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.
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For
the quarterly period ended October 31, 2009
|
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OR
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|
o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from _______________ to
____________
|
Commission File Number:
33-55254-10
Drinks
Americas Holdings, Ltd.
(Exact
name of registrant as specified in its charter)
|
Delaware
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87-0438825
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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372
Danbury Road
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Wilton,
CT
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06897
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(Address
of principal executive offices)
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(Zip
Code)
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(203)
762-7000
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
o
Large accelerated filer
|
o
Accelerated filer
|
o
Non-accelerated filer
|
x
Smaller reporting company
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(Do not check if smaller reporting
company)
|
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
As
of December 17, 2009, the number of shares outstanding of the
registrant’s common stock, $0.001 par value, was
134,965,265
.
DRINKS
AMERICAS HOLDINGS, LTD
AND
AFFILIATES
FORM
10-Q
FOR THE
PERIOD ENDED OCTOBER 31, 2009
TABLE OF
CONTENTS
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Page
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PART
I
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FINANCIAL
INFORMATION
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Item
1.
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Financial
Statements (Unaudited)
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Consolidated
Balance Sheets
|
1
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Consolidated
Statements of Operations
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2
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Consolidated
Statements of Cash Flows
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3
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Notes
to Consolidated Statements
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4
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Item
2.
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Management
Discussion and Analysis of Financial Condition And Results of
Operations
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18
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Item
3.
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Quantitative
and Qualitative Disclosure About Market Risk
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22
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Item
4
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Controls
and Procedures
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22
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PART
II
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OTHER
INFORMATION
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Item
1.
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Legal
Proceedings
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22
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Item
1A.
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Risk
Factors
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23
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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23
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Item
3.
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Defaults
Upon Senior Securities
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24
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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24
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Item
5.
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Other
Information
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24
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Item
6.
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Exhibits
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24
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EXPLANATORY
NOTE
Unless
otherwise indicated or the context otherwise requires, all references in this
Report on Form 10-Q to "we", "us", "our" and the “Company” are to Drinks
Americas Holdings, Ltd., a Delaware corporation and formerly Gourmet Group,
Inc., a Nevada corporation, and its majority owned subsidiaries Drinks Americas,
Inc., Drinks Global Imports, LLC, and D.T. Drinks, LLC, and
Maxmillian Mixers, LLC, and Maxmillian Partners, LLC.
Cautionary
Notice Regarding Forward Looking Statements
The
disclosure and analysis in this Report contains some forward-looking statements.
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance and financial condition, in
particular, future sales, product demand, competition and the effect of economic
conditions include forward-looking statements within the meaning of section 27A
of the Securities Act of 1933, referred to herein as the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, referred to herein as the
Exchange Act.
Statements
that are predictive in nature, that depend upon or refer to future events or
conditions or that include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates" and similar expressions, are forward-looking
statements. Although we believe that these statements are based upon reasonable
assumptions, including projections of orders, sales, operating margins,
earnings, cash flow, research and development costs, working capital, capital
expenditures, distribution channels, profitability, new products, adequacy of
funds from operations and other projections, and statements expressing general
optimism about future operating results, and non-historical information, they
are subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Readers
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As for
the forward-looking statements that relate to future financial results and other
projections, actual results will be different due to the inherent uncertainty of
estimates, forecasts and projections and may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent our
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and the
estimates and assumptions associated with them, after the date of this filing to
reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events.
We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our Company's historical
experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described in Part II, "Item
1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form
10-K for the year ended April 30, 2008, and those described from time to time in
our future reports filed with the Securities and Exchange
Commission. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
PART
1 FINANCIAL INFORMATION
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
BALANCE SHEETS
|
|
|
OCTOBER
31,
2009
|
|
|
APRIL
30,
2009
|
|
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(Unaudited)
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Assets
|
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Current
assets:
|
|
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Cash
and equivalents
|
|
$
|
1,286
|
|
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$
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30,169
|
|
|
Accounts
receivable, net of allowances of $147,282 and $128,751,
respectively
|
|
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103,178
|
|
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41,796
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|
Due
from factors
|
|
|
—
|
|
|
|
31,786
|
|
|
Inventories,
net of allowance
|
|
|
1,002,802
|
|
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1,204,266
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|
Other
current assets
|
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365,887
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|
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374,671
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|
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|
|
|
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Total
current assets
|
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1,473,153
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|
1,682,688
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Property
and equipment, at cost less accumulated depreciation and
amortization
|
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35,534
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|
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58,900
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Investment
in equity investees
|
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73,916
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73,916
