Attached files
file | filename |
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EX-32.1 - DRINKS AMERICAS HOLDINGS, LTD | v205933_ex32-1.htm |
EX-31.2 - DRINKS AMERICAS HOLDINGS, LTD | v205933_ex31-2.htm |
EX-31.1 - DRINKS AMERICAS HOLDINGS, LTD | v205933_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 October 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
Suite
163
|
||
Wilton,
CT
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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 ¨
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 ¨ No ¨
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
December 6, 2010 , the number of shares outstanding of the registrant’s common
stock, $0.001 par value, was 44,395,147.
DRINKS
AMERICAS HOLDINGS, LTD. AND AFFILIATES
FORM
10-Q
FOR
THE QUARTER ENDED OCTOBER 31, 2010
TABLE
OF CONTENTS
Page
|
|||
PART
I – FINANCIAL INFORMATION
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|||
Item
1.
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Financial
Statements:
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F-1
|
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Consolidated
Balance Sheets as of October 31, 2010 (unaudited) and April 30,
2010
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F-1
|
||
Consolidated
Statements of Operations (unaudited)
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F-2
|
||
Consolidated
Statements of Cash Flows (unaudited)
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F-3
|
||
Notes
to Consolidated Financial Statements
(unaudited)
|
F-
4 - 22
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||
Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
3
|
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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6
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Item
4.
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Controls
and Procedures
|
6
|
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PART
II – OTHER INFORMATION
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|||
Item
1.
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Legal
Proceedings
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7
|
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Item
1A.
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Risk
Factors
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8
|
|
Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
8
|
|
Item
3.
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Defaults
Upon Senior Securities
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8
|
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Item
4.
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(Removed
and Reserved)
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8
|
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Item
5.
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Other
Information
|
8
|
|
Item
6.
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Exhibits
|
8
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SIGNATURES
|
9
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PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
Consolidated
Balance Sheets
OCTOBER
31,
|
APRIL
30,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and equivalents
|
$ | 17,998 | $ | 203,552 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $124,492and
$127,846, respectively.
|
131,869 | 66,346 | ||||||
Inventories,
net of allowances
|
168,645 | 222,608 | ||||||
Other
current assets
|
65,095 | 19,789 | ||||||
Total
current assets
|
383,607 | 512,295 | ||||||
Property
and equipment, net of accumulated depreciation
|
20,555 | 32,309 | ||||||
Investment
in equity investees
|
73,593 | 73,593 | ||||||
Intangible
assets, net of accumulated amortization
|
1,887,758 | 1,971,300 | ||||||
Deferred
loan costs, net of accumulated amortization
|
193,867 | 437,973 | ||||||
Other
assets
|
55,560 | 85,735 | ||||||
Total
assets
|
$ | 2,614,940 | $ | 3,113,205 | ||||
Liabilities
and Shareholders' Deficiency
|
||||||||
Accounts
payable
|
$ | 2,212,879 | $ | 2,199,665 | ||||
Accrued
expenses
|
2,313,226 | 2,744,058 | ||||||
Investor
note payable
|
450,000 | - | ||||||
Notes
and loans payable, net of long – term portion
|
479,889 | 437,196 | ||||||
Loan
payable – related party
|
19,135 | 154,670 | ||||||
Deferred
revenue
|
21,243 | 63,730 | ||||||
Total
current liabilities
|
5,496,372 | 5,599,319 | ||||||
Notes
and loans payable, net of current portion
|
400,000 | 400,000 | ||||||
Total
liabilities
|
5,896,372 | 5,999,319 | ||||||
Commitments
and Contingencies
|
||||||||
Shareholders'
deficiency:
|
||||||||
Preferred
stock, $0.001 par value; 1,000,000 shares authorized:
|
||||||||
Series
A Convertible: $0.001 par value; 10,544 shares issued and outstanding at
October 31, 2010 and April 30, 2010.
|
11 | 11 | ||||||
Series
B: $10,000 par value; 13.837 issued and outstanding, at October 31, 2010
and April 30, 2010.
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138,370 | 138,370 | ||||||
Series
C: $1.00 par value; 635,835 shares issued and outstanding, at
October 31, 2010 and -0- at April 30, 2010.
|
635,835 | |||||||
Common
stock, $0.001 par value; 500,000,000 and 100,000,000, respectively,
authorized; issued and outstanding 32,017,000 shares and 18,873,000 shares
at October 31, 2010 and April 30, 2010
|
32,017 | 18,873 | ||||||
Treasury
stock, 738,333 and 1,738,333 common shares held at October 31,
2010 and April 30, 2010
|
— | — | ||||||
Additional
paid-in capital
|
40,828,612 | 40,111,695 | ||||||
Accumulated
deficit
|
(44,966,450 | ) | (43,217,597 | ) | ||||
Total
Drinks Americas Holdings, Ltd. shareholders' deficiency
|
(3,331,605 | ) | (2,948,648 | ) | ||||
Equity
attributable to non-controlling interests
|
50,173 | 62,534 | ||||||
Total
shareholders’ deficiency
|
(3,281,432 | ) | (2,886,114 | ) | ||||
Total
liabilities and shareholders’ deficiency
|
$ | 2,614,940 | $ | 3,113,205 |
See notes
to unaudited consolidated financial statements
F-1
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
Six
months ended
|
Three
months ended
|
|||||||||||||||
October 31,
|
October 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 245,898 | $ | 449,278 | $ | 143,642 | $ | 15,305 | ||||||||
Cost
of sales
|
211,953 | 321,709 | 114,034 | 15,801 | ||||||||||||
Gross
margin
|
33,945 | 127,569 | 29,608 | (496 | ) | |||||||||||
Selling,
general & administrative expenses
|
1,326,110 | 3,210,057 | 685,940 | 1,586,440 | ||||||||||||
Loss
from Operations
|
(1,292,165 | ) | (3,082,488 | ) | (656,332 | ) | (1,586,936 | ) | ||||||||
Other
income (expense):
|
||||||||||||||||
Interest
|
(469,049 | ) | (517,485 | ) | (204,212 | ) | (79,780 | ) | ||||||||
Other
|
- | 83,478 | - | 26,547 | ||||||||||||
Net
Other Expense
|
(469,049 | ) | (434,007 | ) | (204,212 | ) | (53,233 | ) | ||||||||
Net
loss before allocation to non-controlling interests
|
$ | (1,761,214 | ) | $ | (3,516,495 | ) | $ | (860,544 | ) | $ | (1,640,169 | ) | ||||
Net
loss attributable to non-controlling interests
|
12,361 | - | 10,129 | - | ||||||||||||
Net
loss attributable to Drinks Americas Holdings, Ltd.
