000.
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”) a company which provided
distribution services for us in several states filed a claim for damages against
us in Duval County Florida for alleged damages including breach of contract and
is seeking damages. It is the Company’s opinion that the claim
arose out of our termination of the agreements we had with them for their
nonperformance, failure of the plaintiff to accurately report sales to the
Company and their withholding of information required by the
agreements. The Company filed a counterclaim of $500,000 for damages
against Liquor Group and has denied their claimed breach of contract claim
previously made against it. The Company contends that it is owed money by
Liquor Group under the agreements. There is currently pending an arbitration
before the American Arbitration Association involving the dispute between Liquor
Group and Drinks Americas. A final arbitration hearing has been scheduled for
June 22, 2010, in Jacksonville, Florida. Liquor Group Wholesale, Inc. and/or
Liquor Group Holdings, LLC sought arbitration on a breach of contract claim
asserting damages in excess of $1,100,000. The claim was filed against Drinks
Americas Holding Limited, not Drink Americas, Inc., the contracting party.
Drinks America, Inc. has counter claimed against the initial Liquor Group
claimants, and has included several other Liquor Group entities because of the
considerable confusion Liquor Group has created through the use of multiple
entities with the same or virtually identical names. The counterclaim is for
$500,000 and includes claims concerning breach of contract, civil conspiracy,
fraudulent concealment, and civil theft.
Liquor
Group has been authorized to conduct certain limited discovery concerning Drinks
Americas’ civil conspiracy, fraudulent concealment and civil theft claims and
the parties are scheduled to exchange witness lists on April 23rd and
exhibit lists on May 14th and to file prehearing briefs on June
8th.
In
December 2009, Niche Media, Inc., an advertising vendor, filed suit against the
Company in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk (Docket Number FST-CV09-6002627-S) claiming unpaid
invoices for the approximate amount of $300,000.00. The Company
believes that it has defenses to this action and is attempting to reach a
resolution.
Other
than the items discussed above, we believe that the Company is currently
not subject to litigation, which, in the opinion of our management, is likely to
have a material adverse effect on the Company.
17. Subsequent
Events
The
Company has evaluated events subsequent to January 31, 2010 to assess the need
for potential recognition or disclosure in this report. Such events were
evaluated through March 22, 2010, the date these financial statements were
issued and has disclosed such items in Note 17, “Subsequent Events” herein in
addition to those referred to in Notes 6, 7, 8, and 9, subsequent events which
have been reviewed through March 22, 2010 include the
following:
On
February 11, 2010, the Company signed an agreement with Mexcor, Inc.,
an importer and distributor for hundreds of high quality brands
nationally and internationally. Mexcor has agreed to manage the
sourcing importing and distribution of our portfolio of brands
nationally. Our Company will continue to focus its efforts on its core business
of marketing and building a portfolio of iconic brands as well as developing,
coordinating and executing marketing and promotional strategies for its icon
brands. We anticipate that the agreement with Mexcor will rapidly drive
additional revenues and substantially reduce our overhead costs.
Under the
terms of the agreement, the parties have agreed to a 15-year term. Additionally,
the Company has agreed to issue the principal of the business 12 million shares
of Company common stock in exchange for consulting services. Mexcor is eligible
to receive financial incentives provided the parties deliver and attain certain
minimum performance requirements. Mexcor has agreed to deliver
additional new brands to the Company’s brand portfolio, which the companies plan
to jointly acquire, develop and market.
On March
4, 2010, we granted 2,000,000 shares of Company common stock under the 2009 Plan
to a financial consultant in satisfaction of payment for a $40,000 note payable
(See Note 9 (d) - Notes and Loans Payable.).
On March
2, 2010, we issued 6,000,000 shares to our Chief Executive Officer and
President; 5,000,000 (aggregate value $100,000) was a partial payment against
the working capital loan he has provided to the Company and 1,000,000 (aggregate
value $20,000) was awarded by the Board of Directors as a stock bonus for his
accomplishments in the creation and launch of one of our premier
brands.
On March
2, 2010, we issued 36,150 shares of our common stock with an aggregate value of
$723 to a former employee in satisfaction of past due wages net of
advances.
On March
2, 2010, we granted 2,000,000 shares of our common stock with an aggregate value
of $40,000 under the 2009 Plan to a consultant in exchange for marketing
services. The shares vested immediately on the date of grant.
On March
10, 2010, we issued 2,000,000 shares of our common stock with an aggregate value
of $40,000 for investor relation services provided to us under the terms to a
management consulting agreement.
On March
10, 2010, we granted 3,000,000 shares of our common stock with an aggregate
value of $60,000 under the 2009 Plan to a consultant in exchange for marketing
and promotional services. The shares vested immediately on the date of
grant.
In
connection with the June 18, 2009 Drinks Debenture financing by an investor, the
investor submitted a Notice of Conversion, on February 11, 2010 to convert
$108,375 of the outstanding balance of the Debenture in exchange for 8,500,000
shares of our common stock.
(See Note
6. – Note Receivable)
20
In
connection with the June 18, 2009 Drinks Debenture financing by an investor, the
investor submitted a Notice of Conversion, on March 11, 2010 to convert $120,000
of the outstanding balance of the Debenture in exchange for 7,058,824 shares of
our common stock.
(See Note
6. – Note Receivable)
In
connection with the June 18, 2009 Drinks Debenture financing, (See Note 6. –
Note Receivable) we agreed to issue to the Placement Agent, warrants to acquire
5% of the shares of our common stock which we would deliver in response to Share
Repayment Requests made by the Investor (described above in Note 6), at an
exercise price equal to the Market Price related to the shares delivered in
response to the Share Repayment Request (the "Placement Agent Warrants"). The
Placement Agent Warrants are exercisable for a five year period, will contain
cashless exercise provisions as well as anti-dilution provisions in the case of
stock splits and similar matters. In March 2010, the Company delivered to the
Placement Agent, in aggregate, 4,674,126 Placement Agent Warrants as follows:
effective February 24, 2010, a warrant to purchase 425,000 shares of Company
common stock at an exercise price of $0.01594; effective February 11, 2010, a
warrant to purchase 2,000,000 shares of Company common stock at an exercise
price of $0.001; effective January 15, 2010, a warrant to purchase 1,000,000
shares of Company common stock at an exercise price of $0.00625; effective
December 30, 2009, a warrant to purchase 681,818 shares of Company common stock
at an exercise price of $0.01375; effective August 28, 2009, a warrant to
purchase 192,308 shares of Company common stock at an exercise price of $0.065;
effective June 19, 2009, a warrant to purchase 250,000 shares of Company common
stock at an exercise price of $0.09375; and, effective June 19, 2009, a warrant
to purchase 125,000 shares of Company common stock at an exercise price of
$0.4375.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
Introduction
The
following discussion and analysis summarizes the significant factors affecting
(1) our consolidated results of operations for the nine and three months ended
January 31, 2010, as compared to the nine and three months ended
January 31, 2009, and (2) our liquidity and capital resources. This
discussion and analysis should be read in conjunction with the consolidated
financial statements and notes included in Item 1 of this Report, and the
audited consolidated financial statements and notes included in Form 10-K, which
Report was filed on August 13, 2009 for the year ended April 30,
2009.