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Intangible
assets, net of accumulated amortization of $ and $245,678,
respectively
|
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1,804,932
|
|
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1,892,650
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Deferred
loan costs, net of accumulated amortization of $376,529 and $335,452,
respectively
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535,404
|
|
|
|
—
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Note
receivable, net
|
|
|
204,013
|
|
|
|
—
|
|
|
Other
assets
|
|
|
43,415
|
|
|
|
467,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,170,367
|
|
|
$
|
4,176,066
|
|
|
|
|
|
|
|
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|
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Liabilities
and Shareholders' Equity (Deficiency)
|
|
|
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|
|
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Notes
and loans payable
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|
$
|
632,661
|
|
|
$
|
799,329
|
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Loan
Payable – related party
|
|
|
361,461
|
|
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|
305,935
|
|
|
Accounts
payable
|
|
|
2,650,151
|
|
|
|
2,746,181
|
|
|
Accrued
expenses
|
|
|
3,808,138
|
|
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|
2,900,425
|
|
|
|
|
|
|
|
|
|
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|
Total
current liabilities
|
|
|
7,452,411
|
|
|
|
6,751,870
|
|
|
|
|
|
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Long-term
debt, less current maturities
|
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600,000
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600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,052,411
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|
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|
7,351,870
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|
|
Commitments
and Contingencies (note 16)
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|
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|
|
Shareholders'
Deficiency:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 1,000,000 shares authorized; issued and
outstanding 11,000 and 10,644 Series A shares,
respectively (redemption value $11,000,000 and $10,664,000,
respectively) (Series B – see Note 11)
|
|
|
11
|
|
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|
11
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Common
stock, $0.001 par value; 500,000,000 and 100,000,000, respectively,
authorized; issued and outstanding 105,966,545 shares and 87,662,383
shares, respectively
|
|
|
105,966
|
|
|
|
87,662
|
|
|
Additional
paid-in capital
|
|
|
36,997,717
|
|
|
|
34,206,433
|
|
|
Accumulated
deficit
|
|
|
(41,117,349
|
)
|
|
|
(37,600,854
|
)
|
|
|
|
|
(4,013,655
|
)
|
|
|
(3,306,748
|
)
|
|
Noncontrolling
Interests
|
|
|
131,611
|
|
|
|
130,944
|
|
|
|
|
$
|
4,170,367
|
|
|
$
|
4,176,066
|
|
See
accompanying notes to unaudited consolidated financial
statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
Six
months ended
|
|
|
Three
months ended
|
|
|
|
|
October
31,
|
|
|
October
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
449,278
|
|
|
$
|
1,649,557
|
|
|
$
|
15,305
|
|
|
$
|
580,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
321,709
|
|
|
|
1,270,034
|
|
|
|
15,801
|
|
|
|
539,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
127,569
|
|
|
|
379,523
|
|
|
|
(496
|
)
|
|
|
41,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general & administrative expenses
|
|
|
3,210,057
|
|
|
|
2,706,583
|
|
|
|
1,586,440
|
|
|
|
1,089,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from Operations
|
|
|
(3,082,488
|
)
|
|
|
(2,327,060
|
)
|
|
|
(1,586,936
|
)
|
|
|
(1,047,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
(517,485
|
)
|
|
|
(157,144
|
)
|
|
|
(79,780
|
)
|
|
|
(135,847
|
)
|
|
Other
|
|
|
83,478
|
|
|
|
—
|
|
|
|
26,547
|
|
|
|
—
|
|
|
Net
Other Expense
|
|
|
(434,007
|
)
|
|
|
(157,144
|
)
|
|
|
(53,233
|
)
|
|
|
(135,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,516,495
|
)
|
|
$
|
(2,484,204
|
)
|
|
$
|
(1,640,169
|
)
|
|
$
|
(1,183,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share (basic and diluted)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares (basic and
diluted)
|
|
|
96,131,906
|
|
|
|
81,501,368
|
|
|
|
101,980,656
|
|
|
|
81,814,511
|
|
See
accompanying notes to unaudited consolidated financial
statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
Six
months ended
October
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(3,516,495
|
)
|
|
$
|
(2,484,204
|
)
|
|
Adjustments
to reconcile net loss to net cash used
|
|
|
|
|
|
|
|
|
|
in
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
481,527
|
|
|
|
72,614
|
|
|
Addition
to inventory allowance
|
|
|
40,939
|
|
|
|
—
|
|
|
Stock
and warrants issued for services of vendors, promotions, directors and
interest payments
|
|
|
1,248,070
|
|
|
|
64,390
|
|
|
Accounts
payable settlements
|
|
|
243,083
|
|
|
|
—
|
|
|
Minority
interest in net loss of consolidated subsidiary
|
|
|
667
|
|
|
|
—
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(61,382
|
)
|
|
|
97,710
|
|
|
Due
from factor
|
|
|
31,786
|
|
|
|
—
|
|
|
Inventories
|
|
|
160,524
|
|
|
|
552,164
|
|
|
Other
current assets
|
|
|
8,784
|
|
|
|
131,361
|
|
|
Other
assets
|
|
|
223,802
|
|
|
|
135,594
|
|
|
Accounts
payable
|
|
|
(175,010
|
)
|
|
|
399,054
|
|
|
Accrued
expenses
|
|
|
1,162,333
|
|
|
|
983,319
|
|
|
Net
cash used in operating activities
|
|
|
(151,372
|
)
|
|
|
(47,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
—
|
|
|
|
684,592
|
|
|
Proceeds
from debt
|
|
|
270,024
|
|
|
|
123,375
|
|
|
Repayment
of debt
|
|
|
(147,535
|
)
|
|
|
(31,100
|
)
|
|
Increase
(decrease) in working capital revolver
|
|
|
—
|
|
|
|
(105,580
|
)
|
|
Payments
for loan costs
|
|
|
—
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
122,489
|
|
|
|
646,287
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and equivalents
|
|
|
(28,883
|
)
|
|
|
598,289
|
|
|
Cash
and equivalents - beginning
|
|
|
30,169
|
|
|
|
133,402
|
|
|
Cash
and equivalents - ending
|
|
$
|
1,286
|
|
|
$
|
731,691
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash
|
|
|
|
|
|
|
|
|
|
transactions:
|
|
|
|
|
|
|
|
|
|
Increase
in other current assets, other assets and additional paid in
capital equal to the value of stock and warrants
issued
|
|
$
|
210,000
|
|
|
$
|
37,333
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in other current assts equal to increase in notes payable
|
|
$
|
100,000
|
|
|
|
—
|
|
|
Increase
in notes receivable equal to increase in notes payable
|
|
$
|
2,625,000
|
|
|
|
—
|
|
|
Increase
in deferred charges equal to decrease in notes receivable,
net
|
|
$
|
535,404
|
|
|
|
—
|
|
|
Accrued
interest capitalized to debt principal
|
|
|
9,149
|
|
|
|
—
|
|
|
Satisfaction
of note payable by issuance of common stock
|
|
|
450,000
|
|
|
|
—
|
|
|
Payment
of accounts payable and accrued expenses with shares of common
stock
|
|
$
|
379,568
|
|
|
$
|
153,000
|
|
|
Interest
paid
|
|
$
|
533
|
|
|
$
|
31,734
|
|
|
Income
taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
See notes
to consolidated financial statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Basis of Presentation and
Nature of Business
Basis
of Presentation
On March
9, 2005 the shareholders of Drinks Americas, Inc. ("Drinks") a company engaged
in the business of importing and distributing unique, premium alcoholic and
non-alcoholic beverages associated with icon entertainers, sports figures,
celebrities and destinations, to beverage wholesalers throughout the United
States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings").
Holdings and Drinks was incorporated in the state of Delaware on February 14,
2005and September 24, 2002, respectively. On March 9, 2005 Holdings merged with
Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which
resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in
exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were
considered "shell" corporations, as Gourmet had no operating business on the
date of the share exchange, or for the previous three years. Pursuant to the
June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the
Drinks' shareholders, Holdings, with approximately 4,058,000 shares of
outstanding common stock, issued approximately 45,164,000 of additional shares
of its common stock on March 9, 2005 (the "Acquisition Date") to the common
shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers,
LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and
Mixers' membership units, respectively. As a result Maxmillian Partners, LLC
("Partners") a holding company which owned 99% of Drinks' outstanding common
stock and approximately 55% of Mixers' outstanding membership units, became
Holdings' controlling shareholder with approximately 87% of Holdings'
outstanding common stock. For financial accounting purposes this business
combination has been treated as a reverse acquisition, or a recapitalization of
Partners' subsidiaries (Drinks and Mixers).