|
$ | (1,748,853 | ) | $ | (3,516,495 | ) | $ | (850,415 | ) | $ | (1,640,169 | ) | ||||
Net
loss per share (basic and diluted)
|
$ | (0.08 | ) | $ | (0.55 | ) | $ | (0.03 | ) | $ | (0.24 | ) | ||||
Weighted
average number of common shares (basic and
diluted)
|
23,544,905 | 6,408,794 | 27,247,013 | 6,798,710 |
See notes
to unaudited consolidated financial statements
F-2
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
SIX
MONTHS ENDED
|
||||||||
OCTOBER 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities:
|
||||||||
Net
loss
|
$ | (1,761,214 | ) | $ | (3,516,495 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
and amortization
|
95,296 | 481,527 | ||||||
Addition
to inventory allowance
|
- | 40,939 | ||||||
Stock
and warrants issued for services of vendors, promotions, directors,
interest payments and stock compensation
|
425,426 | 1,248,070 | ||||||
Increase
in deferred loan costs
|
499,919 | — | ||||||
Investor
return of collateral
|
450,000 | |||||||
Accounts
payable settlements
|
— | 243,083 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(65,523 | ) | (61,382 | ) | ||||
Due
from factor
|
- | 31,786 | ||||||
Inventories
|
53,963 | 160,524 | ||||||
Other
current assets
|
(22,119 | ) | 8,784 | |||||
Other
assets
|
30,175 | 223,802 | ||||||
Accounts
payable
|
13,214 | (175,010 | ) | |||||
Accrued
expenses
|
201,892 | 1,163,000 | ||||||
Deferred
revenue
|
(42,487 | ) | — | |||||
Net
cash (used in) operating activities
|
(121,458 | ) | (151,372 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
from debt
|
270,024 | |||||||
Repayment
of debt
|
(111,226 | ) | (147,535 | ) | ||||
Proceeds
from other notes
|
47,130 | — | ||||||
Net
cash (used in) provided by financing activities
|
(64,096 | ) | 122,489 | |||||
Net
decrease in cash and equivalents
|
(185,554 | ) | (28,883 | ) | ||||
Cash
and equivalents at beginning of period
|
203,552 | 30,169 | ||||||
Cash
and equivalents at end of period
|
$ | 17,998 | $ | 1,286 | ||||
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 | ||||
Accrued
interest capitalized to debt principal
|
$ | 4,763 | $ | 9,149 | ||||
Payment
of accounts payable and accrued expenses with shares of common
stock
|
$ | 482,058 | $ | 379,568 | ||||
Payments
of notes by issuance of common stock
|
$ | - | $ | 450,000 | ||||
Increase
in other current assets equal to increase in notes payable
|
$ | - | $ | 100,000 | ||||
Increase
in deferred charges equal to decrease in note receivable,
net
|
$ | 499,919 | $ | 535,404 | ||||
Increase
in note payable from return of common stock
|
$ | 450,000 | $ | - | ||||
Increase
in notes receivable equal to increase in note payable
|
$ | - | $ | 2,625,000 | ||||
Supplemental disclosure of cash flow
information:
|
||||||||
Interest
paid
|
$ | 6,061 | $ | 533 |
See notes
to consolidated financial statements
F-3
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Basis of Presentation and Nature of Business
Description
of Business
Drinks
Americas Holdings, Ltd,. (the “Company”, “we” and / or “Holdings”) through our
majority-owned subsidiaries, Drinks Americas, Inc., Maxmillian Mixers, LLC,
Maxmillian Partners, LLC., Drinks Global Imports, LLC, DT Drinks, LLC,
and Olifant U.S.A., Inc. (as of January 15, 2009) 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.,
("Mexcor") 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
pre-reverse split shares of Company common stock equivalent to $800,000
post-reverse split 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.
As a
result of the overhead reductions we initiated in the second quarter of fiscal
2010, our selling, general and administrative expenses for the year ended April
30, 2010 of approximately $3,874,000 reflect a substantial reduction of 32% or
$1,846,000 compared to $5,720,000 for the year ended April 30, 2009. The
fiscal year 2010 decrease in selling, general and administrative expenses is
predominately due to our decision to reduce our operating expenses and thereby
sustain our limited working capital. The overhead reductions resulted in lower
payroll and payroll related and travel expenses. Additionally, our agreement
with Mexcor resulted in our ability to transfer of our field sales force and its
associated sales commission costs and travel expenses to Mexcor. The reduction
in selling, general and administrative expenses continues to benefit our current
2011 fiscal year. Selling, general and administrative expenses for the six and
three months ended October 31, 2010 were approximately $1,326,000 and $686,000,
respectively or approximately $1,884,000 and $900,000 lower, respectively (59%
and 57%, respectively), than selling, general and administrative expenses for
the six and three months ended October 31, 2009.
Basis
of Presentation
The
accompanying unaudited interim consolidated financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principles pursuant to Regulation S-X of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in audited consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Accordingly, these interim financial statements should be read in conjunction
with the Company’s financial statements and related notes as contained in Form
10-K for the year ended April 30, 2010. In the opinion of management, the
interim consolidated financial statements reflect all adjustments, including
normal recurring adjustments, necessary for fair presentation of the interim
periods presented. The results of the operations for the three and six months
ended October 31, 2010 are not necessarily indicative of the results of
operations to be expected for the full year.
Reverse
Stock Split
On
November 15, 2010, the Company amended its certificate of incorporation to
affect a 15-to-1 reverse stock split, which was approved by Financial Industry
Regulatory Authority and became effective. As a result of the reverse split,
each 15 shares of Common Stock (the “Old Shares”) became and converted into one
share of Common Stock (the “New Shares”), with stockholders who would receive a
fractional share to receive such additional fractional shares as l resulted in
the holder having a whole number of shares. All references to shares of common
stock in the following financial statements have been retroactively restated in
accordance with FASB ASC 260-10-55-12. Issued and outstanding and treasury
shares as reported on the balance sheets at October 31, 2010 and April 30, 2010
have been retroactively restated to the earliest period presented to give effect
for the reverse stock split. Earnings per share calculations for the six and
three months ended October 31, 2010 and 2009 are based on the New
Shares. As such, the total number of the common stock shares outstanding as
of October 31, 2010 and 2009 were 32,017,000 and 18,873,000 shares,
respectively.
F-4
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated balance sheets as of October 31, 2010 and April
30, 2010, the consolidated results of operations for the six and three months
ended October 31, 2010 and 2009, and consolidated cash flows for the six months
ended October 31, 2010 and 2009 , reflect Holdings and its majority-owned
subsidiaries (collectively, the "Company"). All intercompany transactions and
balances in these financial statements have been eliminated in consolidation.
The amounts of common and preferred shares authorized, issued and outstanding as
of October 31, 2010 and April 30, 2010 are those of Holdings. Common shares
issued and outstanding have been restated to give effect to a 15-1 reverse stock
split which became effective November 15, 2010, subsequent to the balance sheet
date.
Going
Concern
The
accompanying consolidated financial statements have been prepared on a basis
that assumes the Company will continue as a going concern. As of October
31, 2010, the Company has a shareholders' deficiency of approximately $3,332,000
applicable to controlling interests compared with $2,949,000 applicable to
controlling interests at April 30, 2010, and working capital
deficiency of $5,113,000 as of October 31, 2010 and has incurred significant
operating losses and negative cash flows since inception. For the six and three
months ended October 31, 2010, the Company sustained a net loss of approximately
$1,749,000 and $850,000, respectively compared to a net loss of $3,516,000
and $1,640,000, respectively for the six and three months ended October 31, 2009
and used cash of approximately $121,000 in operating activities for the six
months ended October 31, 2010 compared with approximately $151,000 for the
six months ended October 31, 2009. We will need additional financing which
may take the form of equity or debt and we have converted certain liabilities
into equity. We anticipate that increased sales revenues from our newly
launched Rheingold Beer product line and our Mexcor Agreement will
contribute to improving our cash flow and provide additional liquidity from
operations. 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
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.
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 October 31, 2010 and April 30, 2009,
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.
F-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. For the year ended April 30, 2009, the Company
determined that based on estimated future cash flows, the carrying amount of our
Rheingold license rights exceeded its fair value by $90,000, and accordingly,
recognized an impairment loss of $90,000. For the six months ended October 31,
2010, the Company concluded that there was no impairment as the Company has
actively invested in the Rheingold license and launched Rheingold Beer with
shipments into the Metro New York market, including New Jersey, Connecticut, and
Pennsylvania in August 2010.
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. Management has examined our annual impairment evaluation and
the results of our tests indicate that there was no impairment for the six
and three months ended October 31, 2010. 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 accounts for income taxes under the asset and liability method. 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 basis.
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. The Company has recognized no adjustment for
uncertain tax provisions. As of October 31, 2010, the consolidated net
operating loss carry forward available to offset future years’ taxable income is
in excess of approximately $35,800,000 expiring in various
years through 2030.
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.
F-6
Earnings
(Loss) Per Share
The
Company computes earnings (loss) per share whereby basic earnings (loss) 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 (loss)
per share is determined in the same manner as basic earnings (loss) 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 six and three
months ended October 31, 2010 and 2009, the diluted earnings per (loss) share
amounts equal basic earnings (loss) 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 of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could materially differ from those
estimates.
Recent
accounting pronouncements
In July
2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and
the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the
disclosures that an entity provides about the credit quality of its financing
receivables and the related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate by portfolio segment or class
certain existing disclosures and provide certain new disclosures about its
financing receivables and related allowance for credit losses. For public
entities, the disclosures as of the end of a reporting period are effective for
interim and annual reporting periods ending on or after December 15, 2010.