RESULTS
OF OPERATIONS
Nine
Months Ended January 31, 2010 and 2009:
Net Sales: Net Sales were
$846,020 for the nine months ended January 31, 2010 compared to net sales of
$2,214,710 for the nine months ended January 31, 2009, representing a decrease
of $1,368,690 or 62%. As we announced previously, the delay in securing timely
financing, now currently in place, resulted in various second and third quarter
customer orders and their respective inventories experiencing shipment delays
into our third and fourth quarters. Our significant second quarter decrease is
predominantly due to inventory shortfalls because of insufficient working
capital, and the untimely issuance of letters of credit resulting in the delay
of certain shipments and the reluctance of distributors to place orders for our
products. We believe, and subsequent customer orders and demand
indicate, that with adequate working capital, our recent distribution and
importation agreement (February 2010) now currently in place with Mexcor, Inc.,
sales of our products will increase in the fourth quarter and should be
very successful in this economic environment.
Gross Margin: Gross margin was
$236,764 (28.0% of net sales) for the nine months ended January 31, 2010
compared to gross margin of $524,875 (23.7% of net sales) for the comparable
three month period of the prior year reflects an improvement of 4.3% percentage
points in gross margin. This improvement results from the discontinuance of the
Newman’s Own product line which was providing lower margins during the nine
months ended January 31, 2009 as the product was sold at or below cost due
to increased production costs coupled with its the inability to sustain growth.
As this trend continued into the current fiscal year, we decided to discontinue
the product line in the second quarter of 2009, and wrote-off the related
inventory by recording a charge of $40,000 to cost of goods sold. Additionally,
for the nine months ended January 31, 2009, we terminated the Cohete Rum brand
and recorded a loss for the subsequent inventory liquidation.
Selling, general and administrative
expenses: Selling, general and administrative expenses amounted to
$3,840,716 for the nine months ended January 31, 2010, compared to $4,366,544
for the nine months ended January 31, 2009, an 12.0% decrease. The decrease in
selling, general and administrative expenses for the nine months ended January
31, 2010, is predominately due to our decision to reduce our operating expenses
and thereby sustain working capital. The overhead reductions,
resulted in lower payroll and payroll related and travel expenses, that were
mostly realized in the three months ended January 31, 2010 and will continue
into the fourth quarter and beyond as we restructure our business operating
model. Local marketing expenses decreased from the prior year because many
customers were out of inventory of our brands. Additionally, for the nine months
ended January 31, 2010, marketing expenses included $567,000 of fees relating to
the Olifant Summer Concert Series. For the nine months ended January 31, 2009,
we recognized a non-cash charge of $220,000 relating to payment in stock in lieu
of cash paid to certain employees of the Company for the services
they have provided.
21
Other Income (Expense):
Interest expense totaled $906,888 for the nine months ended January 31,
2010 compared to $122,515 for the nine months ended January 31, 2009. The
increase is predominately due to the financing costs attributed to our June
financings and the associated amortization of the deferred financing charges. In
December of 2008, the Company’s lender, Sovereign, notified the Company that it
had computed interest on our outstanding working capital credit line incorrectly
resulting in a $50,000 settlement credit with the Company. For the nine months
ended January 31, 2009, other income aggregated $409,000 as a result of the
Company’s settlement with RBCI Holdings, Inc. The Company issued 350,000 shares
of Company common stock with an aggregate value on the settlement date of
$91,000 in full consideration of a $500,000 note payable to RBCI Holdings,
Inc.
Income Taxes: We have incurred
substantial net losses from our inception and as a result, have not incurred any
income tax liabilities. Our federal net operating loss carry forward is
approximately $29,000,000, which we may be able to use to reduce taxable
earnings in the future. No income tax benefits were recognized for the three and
nine months ended January 31, 2010 and 2009 as we have provided valuation
reserves against the full amount of the future carry forward tax loss benefit
because
of uncertainties over its realization. We will evaluate the reserve every
reporting period and recognize the benefits when realization is reasonably
assured.
Three
Months Ended January 31, 2010 and 2009:
Net Sales: Net Sales were
$396,742 for the three months ended January 31, 2010 compared to net sales of
$565,000 for the thee months ended January 31, 2009, a decrease
of $168,258. While this year over year decrease was 30%,
we believe the greater indication of the Company’s business turnaround is the
current quarter’s $381,437 sales dollar increase over last quarter’s sales of
$15,305. The year over year decrease is predominantly due to inventory
shortfalls because of insufficient working capital, resulting in the delay of
certain shipments and the reluctance of distributors to place orders for our
products. We believe, and subsequent customer orders and demand
indicate, as demonstrated by the current quarter’s to last
quarter’s sales increase, that with adequate working capital, our recently
signed distribution and importation agreement (February 2010) now currently in
place with Mexcor, Inc., sales of our products should be very successful in
this economic environment.
Gross Margin: Gross margin was
$109,195 (27.5% of net sales) for the three months ended January 31, 2010
compared to gross margin of $145,351 (25.7% of net sales) for the comparable
three month period of the prior year reflects an improvement of 1.8 percentage
points in gross margin. This improvement results from the discontinuance of the
Newman’s Own product line which contributed to lower margins in the prior years
third quarter as the product was sold below cost. The low margins for the
Newman’s’ Own products were due to increased production costs coupled with its
the inability to sustain growth lead to our decision to discontinue this
line of products.