Subsequent
to the Acquisition Date, Partners, which was organized as a Delaware limited
liability company on January 1, 2002 and incorporated Drinks in Delaware on
September 24, 2002, transferred all its shares of holdings to its members as
part of a plan of liquidation.
On March
11, 2005 Holdings and an individual organized Drinks Global, LLC ("DGI").
Holdings own 90% of the membership units and the individual, who is the
president of DGI, owns 10%. DGI's business is to import wines from various parts
of the world and sell them to distributors throughout the United States. In May
2006 Holdings organized D.T. Drinks, LLC ("DT Drinks") a New York limited
liability company for the purpose of selling certain alcoholic
beverages.
On
January 15, 2009 Drinks acquired 90% of Olifant U.S.A Inc. (“Olifant”), a
Connecticut corporation, which owns the trademark and brand names and holds the
worldwide distribution rights (excluding Europe) to Olifant Vodka and
Gin.
In
partnership with Kid Rock, the Company is involved in the marketing and
distribution of BadAss Beer.
The
accompanying consolidated balance sheets as of October 31, 2009 and
April 30, 2009 and the consolidated results of operations and consolidated cash
flows for the six months ended October 31, 2009 and 2008 and the consolidated
results of operations for the three months ended October 31, 2009 and 2008
reflect Holdings its majority-owned subsidiaries and Partners (collectively, the
"Company"). All intercompany transactions and balances in these financial
statements have been eliminated in consolidation. The amount of common and
preferred shares authorized, issued and outstanding as of October 31, 2009 and
April 30, 2009 are those of Holdings.
The
accompanying unaudited consolidated financial statements have been prepared on a
basis that assumes the Company will continue as a going concern. As
of October 31, 2009 the Company has a shareholders' deficiency of
$4,013,655 and has incurred significant operating losses and negative cash flows
since inception. For the six months ended October 31, 2009, the Company
sustained a net loss of $3,516,495, and used $151,372 in operating activities.
We will need additional financing which may take the form of equity or debt and
we will seek to convert liabilities into equity. We anticipate that
increased sales revenues will help to some extent. In the event we are not able
to increase our working capital, we will not be able to implement or may be
required to delay all or part of our business plan, and our ability to attain
profitable operations, generate positive cash flows from operating and investing
activities and materially expand the business will be materially adversely
affected. The accompanying unaudited consolidated financial statements do not
include any adjustments relating to the classification of recorded asset amounts
or amounts and classification of liabilities that might be necessary should the
company be unable to continue in existence.
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 October
31, 2009 and April 30, 2009, its results of operations for the six and three
months ended October 31, 2009 and 2008 and its cash flows for the six months
ended October 31, 2009 and 2008. Pursuant to the rules and regulations of the
SEC for the interim financial statement, certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
from these financial statements unless significant changes have taken place
since the end of the most recent fiscal year. Accordingly, these unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the other information in the Form
10-K.
Nature
of Business
Through
our majority-owned subsidiaries, Drinks, DGI, DT Drinks, and Olifant we import,
distribute and market unique premium wine and spirits and alcoholic beverages
associated with icon entertainers, celebrities and destinations, to beverage
wholesalers throughout the United States.
2. Critical Accounting
Policies and Estimates
Significant
Accounting Policies
We
believe the following significant accounting policies, among others, may be
impacted significantly by judgment, assumptions and estimates used in the
preparation of the consolidated financial statements:
Revenue
Recognition
The
Company recognizes revenues when title passes to the customer, which is
generally when products are shipped.
The
Company recognizes revenue dilution from items such as product returns,
inventory credits, discounts and other allowances in the period that such items
are first expected to occur. The Company does not offer its clients the
opportunity to return products for any reason other than manufacturing defects.
In addition, the Company does not offer incentives to its customers to either
acquire more products or maintain higher inventory levels of products than they
would in ordinary course of business. The Company assesses levels of inventory
maintained by its customers through communications with them. Furthermore, it is
the Company's policy to accrue for material post shipment obligations and
customer incentives in the period the related revenue is
recognized.
Accounts
Receivable
Accounts
receivable are recorded at original invoice amount less an allowance for
uncollectible accounts that management believes will be adequate to absorb
estimated losses on existing balances. Management estimates the allowance based
on collectability of accounts receivable and prior bad debt experience. Accounts
receivable balances are written off upon management's determination that such
accounts are uncollectible. Recoveries of accounts receivable previously written
off are recorded when received. Management believes that credit risks on
accounts receivable will not be material to the financial position of the
Company or results of operations at October 31, 2009 and April 30, 2009 the
allowance for doubtful accounts was $147,282 and $128,751,
respectively.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amounts of such assets may not be
recoverable. The Company's policy is to record an impairment loss at each
balance sheet date when it is determined that the carrying amount may not be
recoverable. Recoverability of these assets is based on undiscounted future cash
flows of the related asset. The Company concluded that there was no impairment
during the six months ended October 31, 2009 and year ended April 30, 2009,
respectively.
Deferred
Charges and Intangible Assets
The costs
of intangible assets with determinable useful lives are amortized over their
respectful useful lives and reviewed for impairment when circumstances warrant.
Intangible assets that have an indefinite useful life are not amortized until
such useful life is determined to be no longer indefinite. Evaluation of the
remaining useful life of an intangible asset that is not being amortized must be
completed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. Indefinite-lived intangible
assets must be tested for impairment at least annually, or more frequently if
warranted. Intangible assets with finite lives are generally amortized on a
straight line bases over the estimated period benefited. The costs of trademarks
and product distribution rights are amortized over their related useful lives of
between 15 to 40 years. We review our intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable, in which case an impairment charge is recognized
currently.
Deferred
financing costs are amortized ratably over the life of the related debt. If debt
is retired early, the related unamortized deferred financing costs are written
off in the period debt is retired.
Income
Taxes
The
Company the asset and liability method of deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The
effect on deferred tax assets and liabilities of a change in tax laws is
recognized in the results of operations in the period the new laws are
enacted. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not
that such assets will be realized.
Stock
Based Compensation
The
Company accounts for stock-based compensation using the modified prospective
approach. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity based compensation issued to
employees and non employees.
