NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Basis
of Presentation and Nature of Business
Basis
of Presentation
On
March
9, 2005, (the “Acquisition Date”) the shareholders of Drinks Americas, Inc.,
("Drinks") a company engaged in the business of importing and distributing
unique premium wine and spirits and non-alcoholic beverages associated with
icon
entertainers and celebrities to beverage wholesalers throughout the United
States, acquired control of Drinks Americas Holdings, Ltd. (“Holdings”).
Holdings was incorporated in the State of Delaware on February 14, 2005. On
the
Acquisition Date, Holdings merged with Gourmet Group, Inc. (‘Gourmet”), a
publicly traded Nevada Corporation, which resulted in Gourmet’s shareholders
acquiring 1 share of Holdings common stock in exchange for 10 shares of the
common stock of Gourmet. Both Holdings and Gourmet were considered “shell”
corporations, as Gourmet had no operating business on the date of the share
exchange, or for any of the previous three years. Pursuant to the June 9, 2004
Agreement and Plan of Share Exchange among Gourmet and Drinks and the Drinks’
shareholders, on the Acquisition Date, Holdings, with approximately 4,058,000
shares of outstanding common stock, issued approximately 45,164,000 additional
shares of its common stock to the common shareholders of Drinks and to the
members of its affiliate, Maxmillian Mixers, LLC (“Mixers”), in exchange for all
of the outstanding common stock of Drinks and Mixers' membership units. As
a
result, Maxmillian Partners, LLC, (“Partners”), which owned 99% of Drinks
outstanding common stock and approximately 55% of Mixers’ outstanding membership
units, became Holding’s controlling shareholder (owning approximately 87% of
Holding’s outstanding common stock). For financial accounting purposes, this
business combination has been treated as a reverse acquisition, or a
recapitalization of Partners’ subsidiaries, Drinks and Mixers.
Subsequent
to the Acquisition Date, Partners, which was organized as a Delaware limited
liability company on January 1, 2002 and incorporated Drinks in Delaware on
September 24, 2002, transferred all its shares of Holdings to its members as
part of a plan of liquidation.
On
March
11, 2005, Holdings and another individual organized Drinks Global Imports,
LLC
(“DGI”). Holdings owns 90% of the membership units; the individual, who is the
President of DGI, owns the remaining 10%. DGI imports wines from various parts
of the world and sells them to distributors throughout the United States. In
May
2006, Holdings organized D.T. Drinks, LLC (“DT Drinks”), a New York limited
liability company, for the purpose of selling certain wine and
spirits.
The
accompanying consolidated balance sheet as of January 31, 2008, the results
of
operations and cash flows for the nine months ended January 31, 2008 and 2007,
and the results of operations for the three months ended January 31, 2008 and
2007, reflect Holdings and its majority-owned subsidiaries and Partners
(collectively, the “Company”). All intercompany transactions and balances in
these financial statements have been eliminated in consolidation. The common
and
preferred shares authorized, issued, and outstanding as of January 31, 2008
and
2007, are those of Holdings.
The
accompanying consolidated financial statements have been prepared on a basis
that assumes the Company will continue as a going concern. Although the Company
has shareholders' equity of $1,567,371 as of January 31, 2008, we have incurred
significant operating losses and negative cash flows since inception. During
the
nine months ended January 31, 2008, the Company sustained a net loss of
$4,670,875 compared with a net loss of $7,555,703 over the same period prior
year, and used $2,631,023 in operating activities compared with $5,088,589
over
the same period in the prior fiscal period. We have increased our working
capital as a result of our December 2007 private placement of our preferred
stock. In addition, we have improved our liquidity by extinguishing a
significant amount of debt by exchanging it for our common stock in previous
periods. We will need to continue to carefully manage our working capital and
our business decisions will continue to be influenced by our working capital
requirements. We will need additional financing which may take the form of
equity or debt. We anticipate that increased sales revenues will help to some
extent. In the event we are not able to increase our working capital, we will
not be able to implement or may be required to delay all or part of our business
plan, and our ability to attain profitable operations, generate positive cash
flows from operating and investing activities and materially expand the business
will be materially adversely affected. The accompanying 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.
In
the
opinion of management, the accompanying unaudited consolidated financial
statements reflect all adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial position of the Company as of January
31, 2008, its results of operations for the nine and three months ended January
31, 2008 and 2007 and its cash flows for the nine months ended January 31,
2008
and 2007. Pursuant to the rules and regulations of the SEC for the interim
financial statement, certain information and disclosures normally included
in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted from these financial
statements unless significant changes have taken place since the end of the
most
recent fiscal year. Accordingly, these financial statements should be read
in
conjunction with the audited consolidated financial statements and the other
information in the Form 10-KSB.