Selling, general and administrative
expenses: Selling, general and administrative expenses amounted to
$630,659 for the three months ended January 31, 2010, compared to $1,659,960 for
the three months ended January 31, 2009, a 62% decrease. The decrease
in selling, general and administrative expenses is predominately due to the
reduction in overhead which resulted in lower payroll and payroll related and
travel expenses as we sought to reduce our operating expenses and sustain our
reduced levels of working capital. Local marketing expenses decreased from the
prior year because many customers were out of inventory of our brands. The
reduction in selling, general and administrative expenses provides a strong
indication of the Company’s potential once our revised operating business model
is fully implemented.
Other Income (Expense):
Interest expense for the three months ended January 31, 2010 totaled
$389,404 predominately from interest expense incurred on our notes
and loans payable and the related amortization associated with the deferred June
financing charges. Interest expense for the three months ended January 31, 2009,
reflects the income benefit a $50,000 settlement with the Company’s lender,
Sovereign offset by interest expense on borrowings of $15,371. Other income of
$409,000 for the three months ended January 31, 2009, is the result of the
Company’s settlement with RBCI Holdings, Inc. whereby we issued 350,000 shares
of Company common stock with an aggregate value of $91,000 on the settlement
date in full consideration for the $500,000 note payable to RBCI.
Income Taxes: We have incurred
substantial net losses from our inception and as a result, have not incurred any
income tax liabilities. Our federal net operating loss carry forward is
approximately $29,000,000, which we may use to reduce taxable earnings in the
future. No income tax benefits were recognized for the three and nine months
ended January 31, 2010 and 2009 as we have provided valuation reserves against
the full amount of the future carry forward tax loss benefit. We will continue
to evaluate the reserve every reporting period and recognize the benefits when
realization is reasonably assured.
IMPACT
OF INFLATION
Although
management expects that our operations will be influenced by general economic
conditions we do not believe that inflation has had a material effect on our
results of operations.
SEASONALITY
As a
general rule, the second and third quarters of our fiscal year (August-January)
are the periods that we realize our greatest sales as a result of sales of
alcoholic beverages during the holiday season. During the fourth quarter of our
fiscal year (February-April) we generally realize our lowest sales volume as a
result of our distributors decreasing their inventory levels which typically
remain on hand after the holiday season. Given our lack of working capital, the
effects of seasonality on our sales have been lessened.
22
FINANCIAL
LIQUIDITY AND CAPITAL RESOURCES
Although
we expect that our working capital position will benefit from our June 2009
sales of our debentures, our August 2009 agreement relating to our Series B
Preferred Stock and our February 2010 Agreement with Mexcor, our business
continued to be effected by insufficient working capital. We will need to
continue to manage carefully our working capital and our business decisions will
continue to be influenced by our working capital requirements. Lack of liquidity
continued to negatively affect our business and curtail the execution of our
business plan.
We have
experienced net losses and negative cash flows from operations and investing
activities since our inception in 2003. Our net loss for the nine months ended
January 31, 2010 was $ 4,414,612. Cash used in operating activities for the nine
months ended January 31, 2010 was $ 274,200. We have to date funded our
operations predominantly through factoring, vendor credit, loans from
shareholders and investors, and proceeds from the sale of our common stock,
preferred stock, and warrants.
As of
August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the “Fund”),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time
to time until August 16, 2011 and at our sole discretion, we may present the
Fund with a notice to purchase such Series B Preferred Stock (the
“Notice”). The Fund is obligated to purchase such Series B Preferred
Stock on the tenth trading day after the Notice date, subject to satisfaction of
certain closing conditions. The Fund will not be obligated to
purchase the Series B Preferred Stock (i) in the event the closing price of our
common stock during the nine trading days following delivery of a Notice falls
below 75% of the closing price on the trading day prior to the date such Notice
is delivered to the Fund, or (ii) to the extent such purchase would result in
the Fund and its affiliates beneficially owning more than 9.99% of our common
stock.
On
November 25, 2009, the Company received gross proceeds of $87,037 from the
issuance of 8.7037 shares of Series B preferred stock at $10,000.00 per share
and a warrant for 4,701,167 shares of common stock with an exercise price based
on prevailing market prices. The warrant is exercisable upon the
earlier of (a) May 25, 2010, or (b) the date a registration statement covering
the warrant shares is declared effective, but not after November 25, 2014, that
number of duly authorized, validly issued, fully paid and non-assessable shares
of common stock set forth above; provided, however, that this warrant may only
be exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.025 initial exercise price. We have determined the warrants to
have a fair value of $66,960 using Black-Scholes pricing model and will amortize
the cost over five years or until exercised.
On
December 17, 2009, the Company received gross proceeds of $51,333 from the
issuance of 5.133333 shares of Series B preferred stock at $10,000.00 per share
and a warrant for 4,200,000 shares of common stock with an exercise price based
on prevailing market prices. The warrant is exercisable upon the
earlier of (a) June 17, 2010, or (b) the date a registration statement covering
the warrant shares is declared effective, but not after December 17, 2014, that
number of duly authorized, validly issued, fully paid and non-assessable shares
of common stock set forth above; provided, however, that this warrant may only
be exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.0165 initial exercise price. We have determined the warrants to have
a fair value of $53,922 using Black-Scholes pricing model and will amortize the
cost over five years or until exercised.
Our
ability to send additional notices is also subject to certain
conditions. Therefore, the actual amount of the Fund’s investment is
not certain.
On March
4, 2010, we granted 2,000,000 shares of Company common stock under the 2009 Plan
to a financial consultant in satisfaction of payment for a $40,000 note payable
(See Note 9 (d) - Notes and Loans Payable.).
On March
2, 2010, we issued 6,000,000 shares to our Chief Executive Officer and
President; 5,000,000 (aggregate value $100,000) was a partial payment against
the working capital loan he has provided to the Company and 1,000,000 (aggregate
value $20,000) was awarded by the Board of Directors as a stock bonus for his
accomplishments in the creation and launch of one of our premier
brands.
On March
2, 2010, we issued 36,150 shares of our common stock with an aggregate value of
$723 to a former employee in satisfaction of past due wages, net of
advances.
On March
2, 2010, we granted 2,000,000 shares of our common stock with an aggregate value
of $40,000 under the 2009 Plan to a consultant in exchange for marketing
services. The shares vested immediately on the date of grant.