Earnings
Per Share
The
Company computes earnings per share whereby basic earnings per share is computed
by dividing net income (loss) attributable to all classes of common shareholders
by the weighted average number of shares of all classes of common stock
outstanding during the applicable period. Diluted earnings per share is
determined in the same manner as basic earnings per share except that the number
of shares is increased to assume exercise of potentially dilutive and
contingently issuable shares using the treasury stock method, unless the effect
of such increase would be anti-dilutive. For the six months ended October 31,
2009 and 2008, the diluted earnings per share amounts equal basic earnings per
share because the Company had net losses and the impact of the assumed exercise
of contingently issuable shares would have been anti-dilutive.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent
accounting pronouncements
Accounting Standards Codification
and GAAP Hierarchy —
Effective for interim and annual periods
ending after September 15, 2009, the Accounting Standards Codification and
related disclosure requirements issued by the FASB became the single official
source of authoritative, nongovernmental GAAP. The ASC simplifies GAAP, without
change, by consolidating the numerous, predecessor accounting standards and
requirements into logically organized topics. All other literature not included
in the ASC is non-authoritative. We adopted the ASC as of September 30, 2009,
which did not have any impact on our results of operations, financial condition
or cash flows as it does not represent new accounting literature or
requirements. All references to pre-codified U.S. GAAP have been
removed from this Form 10Q.
Determining Fair Value in Inactive
Markets
— Effective for interim and annual periods beginning
after June 15, 2009, GAAP established new accounting standards for determining
fair value when the volume and level of activity for the asset or liability have
significantly decreased and the identifying transactions are not orderly. The
new standards apply to all fair value measurements when appropriate. Among other
things, the new standards:
|
•
|
affirm
that the objective of fair value, when the market for an asset is not
active, is the price that would be received in a sale of the asset in an
orderly transaction;
|
|
•
|
clarify
certain factors and provide additional factors for determining whether
there has been a significant decrease in market activity for an asset when
the market for that asset is not
active;
|
|
•
|
provide
that a transaction for an asset or liability may not be presumed to be
distressed (not orderly) simply because there has been a significant
decrease in the volume and level of activity for the asset or liability,
rather, a company must determine whether a transaction is not orderly
based on the weight of the evidence, and provide a non-exclusive list of
the evidence that may indicate that a transaction is not orderly;
and
|
|
•
|
require
disclosure in interim and annual periods of the inputs and valuation
techniques used to measure fair value and any change in valuation
technique (and the related inputs) resulting from the application of the
standard, including quantification of its effects, if
practicable.
|
These new
accounting standards must be applied prospectively and retrospective application
is not permitted.
Financial
Instruments
— Effective for interim and annual periods ending
after June 15, 2009, GAAP established new disclosure requirements for the
fair value of financial instruments in both interim and annual financial
statements. Previously, the disclosure was only required annually. We adopted
the new requirements as of September 30, 2009, which resulted in no change to
our accounting policies, and had no effect on our results of operations, cash
flows or financial position, but did result in the addition of interim
disclosure of the fair values of our financial instruments. See Note 4 for
disclosure of the fair value of our debt.
Subsequent
Events
— Effective for interim and annual periods ending after
June 15, 2009, GAAP established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The new
requirements do not change the accounting for subsequent events; however, they
do require disclosure, on a prospective basis, of the date an entity has
evaluated subsequent events. We adopted these new requirements as of July 31,
2009, which had no impact on our results of operations, financial condition or
cash flows.
Consolidation
— Effective
for interim and annual periods beginning after November 15, 2009, with
earlier application prohibited, GAAP amends the current accounting standards for
determining which enterprise has a controlling financial interest in a VIE and
amends guidance for determining whether an entity is a VIE. The new standards
will also add reconsideration events for determining whether an entity is a VIE
and will require ongoing reassessment of which entity is determined to be the
VIE’s primary beneficiary as well as enhanced disclosures about the enterprise’s
involvement with a VIE. We are currently assessing the future impact these new
standards will have on our results of operations, financial position or cash
flows.
Transfers and Servicing
—
Effective for interim and annual periods beginning after November 15, 2009,
GAAP eliminates the concept of a qualifying special purpose entity, changes the
requirements for derecognizing financial assets and requires additional
disclosures. We are currently assessing the future impact these new standards
will have on our results of operations, financial position or cash
flows.
3. Due From
Factors
As
of October 31, 2009 and April 30, 2009, Due From Factors consist of the
following:
|
|
|
October 31,
|
|
|
April 30,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
—
|
|
|
$
|
153,444
|
|
|
Advances
|
|
|
—
|
|
|
|
(118,191
|
)
|
|
Allowances
|
|
|
—
|
|
|
|
3,467
|
|
|
|
|
$
|
—
|
|
|
$
|
31,786
|
|
The Company consolidated its factor
agreements for both production and receivables and was able to use this combined
financing effective in the third quarter. Due from factors amounts
are $0 as of October 31, 2009. The Company has an agreement with
a factor entered into April 2009, pursuant to which a substantial portion
of the Company’s accounts receivable is sold to the factor with recourse to bad
debts and other customer claims. Effective in the Company’s
fiscal third quarter, the factor also began to facilitate production financing
as well. The Company receives a cash advance equal to 80% of the invoice amount
and is paid the balance of the invoice less fees incurred at the time the factor
receives the final payment from the customer. The factor fee is 1.75% for the
first 30 days the invoice remains unpaid and 0.07% for each day thereafter. The
facility shall remain open until a 30 day notice by either party of termination
of the agreement. The facility is secured by all assets of the
Company.
The
Company also had an agreement with a second factor which was terminated in
August 2009.
.
4.
Inventories
As
of October 31, 2009 and April 30, Inventories consist of the
following:
|
|
|
October 31,
2009
|
|
|
April 30,
2009
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
341,553
|
|
|
$
|
518,489
|
|
|
Raw
materials
|
|
|
661,249
|
|
|
|
685,777
|
|
|
|
|
$
|
1,002,802
|
|
|
$
|
1,204,266
|
|
All raw materials used in the production of the Company's inventories are
purchased by the Company and delivered to independent production
contractors.