The disclosures about activity that occurs during a reporting period are
effective for interim and annual reporting periods beginning on or after
December 15, 2010. Except for the expanded disclosure requirements, the adoption
of this ASU is not expected to have a material impact on the Company’s
consolidated financial statements.
In April
2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trades - a
consensus of the FASB Emerging Issues Task Force. The amendments in this
Update are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2010. Earlier application is
permitted. The Company does not expect the provisions of ASU 2010-13 to
have a material effect on the financial position, results of operations or cash
flows of the Company.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.
3.
Accounts Receivable
Accounts
Receivable as of October 31, 2010 and April 30, 2010, consist of the
following:
October 31, 2010
|
April 30, 2010
|
|||||||
(Unaudited)
|
||||||||
Accounts
receivable
|
$ | 256,361 | $ | 194,192 | ||||
Allowances
|
(124,492 | ) | (127,846 | ) | ||||
$ | 131,869 | $ | 66,346 |
For the
six months ended October 31, 2010, $15,971 was written-off as
uncollectible.
F-7
Inventories
as of October 31, 2010 and April 30, 2010 consist of the following:
|
October 31, 2010
(Unaudited)
|
April 30, 2010
|
||||||
Raw
Materials
|
$ | 87,546 | $ | 87,546 | ||||
Finished
goods
|
158,087 | 168,948 | ||||||
Reserves
for excess and slow-moving inventories
|
(76,988 | ) | (33,886 | ) | ||||
$ | 168,645 | $ | 222,608 |
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
Other
Current Assets as of October 31, 2010 and April 30, 2010 consist of the
following:
|
October 31, 2010
(Unaudited)
|
April 30, 2010
|
||||||
Employee
advances
|
$ | 13,686 | $ | — | ||||
Prepaid
Other
|
51,409 | 19,789 | ||||||
$ | 65,095 | $ | 19,789 |
Prepaid
other are comprised of prepaid marketing fees, employee travel advances and
expenses.
6.
Property and Equipment
Property
and equipment as of October 31, 2010 and April 30, 2010 consist of the
following:
|
October
31,
|
|
|||||||
Useful
Life |
2010
(Unaudited)
|
April 30,
2010 |
|||||||
Computer
equipment
|
5
years
|
$ | 23,939 | $ | 23,939 | ||||
Furniture
& fixtures
|
5
years
|
10,654 | 10,654 | ||||||
Automobiles
|
5
years
|
68,337 | 68,337 | ||||||
Leasehold
Improvements
|
5
years
|
66,259 | 66,259 | ||||||
Production
molds & tools
|
5
years
|
122,449 | 122,449 | ||||||
291,638 | 291,638 | ||||||||
Accumulated
depreciation
|
(271,083 | ) | (259,329 | ) | |||||
$ | 20,555 | $ | 32,309 |
Depreciation
expense for the six and three months ended October 31, 2010 and 2009, was
$11,754 and $5,877 and $16,105
and $8,043, respectively. Depreciation expense for the year ended April
30, 2010 was $26,591.
F-8
7.
Intangible Assets
Intangible
assets include the acquisition costs of trademarks, license rights and
distribution rights for the Company’s alcoholic beverages.
As of
October 31, 2010 and April 30, 2010, intangible assets are comprised of the
following:
October 31,
2010
(Unaudited)
|
April 30,
2010
|
|||||||
Trademark
& distribution rights of Olifant vodka acquisition
|
$ | 1,333,333 | $ | 1,333,333 | ||||
Trademark
and license rights of Rheingold beer
|
230,000 | 230,000 | ||||||
Mexcor
agreement
|
240,000 | 240,000 | ||||||
Other
trademark and distribution rights
|
575,000 | 575,000 | ||||||
2,378,333 | 2,378,333 | |||||||
Accumulated
amortization
|
(490,575 | ) | (407,033 | ) | ||||
$ | 1,887,758 | $ | 1,971,300 |
Amortization
expense for the six and three months ended October 31, 2010 and 2009, was
$83,542 and $41,771 and $74,656 and $37,328, respectively. Amortization expense
for the year ended April 30, 2010 was $161,350.
8.
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. 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, 2010 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 October 31, 2010 and April 30,
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.
F-9
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 166,667
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 223,867 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 80,000 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.
In March
2010, the Company delivered to the Placement Agent, in aggregate 311,608
Placement Agent Warrants as follows: effective February 24, 2010, a warrant to
purchase 28,334 shares of Company common stock at an exercise price of $0.2391;
effective February 11, 2010, a warrant to purchase 1,333,334 shares of Company
common stock at an exercise price of $0.015; effective January 15, 2010, a
warrant to purchase 66,667 shares of Company common stock at an exercise price
of $0.0938 ; effective December 30, 2009, a warrant to purchase 45,455 shares of
Company common stock at an exercise price of $0.01375; effective August 28,
2009, a warrant to purchase 12,821 shares of Company common stock at
an exercise price of $0.9750 $0.065; effective June 19, 2009, a
warrant to purchase 16,667 shares of Company common stock at an exercise price
of $1.4063 ; and, effective June 19, 2009, a warrant to purchase
8,334 shares of Company common stock at an exercise price of $6.5625
. The fair value, taken together, of the warrants determined using Black-Scholes
valuation model was determined to be $101,864 at the dates of grant and is
recorded as deferred financing costs a long-term asset on the balance sheet and
additional paid in capital. The warrants are being amortized over 5 years. For
the six and three months ended October 31, 2010, $10,270
and $5,135, respectively has been expensed. As of April 30, 2010, $10,172 has
been expensed.
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 800,248 shares of our common stock
(of which 200,000 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 300,124 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.
F-10
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.
In addition, a member of the Company’s board of directors pledged 84,216 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 168,243 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 168,243 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, 200,000 of the Company shares having an
aggregate value of $450,000 that were issued in July, 2009 were transferred
to the Investor.
F-11
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 1,200,373
shares of Company common stock to the individuals at a fair market value of
$720,224. Included in the total shares is 300,124 shares, which
represent 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 300,124 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
October 31, 2010, the drinks debenture, excluding the return of the 200,000
shares (post-reverse split) issued as collateral to our investor in July 2009 in
the amount of $450,000 which was previously treated as a reduction in our loan
balance, was $2,161,404, offset by debenture debt discount of $1,030,719,
investor notes receivable of $792,646 and deferred loan costs of $531,901
resulting in a net asset of deferred loan costs balance of $193,867, which has
been reflected as a non-current asset in the accompanying consolidated balance
sheet. The returned collateral has been reflected separately in the consolidated
balance sheet as an investor note payable in current liabilities. At April 30,
2010, offsetting of the Drinks Debenture of $2,835,953 was unamortized Debenture
debt discount of $1,319,938 and investor notes receivable of $1,444,836 and
deferred loan costs of $605,559 resulting in a net asset of deferred loan costs
balance of $437,973, which balance has been reflected as a non-current asset in
the accompanying consolidated balance sheet.
9.
Other assets
In August
2008, the Company entered into a three-year agreement with an unrelated entity
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 23,334 shares of
Company stock at an exercise price of $7.50. The Company determined, as of the
grant date the warrants had an aggregate value of $6,730, which was being
amortized over the three-year benefit period. As of October 31, 2010 and April
30, 2010 the warrants were fully amortized. As of October 31, 2010 and April 30,
2010, a warrant to purchase an aggregate of 18,334 shares of Company stock was
issued and the balance of 5,000 remains to be issued.
On June
14, 2007, in connection with an endorsement agreement, the Company issued
warrants to purchase 53,400 shares of the Company’s common stock at a price of
$19.26 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 October 31, 2010, and April 30, 2010, the unamortized balance of these
warrants was $-0- and $16,494, 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 200 shares of the Company’s common
stock per month at the monthly average market price. At April 30, 2010,
warrants to purchase 7,200 shares of the Company’s stock accrued under this
agreement, of which a warrant for 3,600 shares was issued at
exercise prices ranging from $2.85 to $31.80 per share of common stock. Each
warrant issuance has an exercise period of 5 years from date of issuance.