On March
10, 2010, we issued 2,000,000 shares of our common stock with an aggregate value
of $40,000 for investor relation services provided to us under the terms to a
management consulting agreement.
23
On March
10, 2010, we granted 3,000,000 shares of our common stock with an aggregate
value of $60,000 under the 2009 Plan to a consultant in exchange for marketing
and promotional services. The shares vested immediately on the date of
grant.
In
connection with the June 18, 2009 Drinks Debenture financing by an investor, the
investor submitted a Notice of Conversion on February 11, 2010 to convert
$108,375 of the outstanding balance of the Debenture in exchange for 8,500,000
shares of our common stock.
In
connection with the June 18, 2009 Drinks Debenture financing by an investor, the
investor submitted a Notice of Conversion on March 11, 2010 to convert $120,000
of the outstanding balance of the Debenture in exchange for 7,058,824 shares of
our common stock.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. At the option of the note holder, interest can be paid in
either cash or shares of Company common stock based on the convertible note’s
$0.06 conversion price. As additional consideration, the Company
granted the note holder 250,000 shares of Company’s common and agreed to
register the shares by January 8, 2010 or pay to the note holder as damages
additional shares of the Company’s common stock equal to 2.0% of the common
shares issuable upon conversion of the convertible note. The Company
also granted the note holder piggyback registration rights. On
November 23, 2009, the Company issued the 250,000 shares.
In June
2009, (the "Closing Date") we sold to one investor (the “Investor”) a $4,000,000
non-interest bearing debenture with a 25% ($1,000,000) original issue discount,
that matures in 48 months from the Closing Date (the Drink’s Debenture) for
$3,000,000, consisting of $375,000 paid in cash at closing and eleven secured
promissory notes, aggregating $2,625,000, bearing interest at the rate of 5% per
annum, each maturing 50 months after the Closing Date (the “Investor
Notes”). The Investor Notes, the first ten of which are in the
principal amount of $250,000 and the last of which is in the principal amount of
$125,000, are mandatorily pre-payable, in sequence, at the rate of one note per
month commencing on the seven month anniversary of the Closing
Date. If the prepayment occurs, the entire aggregate principal
balance of the Investor Notes (less the $200,000 August prepayment) in the
amount of $2,425,000, together with the interest outstanding thereon, will be
paid in eleven monthly installments (ten in the amount of $230,000 and one the
amount of $125,000) such that the entire amount would be paid to us by November
26, 2010. These monthly payments if made will help fund operations
over their eleven month period.
The
Company has an agreement with a factor entered into April
2009, pursuant to which a substantial portion of the Company’s accounts
receivable, is sold to the factor with recourse to bad debts and other
customer claims. The Company receives a cash advance equal to 80% of
the invoice amount and is paid the balance of the invoice less fees incurred at
the time the factor receives the final payment from the customer. The factor fee
is 1.75% for the first 30 days the invoice remains unpaid and 0.07% for each day
thereafter. The facility shall remain open until a 30 day notice by either party
of termination of the agreement The facility is secured by all assets of the
Company.
In
October 2006, the Company borrowed $250,000 and issued a convertible promissory
note in like amount. The due date of the loan was originally extended by the
Company to October 2008 from October 2007 in accordance with the terms of the
original note agreement. On March 1, 2009 the note was amended to extend the due
date to October 18, 2009. As consideration for extending the note in March 1,
2009 the Company issued the lender 286,623 shares of Company common
stock. On November 9, 2009, an investor purchased the past due note in the
amount of $309,839 including interest from the note-holder. On November 13,
2009, the Company exchanged the past due Company Note for a new $447,500
Convertible Promissory Note. The new convertible promissory note is convertible
at the note holder’s option using a conversion price based on the prevailing
market prices.
As of
January 31, 2010, the Company issued the note holder a total of
16,162,687 shares of Company common stock in satisfaction of conversions of note
principal leaving a balance of $153,618 in note principal available for
conversion. On November 23, the Company issued 400,000 shares of common stock in
satisfaction of interest payable on the note described
above. Subsequent to January 31, 2010, the Company issued the note
holder a total of 13,688,679 shares of Company common stock at prevailing market
prices in satisfaction of conversions of the remaining note
principal.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. As of January 31, 2010, interest expense of $2,882 was
accrued. At the option of the note holder, interest can be paid in either cash
or shares of Company common stock based on the convertible note’s $0.06
conversion price. As additional consideration, the Company granted
the note holder 250,000 shares of Company’s common and agreed to register the
shares by January 8, 2010 or pay to the note holder as damages additional shares
of the Company’s common stock equal to 2.0% of the common shares issuable upon
conversion of the convertible note. The Company also granted the note
holder piggyback registration rights. On November 9, 2009, the
Company issued the 250,000 shares valued at $10,000 which the Company deemed a
loan origination fee. As of January 31, 2010, $7,694 has been recorded as a
deferred charge on the balance sheet and $3,306 has been amortized to interest
expense.
On
November 17, 2009, the Company issued a total of 12,003,720 shares of Company
common stock to certain officers and directors as a replacement for the shares
they pledged pursuant to a financing transaction (including 8,000,000 to our
CEO; 906,000 to our COO and an aggregate of 3,097720 among our three directors.)
On January 11, 2010, pursuant to the previously noted financing transaction, the
Company issued to those individuals who pledged their shares, 0.5
shares of Company stock for each share pledged, which aggregated 6,001,860
shares (including 4,000,000 to our CEO; 453,000 to our COO and an aggregate of
1,548,860 to our three directors). The 6,001,860 shares had an approximate fair
value of $240,074 on January 11, 2010, the
issuance date, which amount is recorded in common stock and additional paid in
capital in the accompanying balance sheet as of January 31, 2010. (See Note 6 –
Note Receivable.)
24
On
November 18, 2009, the Company retained a business advisory consultant and
agreed to issue 2,000,000 shares of Company Common Stock in exchange for
consulting services which shares the Company issued on March 10,
2010.
On
November 17, 2009, the Company issued 23,000,000 shares of Company common stock,
to be held as treasury shares which are pledged in lieu of prejudgment remedies
on two litigation matters. (See Note 16. Commitments and Contingencies –
Litigation).