Nature
of Business
Through
our majority-owned subsidiaries, Drinks, DGI and DT Drinks, we import,
distribute and market unique premium wine and spirits and alcoholic
beverages associated with icon entertainers, celebrities and destinations,
to beverage wholesalers throughout the United States.
2.
Critical Accounting Policies and Estimates
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Accordingly, actual results may differ from
those estimates.
Significant
Accounting Policies
We
believe the following significant accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of the consolidated financial statements:
The
Company recognizes revenues when title passes to the customer, which is
generally when products are shipped.
The
Company recognizes revenue dilution from items such as product returns, 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 acquire more products
or
maintain higher inventory levels of products, than they would in the ordinary
course of business. The Company assesses inventory levels through constant
communication with our customers. It is the Company’s policy to recognize and
accrue for material post shipment obligations and customer incentives in the
period in which the related revenue is recognized.
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 the collectability of accounts receivable and previous 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 payments are received on those
accounts. Management believes that credit risks are not material to the
financial position of the Company or results of its operations.
The
Company computes earnings per share under the provisions of SFAS No. 128,
Earnings 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 per share is determined in the
same manner as basic earnings per share except that the number of shares is
increased to assume exercise of potentially dilutive and contingently issuable
shares using the treasury stock method, unless the effect of such increase
would
be anti-dilutive. For the nine and three months ended January 31, 2008 and
2007,
diluted losses per share amounts equal basic losses per share because the impact
of the assumed exercise of contingently issuable shares would have been
anti-dilutive.
Recent
accounting pronouncements
In
September 2006, the Financial Accounts Standards Board issued SFAS No. 157,
‘‘
Fair
Value Measurements
,’’
to
define fair value, establish a framework for measuring fair value in accordance
with generally accepted accounting principles, and expand disclosures about
fair
value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The Company is assessing the impact the
adoption of SFAS No. 157 will have on the Company’s financial position and
results of operations.
3.
Inventories
As
of
January 31, 2008, Inventories consist of the following:
|
Raw
materials
|
|
$
|
921,302
|
|
|
Finished
goods
|
|
|
1,169,943
|
|
|
|
|
|
|
|
|
|
|
$
|
2,091,245
|
|
4.
Other
current assets
As
of
January 31, 2008, other current assets consisted of the
following:
|
Prepaid
inventory
|
|
$
|
407,271
|
|
|
Prepaid
insurance
|
|
|
20,270
|
|
|
Other
prepaid expenses
|
|
|
256,856
|
|
|
|
|
|
|
|
|
|
|
$
|
684,397
|
|
5.
Long-term Assets
In
August
2006, in connection with an agreement with one of its sales consultants, the
Company issued warrants to purchase 100,000 shares of Holdings common stock
at
an exercise price of $0.60 per share. The warrants may be exercised at any
time
up to five years from the date of the agreement. The Company determined, as
of
the date the warrants were issued, that the warrants had a value of $18,000
which was amortized over the one year benefit period of such warrants. In
addition, under the terms of the agreement, the consultant received 175,000
shares of Holdings common stock which were valued at $107,000 based on the
market price of the stock at the date of the agreement. The value of stock
issued is being amortized over the five year life of the consulting agreement.
The unamortized value of the stock at January 31, 2008 was $90,950. The
consultant is to receive an additional 100,000 warrants for each contract year
with an exercise price to be determined by the Company’s board of directors. No
cost for the value of the warrants currently issuable has been made since the
exercise price has not been determined.
In
February 2007, the Company entered into a five year agreement with a consulting
company to provide certain financial advisory services. The Company prepaid
$300,000 for such services. This amount is carried as a long-term asset and
is
being amortized over the five year life of the agreement. At January 31, 2008,
the unamortized balance of the agreement is $240,164.
0n
June
14, 2007, in connection with an endorsement agreement, the Company issued
warrants to purchase 801,000 shares of the Company’s common stock at a price of
$1.284 per share. The warrants may be exercised at any time up to June 14,
2017.
The Company determined that the warrants had a value of $416,500, as of the
date
the warrants were issued, which is being amortized over the three year term
of
the endorsement agreement. The warrants have cashless exercise provisions.
