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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 September 30, 2012
 
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period From ____to _____

Commission File Number: 000-52670

PANACHE BEVERAGE INC.
(Exact name of small business issuer as specified in its charter) 
 
Florida
 
20-2089854
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

40 W. 23rd Street, 2nd Floor, New York, NY 10010
(Address of principal executive offices)

(347) 436-8383
 (Issuer's telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x                                No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
Yes x                                No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 if Regulation S-K (229.405 of this Chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-Q or any amendments to this Form 10-Q.
Yes o                                No x
 
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 definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
o
Non-accelerated filer 
o (Do not check if a smaller reporting company) 
Accelerated filer 
o
Smaller reporting company 
x

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes o                                No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o                                No o

Number of shares of common stock, par value $.001, outstanding as of November 6, 2012:  26,422,891

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
 
The discussion contained in this 10-Q under the Securities Exchange Act of 1934, as amended, contains forward-looking statements that involve risks and uncertainties. The issuer's actual results could differ significantly from those discussed herein. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the Company believes," "management believes" and similar language, including those set forth in the discussions under "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis or Plan of Operation" as well as those discussed elsewhere in this Form 10-Q. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. Statements contained in this Form 10-Q that are not historical facts are forward-looking statements that are subject to the "safe harbor" created by the Private Securities Litigation Reform Act of 1995.
 


 
 

 
 
 
  TABLE OF CONTENTS
     
         
 
PART I. FINANCIAL INFORMATION
     
         
ITEM 1.
FINANCIAL STATEMENTS
    3  
           
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    19  
           
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    23  
           
ITEM 4.
CONTROLS AND PROCEDURES
    23  
           
 
PART II. OTHER INFORMATION
       
           
ITEM 1.
LEGAL PROCEEDINGS
    24  
           
ITEM 1A.
RISK FACTORS
    24  
           
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    24  
           
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
    25  
           
ITEM 4.
MINE SAFETY DISCLOSURES
    25  
           
ITEM 5.
OTHER INFORMATION
    25  
           
ITEM 6.
EXHIBITS
    26  
           
SIGNATURES     27  
           
INDEX TO EXHIBITS     28  
 
 
2

 
 
ITEM 1.FINANCIAL STATEMENTS
 
 
 
PANACHE BEVERAGE, INC.

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2012 AND 2011



 
3

 
 
PANACHE BEVERAGE, INC.

TABLE OF CONTENTS

SEPTEMBER 30, 2012 AND 2011
 
Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (unaudited)     5  
         
Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011 (unaudited)     6  
         
Consolidated Statement of Equity (Deficit) as of September 30, 2012 (unaudited)     7  
         
Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011 (unaudited)     8  
         
Notes to Consolidated Financial Statements (unaudited)     9  
 
 
4

 
 
PANACHE BEVERAGE, INC.
 
CONSOLIDATED BALANCE SHEETS - (Unaudited)
 
             
   
September 30,
   
December 31,
 
   
2012
   
2011
 
             
ASSETS
Current Assets
           
Cash and cash equivalents
  $ 47,904     $ 152,464  
Accounts receivable – net
    538,490       430,087  
Inventory
    4,689       41,723  
Prepaid expenses and other current assets
    101,641       106,661  
Total Current Assets
    692,724       730,935  
                 
Property and Equipment - net
    10,421       6,565  
                 
TOTAL ASSETS
  $ 703,145     $ 737,500  
                 
LIABILITIES AND EQUITY (DEFICIT)
                 
Current Liabilities
               
Accounts payable
  $ 954,069     $ 621,397  
Due to factor
    299,997       317,293  
Notes payable
    293,132       28,000  
Loans payable – related parties
    567,827       358,629  
Consulting fees payable – related party
    -       2,705  
Accrued interest
    57,162       38,860  
Other current liabilities
    499,167       335,464  
Total Current Liabilities
    2,671,354       1,702,348  
                 
Long term debt
    183,500       183,500  
                 
Total Liabilities
    2,854,854       1,885,848  
                 
Equity (Deficit)
               
Common stock, par value $0.001; 200,000,000 and 200,000,000 shares authorized as of June 30, 2012 and December 31, 2011, respectively; 26,422,891 and 25,107,891 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively
    26,423       25,108  
Additional paid in capital
    2,726,617       1,303,412  
Additional paid in capital - warrants
    288,177       163,097  
Treasury stock, at cost, 50,000 and 0 shares as of September 30, 2012 and December 31, 2011, respectively
    (50,000 )     -  
Accumulated (deficit)
    (4,796,845 )     (2,516,269 )
Total stockholders' deficit
    (1,805,628 )     (1,024,652 )
Non-controlling interests
    (346,081 )     (123,696 )
Total Equity (Deficit)
    (2,151,709 )     (1,148,348 )
                 
TOTAL LIABILITIES AND EQUITY (DEFICIT)
  $ 703,145     $ 737,500  
 
 
5

 
 
PANACHE BEVERAGE, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS  - (Unaudited)
 
   
For the three months ended
   
For the nine months ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
REVENUES - NET
  $ 271,241     $ 433,979     $ 1,310,765     $ 1,265,671  
                                 
COST OF GOODS SOLD
    115,122       357,304       811,462       1,004,756  
                                 
GROSS PROFIT
    156,119       76,675       499,303       260,915  
                                 
OPERATING EXPENSES
                               
Advertising and promotion
    177,415       426,986       704,516       1,429,232  
Consulting
    48,836       150,105       333,245       309,426  
Professional fees
    151,744       718,173       773,747       783,396  
General and administrative
    498,071       127,005       1,386,777       287,699  
TOTAL OPERATING EXPENSES
    876,066       1,422,269       3,198,285       2,809,753  
                                 
LOSS FROM OPERATIONS
    (719,947 )     (1,345,594 )     (2,698,982 )     (2,548,838 )
                                 
OTHER EXPENSE
                               
Interest expense
    (38,772 )     (21,466 )     (61,923 )     (55,580 )
                                 
LOSS FROM OPERATIONS AND BEFORE NON-CONTROLLING INTERESTS
    (758,719 )     (1,367,060 )     (2,760,905 )     (2,604,418 )
                                 
LESS: LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS
    74,020       528,432       480,329       1,736,403  
                                 
LOSS BEFORE PROVISION FOR INCOME TAXES
    (684,699 )     (838,628 )     (2,280,576 )     (868,015 )
                                 
PROVISION FOR INCOME TAXES
    -       -       -       -  
                                 
NET LOSS ATTRIBUTABLE TO PANACHE BEVERAGE, INC.
  $ (684,699 )   $ (838,628 )   $ (2,280,576 )   $ (868,015 )
                                 
BASIC AND DILUTED RESULTS PER SHARE OF COMMON STOCK:
                 
                                 
LOSS PER SHARE ATTRIBUTABLE TO PANACHE BEVERAGE, INC.:  BASIC AND DILUTED
  $ (0.03 )   $ (0.03 )   $ (0.09 )   $ (0.04 )
                                 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: BASIC AND DILUTED
    26,392,674       24,464,170       26,025,519       24,464,170  

 
6

 
 
PANACHE BEVERAGE, INC.
 