On
December 18, 2007, (the "Closing Date") the Company sold to three related
investors (the "December Investors") an aggregate of 3,000 shares of our Series
A Preferred Stock, $.001 par value (the "Preferred Stock"), at a cash purchase
price of $1,000 per share, generating gross proceeds of $3,000,000 (the
“December Financing”). The Preferred Stock has no voting or dividend rights. Out
of the gross proceeds of the December Financing, we paid Midtown Partners &
Co., LLC (the "Placement Agent") $180,000 in commissions and $30,000 for
non-accountable expenses. We also issued, to the Placement Agent, warrants to
acquire 600,000 shares of our Common Stock for a purchase price of $.50 per
share (the "Placement Agent Warrants"), which warrants are exercisable for a
five year period and contain anti-dilution provisions in the events of stock
splits and similar matters. Both the commissions and expenses were accounted for
as a reduction of Additional Paid in Capital.
The
financing that we consummated in January 2007 (the “January Financing”) provided
participating investors (the “January Investors”) rights to exchange the common
stock they acquired for securities issued in subsequent financings which were
consummated at a common stock equivalent of $2.00 per share or less. Under this
provision, the January Investors have exchanged 4,444,445 shares of common stock
for 8,000 shares of Preferred Stock. The 4,444,445 shares returned were
accounted for as a reduction of Additional Paid in Capital and a reduction of
Common Stock since the shares have been cancelled. Also in the January
Financing, the January Investors acquired warrants to purchase 3,777,778 shares
of our common stock at an exercise price of $3.00 per share (the “January
Warrants”). These warrants were exercised at $.20 per share of common
stock.
Each of
our December Investors participated in the January Financing but not all of our
January Investors participated in the December Financing.
The
December Investors may allege that certain penalties are owed to them by the
Company based on certain time requirements in the documentation relating to the
December Financing. If such claim is successfully made, we may lack the
liquidity to satisfy such claim.
On
January 15, 2009 (the “Closing”), the Company acquired 90% of the capital stock
of Olifant U.S.A, Inc. (“Olifant”) , pursuant to a Stock Purchase Agreement (the
“Agreement. As security for the balance due to the sellers the
Company issued a promissory note for the $800,000 balance. The promissory note
is payable in four annual installments, the first payment is due one year from
Closing. Each $200,000 installment is payable $100,000 in cash and Company stock
valued at $100,000 with the stock value based on the 30 trading days immediately
prior to the installment date. The cash portion of the note accrues interest at
a rate of 5% per annum. On January 15, 2010, the Company paid the first loan
installment in the amount of $200,000 and $5,000 in interest. The Company issued
4,950,496 shares as payment for the stock portion of the installment, and at the
election of the sellers, $63,000 in cash and 2,079,208 in common stock as
payment of the cash and interest portion on the first installment.
On
November 5, 2009, the Company borrowed $37,500 from an investor under an
informal agreement for working capital purposes. The loan is payable on demand
and is classified under notes and loans payable as a current liability on the
balance sheet as of January 31, 2010.
From July
2007 through January 2010, the Company has borrowed and our CEO has loaned
various amounts up to $813,035 to the Company for working capital purposes at an
annual interest rate of 12%. As of January 31, 2010 and April 30,
2009, amounts owed to our CEO on these loans including accrued and unpaid
interest aggregated $280,845 and $295,179, respectively. For the nine months
ended January 31, 2010 and 2009, interest incurred on these loans
aggregated $27,983 and $29,179, respectively.
On March
2, 2010, we issued 6,000,000 shares to our Chief Executive Officer and
President; 5,000,000 (aggregate value $100,000) was a partial payment against
the working capital loan he has provided to the Company and 1,000,000 (aggregate
value $20,000) was awarded by the Board of Directors as a stock bonus for his
accomplishments in the creation and launch of one of our premier
brands.
On
October 20, 2009, the Company reached agreements with its Chief Executive
Officer and members of its Board of Directors to satisfy obligations owed to
them, in the aggregate amount of $1,002,450 for salary, director fees,
consulting fees and for satisfaction of a portion of an outstanding loan and the
interest accrued thereon, by issuing to them 1,763,607 shares of our common
stock and warrants to acquire 9,838,793 shares of our common stock. Under
this arrangement, the valuation of the common stock and the exercise price of
the warrants was $0.15 a share. Fifty percent of the warrants can be
exercised at anytime during the ten-year term and the other 50 percent will only
be exercisable when the Company has achieved positive EBITDA for two successive
quarters. If this profitably standard is not realized during the term
of the warrants, 50 percent of the warrants will be
forfeited. While the Company has not yet issued the shares or
warrants as of January 31, 2010, it expects to do so in the fourth
quarter.
As of
January 31,2010, the Company has a shareholders' deficiency of
$3,530,761 including $42,015,466 in accumulated losses since its inception in
2002. For the nine months ended January 31,2010, the Company
sustained a net loss of $4,414,612 and used $274,200 in operating activities. We
will need additional financing which may take the form of equity or debt and we
will seek to convert liabilities into equity.
25
We expect
that our working capital position and our cash balance will benefit from
financing agreement we have in place; however, our business continues to be
effected by insufficient working capital. We will need to continue to carefully
manage our working capital and our business decisions will continue to be
influenced by our working capital requirements.
Therefore,
our short term business strategy will rely heavily on our cost efficient icon
brand strategy and the resources available to us from current and new strategic
partners we may attract. Consequently, in direct pursuit of this strategy,
effective February 15, 2010, the Company entered into an exclusive distribution
agreement with Mexcor, Inc., to manage, promote and distribute in the United
States, the Company’s portfolio of brands, as defined. The initial term of the
agreement is for five years, requires a minimum net sales performance by Mexcor,
which when attained, will automatically renew for an additional ten years. Under the
terms of the agreement, the Company has agreed to issue the principal of the
business 12 million shares of Company common stock in exchange for consulting
services.
Furthermore. the
Company shall earn and Mexcor shall pay, a royalty fee on a per case or case
equivalent basis on all Company products distributed by Mexcor which royalty fee
will increase by ten percent on August 12, 2011, with additional ten percent
increases (compounded) on August 15th of each successive year during the initial
term of the agreement. Additionally, the Company shall earn $10.00 for each case
of Damiana product, as defined, distributed by Mexcor. For the first full
twenty-one calendar months following the effective date, Mexcor will pay the
Company the greater of the per case royalty fees described above or the
following monthly minimum royalties; $20,000, for the first six months; $35,000,
for months 7-9 and $50,000 for months 10-21. The minimum monthly royalties are
payable on the 15th day of
that month.