At October 31, 2010, and April 30, 2010, the agreement was terminated and the
balance of 3,600 shares will not be issued.
F-12
10.
Notes and Loans Payable
Notes and
Loans Payable as of October 31, 2010 and April 30, 2010 consisted of
the following:
October
31, 2010
|
||||||||
(Unaudited)
|
April 30, 2010
|
|||||||
Convertible
note (a)
|
$ | 100,000 | $ | 100,000 | ||||
Olifant
note (b)
|
695,260 | 695,260 | ||||||
Convertible
promissory note (c)
|
47,130 | - | ||||||
Other
(d)
|
37,500 | 41,936 | ||||||
|
879,890 | 837,196 | ||||||
Less
current portion
|
479,890 | 437,196 | ||||||
Long-term
portion
|
$ | 400,000 | $ | 400,000 |
(a)
|
In October 2006, the Company
borrowed $250,000 and issued a convertible promissory note in like amount.
The Company originally extended the due date of the loan 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
$5.25 per share, a decrease from the $9.00 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. At of
July 2009, the Company had not made any payments under the amended
note and reached an informal agreement with the note-holder, to
issue 3,333 shares of the Company’s common stock for each week
of nonpayment.
|
On August
4, 2009 and on September 29, 2009, the Company issued the note-holder
13,333 and 26,667 shares of its common stock, respectively as payment
of interest on the note with values of $28,000 and $32,000, respectively. In
addition, as consideration for extending the note the Company issued the lender
19,109 shares of Company common stock, which had a value of $42,992. On
November 23, 2009, the Company issued 26,667 shares of common stock, which had a
value of $12,000 in satisfaction of interest payable on the note described above
in Note 10 (a). At October 31, 2010 and April 30, 2010, the value of the
19,109 shares issued was fully amortized.
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 16,667 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 June 28, 2010,
the Company issued the note holder 8,889 shares of common stock with a fair
value of $973 as damages for failing to timely register the 16,667 common
shares. For the six and three months ended October 31, 2010, interest
expense of $6,490 and $3,194, respectively was accrued and expensed. At April
30, 2010, interest expense of $6,061 was accrued on the note and paid on
June 30, 2010.
On
December 10, 2010 the convertible note payable in the amount of $100,000 was
amended and extended for six months, and the Company is in discussions with the
note holder regarding additional consideration to be provided for extending the
term of the note.
On
November 9, 2009, the Company issued the 16,667 shares valued at $10,000, which
the Company deemed a loan origination fee. At October 31, 2010 and April 30,
2010, $111 and $5,222, respectively has been recorded as a deferred charge on
the balance sheets and $9,889 and $4,778, respectively has been amortized to
interest expense.
F-13
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 April 30, 2010, the Company issued the note
holder 1,990,091 shares of Company common stock in satisfaction of conversions
of note principal and interest expense of $7,928.
(b)
|
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 330,033 shares as payment for the stock portion of the installment,
and at the election of the sellers, $63,000 in cash and
138,614 in common stock as payment of the cash and interest
portion on the first installment. For the six and three months ended
October 31, 2010, interest expense of $10,222 and $5,111, respectively has
been expensed and accrued. At April 30, 2010 interest expense of $4,944
was accrued.
|
(c)
|
On
July 12, 2010, the Company settled its lawsuit with James Sokol (“Sokol”)
(see Note 16- Litigation) in accordance with the settlement, the Company
issued a 6% convertible promissory note in the amount of $47,130.
Principal and interest on the note are payable upon the successful
completion by the Company of a $1,000,000 financing or on January 1, 2013.
In lieu of cash, Sokol may elect to receive the principal and interest due
on the note for an equivalent value of common shares of the Company. As of
October 31, 2010, the Company accrued interest payable of
$872.
|
(d)
|
On March 4, 2010, the Company
issued to a shareholder 133,333 shares of its common stock with a fair
value of $40,000 in full payment of the outstanding loan for financial
consulting services.
|
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 October 31, 2010 and April 30, 2010,
respectively.
Accrued
expenses consist of the following at October 31, 2010 and April 30,
2010:
October 31, 2010
(Unaudited)
|
April 30, 2010
|
|||||||
Payroll,
board compensation and consulting fees owed to officers,
directors and shareholders
|
$ | 788,051 | $ | 1,220,392 | ||||
Other
payroll and consulting fees
|
716,533 | 688,740 | ||||||
Interest
|
534,160 | 405,394 | ||||||
Other
|
274,482 | 429,532 | ||||||
$ | 2,313,226 | $ | 2,744,058 |
At
October 31, 2010 and April 30, 2010, Other accrued expenses includes accruals
for professional legal services , directors and officers liability insurance,
public relations, marketing fees and business travel expenses.
12.
Shareholders' Deficiency
In
addition to those referred to in Notes 8, 9, and 10 additional transactions
affecting the Company's equity for the six months ended October 31, 2010
are as follows:
On
October 5, 2010, in connection with the June 18, 2009 Drinks Debenture financing
by an investor, the investor submitted a Notice of Conversion, to
convert $88,800 of the outstanding balance of the Debenture in
exchange for 1,600,000 shares of our common stock.
On
October 6, 2010, in connection with the Socius CG II, Ltd. (“Socius”),
litigation settlement (See Note 16 –Litigation), we issued 2,586,667 shares of
our common stock with a fair value of $131,920 to Socius in compliance with the
September 9, 2010 court approved settlement agreement in exchange for
satisfaction of the claim for $364,006. On November 17, 2010, since we could
only deliver partial payment in shares, as we had attained the limit of our
authorized shares, we delivered 3,300,00 shares with a fair value of $122,100 to
Socius in partial settlement of the outstanding obligation. See Subsequent Event
Note – 17.
On
October 13, 2010, in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $48,000 of the outstanding balance of the Debenture in
exchange for 866,667 shares of our common stock.
On
September 15, 2010, the Company authorized the issuance of 650,000 shares of
preferred stock designated Series C Preferred Stock (the “Series C Preferred
Stock”). Each share of the Series C Preferred Stock will be convertible into the
number of shares of the Common Stock equal to the Stated Value of $1.00 divided
by the Conversion Price of $0.10 subject to adjustment for stock splits, stock
dividends and similar transactions. The Series C Preferred Stock will vote as a
single class with the common stock and the holders of the Series C Preferred
Stock will have the number of votes equal to 165 times the number of shares of
Series C Preferred Stock. Upon liquidation, the holders of the Series C
Preferred Stock will have the right to receive, prior to any distribution with
respect to the common stock, but subject to the rights of the holders of the
Series A Preferred Stock and Series B Preferred Stock, the stated value (plus
any other fees or liquidated damages payable thereon).
On
September 27, 2010, in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $50,000 of the outstanding balance of the Debenture in
exchange for 555,556 shares of our common stock.
On
September 28, 2010, we issued 856,991 shares of our common stock under our 2010
Stock Incentive Plan with a fair value of $53,566 for legal services. The shares
vested immediately on the date of grant.
On
September 29, 2010, we received the consent of approximately 53% of the voting
power of our outstanding common shares and Series C Preferred Stock, voting
together as one class, that were entitled to give such consent, for the approval
of an amendment to our certificate of incorporation to effect a 15-to-1 reverse
stock split.
On August
30, 2010, the Company entered into a series of securities exchange agreements
with four directors of the Company, pursuant to which the directors each agreed
to return for cancellation, warrants to purchase an aggregate of 655,920 shares
of the Company’s common stock, and on October 14, 2010, the Company issued, upon
receipt of the warrants, an aggregate of 59,743 shares of the Company’s Series C
Preferred Stock to its four directors.
Additionally,
on August 30, 2010, the Company entered into an agreement with its Chairman and
Chief Executive Officer, pursuant to which, the Company agreed to issue 576,091
shares of its Series C Preferred Stock as payment of $576,091 or 90% of the
aggregate salary of $640,101 owed and accrued by the Company to its Chairman and
CEO as of that date. On October 14, 2010, the Company issued 576,091 shares of
its Series C preferred Stock to its Chairman and CEO.