CONSOLIDATED STATEMENT OF EQUITY (DEFICIT) - (Unaudited)
 
AS OF SEPTEMBER 30, 2012
 
                                                       
   
Common stock
   
Additional Paid in
   
Common Stock
   
Treasury
   
Accumulated
   
Total Stockholders'
(Deficit)
   
Non-Controlling
   
Total Equity
 
   
Shares
   
Amount
   
Capital
   
Warrants
   
Stock
   
Deficit
   
Equity
   
Interests
   
(Deficit)
 
                                                       
Balance, January 1, 2011
    -     $ -     $ -     $ -     $ -     $ (1,056,691 )   $ (1,056,691 )   $ 1,472,388     $ 415,697  
                                                                         
Capital contributions
    -       -       -       -       -       -       -       622,778       622,778  
                                                                         
Equity assumed in conjuction
  with reverse merger
    4,914,500       4,915       44,984       15,768       -       -       65,667       -       65,667  
                                                                         
Common stock issued in
   conjuction with reverse merger
    17,440,000       17,440       (1,172,265 )     -       -       -       (1,154,825 )     -       (1,154,825 )
                                                                         
Common stock and warrants
   issued for $0.50 per share
    500,000       500       178,354       71,146       -       -       250,000       -       250,000  
                                                                         
Common stock and warrants
   issued for $1.00 per share
    430,000       430       330,617       98,953       -       -       430,000       -       430,000  
                                                                         
Common stock issued for
   services rendered
    1,748,391       1,748       1,824,027       -       -       -       1,825,775       -       1,825,775  
                                                                         
Warrants exercised
    75,000       75       97,695       (22,770 )     -               75,000       -       75,000  
                                                                         
Net loss for the year ended
   December 31, 2011
    -       -       -       -       -       (1,459,578 )     (1,459,578 )     (2,218,862 )     (3,678,440 )
                                                                         
Balance, December 31, 2011
    25,107,891     $ 25,108     $ 1,303,412     $ 163,097     $ -     $ (2,516,269 )   $ (1,024,652 )   $ (123,696 )   $ (1,148,348 )
                                                                         
Capital contributions
    -       -       -       -               -       -       257,944       257,944  
                                                                         
Common stock and warrants
   issued for $1.00 per share
    120,000       120       99,761       20,119       -       -       120,000       -       120,000  
                                                                         
Common stock and warrants
   issued for $1.25 per share
    490,000       490       514,771       97,239       -       -       612,500       -       612,500  
                                                                         
Common stock issued for
   services rendered
    440,000       440       444,760       -       -       -       445,200       -       445,200  
                                                                         
Warrants exercised
    230,000       230       337,506       (47,736 )     -       -       290,000       -       290,000  
                                                                         
Warrants modified
    -       -       (148,395 )     148,395       -       -       -       -       -  
                                                                         
Warrants expired
    -       -       92,937       (92,937 )     -       -       -       -       -  
                                                                         
Shares repurchased
    -       -       -       -       (50,000 )             (50,000 )     -       (50,000 )
                                                                         
Stock-based compensation
    -       -       56,900       -       -       -       56,900       -       56,900  
                                                                         
Issuance of shares from
   stock-based compensation
    35,000       35       (35 )     -       -       -       -       -       -  
                                                                         
Beneficial interest in conversion
   feature of convertible debt
    -       -       25,000       -       -       -       25,000       -       25,000  
                                                                         
Net loss for the nine months
   ended September 30, 2012
    -       -       -       -       -       (2,280,576 )     (2,280,576 )     (480,329 )     (2,760,905 )
                                                                         
Balance, September 30, 2012
    26,422,891     $ 26,423     $ 2,726,617     $ 288,177     $ (50,000 )   $ (4,796,845 )   $ (1,805,628 )   $ (346,081 )   $ (2,151,709 )

 
7

 
 
PANACHE BEVERAGE, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
 
             
   
For the nine months ended
 
   
September 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net (loss) income for the period
  $ (2,280,576 )   $ (868,015 )
Adjustments to Reconcile Net (Loss) Income to Net Cash Used in Operating Activities:
 
Non-controlling interest
    (480,329 )     (1,736,403 )
Depreciation
    4,585       666  
Bad debt expense
    -       2,026  
Stock issued for services rendered
    445,000       627,200  
Advertising expense from capital contribution
    257,944       1,251,539  
Stock-based compensation
    56,900       -  
Changes in assets and liabilities:
               
Accounts receivable
    (108,403 )     (206,186 )
Inventory
    37,034       53,802  
Prepaid expenses
    5,020       (88,583 )
Accounts payable
    353,672       259,154  
Consulting fees payable – related party
    (2,705 )     (52,592 )
Accrued interest
    18,302       (2,348 )
Other current liabilities
    163,703       (6,009 )
CASH FLOWS USED IN OPERATING ACTIVITIES
    (1,529,853 )     (765,749 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchase of property and equipment
    (8,441 )     (1,660 )
CASH FLOWS USED IN INVESTING ACTIVITIES
    (8,441 )     (1,660 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from notes payable
    272,500       407,378  
Repayments of notes payable
    (7,368 )     (430,581 )
Proceeds from loans payable – related parties
    213,198       429,476  
Repayments of loans payable – related parties
    -       (364,561 )
Net (decrease) increase in due to factor
    (17,296 )     184,639  
Contributions from non-controlling interests
    -       199,800  
Proceeds from issuance of stock and warrants
    1,022,700       270,000  
Cash received in conjunction with reverse merger
    -       60,000  
Repurchase of treasury stock
    (50,000 )     -  
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
    1,433,734       756,151  
                 
NET INCREASE (DECREASE) IN CASH
    (104,560 )     (11,258 )
Cash, beginning of period
    152,464       29,776  
Cash, end of period
  $ 47,904     $ 18,518  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash paid for interest
  $ 80,225     $ 53,232  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES
               
Stock issued for services rendered
  $ 445,000     $ 627,200  
Prepaid expense received in conjuction with reverse merger
  $ -     $ 5,667  
Capital contribution – Advertising services
  $ 257,944     $ -  
Conversion of accounts payable to notes payable - related party
  $ 21,000     $ -  
 
 
8

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations

Panache Beverage Inc. (the “Company”) was incorporated in the State of Florida on December 28, 2004 under the name as Biometrix International Inc. On May 30, 2007, the Company changed its name to BMX Development Corp. On September 6, 2011, the Company filed an Articles of Amendment to the Articles of Incorporation with the Florida Secretary of State to change its name to Panache Beverage Inc. and believed the new name would more accurately reflect its business after a stock exchange transaction with Panache LLC, a New York Limited Liability Company.