Additionally,
the Company will issue to Mexcor, warrants to acquire 2,000,000 shares of the
Company’s common stock at such time Mexcor realizes the minimum net sales
requirements under the initial term. The Company has further agreed to issue
Mexcor a warrant to acquire an additional 2,000,000 shares of Company common
stock at such time Mexcor attains a second net sales performance level based on
a twelve-month look-back period provided such performance criteria are satisfied
during the initial term. Finally, the Company has agreed to issue Mexcor
additional financial incentives payable in cash or stock and warrants for the
attainment of certain volume or business metrics.
We
anticipate that the agreement with Mexcor will rapidly drive additional
revenues and substantially reduce our overhead costs. Our Company will continue
to focus its efforts on its core business of building a portfolio of iconic
brands as well as developing, coordinating and executing marketing and
promotional strategies for its icon brands.
We will
continue to focus on those of our products which we believe will provide the
greatest return per dollar of investment with the expectation that as a result
of increases in sales and the resulting improvement in our working capital
position, we will be able to focus on those products for which market acceptance
might require greater investments of time and resources. To that end, our
short-term focus, for beer and spirits, will be on Trump Super
Premium Vodka, Old Whiskey River Bourbon, Damiana, Aquila Tequila, and in
association with our recent joint venture with music icon Dr. Dre,
our Leyrat Cognac and our recent joint venture with music icon Kid
Rock, BadAss Beer. In order for us to continue and grow our business, we
will need additional financing which may take the form of equity or
debt.
There can
be no assurance we will be able to secure the financing we require, and if we
are unable to secure the financing we need, we may be unable to continue our
operations. We anticipate that increased sales revenues will help to some
extent, but we will need to obtain funds from equity or debt offerings, and/or
from a new or expanded credit facility. In the event we are not able to increase
our working capital, we will not be able to implement or may be required to
delay all or part of our business plan, and our ability to attain profitable
operations, generate positive cash flows from operating and investing activities
and materially expand the business will be materially adversely
affected.
ROYALTIES/LICENSING
AGREEMENTS
In
November 2005 the Company entered into an eight-year license agreement for sales
of Trump Super Premium Vodka. Under the agreement the Company is required to pay
royalties on sales of the licensed product. The agreement requires minimal
royalty payments through November 2012 which if not paid could result in
termination of the license. The Company is currently in default under the terms
of its license agreement with Trump Marks LLC. The licensor has the right
to terminate the license, but at present has not formally asserted that right.
The Company under a non documented arrangement with the licensor is continuing
to sell the product. The Company and licensor are currently in discussion to
amend the agreement under mutually beneficial terms.
Under our
license agreement for Old Whiskey River, we are obligated to pay royalties of
between $10 and $33 per case, depending on the size of the bottle.
Under our
license agreement with Aguila Tequila we are obligated to pay $3 per
case.
26
Under our
joint venture agreements with Dr. Dre and Interscope
Records, which includes our Leyrat Cognac, we are obligated
to pay a percentage of gross profits, less certain direct selling
expenses.
Our license with respect to the Kid Rock related trademarks currently requires
payments to Drinks Americas based upon volume through the term of the
agreement.
OTHER
AGREEMENTS
The
Company has an agreement with a foreign distributor, through December 2023, to
distribute our products in their country. The agreement requires the distributor
to purchase a set monthly amount of our products, predominately our
Trump Super Premium Vodka for the term of the agreement. The distributor is to
pay the Company a monthly fee over the term of the agreement for the rights to
be the exclusive distributor in Israel. As of January 31,
2009, the distributor received its distribution license and has
commenced performance under the contract.
Effective
February 15, 2010, the Company entered into an exclusive agreement with Mexcor,
Inc., to manage , promote and distribute in the United States, the Company’s
portfolio of brands, as defined. The initial term of the agreement is for five
years, requires a minimum net sales performance by Mexcor, which when attained,
will automatically renew for an additional ten years. Furthermore, the Company
has agreed to issue the principal of the business 12 million shares of Company
common stock in exchange for consulting services.
Under the
terms of the agreement, the Company shall earn and Mexcor shall pay, a royalty
fee on a per case or case equivalent basis on all Company products distributed
by Mexcor. which royalty fee will increase by ten percent on August 12, 2011,
with additional ten percent increases (compounded) on August 15th of each
successive year during the initial term of the agreement. Additionally, the
Company shall earn $10.00 for each case of Damiana product, as defined,
distributed by Mexcor. For the first full twenty-one calendar months following
the effective date, Mexcor will pay the Company the greater of the per case
royalty fees described above or the following monthly minimum royalties;
$20,000, for the first six months; $35,000, for months 7-9 and $50,000 for
months 10-21. The minimum monthly royalties are payable on the 15th day of
that month. Mexcor can earn additional financial compensation in cash or stock
for achieving certain metrics.
In April
2009, the Company entered into a sponsorship agreement with concert
producer and promoter to promote Olifant Vodka in its concert
tour which runs from July 10, thru August 8, 2009. In
consideration for their services the Company has given the promoter the
following: 4,700,000 shares of its common stock that have been issued;
3% of the net profits of Olifant for each fiscal year
beginning following the third anniversary of the agreement
(years beginning May 2012) and ending the earlier of
Olifant’s fiscal year ending in 2018 or when Olifant is sold, if that were to
occur. If Olifant is sold prior to expiration the promoter will
receive 3% of the consideration received from the sale. The Company has agreed
to grant an additional 2% (of Olifant or a
future brand) for promotion in the 2010 concert tour; and
warrants to purchase 200,000 shares of Company stock at an exercise price of
$.50 per share which shall be issued at the end of the 2009 tour. In
accordance with the agreement the amount of cash and stock based consideration
issued by the Company shall not be less than $400,000. In accordance
with the agreement, in May 2009, the Company issued a promissory note to
the promoter for a loan in the same amount to cover expenses relating
to the tour. The note, which bears no interest, was repaid with shares of
Company stock.