5. Other Current
Assets
As of
October 31, 2009 and April 30, 2009 Other Current Assets consist of the
following:
|
|
|
October 31,
2009
|
|
|
April 30,
2009
|
|
|
Prepaid
inventory purchases
|
|
$
|
315,592
|
|
|
$
|
315,592
|
|
|
Other
|
|
|
50,295
|
|
|
|
59,079
|
|
|
|
|
$
|
365,887
|
|
|
$
|
374,671
|
|
6. Note
receivable
On June
19, 2009, (the "Closing Date") we sold to one investor (the “Investor”) a
$4,000,000 non interest bearing debenture with a 25% ($1,000,000) original issue
discount, that matures in 48 months from the Closing Date (the Drink’s
Debenture) for $3,000,000, consisting of $375,000 paid in cash at closing and
eleven secured promissory notes, aggregating $2,625,000, bearing interest at the
rate of 5% per annum, each maturing 50 months after the Closing Date (the
“Investor Notes”). The Investor Notes, the first ten of which are in the
principal amount of $250,000 and the last of which is in the principal amount of
$125,000, are mandatorily pre-payable, in sequence, at the rate of one note per
month commencing on January 19, 2010, subject to certain contingencies. If the
prepayment occurs, the entire aggregate principal balance of the Investor Notes
in the amount of $2,625,000 (less the $200,000 August prepayment) together with
the interest outstanding thereon, will be paid in eleven monthly installments
(ten in the amount of $230,000 and one the amount of $125,000) such that the
entire amount would be paid to us by November 26, 2010. As a practical matter,
the interest rate on the Investor Notes serves to lessen the interest cost
inherent in the original issue discount element of the Drinks Debenture. For the
mandatory prepayment to occur, no Event of Default or Triggering Event as
defined under the Drinks Debenture shall have occurred and be continuing and the
outstanding balance due under the Drinks Debenture must have been reduced to
$3,500,000 on January 19, 2009 and be reduced at the rate of $333,334 per month
thereafter. Due to the uncertainty of the mandatory prepayments by the Investor
the note receivable has been classified as a long term asset as of October 31,
2009.
One of
the Triggering Events includes the failure of the Company to maintain an average
daily dollar volume of common stock traded per day for any consecutive 10-day
period of at least $10,000 or if the average value of the shares are pledge to
secure our obligation under the Drinks Debenture (as subsequently described)
falls below $1,600,000.
Under the
Drinks Debenture, commencing six months after the Closing Date, the Investor may
request the Company to repay all or a portion of the Drinks Debenture by issuing
the Company’s common stock, $0.001 par value, in satisfaction of all or part of
the Drinks Debenture, valued at the Market Price,(as defined in the Drinks
Debenture), of Drink’s common stock at the time the request is made
(collectively, the “Share Repayment Requests”). The Investor’s may not request
repayment in common stock if, at the time of the request, the amount requested
would be higher than the difference between the outstanding balance owed under
the Drinks Debenture and 125% of the aggregate amount owed under the Investor
Note.
The
Company may prepay all or part of the Drinks Debenture upon 10-days prior
written notice and are entitled to satisfy a portion of the amount outstanding
under the debenture by offset of an amount equal to 125% of the amount owed
under the Investor Notes, which amount will satisfy a corresponding portion of
the Drinks Debenture.
Also as
part of this financing, the Investor acquired warrants to purchase 2,500,000
shares of our common stock at an exercise price of $0.35 per share (the
“Investor Warrants”). The Investor Warrants contain full ratchet anti-dilution
provisions, as to the exercise price and are exercisable for a five year period.
Management has determined that the aggregate value of the warrants was $142,500
based on the market price per share of the Company’s common stock on the date of
the agreement.
Out of
the gross proceeds of this Offering, we paid the placement agent $37,500 in
commissions and we are obligated to pay the placement agent 10% of the principal
balance of the Investor Notes when each note is paid. We will also issue to the
Placement Agent, warrants to acquire 5% of the shares of our Common Stock which
we deliver in response to Share Repayment Requests, at an exercise price equal
to the Market Price related to the shares delivered in response to the Share
Repayment Request (the "Placement Agent Warrants"), which warrants are
exercisable for a five year period, will contain cashless exercise provisions as
well as anti-dilution provisions in the case of stock splits and similar
matters
Our CEO
has guaranteed our obligations under the Drinks Debenture in an amount not to
exceed the lesser of (i) $375,000 or (ii) the outstanding balance owed under the
Drinks Debenture. In addition our CEO, COO, and two other members of our Board
of Directors and another of our shareholders, have, either directly, or through
entities they control pledged an aggregate of 9,000,000 shares of our common
stock to secure our obligations under the Drinks Debenture (the “Pledged
Shares”). The Company has pledged an additional 3,000,000 shares of its common
stock. The Company has agreed in principle to issue to those individuals who
pledged their shares, 0.5 shares of Company stock for each share pledged which
aggregates to 4,500,000 shares (including 3,000,000 to its CEO, 453,000 to its
COO and an aggregate of 1,047,000 to two members of its board of directors). The
4,500,000 shares had a value of $675,279 on the date of the agreement and is
included in additional paid in capital in accompanying balance sheet as of
October 31, 2009.
On July
14, 2009 the value of the Pledged Shares fell below the required amount and
consequently the Investor delivered a notice of default to the Company. On
receipt of the notice the Company requested, and the Investor orally agreed,
that the penalties the Company would have incurred would not apply. The
agreement was subsequently documented and the Investor also waived the
application of this provision through October 31, 2009. In response to the
default the Investor transferred 5,523,645 shares of the Pledged Shares into its
own name in order to commence sale thereof to satisfy payment of the Drinks
Debenture. Accordingly and upon the Company’s request, Investor agreed to waive
its right under an Event of Default. The value of the 5,523,645 shares on the
date transferred to the Investor aggregated $828,547 which when sold by the
Investor will reduce the balance of the Drinks Debenture. The aggregate value of
$828,547 of the shares transferred has been accounted for as a reduction of the
Drinks Debenture for accounting purposes. Of the 5,523,645 shares transferred
3,000,0000 were Company shares having an aggregate value of $450,000 and the
balance, 2,523,645 shares, were shares pledged by Company shareholders having an
aggregate value $378,547. The aggregate value of the shares transferred is
included in additional paid in capital on the accompanying balance sheet at
October 31, 2009 The Original Issue Discount of $1,000,000, and the value of the
Investor warrants which aggregated $142,500 together totaling $1,142,500 was
accounted for as a discount on the Drinks Debenture. The unamortized balance of
the discount of $935,363 has been presented as a reduction of the Drinks
Debenture as of October 31, 2009. The 4,500,000 shares the Company agreed to
issue to our shareholders who pledged shares for this financing aggregated
$675,279 which is included in deferred loan costs net of accumulated
amortization of $ as of October 31, 2009.
At
October 31, 2009 the balance of the Investor notes has been reduced by the
balance of the Drinks Debentures of $2,236,090 (net of discount of $935,363) for
presentation purposes.