On August 19, 2011, the Company completed a stock exchange transaction with Panache LLC (“Panache”).  Panache was organized as a limited liability company in the State of New York on February 9, 2010.  Panache is an alcoholic beverage company specializing in development, global sales and marketing of spirits brands, and currently owns 65.5% ownership of Wodka LLC (“Wodka”), a New York Limited Liability Company organized on August 14, 2009.  Upon its organization, Panache assumed ownership of Wodka from a related party.  Wodka imports vodka under the brand name Wodka for wholesale distribution to retailers located throughout the United States and internationally.
 
The stock exchange transaction involved two simultaneous transactions:
 
The majority shareholder of the Company delivered 2,560,000 shares of the Company’s common stock to the Panache Members in exchange for total payments of $125,000 in cash and;
 
The Company issued to the Panache Members an amount equal to 17,440,000 new investment shares of common stock of the Company pursuant to Rule 144 under the Securities Act of 1933, as amended, in exchange for one hundred percent (100%) of the issued and outstanding membership interest units of Panache from the Panache Members.

Alibi NYC, LLC (“Alibi”) was organized as a limited liability company in the State of New York on May 17, 2007 and remained dormant until it conducted its first business operations during the first quarter of 2012.  Effective January 1, 2012, the members of Alibi transferred their interests to Panache Beverage, Inc. and Alibi became a 100% owned subsidiary of Panache Beverage, Inc.  Alibi markets and distributes Alibi American Whiskey.

Basis of consolidation

The consolidated financial statements include the accounts of Panache Beverage, Inc., Panache LLC, Wodka LLC and Alibi NYC, LLC (collectively, the “Company”). All material intercompany transactions have been eliminated.

Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) that are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results to be expected for a full year.
 
 
9

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Basis of presentation- (Continued)

The unaudited consolidated financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the Company’s annual audited consolidated financial statements for the preceding fiscal year.  The financial statements of the Company are presented in US dollars.

Accounting basis

The Company uses the accrual basis of accounting and generally accepted accounting principles in the United States of America (“US GAAP”).  The Company has adopted a December 31 fiscal year end.  Certain reclassifications were made to the 2011 financial statements presentation in order to conform to the 2012 presentation.  Such reclassifications had no effect on reported income.

Revenue recognition

We recognize revenue when title and risk of loss pass to the customer, typically when the product is shipped.  Some sales contracts contain customer acceptance provisions that grant a right of return.  Under these provisions, customers can return products that are not merchantable and fit and suitable for their intended use, are not of the same premium quality as products currently in existence, or are defectively packaged, bottled or labeled.  Customers may also return any product that does not comply with all applicable laws and regulations.  We record revenue net of the estimated cost of sales returns and allowances.  Gross revenue was reduced due to sales returns and allowances by $0 and $65 during the three months ended September 30, 2012 and 2011, respectively and $30,325 and $16,142 during the nine months ended September 30, 2012 and 2011, respectively.

Sales discounts were $1,677 and $65 for the three months ended September 30, 2012 and 2011 and $23,943 and $16,142 for the nine months ended September 30, 2012 and 2011.

From time to time the Company provides incentives to its customers in the form of free product.  The costs associated with producing this product is included as an expense in costs of goods sold.  No revenue is recognized with respect to such product giveaways.  The Company gave away product costing $0 and $1,440 during the three and nine months ended September 30, 2012 and $615 and $2,108 during the three and nine months ended September 30, 2011.

Advertising

Advertising costs are expensed as incurred and aggregated $177,415 and $426,987 for the three months ended September 30, 2012 and 2011, respectively and $705,516 and $1,429,232 for the nine months ended September 30, 2012 and 2011, respectively.

Wodka receives advertising services in the form of out of home media space from a related party who holds a non-controlling interest in Wodka.  The Company recorded advertising expense and capital contributions from non-controlling interests of $0 and $345,885 in relation to this arrangement for the three months ended September 30, 2012 and 2011, respectively and $257,944 and $1,251,539 in relation to this arrangement for the nine months ended September 30, 2012 and 2011, respectively.
 
 
10

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (Continued)

Other Significant Accounting Policies

Other significant accounting policies are set forth in Note 1 of the audited financial statements included in the Company’s 2011 Annual Report on Form 10-K and remain unchanged as of September 30, 2012.

Use of estimates

The preparation of financial statements in conformity with GAAP 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 revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Recently issued accounting standards

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

NOTE 2 – ACCOUNTS RECEIVABLE

The Company grants customers standard credit terms as governed by the terms specified in the contracts. Our major customers receive payment credit terms that range between 60 and 65 days.

The Company evaluates the need of an allowance for doubtful accounts based on specifically identified amounts that management believes to be uncollectible. If actual collections experience changes, revisions to the allowance may be required.  Based on management review of outstanding balances, no allowance for doubtful accounts was recorded as of September 30, 2012 and 2011.

Bad debt expense was $0 for the three months ended September 30, 2012 and 2011.  Bad debt expense was $0 and $2,026 for the nine months ended September 30, 2012 and 2011, respectively.

NOTE 3 – PREPAID EXPENSES

The Company has entered into various agreements with consultants whereby the Company issues common stock in exchange for consulting services.  The Company values the common stock and the consulting services based on the closing price of its common stock on the date of the agreement or the negotiated value of the consulting services.  The Company recognized $59,273 and $8,500 of professional fee expense in relation to these agreements for the three months ended September 30, 2012 and 2011, respectively and $379,802 and $8,500 of professional fee expense in relation to these agreements for the nine months ended September 30, 2012 and 2011.  Prepaid expenses relating to these agreements were $50,310 and $101,563 as of September 30, 2012 and December 31, 2011, respectively.
 
 
11

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 4 – FACTORING AGREEMENT

In the third quarter of 2012, the Company entered into a purchase and sale factoring agreement with a commercial factor whereby the Company sells certain accounts receivable to the factor. Under the terms of the agreement, the factor may, in its sole discretion, make advances to the Company of amounts representing up to 75% of the net amount of eligible accounts receivable up to an initial maximum of $150,000 with a possible increased maximum of $300,000.  The factor's purchase of the eligible accounts receivable includes a discount fee which is deducted from the face value of each collection. The Discount Fee is based on the number of days outstanding from the date of purchase.  The Discount Fee is 3.0% if paid within 30 days and 1.0% for each 10 day period until the account is paid. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.