In fiscal
2003, we entered into a consulting agreement with a company owned 100% by a
member of the Board of Directors. Under the agreement, the consulting company is
being compensated at the rate of $100,000 per annum. As of January 31, 2010, we
were indebted to in the amount of $331,243. . The Company and the Board
member have agreed to settle the outstanding amount due at January 31, 2010 by
the Company issuing shares of our common stock and warrants to acquire shares of
our common stock. The Company plans to issue the shares and associated warrants
in our fiscal fourth quarter.
In
December 2002, the Company entered into a consulting agreement with one of its
shareholders which provides for $600,000 in fees payable in five fixed
increments over a period of 78 months. The agreement expired on June 9,
2009. The Company has an informal agreement with the shareholder pursuant to
which he has the option of converting all or a portion of the consulting fees
owed him into shares of Holding's common stock at a conversion price to be
agreed upon. In March 2009 the consultant elected to convert
$120,000 due him for consulting fees into shares of Company stock at a
price of $0.35 per share resulting in the Company issuing 342,857 shares to
him. In February, 2008 the consultant elected to convert $190,000 due
him for consulting fees into shares of Company common stock at a price of $0.50
per share resulting in the Company issuing 380,000 shares to him. Each of the
conversions were at a premium to the market price of the Company’s common
stock on the date of the elections to convert. As
of January 31, 2010 and April 30, 2009, amounts owed to this shareholder
aggregated $43,151 and $30,000,
respectively.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
Item 4. Controls
and Procedures
Disclosure
Controls and Procedures
27
On
November 2, 2009, our former Chief Financial Officer resigned in order to pursue
other opportunities. Our Chief Executive Officer has assumed the duties of
Principal Financial Officer. The number of full-time Company employees has been
and continues to be substantially reduced. The Company has engaged a consultant
to assist with handling some of the former CFO’s responsibilities.
We have
adopted and maintain disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Exchange Act,
is recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) who is also our Principal Financial Officer, as appropriate,
to allow for timely decisions regarding required disclosure.
Our Chief
Executive Officer who also is our principal executive officer, and our Principal
Financial Officer evaluated the effectiveness of our disclosure controls and
procedures as of January 31, 2010, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act. Our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on the evaluation of our disclosure controls and
procedures as of January 31, 2010, our Chief Executive Officer, who also is our
principal executive officer, and our Principal Financial Officer, concluded
that, as of such date, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be declared by us in
reports that we file with or submit to the SEC is (1) recorded, processed,
summarized, and reported within the periods specified in the SEC’s rules and
forms and (2) accumulated and communicated to our management, including our
Chief Executive Officer, to allow timely decisions regarding required
disclosure. There was no change in our internal control over
financial reporting that occurred during the fiscal quarter ended January 31,
2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The
Company continues to assess the effects of these developments on its
internal accounting controls and may determine that material weaknesses in
internal controls may or may not exist.
Changes in Internal Controls
Our
management, with the participation our principal financial officer, performed an
evaluation as to whether any change in our internal controls over financial
reporting occurred during the Quarter ended January 31, 2010. Based on that
evaluation, our management concluded that no change occurred in the Company’s
internal controls over financial reporting during the Quarter ended January 31,
2010 that has materially affected, or is reasonably likely to materially affect,
the Company’s internal controls over financial reporting.
PART II
OTHER INFORMATION
Item
1. Legal Proceedings
In June
2009, Richard Shiekman, a former employee of the Company, filed an application
for prejudgment remedy against the Company and our chief Executive Officer in
Superior Court of Connecticut, Judicial District of Fairfield (Docket
Number CV 09 4028895 S). The plaintiff seeks $127,250 of unpaid wages and
commissions and, $1,500 for reimbursement of expenses. The maximum exposure to
the Company and our CEO is approximately $260,000 for double damages
plus attorneys’ fees and costs. The Company believes that the claims made by the
plaintiff are false and plans to vigorously defend this suit. In addition,
the Company plans to commence a countersuit for damage and theft of
services. As of November 30, 2009, we pledged 10,325,000 shares
of Company common stock in lieu of a prejudgment remedy that the Plaintiff had
sought against the Company and its Chief Executive Officer.
In
October 2009, James Sokol, a former salesperson for the Company, filed suit
against the Company and its Chief Executive Officer in the Superior Court for
the Judicial District of Fairfield (Docket Number CV 09 5027925 S) claiming
unpaid compensation of $256,000.00. The maximum exposure to the Company
and our CEO is approximately $520,000.00 for double damages plus attorney's
fees and costs. The Company believes that the claims made by the plaintiff
are false and plans to vigorously defend this suit. As of November
30, 2009, we pledged 15,00,000 shares of Company common stock in lieu of a
prejudgment remedy that the Plaintiff had sought against the Company and its
Chief Executive Officer.
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company which has the patent
to the Trump Vodka bottle design filed a complaint against us in the U.S.
District Court, Southern District of New York for alleged breach of contract and
seeking $225,000 for alleged past due invoices and royalties. The Company filed
a counterclaim. The case was settled in October 2009. This settlement resulted
in the reduction of the Company’s annual glass royalty obligation and a
settlement of the outstanding balance the Company owed Bruni. . In October 2009,
the case was settled, whereby we agreed to pay Bruni $150,000 in settlement of
all claims. The settlement amount was to be paid in monthly installments of
$12,500 beginning February 15, 2010, and $12,500 on 15th of each
succeeding month through January 15th, 2011.
The February 15, 2010 and March 15, 2010 payments were made. The
Company has accrued $150,000 as of January 31, 2010 which if paid in full by
August 2010 reverts to $120,000. . Additionally, the annual going forward
royalty has been lowered by as much as 75% depending on utilization
levels.
28
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”) a company which provided
distribution services for us in several states filed a claim for damages against
us in Duval County Florida for alleged damages including breach of contract and
is seeking damages. It is the Company’s strong opinion that the claim arose
out of our termination of the agreements we had with them for their
nonperformance, failure of the plaintiff to accurately report sales to the
Company and their withholding of information required by the
agreements. The Company filed a counterclaim of $500,000 for damages
against Liquor Group and has denied their claimed breach of contract claim
previously made against it. The Company contends that it is owed money by
Liquor Group under the agreements. There is currently pending an arbitration
before the American Arbitration Association involving the dispute between Liquor
Group and Drinks Americas. A final arbitration hearing has been scheduled for
June 22, 2010, in Jacksonville, Florida. Liquor Group Wholesale, Inc. and/or
Liquor Group Holdings, LLC sought arbitration on a breach of contract claim
asserting damages in excess of $1,100,000. The claim was filed against Drinks
Americas Holding Limited, not Drink Americas, Inc., the contracting party.