On August
13, 2010, we issued 786,667 shares of our common stock with a fair value of
$28,320 and on August 25, 2010, we issued 1,020,280 shares of our common stock
with a fair value of $28,313 as payments in full and final payment of our
obligations in conjunction with the legal settlement of the Brunei
litigation (See Note 16-Litigation).
On May
10, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to
convert $75,000 of the outstanding balance of the Debenture in
exchange for 400,000 shares of our common stock.
On May
25, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $116,666 of
the outstanding balance of the Debenture in exchange for 740,737 shares of our
common stock.
F-14
On June
25, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $150,000 of
the outstanding balance of the Debenture in exchange for 1,785,715 shares of our
common stock
On July
19, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $133,334 of
the outstanding balance of the Debenture in exchange for 1,777,787 shares of our
common stock.
On June
24, 2010, the Company entered into an agreement (the “Agreement”) with Enable
Growth Partners, LP, Enable Opportunity Partners, LP and Pierce Diversified
Strategy Master Fund, LLC (the “Holders”) pursuant to which the Company agreed,
in part, to issue the Holders an aggregate 800,000 shares of its Common Stock
with a fair value of $67,200, in accordance with the terms of the Agreement
which permitted the waiver and lifting of certain various provisions from prior
agreements.
On June
2, 2010, we issued 147,232 shares to our CEO in exchange for $25,000 payment of
past due and accrued salary due him.
On June
2, 2010, we issued 133,333 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $22,640 for marketing consulting services.
The shares vested immediately on the date of grant.
On May
25, 2010, we issued 103,181 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $17,706 for marketing consulting services.
The shares vested immediately on the date of grant.
On May
26, 2010, we issued 332,906 shares of our common stock under our 2009 Stock
Incentive Plan with a fair value of $57,127 for legal services. The shares
vested immediately on the date of grant.
On May
26, 2010, we issued 49,767 shares of our common stock under our 2009 Stock
Incentive Plan with a fair value of $8,540 for legal services. The shares vested
immediately on the date of grant.
On July
19, 2010, we issued 133,333 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $10,000 for marketing consulting services.
The shares vested immediately on the date of grant.
On July
16, 2010, we issued 293,333 of our common stock with a fair value of $77,000 to
a director for financial consulting services.
On April
13, 2010, the Company filed a registration statement on Form S-8 and
registered 2,000,000 shares issuable under the 2010 Plan. As of
October 31, 2010, the Company has issued 1,222,839 shares of Company common
stock under the plan as compensation for legal and marketing services at a fair
value of $103,912 and 773,161 shares remain available for future issuance under
the 2010 Plan.
On
November 6, 2009, the Company filed a registration statement on Form S-8 and
registered 1,333,333 shares issuable under the 2009 Stock Incentive Plan
(the “2009 Plan”). As of April 30, 2009, the Company issued 906,490 shares of
Company common stock under the plan as compensation for legal and marketing
services at a fair value of $ 316,450 which vested immediately upon grant. As of
October 31, 2010, 1,289,163 shares of common stock were issued under the plan as
compensation for legal and marketing services at a fair value of $382,117 and
44,170 shares remain available for future issuance under the 2009
Plan.
F-15
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, 666,667 common shares were
reserved for distribution. As of October 31, 2010, 618,333 have been issued and
48,334 remain available for future issuance. Of this amount, 30,000 of the
shares issued to employees were subsequently canceled when the employees
terminated their service with the Company. 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 233,333 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 385,000 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 278,333 options to purchase shares of its common
stock to its employees including 166,667 to its CEO; 33,333 to its COO and
20,000 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
(66,667) and the consultants (40,000) 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 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. ASC 718-10, “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. Option expense for the six and three
months ended October 31, 2010 was $41,186 and $20,953,
respectively.
F-16
14.
Income Taxes
No
provision for income taxes is included in the accompanying statements of
operations because of net operating losses for the six and three months
ended October 31, 2010 and 2009, respectively. 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 October 31, 2010 to offset future
years' taxable income is approximately $ 35,800,000, expiring in various years
through 2030. 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 be evaluated each reporting
period.
15.
Related Party Transactions
Related
party transactions, in addition to those referred to in Notes 9 and 10 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
October 31, 2010, and April 30, 2010, unpaid fees owed to a director and his
firm aggregated $-0- and $91,000. As of October 31, 2010, the Company
issued 293,333 in full satisfaction of the unpaid fees owed to a director and
his firm.
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. As of October 31, 2010
and April 30, 2010, we were indebted to the consulting company in the amount of
$50,000.
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. Under this agreement, as of October 31, 2010 and April 30, 2010,
amounts owed to this shareholder aggregated $43,151.
In
October 2009, upon the resignation of Brian Kenny as VP Marketing of the
Company, we entered into a marketing consulting agreement with a company
controlled by him to provide marketing services to the Company at the annual
rate of $144,000. Brian Kenny is the son of our CEO, J. Patrick Kenny. At
October 31, 2010, we were indebted to the consulting company in the amount of
$51,500.
Royalty
Fees
In
connection with the Company's distribution and licensing agreements with its
equity investee the Company incurred royalty expenses for the six and three
months ended October 31, 2010 and 2009 of approximately $5,965 and $4,265,
respectively and$1,310 and $2,500, respectively. The operations and the
net assets are immaterial.
Loan
Payable
From July
2007 through October 31, 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 October 31, 2010 and April 30,
2010, amounts owed to our CEO on these loans including accrued and unpaid
interest aggregated $19,135 and $154,670, respectively. For the six and three
months ended October 31, 2010 and 2009, interest incurred on these
loans aggregated $4,763 and $3,387, respectively and $18,566 and $9,417,
respectively.
16.
Customer Concentration
For the
six and three months ended October 31, 2010, the Company earned
royalty revenue under its agreement with Mexcor, Inc. that represented 37% and
10% of the its revenue. For the six and three months ended October
31, 2010, two customers accounted for 17% and 10%, respectively and three
customers accounted for 18%, 15% and 11%, respectively of the Company’s sales
for the three and six months periods ended October 31, 2010. For the six months
ended October 31, 2009, the largest customer accounted for 15% of its sales and
three other customers accounted for 10% or more of the Company’s sales. The
Company did not have significant sales to any single customer that accounted for
10% or more of its sales for the three months ended October 31,
2009.
F-17
16.
Commitments and Contingencies
Lease
The
Company leases office space under an operating lease for a two-year period
through September 2011 with minimum annual rentals of $36,000. Rent expense for
the six and three months ended October 31, 2010 and 2009, was
approximately $18,000 and $9,000, respectively in 2010 and $24,000 and 12,000,
respectively in 2009.
Future
minimum payments as of October 31, 2010 for all leases are approximately as
follows:
Years Ending
|
||||
April 30,
|
Amount
|
|||
2011
|
$ | 18,000 | ||
2012
|
15,000 | |||
$ | 33,000 |
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 in October 2009. This settlement resulted
in the reduction of the Company’s annual glass royalty obligation on a going
forward basis by as much as 75% depending on utilization levels and a settlement
of the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, as of October 31, 2010 and April 30, 2010, the outstanding
unpaid balance was $-0- and $125,000. On August 13, 2010, we issued
786,667 shares of our common stock with a fair value of $28,320 and on August
25, 2010, we issued 1,020,279 shares of our common stock with a fair value of
$28,313 as payments in full and final settlement of our
obligation.
F-18
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 received a
prepayment $84,970 and recognized $21,243 for shipments in the fourth
quarter-ended April 30, 2010 and $42,486 for the six months and $21,243 for the
three months ended October 31, 2010. As of October 31, 2010 and April 30, 2010,
deferred revenue on the balance sheet amounted to $21,243 and $63,730,
respectively.
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 pre-reverse split shares of Company common stock equivalent to 800,000
post-reverse split 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 pre-reverse
split shares of the Company’s common stock equivalent to 133,334 post-reverse
split 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 pre-reverse split shares of Company common stock
equivalent to 133,334 post-reverse split 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.
F-19
Litigation
On July
29, 2010, we entered into a settlement agreement with Socius CG II, Ltd.