On June 10, 2011, the Company entered into a purchase and sale factoring agreement with a commercial factor whereby the Company sells certain accounts receivable to the factor. Under the terms of the agreement, the factor may, in its sole discretion, make advances to the Company of amounts representing up to 70% of the net amount of eligible accounts receivable up to a maximum of $1,000,000.  On September 22, 2011, the factor increased the advance to 75% of eligible accounts receivable.  On March 19, 2012, the factor reduced the advance to 70% of eligible accounts receivable.  The factor's purchase of the eligible accounts receivable includes a discount fee which is deducted from the face value of each collection. The Discount Fee is based on the number of days outstanding from the date of purchase. The Discount Fee is 2.50% if paid within 40 days, 3.34% if paid within 50 days, 4.18% if paid within 60 days, 5.00% if paid within 60 days, 5.84% if paid within 70 days, 6.68% if paid within 80 days, 7.50% if paid within 90 days and 2.0% for each 15 day period until the account is paid. Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.

On December 22, 2011, the Company entered into a separate purchase and sale factoring agreement with a different commercial factor whereby the Company sells certain accounts receivable to the factor.  Under the terms of this agreement, the factor makes advances to the Company of amounts representing up to 90% of certain accounts receivable.  The factor purchases the accounts receivable at a $500 discount plus monthly compounded interest of 2% of the factored amount for the period the factored accounts receivable remain outstanding.  Based on this arrangement, the Company is liable to the factor if the accounts receivable is not collected, and therefore the Company has accounted for cash received on factored receivables as a liability.

The combined balance due to the factors as of September 30, 2012 and December 31, 2011 was $299,997 and $317,293, respectively.  Factor expense charged to operations for the three months ended September 30, 2012 and 2011 amounted to $10,263 and $16,583, respectively, and for the nine months ended September 30, 2012 and 2011 amounted to $67,926 and $20,428, respectively.

NOTE 5 – LOANS PAYABLE – RELATED PARTIES

The Company had an outstanding loan payable to its chief executive officer, majority shareholder and former member of Panache LLC in the amount of $245,000 as of September 30, 2012 and December 31, 2011.  The loan balance includes $110,275 that was transferred into Wodka from a related entity as a deemed distribution. The loan is unsecured, and non-interest bearing. In order to induce a new member to purchase a membership interest, the related party agreed that the loan would not be repaid without unanimous Board approval. In addition, the loan would not become due and payable until all of the equity interests of Wodka, or substantially all of the assets of Wodka are sold to an unrelated third party.
 
 
12

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 5 – LOANS PAYABLE – RELATED PARTIES – (Continued)
 
On July 10, 2012, the Company entered into a loan agreement with its chief executive officer and majority shareholder whereby it borrowed $150,000 at an interest rate of 24% per annum.  The loan agreement provides the chief executive officer with the option to convert the outstanding loan balance into shares of Panache Beverage, Inc. common stock at $1.00 per share.  The loan agreement also allowed the Company to borrow an additional $50,000 under the same terms, which the Company did on August 16, 2012.  The full $200,000 loan is to be repaid within four months of its commencement.

Because the conversion feature is at a share price less than the Company’s share price at the time of the loan, it is deemed beneficial to the holder.  As such, generally accepted accounting principles require the Company to record the intrinsic value of the conversion feature as additional paid in capital and record a corresponding discount on the loan payable.  This discount is amortized to interest expense over the life of the loan.  The discount on the loan payable due to the intrinsic value of the conversion feature is $25,000, of which $12,840 was amortized to interest expense in the three and nine months ended September 30, 2012.  Total interest expense from this loan payable was $22,407 for the three and nine months ending September 30, 2012.

The Company had additional loans payable to related parties totaling $134,987 and $113,629 at September 30, 2012 and December 31, 2011, respectively.  The loans are unsecured and non-interest bearing with no stated payment terms. Proceeds from the loans were used to fund operations.

NOTE 6 – OTHER CURRENT LIABILITIES

Other current liabilities consisted of the following:
 
   
September 30,
   
December 31,
 
   
2012
   
2011
 
Commissions payable
  $ 171,778     $ 171,778  
Excise taxes payable
    75,954       101,262  
Accrued salaries
    132,900       -  
Accrued expenses and other liabilities
    118,535       62,424  
Total other current liabilities
  $ 499,167     $ 335,464  

NOTE 7 – LONG TERM DEBT

The Company assumed an unsecured promissory note agreement with an individual lender in the amount of $128,500 at an annual interest rate of 24%, due upon the mutual agreement of the parties.  The loan was transferred into Wodka from a related entity as a deemed distribution.  The Company borrowed an additional $55,000 from this individual lender under the same terms.  The additional proceeds were used to fund operations.  The balance of this loan was $183,500 as of June 30, 2012 and December 31, 2011.  The loan is personally guaranteed by a related party.

On January 1, 2012, the Company engaged this individual lender to provide business advisory services in exchange for 100,000 shares of common stock.
 
 
13

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 8 – RELATED PARTY TRANSACTIONS

As noted above, the Company recorded unsecured, non-interest bearing loans totaling $245,000 to a related party in 2009. The loan consists of $110,275 transferred in from a related entity as a deemed distribution, plus cash loans of $134,725 for operations. The loan balance of $245,000 was outstanding as of September 30, 2012 and December 31, 2011.

On July 10, 2012, the Company entered into a loan agreement with its chief executive officer and majority shareholder whereby it borrowed $150,000 at an interest rate of 24% per annum.  The loan agreement provides the chief executive officer with the option to convert the outstanding loan balance into shares of Panache Beverage, Inc. common stock at $1.00 per share.  The loan agreement also allowed the Company to borrow an additional $50,000 under the same terms, which the Company did on August 16, 2012.  The full $200,000 loan is to be repaid within four months of its commencement.

In addition, the Company received various loans from related parties to fund operations. The related party loans totaled $134,987 and $113,629 at September 30, 2012 and December 31, 2011, respectively, and are unsecured and non-interest bearing with no stated payment terms.

The Company owes consulting fees totaling $0 and $2,705, at September 30, 2012 and December 31 2011, respectively, to a member under a consulting agreement dated October 1, 2009.  Consulting fee expense related to this agreement totaled $0 and $30,000 for the three months ended September 30, 2012 and 2011, respectively, and $60,000 and $90,000 for the nine months ended September 30, 2012 and 2011, respectively.

As noted above, Wodka receives advertising services in the form of out of home media space from a related party who holds a non-controlling interest in Wodka.  The Company recorded advertising expense and capital contributions from non-controlling interests of $0 and $257,944 in relation to this arrangement for the three and nine months ended September 30, 2012, respectively.  The Company recorded advertising expense and a reduction of prepaid expenses from prior year capital contributions from non-controlling interests of $345,885 and $1,251,539 in relation to this arrangement for the three and nine months ended September 30, 2011, respectively.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

The Company has a pending settlement with Incubrands Spirits Group (“Incubrands”) in connection with an equity agreement (the “Agreement”), dated April 30, 2007. Pursuant to the Agreement, Incubrands claimed commission fees of $191,778 incurred during the agreement period with a predecessor of the Company. Panache assumed this liability upon Panache’s creation in February 2010 and recorded $162,309 as a deemed distribution, since the liability was transferred from a related entity.  The balance as of September 30, 2012 and December 31, 2011 was $171,778.
 