Drinks America, Inc. has counter claimed against the initial Liquor Group
claimants, and has included several other Liquor Group entities because of the
considerable confusion Liquor Group has created through the use of multiple
entities with the same or virtually identical names. The counterclaim is for
$500,000 and includes claims concerning breach of contract, civil conspiracy,
fraudulent concealment, and civil theft.
Liquor
Group has been authorized to conduct certain limited discovery concerning Drinks
Americas’ civil conspiracy, fraudulent concealment and civil theft claims and
the parties are scheduled to exchange witness lists on April 23rd and
exhibit lists on May 14th and to file prehearing briefs on June
8th.
In
December 2009, Niche Media, Inc., an advertising vendor, filed suit against the
Company in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk (Docket Number FST-CV09-6002627-S) claiming unpaid
invoices for the approximate amount of $300,000.00. The Company
believes that it has defenses to this action and is attempting to reach a
resolution.
Other
than the items discussed above, we believe that the Company is currently
not subject to litigation, which, in the opinion of our management, is likely to
have a material adverse effect on us.
Item
1A. Risk Factors
In
addition to the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended April 30, 2009, the Company has the
following new material risk factor:
Risks Relating to Our
Current Financing Arrangement:
In order to raise working capital
necessary for operating the business, the Company, we entered in financing
transactions that can be settled by issuance of new shares of our common
stock. There
are a large number of shares underlying our convertible notes, convertible
preferred stock, and warrants that may be available for future sale and the sale
of these shares may depress the market price of our common stock. The continuously adjustable conversion
price feature of our convertible notes could require us to issue a substantially
greater number of shares, which will cause dilution to our existing
stockholders. Our obligation to issue shares upon conversion of our convertible
notes is essentially limitless. The continuously adjustable conversion
price feature of our convertible notes may encourage investors to make short
sales in our common Stock, which could have a depressive effect on the price of
our common stock. The significant downward pressure on
the price of the common stock as the selling stockholder converts and sells
material amounts of common stock could encourage short sales by investors. This
could place further downward pressure on the price of the common stock. The
selling stockholder could sell common stock into the market in anticipation of
covering the short sale by converting their securities, which could cause the
further downward pressure on the stock price. In addition, not only the sale of
shares issued upon conversion or exercise of notes, warrants and options, but
also the mere perception that these sales could occur, may adversely affect the
market price of the common stock. If we are required for any reason to
repay our outstanding convertible notes, we would be required to deplete our
working capital, if available, or raise additional funds. Our failure to repay
the convertible notes, if required, could result in legal action against us,
which could require the sale of substantial assets.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
On
November 25, 2009, the Company received gross proceeds of $87,037 from the
issuance of 8.7037 shares of Series B preferred stock at $10,000.00 per share
and a warrant for 4,701,167 shares of common stock with an exercise price based
on prevailing market prices. The warrant is exercisable upon the
earlier of (a) May 25, 2010, or (b) the date a registration statement covering
the warrant shares is declared effective, but not after November 25, 2014, that
number of duly authorized, validly issued, fully paid and non-assessable shares
of common stock set forth above; provided, however, that this warrant may only
be exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.025 initial exercise price. We have determined the warrants to have a
fair value of $66,960 using Black-Scholes pricing model and we will amortize the
cost over five years or until exercised.
On
December 17, 2009, the Company received gross proceeds of $51,333 from the
issuance of 5.133333 shares of Series B preferred stock at $10,000.00 per share
and a warrant for 4,200,000 shares of common stock with an exercise price based
on prevailing market prices. The warrant is exercisable upon the
earlier of (a) June 17, 2010, or (b) the date a registration statement covering
the warrant shares is declared effective, but not after December 17, 2014, that
number of duly authorized, validly issued, fully paid and non-assessable shares
of common stock set forth above; provided, however, that this warrant may only
be exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.0165 initial exercise price. We have determined the warrants to have
a fair value of $53,922 using Black-Scholes pricing model and we will amortize
the cost over five years or until exercised.
29
In
connection with the foregoing, the Company relied upon the exemption from
securities registration afforded by Rule 506 of Regulation D as promulgated by
the SEC under the Securities Act of 1933, as amended (the “Securities Act”)
an/or Section 4(2) of the Securities Act. No advertising or general solicitation
was employed in offering the securities. The offerings and sales were made to a
limited number of persons, all of whom were accredited investors, and transfer
was restricted by the Company in accordance with the requirements of the
Securities Act of 1933.
Item 3. Defaults
Upon Senior Securities
On October 27, 2009, St. George
Investments, LLC (“St. George”) declared a default under our $4,400,000
debenture as a result of the failure of certain shares of our common stock,
which were pledged by certain shareholders and the Company, to secure the
debenture that had been acquired by St. George. The Company has secured an agreement
from St. George not to enforce the default based on any decline in value of the
pledge shares that has occurred in the past or that may occur prior to December
31, 2006. Under the terms of such agreement,
3,209,997 pledge shares owned by the Company’s shareholders have become the property
of St. George. (See Note 6 in the Notes to the Financial
Statements)
Item 4. (Removed
and Reserved)
Item 5. Other
Information
None
Item 6. Exhibits
10.1
|
Agreement,
dated February 15, 2010 by and between Drinks Americas Holdings,
Ltd. and Mexcor, Inc. (Incorporated
by reference to the Company’s Form 8-K, filed with the Securities and
Exchange Commission on February 16,
2010.)
|
31.1
|
Certification of Principal
Executive Officer
|
31.2
|
Certification of Principal
Financial Officer
|
32.1
|
Certification of J.
Patrick Kenny, President and Chief Executive Officer, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
30
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned hereunto
duly authorized.
March 22,
2010
DRINKS
AMERICAS HOLDINGS, LTD.
|
||
By:
|
/s/ J. Patrick
Kenny
|
|
J.
Patrick Kenny
President,
Chief Executive Officer and Chief Accounting
Officer
|
31