In order
to secure waivers which the investors in our December 2007 placement of our
Series A Preferred stock claimed were required for the Company to consummate
this financing , we allowed, and the three December investors elected, to
convert an aggregate of $335,800 (335.8 shares) of our preferred stock into
3,358,000 shares of our common stock.. In addition, in August 2009 we allowed
the two other holders of our Series A Preferred Stock to convert an aggregate of
$134,625 (134.6 shares) of our Series A Preferred Stock into 1,200,000 shares of
our common stock. The book value of the preferred stock converted exceeded the
par value of the common stock received on the date of conversions.
On August
31, 2009, we amended the Drink’s Debenture. Pursuant to the amendment, the
outstanding balance of the debenture was increased by $400,000 and the debenture
will carry an interest rate of 12% per annum. Also, a member of the Company’s
board of directors pledged 1,263,235 shares of our common stock as security for
our obligations under the debenture, which increased the total number of shares
pledged for this purpose. In return, the investor has prepaid $200,000 of the
notes it issued to the Company in partial payment for the debenture and agreed
that the provisions of the debenture relating to a 10% premium and the
imposition of default interest will not apply in the event a “Triggering Event”,
as defined in the debenture, was to occur in the future. The October 31, 2009
financial statements do not give effect to the modifications made on August 31,
2009.
On
October 27, 2009, the Investor declared a default under our $4,400,000 debenture
as a result of the failure of certain shares of our common stock, which were
pledged by certain shareholders and the Company, to secure the debenture that
had been acquired by St. George. The Company has secured an agreement from the
Investor not to enforce the default based on any decline in value of the pledge
shares that has occurred in the past or that may occur prior to December 31,
2006. Under the terms of such agreement, 3,209,997 pledge shares owned by the
Company’s shareholders have become the property of the Investor.
7. Other long term
assets
In
January 2009, in accordance with an employment agreement executed with an
Olifant employee the Company issued 100,000 shares of its common stock (see Note
8). The value of the stock on the date of grant aggregated $26,000 which is
being amortized over the five year life of the un-extended term of the
agreement. At October 31, 2009 and April 30, 2009 the unamortized balance of the
stock was $21,885 and $24,505, respectively.
In August
2008 the Company entered into a three year agreement with an unrelated entity
which is to provide marketing and promotional services for the Company. Under
the terms of the agreement, as consideration for the services to be provided,
the Company is to issue warrants to purchase an aggregate of 350,000 shares of
Company stock at an exercise price of $.50. The Company determined, as of the
grant date the warrants had an aggregate value of $6,730 which is being
amortized over the three year benefit period. At October 31, 2009 and April 30,
2009 the unamortized balance of the warrants was $ and $5,666, respectively. As
of October 31, 2009 a warrant to purchase an aggregate of 275,000 shares of
Company stock has been issued with 75,000 remaining to be issued.
In August
2006, in connection with an agreement with one of its sales consultants the
Company issued warrants to purchase 100,000 shares of Holdings common stock at
an exercise price of $0.60 per share. The agreement which was for three years,
expiring in June 30, 2009, was automatically extended for a one year renewal
term with an optional renewal term of one year remaining . The warrants may be
exercised at any time up to five years from the date of the agreement. The
Company determined, as of the grant date of the warrants, that the warrants had
a value of $18,000 which was amortized over the one year benefit period of such
warrants. In addition, under the terms of the agreement, the consultant received
175,000 shares of Holdings common stock which were valued at $107,000 based on
the market price of the stock at the date of the agreement. The value of stock
issued is being amortized over the five year life of the consulting agreement.
On August 28, 2008, the Company granted the consultant warrants to purchase an
additional 200,000 shares of the Company’s common stock at an exercise price of
$0.50 per share. This issuance satisfies the Company’s requirements for the
contract years ending June 30, 2008 and 2009. Management has determined that the
aggregate value of the warrants was $4,000 based on a market price of $0.28 per
share of the Company stock on the date of grant. The warrants expire five years
from the date of grant. The unamortized value of the aggregate stock and
warrants issued to the consultant under the agreement at October 31, 2009 and
April 30, 2009 was $0 and $53,478, respectively. On August 28, 2008 the
consultant and the Company agreed to convert $153,000 of past due consulting
fees into 306,000 shares of common stock at a value of $0.50 per share which was
at a premium to the market price on date of grant. Also, in August 2009, the
consultant converted $ 307,981 of past due and future consideration into
2,053,210 shares of Company stock.
In
February 2007, the Company entered into a five year agreement with a consulting
company to provide certain financial advisory services. The Company prepaid
$300,000 for such services. This amount is carried as a long-term asset and was
being amortized over the five year life of the agreement. The Company determined
that the services no remaining value and fully amortized the remaining
unamortized balance. At October 31, 2009 and April 30, 2009 the unamortized
balance of the agreement was $0 and $165,370 respectively.
On June
14, 2007, in connection with an endorsement agreement, the Company issued
warrants to purchase 801,000 shares of the Company’s common stock at a price of
$1.284 per share. The warrants may be exercised at any time up to June 14, 2017.
The Company determined that the warrants had a value of $416,500, as of the date
the warrants were granted, which is being amortized over the three year term of
the endorsement agreement. The warrants have cashless exercise provisions. At
October 31, 2009 and April 30, 2009, the unamortized balance of these warrants
was $85,911 and $155,856 respectively. In addition, the Company has agreed to
issue, as partial consideration for monthly consulting services, to a principal
of one of the entities involved in the endorsement agreement, warrants to
purchase 3,000 shares of the Company’s common stock per month at the monthly
average market price. As of October 31, 2009 warrants to purchase 99,000 shares
of the Company’s stock have been earned under this agreement of which a warrant
for 54,000 shares has been issued at exercise prices ranging from $0.19 to $2.12
per share of common stock. Each warrant issuance has an exercise period of 5
years from date of issuance.
8
.
Acquisition
On
January 15, 2009 (the “Closing”), the Company acquired 90% of the capital stock
of Olifant U.S.A, Inc. (“Olifant”) , pursuant to a Stock Purchase Agreement (the
“Agreement”). Olifant has the worldwide distribution rights (other than Europe)
to Olifant Vodka and Olifant Gin which are both produced in Holland. The
transaction was accounted for as a business combination using the purchase
method of accounting.