The Company has $288,922 of outstanding receivables from an international distributor of the Company¹s products who experienced a re-organization in the third quarter of 2012. These receivables were factored with an international factor who is in the processes of collecting this debt on the basis of personal guarantees from the principals of this distributor.  Meanwhile Panache is directly pursuing customers in this market and already received its first purchase order from one of the customers.
 
The Company rents furnished office space on a month-to-month basis.  Rent expense was $3,240 and $3,000 for the three months ended September 30, 2012 and 2011, respectively, and $9,560 and $8,825 for the nine months ended September 30, 2012 and 2011, respectively.
 
 
14

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10 – STOCKHOLDERS’ DEFICIT

In the third quarter of 2012, the Company issued 40,000 shares of common stock and 25,000 stock warrants for cash proceeds of $50,000.  In the first nine months of 2012, the Company issued 610,000 shares of common stock and 486,250 stock warrants for cash proceeds of $732,500.  The Company used the Black Scholes model to bifurcate the value of the stock warrants from the common stock.  The following weighted average assumptions were used in the Black Scholes calculation:

   
Three months ended
September 30, 2012
   
Nine months ended
September 30, 2012
 
Risk free rate
    0.2 %     0.2 %
Expected dividend yield
    0.0 %     0.0 %
Expected volatility
    64 %     75 %
Expected life of options
 
1.35years
   
1.31years
 
Exercise price
  $ 2.00     $ 1.88  
Stock price on issuance date
  $ 0.90     $ 1.45  
 
For shares and warrants issued in the third quarter of 2012, the Company determined the value of the common stock was $47,692 and the value of the stock warrants was $2,308 at issuance.  For shares and warrants issued during the nine months of 2012, the Company determined the value of the common stock was $615,142 and the value of the stock warrants was $117,358 at issuance.
 
On March 1, 2012, the Company modified 845,000 existing warrants to extend the expiration date.  The Company used the Black Scholes model to determine the increase in value of the warrants caused by this modification.  Based on this calculation, the Company determined that the modification increased the value of the warrants by $148,395 and therefore increased Common Stock – Warrants and decreased Additional Paid in Capital by $148,395.
 
The following table shows the warrant activity for the nine months ended September 30, 2012:
 
Warrants
 
Number of
Warrants
   
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Term
 
Aggregate
Intrinsic
Value
 
Outstanding as of January 1, 2012
    1,373,500                
Issued
    486,250                
Exercised
    (210,000 )              
Expired
    (438,500 )              
Outstanding of September 30, 2012
    1,211,250     $ 1.49  
0.7 years
  $ -  
 
As noted above in Note 7 - Long Term Debt, the Company engaged an individual on January 1, 2012 to provide business advisory services through June 30, 2012 in exchange for 100,000 shares of common stock.  The Company valued the common stock at $100,000, which is the value of the services provided.  The Company recognized $0 and $100,000 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
 
15

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 10 – STOCKHOLDERS’ DEFICIT – (Continued)
 
On January 1, 2012, the Company engaged a marketing firm to provide business advisory services from January 1, 2012 to June 30, 2012 in exchange for 100,000 shares of common stock.  The Company valued the common stock at $100,000, which was the value of the services provided.  The Company recognized $0 and $100,000 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
The Company also issued 20,000 shares of common stock to an accounting firm to provide accounting and advisory services.  The Company valued the common stock at $20,000, which was the value of the accounting services provided.  The Company used these services in the second quarter of 2012 and accordingly recognized $0 and $20,000 of professional fee expense for the three and nine months ended September 30, 2012, respectively.
 
On April 1, 2012, the Company engaged a consulting firm to provide business advisory services from April 1, 2012 to June 30, 2012 in exchange for 150,000 shares of common stock.  The Company valued the common stock at $150,000, which was the value of the services provided.  The Company recognized $0 and $150,000 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
On May 30, 2012, the Company engaged a marketing firm to provide business advisory services from May 30, 2012 to May 30, 2013 in exchange for 20,000 shares of common stock.  The Company valued the common stock at $25,000, which was the value of the services provided.  The Company recognized $6,250 and $8,333 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
On July 11, 2012, the Company engaged a consulting firm to provide corporate consulting services for six months in exchange for 50,000 shares of common stock.  The Company valued the common stock at $50,000, which was the value of the services provided.  The Company recognized $19,624 of professional fee expense during the three and nine months ended September 30, 2012.
 
The Company recognized $0 and $56,900 of compensation expense for the three and nine months ended September 30, 2012, respectively, in relation to the grants of 35,000 shares of common stock to employees as stock-based compensation.  The shares immediately vested and the fair value of this stock issuance was determined by the closing price of the common stock on the grant date.

NOTE 11 – NON-CONTROLLING INTERESTS

As of September 30, 2012 and December 31 2011, the non-controlling interests balance was $(346,081) and $(123,696), respectively, due to minority members owning 34.5% of the membership interests of Wodka.

Profits and losses are allocated to the members of Wodka in accordance with Wodka’s Limited Liability Company Agreement (the “Agreement”).   Profits are allocated first to members in the amounts and proportions necessary to bring the members’ respective capital account balances in proportion to their percentage ownership interests and thereafter to the members pro rata in accordance with their percentage ownership interests.  The Agreement allocates losses first to the members in an amount equal to the positive balances in their Capital Accounts until the balances in such accounts are reduced to zero and thereafter to the members pro rata in accordance with their respective percentage ownerships interests.
 
 
16

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 11 – NON-CONTROLLING INTERESTS – (Continued)

For the three months ended September 30, 2012 and 2011, $140,532 and $75,562 respectively, of Wodka’s net loss was allocated to Panache and $74,021 and $515,378, respectively, was allocated to noncontrolling interests.

For the nine months ended September 30, 2012 and 2011, $422,210 and $75,562, respectively, of Wodka’s net loss was allocated to Panache and $480,329 and $1,736,403, respectively, was allocated to noncontrolling interests.

NOTE 12 – CONCENTRATIONS AND RISK

Major customers

The Company had two customers representing approximately 98% of revenues for the three months ended September 30, 2012.  These customers represented approximately 46% of the receivables outstanding as of September 30, 2012.

The Company had one customer representing approximately 90% of revenues for the three months ended September 30, 2011.  This customer represented approximately 80% of the receivables outstanding as of September 30, 2011.

The Company had three customers representing approximately 97% of revenues for the nine months ended September 30, 2012.  These customers represented approximately 99% of the receivables outstanding as of September 30, 2012.

The Company had one customer representing approximately 80% of revenues for the nine months ended September 30, 2011.  This customer represented approximately 80% of the receivables outstanding as of September 30, 2011.

Major suppliers

The Company had two suppliers represent approximately 94% of purchases for the three months ended September 30, 2012.  These suppliers represented approximately 45% of the payables outstanding as of September 30, 2012.