At
January 31, 2008, the unamortized balance was $ 335,813. .
6.
Notes
and Loans Payable
Notes
and
loans p
ayable
consist of the following at January 31, 2008
:
|
Due
to RBCI, October 2006 (a)
|
|
$
|
500,000
|
|
|
Convertible
note, October 2008 (b)
|
|
|
250,000
|
|
|
Revolving
finance facility BACC (c)
|
|
|
126,528
|
|
|
|
|
|
876,528
|
|
|
Less
current portion
|
|
|
876,528
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$
|
—
|
|
(a)
On
October 27, 2005, the Company acquired certain assets of Rheingold Beer
(“Rheingold”) and assumed certain obligations from Rheingold Brewing Company,
Inc. (“RBCI”). Holdings issued 724,638 shares of common stock with a fair value
of approximately $650,000 to RBCI and assumed approximately $142,000 of their
liabilities and are contractually obligated to RBCI to issue an additional
$500,000; payable in Holdings common stock with a value of $350,000 and $150,000
cash, accruing no interest. The obligation due RBCI was originally due on
October 27, 2006. Due to nonpayment of the balance as a result of disagreements
over certain of the acquired assets and liabilities, the Company was sued by
RBCI (see Note 12).
(b)
In
October 2006, the Company borrowed $250,000 and issued a convertible promissory
note in like amount. The due date of the loan was extended by the Company to
October 2008 from October 2007 in accordance with the terms of the original
note
agreement. The note is convertible into shares of our common stock at $0.60
per
share. The note bears interest at 12% per annum and is payable quarterly. At
the
option of the lender, interest can be paid in shares of Company common stock.
During the nine months ended January 31, 2008 the Company issued the note holder
an aggregate of 49,307 shares of Holdings common stock to satisfy an aggregate
of $29,583 of interest accrued through October 31, 2007. In February 2008
the Company paid the note holder an additional $7,742 for interest accrued
through January 10, 2008. In connection with this borrowing we issued warrants
to purchase 250,000 shares of our common stock for $0.60 per share. These
warrants are exercisable for a five-year period from the date of issuance.
The
Company had determined, as of the date the notes were issued, the warrants
had a
value of $48,000 which is being expensed over the life of the related debt.
The
terms of the note enables the holder to convert such security into common stock
of the Company at a price of $0.60 per share, which was at a discount to the
market price of the common stock at the date convertible. At issuance, the
convertible note was convertible into shares of the Company's common stock
with
an aggregate value which exceeded the amount of proceeds allocated to the
convertible note by $58,000. This discount has been fully
amortized.
(c)
In
June 2006, the Company entered into a $10 million, three year, working capital
revolving finance facility with BACC, a division of Sovereign Bank. Interest
on
the line of credit is prime rate plus 1.5%, at January 31, 2008, 7.50%. The
facility is secured by a first security interest in the assets of the Company
(other than those of DT Drinks of which BACC's interest is subordinated to
Gateway Trade Finance, LLC (“Gateway”) (formerly Production Finance
International, LLC). At January 31, 2008, $126,528 is outstanding on this
facility.
I
n
June
2006 the Company entered into a $1.5 million purchase order revolving credit
facility with Gateway for financing the acquisition of certain inventory. The
facility bears interest at prime plus 5% (11% at January 31, 2008) per annum
on
amounts outstanding. Gateway has a first security interest in the assets of
DT
Drinks to the extent of this loan, as described above. At January 31, 2008
there
are no amounts due Gateway.
7.
Accrued Expenses
Accrued
expenses consist of the following at January 31, 2008:
|
Payroll,
director and consulting fees owed to officers,
directors
and shareholders
|
|
$
|
438,295
|
|
|
All
other payroll, consulting and commissions
|
|
|
520,506
|
|
|
Other
accrued expenses
|
|
|
453,286
|
|
|
Accrued
interest expense
|
|
|
20,108
|
|
|
|
|
|
|
|
|
Total
Accrued Expenses
|
|
$
|
1,432,195
|
|
8.