The
Company agreed to pay the sellers $1,200,000 for its 90% interest: $300,000 in
cash and Company common stock valued at $100,000 to be paid 90 days from the
Closing date. At closing the initial cash payment of $300,000 was reduced by
$138,000 because Olifant’s liabilities exceeded the amount provided for in the
Purchase Agreement. . In August 2009, upon final settlement of the consideration
to be paid by the Company, the parties agreed to additional offsets aggregating
$13,000 which resulted in the Company paying the sellers $149,000 and issuing
$100,000 (555,556 shares) of Company stock which were released from escrow to
the sellers. At Closing, the Company issued a promissory note for the $800,000
balance. The promissory note is payable in four annual installments, the first
payment is due one year from Closing. Each $200,000 installment is payable
$100,000 in cash and $100,000 in Company common stock, with the stock value
based on the 30 trading days immediately prior to the installment date. The cash
portion of the note accrues interest at a rate of 5% per annum. The Company will
also pay contingent consideration to the sellers based on the financial
performance of Olifant. The contingent consideration terminates at the later of
(i) full payment of the promissory note or (ii) second year following Closing.
The Agreement also provides for “piggyback” registration rights relating to the
shares issuable.
The
Company has tentatively assigned the excess of cost over investment to
trademarks. We are in the process of completing our acquisition date fair value
allocations which shall be completed no later than January 15,
2010.
The cost
of the acquisition was allocated based on management’s estimates as
follows:
|
Cash
|
|
$
|
17,150
|
|
|
Accounts
receivable
|
|
|
87,850
|
|
|
Inventory
|
|
|
217,770
|
|
|
Other
current assets
|
|
|
27,070
|
|
|
Trademarks and
brand names
|
|
|
1,333,333
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
1,683,173
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
483,173
|
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
1,200,000
|
|
The
operating results of Olifant are reflected in the accompanying consolidated
financial statements from the date of acquisition.
In
connection with the acquisition the Company entered into an employment agreement
with one of the sellers. The agreement is for five years with two automatic
one year extensions. The annual base compensation under the employment agreement
is $132,000 with additional compensation due based on the financial performance
of Olifant. In accordance with the employment agreement the Company
issued to the seller 100,000 shares of its common stock in May
2009.
9. Notes and Loans
Payable
As
of October 31, 2009 and April 30, 2009 Notes and loans payable
consisted of the following:
|
|
|
October 31,
2009
|
|
|
April 30,
2009
|
|
|
|
|
|
|
|
|
|
|
Convertible
note(a)
|
|
$
|
286,623
|
|
|
$
|
286,623
|
|
|
Purchase
order facility(b)
|
|
|
—
|
|
|
|
1,223
|
|
|
Olifant
note(c)
|
|
|
901,380
|
|
|
|
1,061,763
|
|
|
Other
(d)
|
|
|
44,658
|
|
|
|
49,720
|
|
|
|
|
|
1,232,661
|
|
|
|
1,399,329
|
|
|
Less
current portion
|
|
|
632,661
|
|
|
|
799,329
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion
|
|
$
|
600,000
|
|
|
$
|
600,000
|
|
|
|
(a)
|
In
October 2006, the Company borrowed $250,000 and issued a convertible
promissory note in like amount. The due date of the loan was originally
extended by the Company to October 2008 from October 2007 in accordance
with the terms of the original note agreement. On March 1, 2009 the note
was amended to extend the due date to October 18, 2009. As of March 1,
2009, the principal amount of the amended note is $286,623, which includes
the original $250,000 of principal plus accrued and unpaid interest of
36,623 as of March 1, 2009. The amended note is convertible into shares of
our common stock at $0.35 per share, a decrease from the $0.60 price under
the original note but at a premium to the market price on the date of the
amended agreement, with certain anti-dilution provisions. The note bears
interest at 12% per annum which is payable quarterly. At the option of the
lender, interest can be paid in shares of Company common stock. Under the
terms of the amended note monthly principal payments of $20,000 were to
commence June 1, 2009 with the balance paid at maturity. As of September
2009 the Company had not made any payments under the amended note and has
reached an informal agreement with the note-holder, to issue 50,000 shares
of the Company’s common stock for each week of nonpayment. As of October
31, 2009 the Company has issued the note-holder 600,000 shares of its
stock as payment of interest on the note. In addition, as consideration
for extending the note the Company issued the lender 286,623 shares of
Company common stock which had a value of $42,992 on March 1, 2009. As of
the October 31, 2009 and April 30, 2009 the unamortized balance of the
286,623 shares issued was $0 and $30,710, respectively, which is included
in Other current assets on the accompanying balance sheets. See Subsequent
Events.
|
|
|
(b)
|
Balances
on borrowings under purchase order financing facility with Hartsko
Financial Services, LLC (“Hartsko”). Advances under the facility are
subject to a 3% fee for the first 30 days they remain outstanding and 1%
for each 10 days they remain unpaid. Hartsko has a first security interest
in the assets of the Company to the extent of this
advance.
|
|
|
(c)
|
On
January 15, 2009 (the “Closing”), the Company acquired 90% of the capital
stock of Olifant U.S.A, Inc. (“Olifant”), pursuant to a Stock Purchase
Agreement (the “Agreement. The Company has agreed to pay the sellers
$1,200,000 for its 90% interest: $300,000 in cash and common stock valued
at $100,000 to be paid 90 days from the Closing date The initial cash
payment of $300,000 which was due 90 days from Closing, was reduced to
$149,633, which was paid to the sellers in August 2009 together with
Company common stock having an aggregate value of $100,000 based on the
date of the Agreement. The Company issued a promissory note for the
$800,000 balance. The promissory note is payable in four annual
installments, the first payment is due one year from Closing. Each
$200,000 installment is payable $100,000 in cash and Company stock valued
at $100,000 with the stock value based on the 30 trading days immediately
prior to the installment date. The cash portion of the note accrues
interest at a rate of 5% per annum.
|
|
|
(d)
|
As
of October 31, 2009 and April 30, 2009, $40,000 is owed to a shareholder
of the Company and at April 30, 2009 an additional $9,720 is owed to a
member of the Company’s board of directors under an informal agreement s
with the Company for amounts advanced to the Company for working capital
purposes. Amounts owed to the shareholder accrues interest at a rate of
12% per annum. In June 2009, the director was repaid $11,220 which
includes interest of $1,500.