(“Socius”) pursuant to which we agreed to issue 2,586,667 shares of our common
stock with a fair value of $131,920, in exchange for satisfaction of the claim
by Socius for $334,006. This settlement agreement required court approval before
the issuance of such stock because it involved the payment of the settlement in
the form of the Company’s common stock in reliance upon the Section 3(a) (10)
exemption from the registration requirements of Section 5 of the Securities Act
of 1933, as amended. On September 9, 2010, the court approved the settlement
agreement and the issuance of the 2,586,667 shares to Socius as
exempt from registration pursuant to the Section 3(a)(10) registration
exemption. On November 17, 2010, since we could only deliver partial payment in
shares, as we had attained the limit of our authorized shares, we delivered
3,300,00 shares with a fair value of $122,100 to Socius in partial settlement of
the outstanding obligation. See Subsequent Event Note – 17.
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) and thereafter commenced the civil action. 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 defend vigorously
this suit. In addition, the Company has commenced a countersuit
for damage and theft of services. As of November 30, 2009, we pledged
688,334 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
2009, as a matter of public record the former employee was arrested and charged
with alleged theft of Company property. The Company intends to defend
vigorously against this claim and pursue its counterclaims to
judgment.
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. In November 30, 2009, we pledged
1,000,000 shares of Company common stock in lieu of a prejudgment remedy that
the Plaintiff had sought against the Company and its Chief Executive Officer.
On July 12, 2010, the Company and Mr. Sokol reached a settlement of the
suit pursuant to which Mr. Sokol withdrew the suit on July 16, 2010 and
thereafter returned the 1,000,000 shares of the Company’s common stock to the
Company. Additionally, in accordance with the settlement, the Company issued a
6% convertible promissory note in the amount of $47,130. Principal and interest
on the note are payable upon the Company’s successful completion of a $1,000,000
financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the
principal and interest due on the note for an equivalent value of in common
shares of the Company. As of October 31, 2010, the Company accrued interest
payable of $872.
F-20
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, This settlement resulted in
the reduction of the Company’s annual glass royalty obligation on a going
forward basis by as much as 75% depending on utilization levels and a settlement
of the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, as of July 31, 2010 and April 30, 2010, the outstanding unpaid
balance was $125,000. On August 13, 2010, we issued 786,667 shares of our
common stock with a fair value of $28,320 and on August 25, 2010, we issued
1,020,279 shares of our common stock with a fair value of $28,313 as payments in
full and final settlement of our obligation.
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”), a company which provided
distribution services for us in several states, filed an arbitration claim
against us in Duval County, Florida for alleged damages including breach of
contract. Liquor Group asserted damages in excess of $1,000,000. 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
counter claim is for $500,000, and it includes claims concerning breach of
contract, civil conspiracy, fraudulent concealment and civil theft. The
arbitration hearing is scheduled for January 25, 2011.
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 $130,000. 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.
F-21
17.
Subsequent Events
The
Company has evaluated events subsequent to October 31, 2010 to assess the need
for potential recognition or disclosure in this report. As a result of
this evaluation, the Company has identified the following subsequent
events:
On
November 15, 2010, the Company’s amended its certificate of incorporation to
effect a 15-to-1 reverse stock split was approved by Financial Industry
Regulatory Authority and became effective. As a result of the reverse split,
each 15 shares of Common Stock (the “Old Shares”) will become and be converted
into one share of Common Stock (the “New Shares”), with stockholders who would
receive a fractional share to receive such additional fractional shares as will
result in the holder having a whole number of shares. All references to shares
of common stock in the financial statements have been retroactively restated.
Issued and outstanding shares as reported on the balance sheets at October 31,
2010 and April 30, 2010 have been retroactively restated to give effect for the
reverse stock split. Earnings per share calculations for the six and three
months ended October 31, 2010 and 2009 are based on the New Shares. As such, the
total number of the common stock shares outstanding as of October 31, 2010 and
2009 were 32,017,000 and 18,873,000 shares, respectively.
On
November 16, 2010 in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $28,500 of the outstanding balance of the Debenture in exchange for
1,000,000 shares of our common stock.
On
November 17, 2010, we issued 280,000 shares of our common stock under our 2010
Stock Incentive Plan with a fair value of $10,360 for marketing consulting
services. The shares vested immediately on the date of grant.
On
November 17, 2010, we issued an 8%, convertible promissory note in the amount of
$55,000 to an investor, the proceeds of which will be used for working capital
purposes.
On
November 17, 2010, in connection with the Socius CG II, Ltd. (“Socius”),
litigation settlement (See Note 16 –Litigation), we issued 3,300,000 shares of
our common stock with a fair value of $122,100 to Socius in compliance with the
September 9, 2010 court approved settlement agreement as partial settlement of
the outstanding obligation.
On
November 19, 2010, in connection with the settlement of accrued but unpaid
salary compensation due to our former Chief Financial Officer (“CFO”) in the
amount of $40,000, we issued a convertible promissory note to our CFO. The note
was purchased by an investor with the consent of the CFO. In connection
therewith, the investor submitted a Notice of Conversion, to convert $20,000 of
the outstanding principal balance of the Note in exchange for 1,518,989 shares
of our common stock.
On
November 23, 2010 in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $60,000 of the outstanding balance of the Debenture in exchange for
1,500,000 shares of our common stock.
On
November 29, 2010 in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $50,325 of the outstanding balance of the Debenture in exchange for
2,500,000 shares of our common stock.
On
November 30, 2010, in connection with the November 19, 2010 convertible note
purchase agreement with an investor, the investor submitted a Notice of
Conversion, to convert $15,000 of the outstanding principal balance of the Note
in exchange for 1,538,462 shares of our common stock.
On
December 3, 2010, in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $30,780 of the outstanding balance of the Debenture in exchange for
2,700,000 shares of our common stock.
On
December 9, 2010, in connection with the June 18, 2009 Drinks Debenture
financing by an investor, the investor submitted a Notice of Conversion, to
convert $40,250 of the outstanding balance of the Debenture in exchange for
3,500,000 shares of our common stock.
On
December 9, 2010, in connection with the Socius CG II, Ltd. (“Socius”),
litigation settlement (See Note 16 –Litigation), we issued 4,300,000 shares of
our common stock with a fair value of $81,700 to Socius in compliance with the
September 9, 2010 court approved settlement agreement as partial settlement of
the outstanding obligation.
On
December 10, 2010, the convertible note payable in the amount of $100,000 (See
note 10) was amended and extended for six months, and the Company is in
discussions with the note holder regarding additional consideration to be
provided for extending the term of the note.
On
December 13, 2010, in connection with the settlement of accrued but unpaid
salary compensation due to our former Vice President Sales (“VP Sales”), we
issued a convertible promissory note for $192,000. The note accrues interest at
the annual rate of 6% and is due the earliest of thirty business days following
the successful completion and receipt of a financing equal to or greater than
one million dollars or January 1, 2012. The note holder may elect, in lieu of
cash to receive the equivalent amount of principal and interest due under the
note in common shares of the Company.
F-22
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.
|
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, 2010, 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.
Introduction
The
following discussion and analysis summarizes the significant factors affecting:
(1) our consolidated results of operations for the six and three months ended
October 31, 2010, compared to the six and three months ended October
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 Quarterly Report on Form 10-Q,
and the audited consolidated financial statements and notes included in our
Annual Report Form 10-K, filed on August 13, 2010.
3
Results
of Operations
Comparison
of the Three and Six Months Ended October 31, 2010 and October 31,
2009
Net Sales: For the six months
ended October 31, 2010, net sales were approximately $246,000 under our revised
royalty revenue business model compared to net sales of approximately $449,000
for the six months ended October 31, 2009 which was driven by the Company's
wholesale business model. The decrease of 45% reflects the transition of our
business model in February 2010 from a wholesale operation to a royalty based
operation under our distribution and importation agreement with Mexcor,
Inc. as well as the delay in the second quarter of 2009 in replacing our
working capital financing following the termination of our financing facility
with Sovereign Bank. As we announced previously, our business continues to be
impacted by a shortage in working capital and a weak economy. Net sales for the
three months ended October 31, 2010 were approximately $144,000 compared to
approximately, $15,000 for the three months ended October 31, 2009 reflecting an
839% increase. The 2009 working capital shortage resulted in inventory shortages
and shipment delays that resulted in the lower sales for 2009.