The Company had one supplier representing approximately 97% of purchases for the three months ended September 30, 2011.  This supplier represented approximately 59% of the payables outstanding as of September 30, 2011.

The Company had two suppliers represent approximately 97% of purchases for the nine months ended September 30, 2012.  These suppliers represented approximately 45% of the payables outstanding as of September 30, 2012.

The Company had one supplier representing approximately 63% of purchases for the nine months ended September 30, 2011.  This supplier represented approximately 59% of the payables outstanding as of September 30, 2011.

 
17

 
 
PANACHE BEVERAGE, INC.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
NOTE 12 – CONCENTRATIONS AND RISK – (Continued)

Credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with commercial banking institutions.  At times, such cash may be in excess of the Federal Deposit Insurance Corporation’s insurance limit.  From time to time the Company may also hold cash in accounts with foreign financial institutions.  The Company regularly assesses the risk associated with its foreign cash portfolio.  The Company performs ongoing credit evaluations of its customers’ financial condition, but does not require collateral to support such receivables.

NOTE 13 – LOSS PER SHARE
 
Basic net loss per share is computed using the weighted average number of common shares outstanding during the three and nine months ended September 30, 2012, respectively.  There was no dilutive earning per share due to net losses during the periods.  
 
The following table sets forth the computation of basic net loss per share for the periods indicated:

   
Three months ended
 September 30,
   
Nine months ended
 September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Numerator:
                       
Net (loss) income attributable to Panache Beverage, Inc.
  $ (684,699 )   $ (838,628 )   $ (2,280,576 )   $ (868,015 )
                                 
Denominator:
                               
Weighted average shares outstanding
    26,392,674       24,464,170       26,025,519       24,464,170  
                                 
Basic net (loss) income per share
  $ (0.03 )   $ (0.03 )   $ (0.09 )   $ (0.04 )

NOTE 14 – GOING CONCERN
 
These consolidated financial statements have been prepared assuming that Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.
 
As of September 30, 2012, the Company had an accumulated deficit of $2,151,709. Management has taken certain actions and continues to implement changes designed to improve the Company’s financial results and operating cash flows. The actions involve certain cost-saving initiatives and growing strategies, including (a) reductions in operating expenses; and (b) expansion of the business model into new markets. Management believes that these actions will enable the Company to improve future profitability and cash flow in its continuing operations through September 30, 2013. As a result, the financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.
 
NOTE 15 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 9, 2012, the date on which these financial statements were available to be issued.
 
 
18

 
 
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
 
The following information should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and well as our most recent Annual Report on Form 10-K.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management’s expectations. Please see “CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION”

We use the terms “Panache,” “the Company,” “we,” “us,” and “our” to refer to Panache Beverage Inc., its subsidiaries and predecessors, unless indicated otherwise.

Business Overview

Panache Beverages, Inc. is an alcoholic beverage company specializing in the development, global sales and marketing of spirits brands. The Company's expertise lies in the strategic development and aggressive early growth of its brands establishing its assets as viable and attractive acquisition candidates for the major global spirits companies.  Panache intends to build its brands as individual acquisition candidates while continuing to develop its pipeline of new brands into the Panache portfolio. Panache's existing portfolio contains three brands:

Wodka Vodka (www.welovewodka.com)

Wodka is triple distilled and charcoal filtered earning it a 90 point rating by the Beverage Testing Institute – a first for any brand available for under $10.  Wodka was developed as an egalitarian brand – coming from the position that consumers shouldn’t have to pay $30 for a bottle of quality vodka. This position was authentic – the brand was discovered by Panache while walking through a distillery in Eastern Poland – Wodka Vodka, a relic from Poland's communist era, was government owned/issued vodka. Wodka stands tall in the exploding category of ‘quality for value’ spirit brands. It is uniquely positioned in the category as fun, quirky, aloof – all attributes which have been embraced by trade and consumers making Wodka a true “brand” very quickly.

Alchemia Infused Vodka (www.alchemiainfusions.com)

Alchemia is a premium, traditional Polish vodka that is naturally infused with select raw ingredients and made in the “Spiritus Vini”, or “Spirit of Wine”. The spirit is available in three varieties: Chocolate, Ginger, and Wild Cherry. Alchemia’s infusions are a fresh escape for consumers who have been offered very little from a spirits world rife with the artificially flavored vodkas presently taking up store shelves and back bars. Alchemia has found a strategic niche in the exploding culinary world and is being favored by celebrity chefs and their restaurants. Cherry received a 94 PTS by Wine Enthusiast and was named a Top 50 Spirit for 2011, whereas Chocolate received a 92 by The Tasting Panel.

Alibi American Whiskey (www.alibiamerica.com)

Showing its propensity to stir up a little controversy, Panache is finishing test marketing for its latest creation, Alibi American Whiskey. Alibi has been developed to exploit a gap in the exploding brown spirits category – the need for an edgy, cool, premium Whiskey that appeals to the younger generation of legal age drinkers. While we could focus on the fact that Alibi is affordable premium Whiskey, distilled from Rye, aged four years in new American oak barrel — we think that's rather mundane. Alibi is an elixir for the flawed human spirit in all of us, a tonic for sin and an excuse for vulnerability. We created the spirit because we know mankind needs an out, a way to feel better about those poor decisions that will invariably be made.  Everyone needs an Alibi.
 
 
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History

The Company was incorporated in Florida effective December 28, 2004 and provided motorcycle repair services to customers located in and around the Charlotte, North Carolina area. Subsequent to the Plan of Exchange executed on August 19, 2011, the Company has continued operations of Panache, an alcoholic beverage company specializing in the development and global sales and marketing of spirits brands, and no longer be engaged in the business of motor cycle repair services.

Panache was formed in November 2004 by James Dale as the import company of record for the premium vodka, 42 BELOW NZ. At that time, 42 BELOW was a publicly traded company but lack of traction in the most important liquor markets in the world, including the United States. Panache provided the marketing solution for 42 BELOW, and it became a brand available in 19 strategically selected states and was over-performing in top tier image accounts a year later. By mid-2005 42 BELOW was a major player in the business and was being noticed in the United States by major suppliers.

After noticing that 42 BELOW has replaced Grey Goose in numerous key accounts, Bacardi added 42 BELOW to a list of top threats to Grey Goose in the US. Shortly thereafter 42 BELOW was formally approached for global acquisition. At this stage Panache was responsible for over 50% of the total annual cases sold globally and was among the key driving factors in the success of the brand. These agreements were purchased as part of the settlement and purchase of the 42 BELOW Public Company in December 2006.

During this time Panache was developing its current pipeline brands Alchemia Vodka and Alibi Bourbon with an eye toward developing a value brand, which became Wodka.

Today, Panache has developed a unique set of wholesale and retail relationships as well as sales and marketing infrastructure and proprietary partnerships enabling it to successfully develop, roll out and exit its brands.