Shareholders' Equity
On
December 18, 2007 (the "Closing Date") the Company sold to three related
investors (the "December Investors") an aggregate of 3,000 shares of our Series
A Preferred Stock, $.001 par value (the "Preferred Stock"), at a cash purchase
price of $1,000 per share, generating gross proceeds of $3,000,000 (the
“December Financing”). The Preferred Stock is convertible into our common stock
at $.50 per share, which, if all the Preferred Stock is converted, would result
in the issuance of 6,000,000 shares of our common stock. The Preferred Stock
has
no voting or dividend rights. Out of the gross proceeds of the December
Financing, we paid Midtown Partners & Co., LLC (the "Placement Agent")
$180,000 in commissions and $30,000 for non-accountable expenses. We also
issued, to the Placement Agent, warrants to acquire 600,000 shares of our Common
Stock for a purchase price of $.50 per share (the "Placement Agent Warrants"),
which warrants are exercisable for a five year period and contain anti-dilution
provisions in the events of stock splits and similar matters. Both the
commissions and expenses were accounted for as a reduction of Additional Paid
in
Capital.
The
financing that we consummated in January 2007 (the “January Financing”) provided
participating investors (the “January Investors”) rights to exchange the common
stock they acquired for securities issued in subsequent financings which were
consummated at a common stock equivalent of $2.00 per share or less. Under
this
provision, the January Investors have exchanged 4,444,444 shares of common
stock
for 8,000 shares of Preferred Stock (which Preferred Stock is convertible into
an aggregate of 16,000,000 shares of our common stock). The 4,444,444 shares
returned were accounted for as a reduction of Additional Paid in Capital and
a
reduction of Common Stock since the shares are to be cancelled. Also in the
January Financing, the January Investors acquired warrants to purchase 3,777,778
shares of our common stock at an exercise price of $3.00 per share (the “January
Warrants”). The January Warrants contain full ratchet anti-dilution provisions,
as to both the exercise price and the number of shares purchasable under the
warrants, which due to the December Financing, would have resulted in the
January Warrants representing the right to acquire 22,666,668 shares of our
common stock, i.e., an additional 18,888,890 shares (the “Warrant Increment”) at
a reduced exercise price of $.50 per share. We have issued 5,000,000 shares
of
our common stock to the January Investors, in consideration of their waiver
of
the Warrant Increment (the “Waiver Shares”). This waiver will apply to future
financings as well. The provisions of the January Warrants which result in
the
reduction of the exercise price remain in place and, as a result of the December
Financing, the exercise price of the January Warrants have been reduced to
$.50
per share. The value of the Waiver Shares was determined to be $1,650,000 which
was the market value of the $5,000,000 shares which were issued in consideration
of the waiver. Each of our December Investors participated in the January
Financing but not all of our January Investors participated in the December
Financing.
We
agreed
to use our best efforts to file a Registration Statement covering the resale
of
the shares of our common stock issuable on the conversion of Preferred Stock
issued to the December Investors and the January Investors, the Waiver Shares,
and the shares of our common stock issuable on exercise of the Placement Agent
Warrants,
within
45
days of the closing date of the December Financing (the “Closing Date”), and to
cause such Registration Statement to be declared effective by the Securities
and
Exchange Commission, within 90 days of the Closing Date, subject to a thirty
day
extension in the event of a full review by the Securities and Exchange
Commission (the “Required Registration Date”). We filed this Registration
Statement on January 25, 2008 and it is currently under review.
Additional
issuances of the Company’s common stock for the 9 months ended January 31, 2008,
were as follows:
On
January 17, 2008 the Company’s Chief Executive Officer (CEO) elected to convert
$25,000 due him for compensation into shares of Company common stock at a price
of $0.50 per share resulting in the Company issuing 50,000 shares to
him.
In
October 2007 the Company issued 200,000 shares of our common stock with a value
of $80,000 for payments towards legal fees (RBCI and other
matters).
In
July
2007 the Company issued 1,000 shares of our common stock as a bonus for work
performed by an independent contractor.
In
June
2007 a member of our Board of Directors was issued 40,000 shares of our common
stock as compensation for serving on the Board. The aggregate value of the
stock
issued was $50,000 based on the market price on the date of
issuance.
In
June
2007, the Board of Directors adopted the Company’s 2005 Stock Incentive Plan
(the “Plan”). The total number of shares of Common Stock authorized for awards
under the Plan is 7,000,000 shares. As of January 31, 2008 no awards have been
granted under the Plan.
In
addition, in February 2008 the company issued
380,000 shares of its common stock to Shep Gordon to satisfy $190,000 of
consulting fees owed to Mr. Gordon as of January 31, 2008. The shares were
issued in accordance with an informal agreement with Mr. Gordon. Also in
February 2008 the Company issued 33,000 shares of its common stock to an
individual who purchased the stock at $0.60 per share prior to January 31,
2008.