We
launched the sale of Rheingold beer in the second quarter ended October 31,
2010, which sales accounted for over 73% of our total three month sales and 43%
of our total six month year to date sales.
Trump
Super Premium Vodka sales for the six months ended October 31, 2010 aggregated
1,329 cases accounted for approximately 34% of total dollar sales for the six
months ended October 31, 2010. For the same period of the prior year, Trump
Super Premium Vodka net sales aggregated 809 cases which accounted for 19% of
the total dollar sales for the six month period. For the three months
ended October 31, 2010, Sales of Trump Super Premium Vodka amounted to 184 cases
or 16% of total dollar sales. For the same period of the prior year, the Company
did not record any sales of Trump Super Premium Vodka. Sales of Trump Super
Premium Vodka for the six and three months ended October 31, 2010 continued to
be negatively impacted by the weak economy and consumer preferences for a lower
cost alternative vodka.
For the
six months ended October 31, 2010, Old Whiskey River Bourbon totaled 903 cases
sold which accounted for approximately 10% of total dollar sales. For the
three months ended October 31, 2010, Old Whiskey River Bourbon totaled 324 cases
or 5% of total dollar sales. For the six and three months ended October 31, 2009
sales of Old Whiskey Bourbon totaled 299 and 6 cases, respectively and
approximately, 9% and 4% of sales, respectively.
We did
not record any sales for Aquila Tequila for the six and three months ended
October 31, 2010 and 2009, because due to the previously mentioned insufficient
working capital, we decided to allocate our limited resources to the acquisition
of inventory to selling other higher margin brands.
For the
six months ended October 31, 2010, Damiana Liqueur aggregated 1,130 cases sold
or approximately 5% of total dollar sales. For the same period of the prior
year, Damiana Liqueur totaled 214 cases sold or approximately 6% of total dollar
sales. For the three months ended October 31, 2010, Damiana Liqueur totaled 285
cases sold or approximately 2 % of total dollar sales. There were no sales of
Damiana Liqueur for the three months ended October 31, 2009.
There
were no sales of our premium-imported wines for the six and three months ended
October 31, 2010 as the Company exited the wine import business in the second
quarter of fiscal 2010. Sales of our premium-imported wines totaled 796 cases or
approximately 4% of our sales for the six months ended October 31, 2009.
There were no sales of our premium-imported wines for the three months ended
October 31, 2009.
For the
six months ended October 31, 2010, Olifant Vodka amounted to 4,128 cases sold or
approximately 7% of total net sales which compared to 5,430 cases sold or
approximately 53% of total net sales for the same period of the prior year. We
believe, and continuing customer demand and sales indicate, that sales
of our economy priced Olifant Vodka products continue to be very successful in
this economic environment.
Net sales
of Olifant Vodka for the three months ended October 31, 2010, totaled
approximately 497 cases sold or approximately 1% of total net sales. Net sales
of Olifant Vodka for the three months ended October 31, 2009, totaled
approximately 64 cases sold or approximately 29% of total net
sales.
Gross Margin: Gross
margin for the six months ended October 31, 2010 was approximately $34,000 or
13.8% of net sales under the royalty business model compared to gross margin of
approximately $128,000, or 28% of net sales for the six months ended October 31,
2009 under the wholesale business model. This decrease in gross margin is
attributable to the
transition of our business model to a royalty-based revenue operation from a wholesale
revenue
model and the associated
costs involved in launching of Rheingold beer in the second quarter of
2010.
Gross margin for the three
months ended October 31, 2010 was approximately $30,000 or 21% of net sales
compared to negative gross margin of approximately $500 or a negative 3.3% of
net sales for the three months ended October 31, 2009. The $30,500 increase of
2010 over 2009 reflects the impact of the 2009 sales decline due to insufficient
working capital and our decision to discontinue the Newman’s Own non-alcohol
beverage line and record a $40,000 inventory write-down in the
period.
Selling, General and Administrative
Expenses: Selling, general and administrative expenses for the six months
ended October 31, 2010 amounted to approximately $1,326,000 compared to
approximately $3,210,000 for the same period of the prior year, a decrease
of approximately $1,884,000, or 59%, attributable to our decision to reduce
our operating and marketing expenses and thereby sustain our limited working
capital. The overhead reductions resulted in lower payroll and payroll related
travel and marketing expenses. Additionally, our distribution and importation
agreement with Mexcor, Inc. (“Mexcor”) resulted in our ability to
transfer our field sales force and the associated sales commission costs
and travel expenses to Mexcor, as we restructured our business-operating model
in fiscal 2010. The cost reductions we obtained from restructuring our business
plus additional working capital enabled us to successfully launch of Rheingold
beer in our second quarter. Additionally, for the six months ended October 31,
2009, selling, general and administrative expenses included $567,500 of
marketing fees associated with the 2009 Olifant Summer Concert
Series.
For the
three months ended October 31, 2010, selling, general and administrative
expenses amounted to approximately $686,000 compared to approximately $1,586,000
for the same period of the prior year, a decrease of approximately
$900,000, or 57%, attributable to our decision to reduce our operating and
marketing expenses. Additionally, marketing fees associated with the 2009
Olifant Summer Concert Series during the three months ended October 31, 2009
amounted to approximately $278,000, while there were no such costs in
2010.
4
Other expense:
Other expense is comprised of interest expense totaling approximately
$469,000 for the six months ended October 31, 2010 compared to interest expense
of approximately $517,000 for the six months ended October 31, 2009.
This decrease is predominantly due to a reduction in the cost of financing our
outstanding liabilities which we have systematically reduced by approximately
$2,156,000 to $5,896,000 at October 31, 2010 from approximately $8,052,000 at
October 31, 2009. This decrease in our outstanding debt is attributable to a
decrease in our notes and loans payable of approximately $153,000; our repayment
of $342,000 or nearly 95% of the outstanding loan payable to our CEO, a
reduction of our outstanding accrued expenses and accounts payable of
approximately $1,932,000; the addition of $450,000 from the return of collateral
by an investor previously treated as a reduction in our loan balance and the
re-payment of $200,000 of our long-term debt.
Income Taxes: From our
inception, we have incurred substantial net losses and as a result, have not
incurred any income tax liabilities. Our federal net operating loss
carry-forward is approximately $35,800,000, which we can use to reduce taxable
earnings in the future. No income tax benefits were recognized for the three
months ended October 31, 2010 and 2009 as we have provided valuation reserves
against the full amount of the future carry forward tax loss benefit. We will
evaluate the reserve every reporting period and recognize the benefits when
realization is reasonably assured.
Financial
Liquidity and Capital Resources
Our
accompanying consolidated financial statements have been prepared assuming that
we will continue as a going concern. As of October 31, 2010, the Company
has a shareholders' deficiency of approximately $3,332,000 applicable to
controlling interests compared with $2,949,000 applicable to controlling
interests at April 30, 2010, and working capital deficiency of
$5,113,000 as of October 31, 2010 and has incurred significant operating losses
and negative cash flows since inception. For the six-and three- months
ended October 31, 2010, we sustained a net loss of approximately $1,749,000 and
$850,000, respectively compared to a net loss of $3,516,000 and $1,640,000,
respectively for the six- and three- months ended October 31, 2009, and used
cash of approximately $121,000 in operating activities for the six months ended
October 31, 2010 compared with approximately $151,000 for the six
months ended October 31, 2009. We will need additional financing which may
take the form of equity or debt and we have converted certain liabilities into
equity. We anticipate that increased sales revenues from the expanded
distribution of our newly launched Rheingold Beer product line
and our Mexcor Agreement will contribute to improving our cash flow
and provide additional liquidity from operations. 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 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 we be unable to
continue in existence.
While our
working capital position has benefited 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 still 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.
Net Cash Used in
Operating Activities: Net cash used in operating
activities for the quarter ended October 31, 2010 was approximately $121,000. We
have to date funded our operations predominantly through loans from
shareholders, officers and investors and additionally through the issuance of
our common stock as payment for outstanding obligations.
Net Cash provided
by Financing Activities: Net cash provided by in financing
activities for the quarter ended October 31, 2010 was approximately
$64,000.