Operational Highlights for the nine months ended September 30, 2012

Panache continued its expansion into foreign markets by tapping O.B.H. Wine and Spirits Inc. as an exclusive partner to represent Wodka and Alchemia brands in Canada. Panache and O.B.H are in the process of securing approval from the Legal Control Board of Ontario to sell and market the brands throughout all provinces and territories of Canada.

Wodka Vodka has been accepted as a core range product for LMG Bottlemart Group, which represents 12% of total Australian packaged liquor market and comprises over 2,000 members throughout the country. The acceptance of Wodka by LMG Bottlemart is an endorsement of the brand’s strategy, marketing, and pricing.

Alibi American Whiskey has received its Certificate of Label Approval from Alcohol and Tobacco Tax and Trade Bureau. The approval paves the way for Panache to roll out this highly anticipated brand in the third quarter of this year.
 
Panache added 2 new distributors for the Alchemia brand and expanded into 1 state in the third quarter of 2012. Our brands are now available in 31 states across the United States.
 
 
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Results of Operations for the Three and Nine Months Ended September 30, 2012 and 2011

Revenues

Revenues were $271,241 and $433,979 for the three months ended September 30, 2012 and 2011, respectively, a decrease of 37%.  Revenues were $1,310,765 and $1,265,671 for the nine months ended September 30, 2012 and 2011, respectively, an increase of 4%.  We generate our revenues from sales of distilled spirits. The revenues are recognized when persuasive evidence of a sale exists, transfer of title has occurred, the selling price is fixed or determinable and collectability is reasonably assured. Our sales arrangements are not subject to warranty.  Gross revenue was reduced due to sales returns and allowances by $0 and $65 during the three months ended September 30, 2012 and 2011, respectively and $30,325 and $16,142 during the nine months ended September 30, 2012 and 2011, respectively.
 
The decrease in revenue during the three months ended September 30, 2012 compared to the three months ended September 30, 2011 was primarily due to production issues at our supplier in Bialystock, Poland.  Due to these issues at the distillery, the Company has contracted a new distillery on September 10, 2012 to supply its Wodka and Alchemia products and has now begun shipping these products at previous levels.  The increase in revenue during the three and nine months ended September 30, 2012 compared to the same period in 2011 was primarily due to the implementation of our marketing strategies in new markets and growth in existing markets.  This increase has been partially offset by the supplier issues noted above.
 
Cost of Goods Sold
 
Cost of goods sold included expenses directly related to selling our products. Product delivery, broker fees and direct labor would be examples of cost of goods sold items. Cost of goods sold was $115,122, or 42% of revenue, and $357,304, or approximately 82% of revenue, during the three months ended September 30, 2012 and 2011, respectively. Cost of goods sold was $811,462, or approximately 62% of revenue, and $1,004,756, or approximately 79% of revenue, during the nine months ended September 30, 2012 and 2011, respectively.

The decrease in costs of goods sold as a percentage of revenue during the three and nine month periods ended September 30, 2012 in comparison to the same periods in 2011 is primarily due to increased efficiencies in operations and higher gross profit on international sales, which accounted for a higher percentage of sales in 2012.

Expenses
 
Operating expenses were $876,066 and $1,442,269 for the three months ended September 30, 2012 and 2011, respectively and $3,198,285 and $2,809,753 for the nine months ended September 30, 2012 and 2011, respectively.
 
 
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The increase in operating expenses during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 was the result of Panache becoming a public company and its rapid growth.  As a new public company Panache incurred substantial accounting and legal expenses, as well as financial consulting, research, and investor relations expenditures. However, substantial portion of these fees were paid in stock of Panache Beverage Inc. to alleviate pressure on cash reserves.  As part of its expansion and growth efforts, the Company has hired new employees and incurred higher employee compensation, executive recruiting, insurance, and T&E expenses in the first nine months of 2012.

The decrease in operating expenses during the three months ended September 30, 2012 compared to the same period in 2011 was due to the substantial accounting and legal expenses incurred in the early stages of operating at a public company during the third quarter of 2011.  These expenses have decreased as the Company has established better business processes.

Net Loss

The Company’s net loss for stockholders was $684,699 and $838,628 for the three months ended September 30, 2012 and 2011, respectively and $2,280,576 and $868,015 for the nine months ended September 30, 2012 and 2011, respectively.  The change in net loss for the nine months ended September 30, 2012 compared to the same 2011 period was attributable to higher operating expenses and less loss allocated to non-controlling interests.  The decrease in the loss for the three months ended September 30, 2012 compared to the same 2011 period was due to the decrease in operating expenses.

There can be no assurance that we will achieve or maintain profitability, or that any revenue growth will take place in the future.

Liquidity and Capital Resources

Cash flows used in operating activities were $1,529,853 and $765,749 for the nine months ended September 30, 2012 and 2011, respectively. Negative cash flows from operations for the nine months ended September 30, 2012 were due primarily to the net loss of $2,280,576 and the loss allocated to non-controlling interests of $480,329 offset by non-cash advertising of $257,944 and stock issued for services and compensation of $445,000.  Negative cash flows from operations for the nine months ended September 30, 2011 were due primarily to the net loss of $868,015 and the loss allocated to non-controlling interests of $1,736,403 offset by non-cash advertising of $1,251,539.

Cash flows used in investing activities in both 2012 and 2011 were due to the purchase of equipment.

Cash flows provided by financing activities were $1,433,734 and $756,151 during the nine months ended September 30, 2012 and 2011, respectively.  Positive cash flows from financing activities during the nine months ended September 30, 2012 were due primarily to proceeds of $1,022,700 from sales of common stock.  Positive cash flows from financing activities during nine months ended September 30, 2011 were due primarily to proceeds of $270,000 from sales of common stock.  Positive cash flows also resulted from contributions from non-controlling interests to consolidated subsidiaries of $199,800 and proceeds of $184,639 from factoring accounts receivable.

We project that we will need additional capital of approximately $1,100,000 to fund operations over the next 12 months.

Overall, we have funded our cash needs from inception through September 30, 2012 with a series of debt and equity transactions, primarily with related parties. If we are unable to receive additional cash from our related parties, we may need to rely on financing from outside sources through debt or equity transactions. Our related parties are under no legal obligation to provide us with capital infusions. Failure to obtain such financing could have a material adverse effect on operations and financial condition.
 
 
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We had cash of $47,904 on hand as of September 30, 2012. Currently, we may not be able to sustain our capital needs because we do not have enough cash to fund our operations for the next three months. This is based on current negative cash flows from operating activities and net losses during the periods. We will then need to obtain additional capital through equity or debt financing to sustain operations for an additional year. Our current level of operations would require capital of approximately $1,100,000 per year. Modifications to our business plans may require additional capital for us to operate. For example, if we are unable to raise additional capital in the future we may need to curtail our number of product offers or limit our marketing efforts to the most profitable geographical areas. This may result in lower revenues and market share for us. In addition, there can be no assurance that additional capital will be available to us when needed or available on terms favorable to us.