As
of
January 31, 2008, warrants to purchase 8,663,868 shares of Holdings common
stock
were outstanding, as follows:
The
January Warrants, which are exercisable for a five year period commencing on
the
sixth month anniversary of the Closing Date, and contain cashless exercise
provisions, which apply in certain circumstances. Also in connection with the
January Financing we issued warrants to acquire 444,444 shares of our common
stock for a purchase price of $3.00 per share to the Placement Agent. We also
issued in our December Financing, to the Placement Agent, warrants to acquire
600,000 shares of our Common Stock for a purchase price of $.50 per share which
warrants are exercisable for a five year period and contain anti-dilution
provisions in the events of stock splits and similar matters.
In
June
2007, as disclosed in Note 5 to the financial statements, in connection with
an
endorsement agreement, the Company issued warrants to purchase 801,000 shares
of
the Company’s common stock at a price of $1.284 per share. The warrants expire
on June 14, 2017.
In
October and November 2006, the Company sold 1,750,000 shares of its common
stock
for $1,050,000 to investors. Greenwich Beverage Group, LLC (“Greenwich”), an
entity controlled by a member of the Company’s board of directors, acquired
333,333 shares of common stock for $200,000. In addition, these investors were
issued warrants, exercisable for five years from the date of the investment,
to
purchase 875,000 (Greenwich was issued 166,667 of these) shares of common stock
at a price of $1.25 per share. The Company has the option to redeem up to 50%
of
the warrants at anytime prior to exercise at a price of $0.50 per
warrant.
In
October 2006, as disclosed in Note 6 to the financial statements, in connection
with borrowings of $250,000 in exchange for a convertible note, the Company
issued warrants to purchase 250,000 shares of Holdings common stock, at an
exercise price of $0.60 per share. The warrants expire five years from the
date
of the agreement.
In
August
2006,as disclosed in Note 5 to the financial statements, in connection with
a
consulting agreement, the Company issued warrants to purchase 100,000 shares
of
Holdings common stock at an exercise price of $0.60 per share. The warrants
expire five years from the date of the agreement.
Warrants
were issued in connection with convertible notes issued in July 2006 to purchase
an aggregate of 300,000 of Holding’s common stock at an exercise price of $0.50
per share. The warrants were issued in lieu of interest payments.
In
February 2006, the Company issued warrants to purchase 250,000 shares of common
stock at a price of $0.56 per share to a consultant in connection with
consulting services rendered the Company. The warrants are exercisable through
February 2011.
Warrants
issued in connection with convertible notes issued between December 2005 and
February 2006 to purchase an aggregate of 445,646 shares of Holding’s common
stock at an exercise price of $0.45 per share. The warrants may be exercised
at
any time up to five years from the date of the notes. Warrants to purchase
55,556 shares are owned by Greenwich and warrants to purchase 83,333 shares
are
owned by a significant shareholder of the Company.
Warrants
were issued in connection with senior convertible notes which were issued
between March and May 2005 to purchase an aggregate of 1,350,000 shares of
Holdings common stock at a per share price of $0.45. These warrants also have
cashless exercise provisions. The warrants may be exercised at any time up
to
five years from the date of the notes. Warrants to purchase 100,000 shares
are
owned by Greenwich. In December 2006 three of the warrant holders exercised
their warrants under the cashless exercise provisions of the warrants receiving
an aggregate of 402,587 shares of the Company's common stock. Warrants to
purchase an aggregate of 820,000 shares of Holdings common stock remain
outstanding.
9.
Income
Taxes
The
Company does not expect any material changes to its tax position. Because of
the
valuation allowance discussed in the next paragraph, no provision for taxes
on
income is included in the accompanying statements of operations because of
the
net operating losses. 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. The consolidated net operating loss
carry forward as of January 31, 2008 is approximately $20,000,000, available
to
offset future years' taxable income expiring in various years through 2027.
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.
Reconciliation
of the differences between the statutory tax rate and the effective income
tax
rate is as follows for the nine and three months ended January 31, 2008 and
2007:
|
|
|
2008
|
|
2007
|
|
|
Statutory
federal tax (benefit) rate
|
|
|
(34.00
|
%)
|
|
(34.00
|
%)
|
|
Statutory
state tax (benefit) rate
|
|
|
(4.00
|
%)
|
|
(4.00
|
%)
|
|
Valuation
allowance
|
|
|
38.00
|
%
|
|
38.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
—
|
|
|
—
|
|
10.