On July
29, 2010, we entered into a settlement agreement with Socius CG II, Ltd.
(“Socius”) pursuant to which we agreed to issue 2,586,667 shares of our common
stock in exchange for satisfaction of the claim by Socius for $364,006. This
settlement agreement required court approval before the issuance of such stock
because it involved the payment of the settlement in the form of the Company’s
common stock in reliance upon the Section 3(a) (10) exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended. On September 9, 2010, the court approved the settlement agreement and
the issuance of the 2,586,667 shares to Socius as exempt from registration
pursuant to the Section 3(a) (10) registration exemption. On November 17, 2010,
since we could only deliver partial payment in shares, as we had attained the
limit of our authorized shares, we delivered 3,300,00 shares with a fair value
of $122,100 to Socius in partial settlement of the outstanding obligation. See
Subsequent Event Note – 17.
On August
30 2010, the
Company entered
into a series of securities exchange agreements with four directors of
the
Company, pursuant to which the directors each agreed to return for
cancellation, warrants to purchase an aggregate
of $655,920 shares of the Company's common stock, and on October 14, 2010, the
Company issued, upon receipt of the warrants, an aggregate of 59,743 shares of
the Company's Series
C Preferred Stock
to its four directors.
Additionally, on August
30 2010, the Company entered into an agreement
with its Chairman and Chief Executive Officer, pursuant to which, the
Company agreed to issue 576,091 shares of its Series C
Preferred Stock as payment of $576,091 or 90% of the aggregate salary
of $640,101 owed and accrued by the Company to its Chairman and CEO as of
that date. On October 14, 2010, the Company issued 576,091 shares of its Series C
Preferred Stock to its Chairman and CEO.
On
September 15, 2010, the Company authorized the issuance of 650,000 shares of
preferred stock designated Series C Preferred Stock (the “Series C Preferred
Stock”). Each share of the Series C Preferred Stock will be convertible into the
number of shares of the Common Stock equal to the Stated Value of $1.00 divided
by the Conversion Price of $0.10 subject to adjustment for stock splits, stock
dividends and similar transactions. The Series C Preferred Stock will vote as a
single class with the common stock and the holders of the Series C Preferred
Stock will have the number of votes equal to 165 times the number of shares of
Series C Preferred Stock. Upon liquidation, the holders of the Series C
Preferred Stock will have the right to receive, prior to any distribution with
respect to the common stock, but subject to the rights of the holders of the
Series A Preferred Stock and Series B Preferred Stock, the stated value (plus
any other fees or liquidated damages payable thereon).
Based on
our current operating activities and revenue growth plans noted above regarding
the expansion of our Rheingold beer distribution and the revenue growth under
our Mexcor Agreement, we believe our existing financings will enable us to meet
our anticipated cash requirements for at least the next twelve
months.
Impact
of Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not think that inflation has had a material effect on our
results of operations.
5
Seasonality
Generally,
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 decreased working capital, the effects
of seasonality on our sales have been lessened.
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
provides for certain minimum royalty payments through November 2012 which if not
satisfied could result in termination of the license.
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.
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.
The license
agreement with respect to the Kid Rock related trademarks requires the
payment of a per case royalty (or equivalent liquid
volume), with certain minimum royalties for years 2 through 5 of the agreement
payable on the first day of the applicable year.
Item 3.
|
Quantitative and Qualitative
Disclosures About Market
Risk.
|
Not
applicable to smaller reporting companies
Item 4.
|
Controls and
Procedures.
|
Disclosure
Controls and Procedures
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 Chief Financial Officer (Principal
Financial Officer), as appropriate, to allow for timely decisions regarding
required disclosure.
Our Chief
Executive Officer and our Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures as of October 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 October 31, 2010, our
Chief Executive Officer and our Chief 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 Securities and Exchange Commission (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.
6
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting as defined in
Rule 13a-15 under the Exchange Act that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
Item 1.
|
Legal
Proceedings.
|
As
reported previously in our quarterly report on Form 10-Q for the quarter ended
July 31, 2010, on July 29, 2010, we entered into a settlement agreement with
Socius CG II, Ltd. (“Socius”) pursuant to which we agreed to issue 2,586,667
shares of our common stock in exchange for satisfaction of the claim by Socius
for $334,006. This settlement agreement required court approval before the
issuance of such stock because it involved the payment of the settlement in the
form of the Company’s common stock in reliance upon the Section 3(a) (10)
exemption from the registration requirements of Section 5 of the Securities Act
of 1933, as amended. On September 9, 2010, the court approved the settlement
agreement and the issuance of the 2,586,667 shares to Socius as
exempt from registration pursuant to the Section 3(a)(10) registration
exemption. On November 17, 2010, since we could only deliver partial payment in
shares, as we had attained the limit of our authorized shares, we delivered
3,300,000 shares with a fair value of $122,100 to Socius in partial settlement
of the outstanding obligation. See Subsequent Event Note – 17.
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) and thereafter commenced the civil action. 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 defend vigorously
this suit. In addition, the Company has commenced a countersuit
for damage and theft of services. As of November 30, 2009, we pledged
688,334 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
2009, as a matter of public record the former employee was arrested and charged
with alleged theft of Company property. The Company intends to defend
vigorously against this claim and pursue its counterclaims to
judgment.
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. In November 30, 2009, we pledged
1,000,000 shares of Company common stock in lieu of a prejudgment remedy that
the Plaintiff had sought against the Company and its Chief Executive Officer.
On July 12, 2010, the Company and Mr. Sokol reached a settlement of the
suit pursuant to which Mr. Sokol withdrew the suit on July 16, 2010 and
thereafter returned the 1,000,000 shares of the Company’s common stock to the
Company. Additionally, in accordance with the settlement, the Company issued a
6% convertible promissory note in the amount of $47,130. Principal and interest
on the note are payable upon the Company’s successful completion of a $1,000,000
financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the
principal and interest due on the note for an equivalent value of in common
shares of the Company. As of October 31, 2010, the Company accrued interest
payable of $872.
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, This settlement resulted in
the reduction of the Company’s annual glass royalty obligation on a going
forward basis by as much as 75% depending on utilization levels and a settlement
of the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, as of July 31, 2010 and April 30, 2010, the outstanding unpaid
balance was $125,000. On August 13, 2010, we issued 786,667 shares of our
common stock with a fair value of $28,320 and on August 25, 2010, we issued
1,020,279 shares of our common stock with a fair value of $28,313 as payments in
full and final settlement of our obligation.
7
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”), a company which provided
distribution services for us in several states, filed an arbitration claim
against us in Duval County, Florida for alleged damages including breach of
contract. Liquor Group asserted damages in excess of $1,000,000. 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
counter claim is for $500,000, and it includes claims concerning breach of
contract, civil conspiracy, fraudulent concealment and civil theft. The
arbitration hearing is scheduled for January 25, 2011.
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 $130,000. 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.
Item 1A.
|
Risk
Factors.
|
There have
been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K for the year ended April 30, 2010.
Item 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
Not
Applicable.
Item 3.
|
Defaults Upon Senior
Securities.
|
None.
Item 4.
|
(Removed and
Reserved).
|
Item 5.
|
Other
Information.
|
On
December 9, 2010, Bruce Klein, Director, notified the Company that he intends to
resign from the Board of Director to pursue other interests effective the close
of business December 31, 2010.
Item 6.
|
Exhibits.
|
31.1
|
Certification of Principal
Executive Officer
|
31.2
|
Certification of Principal
Financial Officer
|
32.1
|
Certification of J. Patrick
Kenny, Chief Executive Officer and Chief Accounting Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
8
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
December
20, 2010
DRINKS
AMERICAS HOLDINGS, LTD.
|
||
By:
|
/s/ J. Patrick Kenny
|
|
J.
Patrick Kenny
President
and Chief Executive Officer and Chief Accounting
Officer
|
9
EXHIBIT
INDEX
31.1
|
Certification of Principal
Executive Officer
|
31.2
|
Certification of Principal
Financial Officer
|
32.1
|
Certification of J. Patrick
Kenny, Chief Executive Officer and Chief Accounting Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
10