On a long-term basis, liquidity is dependent on continuation and expansion of operations, receipt of revenues, and additional infusions of capital and debt financing. Our current capital and revenues are insufficient to fund such expansion. If we choose to launch such an expansion campaign, we will require substantially more capital. The funds raised from this offering will also be used to market our products and services as well as expand operations and contribute to working capital. However, there can be no assurance that we will be able to obtain additional equity or debt financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected and we will have to significantly modify our plans. For example, if we unable to raise sufficient capital to develop our business plan, we may need to:

·
Curtail new product launches
   
·
Limit our future marketing efforts to areas that we believe would be the most profitable.
 
Demand for the products and services will be dependent on, among other things, market acceptance of our products, our brands’ recognition, distilled spirits market in general, and general economic conditions, which are cyclical in nature. Inasmuch as a major portion of our activities is the receipt of revenues from the sales of our products, our business operations may be adversely affected by our competitors and prolonged recession periods.
  
Our success will be dependent upon implementing our plan of operations and the risks associated with our business plans. We specialize in development, global sales and marketing of spirits brands. We plan to strengthen our position in these markets. We also plan to expand our operations through aggressively marketing our products and our concept. 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information to be reported under this item is not required of smaller reporting companies.
 
ITEM 4. CONTROLS AND PROCEDURES.
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and its Principal Accounting Officer (the “Certifying Officers”), as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, the Certifying Officers carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2012. Their evaluation was carried out with the participation of other members of the Company’s management. Based on an evaluation conducted by the Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15(e), the Certifying Officers concluded that our disclosure controls and procedures were effective as of September 30, 2012 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure.
 
 
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PART II. OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS

None.
 
ITEM 1A. RISK FACTORS
 
The information to be reported under this item is not required of smaller reporting companies.

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 22, 2012, the Company issued 100,000 shares of common stock to an individual in exchange for business advisory services to be provided from January 1, 2012 to June 30, 2012.  The Company valued the common stock at $100,000, which is the value of the services provided.  The Company recognized $0 and $100,000 of professional fee expenses during the three and nine months ended September 30, 2012, respectively.

On February 22, 2012, the Company issued 100,000 shares of common stock to ADL Marketing in exchange for business advisory services to be provided from January 1, 2012 to June 30, 2012.  The Company valued the common stock at $100,000, which is the value of the services provided.  The Company recognized $0 and $100,000 of professional fee expenses during the three and nine months ended September 30, 2012, respectively.
 
On February 22, 2012, the Company issued 20,000 shares of common stock to Rudney Solomon Cohen and Felzer, PC to provide accounting and advisory services.  The Company valued the common stock at $20,000, which was the value of the accounting services provided.  The Company used these services in the first quarter of 2012.  The Company recognized $0 and $20,000 of professional fee expense for the three and nine months ended September 30, 2012, respectively.
 
On March 2, 2012, the Company issued 100,000 shares of common stock in accordance with the exercise of a common stock warrant.  The Company received $125,000 of proceeds in relation to this transaction.

On March 19, 2012, the Company issued 120,000 shares of common stock in accordance with the exercise of a common stock warrant.  The Company received $150,000 of proceeds in relation to this transaction.
 
On April 18, 2012, the Company issued 150,000 shares of common stock to Steeltown Consulting Group, LLC and various affiliates in exchange for business advisory services to be provided from April 1, 2012 to June 30, 2012.  The Company valued the common stock at $150,000, which was the value of the services provided.  The Company recognized $0 and $150,000 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
On May 29, 2012, the Company issued 120,000 shares of common stock in accordance with the exercise of a common stock warrant.  The Company received $150,000 of proceeds in relation to this transaction.
 
On May 30, 2012, the Company engaged a marketing firm to provide business advisory services from May 30, 2012 to May 30, 2013 in exchange for 20,000 shares of common stock.  The Company valued the common stock at $25,000, which was the value of the services provided.  The Company recognized $6,250 and $8,333 of professional fee expense during the three and nine months ended September 30, 2012, respectively.
 
On July 11, 2012, the Company engaged a consulting firm to provide corporate consulting services for six months in exchange for 50,000 shares of common stock.  The Company valued the common stock at $50,000, which was the value of the services provided.  The Company recognized $19,624 of professional fee expense during the three and nine months ended September 30, 2012.
 
 
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The Board of Directors approved the following stock issuances in 2012:

Date
 
Number of Shares
   
Cash Investment
 
             
January 30, 2012
    40,000     $ 40,000  
February 14, 2012
    50,000       50,000  
February 21, 2012
    20,000       20,000  
February 27, 2012
    10,000       10,000  
February 27, 2012
    80,000       100,000  
March 13, 2012
    80,000       100,000  
April 26, 2012
    40,000       50,000  
April 26, 2012
    40,000       50,000  
May 9, 2012
    20,000       25,000  
May 14, 2012
    10,000       12,500  
May 14, 2012
    10,000       12,500  
May 15, 2012
    10,000       12,500  
May 15, 2012
    40,000       50,000  
May 30, 2012
    20,000       25,000  
May 30, 2012
    100,000       125,000  
August 27, 2012
    40,000       50,000  
      610,000     $ 732,500  

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.      MINE SAFETY DISCLOSURES

None.

ITEM 5.      OTHER INFORMATION

None.
 
 
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ITEM 6. EXHIBITS
 
31.1
 
Certification of Chief Executive Officer
     
31.2
 
Certification of Chief Financial Officer
     
32.1
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS **
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Extension Schema Document
     
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document
________
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Reports on Form 8-K
 
1.  
On January 11, 2012, we filed an amendment to the current report on Form 8-K/A to amend the Form 8-K we filed on August 24, 2011.

2.  
On April 11, 2012, we filed an amendment to the current report on Form 8-K/A to amend the Form 8-K we filed on August 24, 2011.

3.  
On July 2, 2012, we filed a current report on Form 8-K to announce the resignation and election of members of the Board of Directors.

 
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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, there unto duly authorized.

 
PANACHE BEVERAGE INC.
 
       
Date: November __, 2012
By:  
/s/ James Dale
 
 
James Dale
Chief Executive Officer
 
 
 
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INDEX TO EXHIBITS
 
Exhibit No.
 
Description
     
31.1
 
Certification of Chief Executive Officer
     
31.2
 
Certification of Acting Principal Accounting Officer
     
32.1
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2
 
Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
101.INS **
 
XBRL Instance Document
     
101.SCH **
 
XBRL Taxonomy Extension Schema Document
     
101.CAL **
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF **
 
XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB **
 
XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE **
 
XBRL Taxonomy Extension Presentation Linkbase Document
__________
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 
 
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