Related Party Transactions
Related
party transactions are as follows:
We
incurred fees to a consulting company owned by a director of the Company, of
$75,000 for each of the nine months ended January 31, 2008 and 2007 and $25,000
for the three months ended January 31, 2008 and 2007. We owed the consulting
company $131,425 at January 31, 2008.
For
the
nine months and three months ended January 31, 2008, we incurred legal fees
of
$57,633 and $36,633, respectively, to a director of the Company. We owe the
director $18,333 at January 31, 2008.
For
the
nine and three months ended January 31, 2008, the company incurred consulting
expenses to a company owned by the Company’s chairman of the board aggregating
$38,500 and $17,500 respectively.
In
connection with the Company's partnership agreements with an entity in which
it
has an equity interest, the Company incurred royalty expenses for the nine
months ended January 31, 2008 and 2007 of $51,799 and $38,027 respectively
and
for the three months ended January 31, 2008 and 2007 of approximately $14,379
and $10,196, respectively.
From
July
2007 through November 2007, the Company borrowed an aggregate of $514,321 from
our CEO for working capital purposes. The borrowings bear interest at 12% per
annum. As of January 31, 2008, $210,352 plus $20,772 of interest has been
repaid. As of January 31, 2008 accrued interest on amounts owed to our CEO
was
$9,367. This amount is included in accrued expenses on the accompanying January
31, 2008 balance sheet. On February 5, 2008 an additional $25,000 was repaid
to
the CEO.
11.
Sales
Concentration
For
the
nine and three months ended January 31, 2008, our largest customer accounted
for
12.3% and 19.6%, respectively, of our net sales. No other customer accounted
for
10% or more of sales for the quarter or period ended January 31, 2008. For
the
nine and three months ended January 31, 2007, our largest customer accounted
for
23.0% and 16.1%, respectively, of our net sales. Another customer accounted
for
11.4% of our net sales for the three months ended January 31, 2007.
12.
Litigation
On
or
about July 19, 2006, Manhattan Beer Distributor, LLC, a wholesale distributor
of
beverages in the State of New York, (“Plaintiff MBD”) initiated litigation in
the Supreme Court of the State of New York in Bronx County (Index No.
17776-2006) against the Company. Plaintiff sued for approximately $87,000 plus
interest, for alleged distribution services rendered both prior and subsequent
to the acquisition of certain assets related to Rheingold Beer. We have answered
the complaint and have filed a cross-claim against RBCI Holdings, Inc., the
entity that sold us the assets, for the portion of the complaint related to
pre-acquisition services. We have completed the discovery phase of the
litigation. There have been continuing settlement negotiations and a pre-trial
conference is scheduled.
In
April
2007, RBCI Holdings Inc. (“Plaintiff RBCI”) filed a complaint against the
Company in the U.S. District court, Southern District of N.Y. (No. 07-CV-02877).
Plaintiff RBCI seeks $150,000 plus 525,738 shares of common stock of the Company
and re-assignment of the Rheingold license in damages for an alleged breach
of
the asset purchase agreement, related to the October 27, 2005 purchase of
certain Rheingold assets. The Company has filed a motion to dismiss the
complaint. The Company believes that Plaintiff RBCI overstated assets,
understated liabilities and misrepresented revenue in connection with the asset
sale. The Company plans to vigorously defend this action.
In
July
2007, Michele Berg, a former employee of the Company, initiated litigation
against the Company in Superior Court of Arizona, Maricopa County (CV
2006-019515). The plaintiff seeks $8,125 of unpaid wages, $31,740 for
reimbursement of expenses and other compensation, and treble damages for wage
claim, for a total of $61,133. The Company is engaging in ongoing settlement
discussions with the plaintiff.
On
or
about June 12, 2007, Phillip Kassai, formally affiliated with Sloan Equity
Partners (“Sloan”), LLC initiated litigation in the US District Court (No. 07
CIV 5590) alleging that the Company failed to recognize the assignment to him,
and his subsequent exercise of, two warrants allegedly issued by the Company
to
Sloan to purchase 300,000 shares and 67,500 shares of the Company’s common
stock. The Plaintiff has demanded that the Company affect these assignments
and
that the Plaintiff be awarded unspecified monetary damages for alleged breach
of
the terms of the warrants and such other relief as may be just and proper.
The
Company has filed an answer with counterclaims against the Plaintiff. A trial
date has been set for May 12, 2008. The Company plans to vigorously defend the
action.