|
10. Accrued
expenses
Accrued
expenses consist of the following at October 31, 2009 and April 30,
2009:
|
|
|
October 31,
2009
|
|
|
April 30,
2009
|
|
|
Payroll,
board compensation, and consulting fees owed to officers, directors and
shareholders
|
|
$
|
1,963,713
|
|
|
$
|
1,565,964
|
|
|
All
other payroll and consulting fees
|
|
|
645,105
|
|
|
|
470,061
|
|
|
Interest
|
|
|
74,890
|
|
|
|
17,465
|
|
|
Others
|
|
|
1,124,430
|
|
|
|
846,935
|
|
|
|
|
$
|
3,808,138
|
|
|
$
|
2,900,425
|
|
On October 20, 2009, the
Company reached agreements with its Chief Executive Officer and members of its
Board of Directors to satisfy obligations owed to them, in the aggregate amount
of $1,002,450 for salary, director fees, consulting fees, and satisfaction of a
portion of an outstanding loan and the interest accrued thereon, by issuing to
them 1,763,607 shares of our common stock and warrants to acquire 9,838,793
shares of our common stock. Under this arrangement, the valuation of the common
stock and the exercise price of the warrants was $0.15 a share. Fifty percent of
the warrants can be exercised at anytime during the ten year term and the other
50 percent will only be exercisable at such time as the Company has achieved
positive EBITDA for two successive quarters. If this profitably standard is not
realized during the term of the warrants, 50 percent of the warrants will be
forfeited. The Company has not yet issued the shares or warrants.
11. Shareholders'
Deficiency
In
addition to those referred to in Note 3, 6, 7, 8, and 9, additional transactions
affecting the Company's equity for the six months ended October 31, 2009 are as
follows:
In May 9,
2009 we issued a sales consultant 85,000 shares of our common stock with an
aggregate value of $11,900 for past due fees owed to him. The value of the
shares is included in selling, general and administrative expenses for the six
months ended October 31, 2009.
On July
1, 2009 we issued an aggregate of 333,333 shares of our common stock having an
aggregate value of $50,000 to a member of our board of directors for an advance
he made to a third, unrelated, entity for services they provided the Company.
The amount the Company was invoiced for these services by the third party was
equal to the value of the stock issued to the director.
On July
1, 2009 we issued 28,000 shares of our common stock having an aggregate value of
$3,600 to a company which provides freight services to the company. The value of
the shares is included in selling, general and administrative expenses for the
six months ended October 31, 2009.
On July
1, 2009 we issued 100,000 shares of our common stock having an aggregate value
of $13,000 to a sales consultant for the Company for services he has provided to
us. The value of the shares is included in selling, general and administrative
expenses for the six months ended October 31, 2009.
On July
22, 2009, we issued 2,325,000 shares of our common stock to Drinks and pledged
the shares in lieu of a prejudgment remedy that the Plaintiff had sought against
the Company and its Chief Executive Officer. These shares may be retired upon
completion of litigation.
See Note
16.
On July
31, 2009, we issued 750,000 shares of our common stock to Drinks and pledged the
shares as collateral against payment for legal services rendered.
On July
29, 2009 we issued 71,500 shares of our common stock having an aggregate value
of $10,000 to a consultant for the Company for services he has performed. The
value of the shares is included in selling, general and administrative expenses
for the six months ended October 31, 2009.
In March
2009, the Company granted 1,175,000 shares of its common stock under its 2008
Stock Incentive Plan (the” Plan”) to several of its employees as consideration
for past services they have performed for the Company. The value of the stock on
the date of grant aggregated $188,000 which was included in accrued expenses at
April 30, 2009 as none of these shares were issued as of that date. In July 2009
the Company issued 750,000 of these shares (including 250,000 each to the
Company’s Chief Operating Officer and former Chief Financial
Officer).
As of
July 31, 2009, warrants to purchase 8,944,423 shares of Holdings common stock
were outstanding, including warrants previously disclosed in Note 9. The
warrants have exercises prices per share of Company common
stock ranging from $0.35 to $3.00.In August 2009, we issued a total of
2,124,710 shares of our common stock having an aggregate value of $193,389 to
vendors in satisfaction of amounts owed.
On August
1, 2009 and September 29, 2009, we issued 200,000 and 400,000 shares of our
common stock, respectively, having an aggregate value of $59,400 to a note
holder as interest payments.
On August
5, 2009, we issued 350,000 shares of our common stock having an aggregate value
of $45,150 as payment for legal services.
In August
2009, we issued 1,200,000 shares of our common stock in satisfaction of a
conversion request for 120 shares of our Series A Preferred Stock.
In
September 2009, we issued a total of 425,000 shares to employees as bonus
payments.
On
September 23, 2009, we issued 4,200,000 shares of our common stock having an
aggregate value of $373,800 as repayment of $100,000 borrowed and promotional
services rendered for Olifant marketing.
On
September 24, 2009, we issued 50,119 shares of our common stock having an
aggregate value of $3,959 to a vendor in satisfaction of amounts
owed.
As of
August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the “Fund”),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time to time
until August 16, 2011 and at our sole discretion, we may present the Fund with a
notice to purchase such Series B Preferred Stock (the “Notice”). The Fund is
obligated to purchase such Series B Preferred Stock on the tenth trading day
after the Notice date, subject to satisfaction of certain closing conditions.
The Fund will not be obligated to purchase the Series B Preferred Stock (i) in
the event the closing price of our common stock during the nine trading days
following delivery of a Notice falls below 75% of the closing price on the
trading day prior to the date such Notice is delivered to the Fund, or (ii) to
the extent such purchase would result in the Fund and its affiliates
beneficially owning more than 9.99% of our common stock. Our ability to send a
notice is also subject to certain conditions. Therefore, the actual amount of
the Fund’s investment is not certain. There were no shares issued of our Series
B Preferred Stock as of October 31, 2009.
In
connection with the Purchaser Agreement, we also issued to the Fund five-year
warrants to purchase 6,750,000 shares of our common stock at an exercise price
equal to the closing price of our common stock on the trading day prior to the
execution of the Purchase Agreement. The number of shares exercisable under the
warrant will be equal in value to 135% of the purchase price of the Series B
Preferred Stock to be issued in respect of the related Notice and the exercise
price of a corresponding number of shares is subject to adjustment to equal the
closing bid price of our common stock on the trading day preceding the Notice.
Each warrant will be exercisable on the earlier of (i) the date on which a
registration statement registering for resale the shares of common stock
issuable upon exercise of such warrant becomes effective and (ii) the date that
is six months after the issuance date of such warrant.
The
Series B Preferred Stock is redeemable at Registrant’s option on or after the
fifth anniversary of the date of its issuance. The Series B Preferred Stock also
has a liquidation preference per share equal to the original price per share
thereof plus all accrued dividends thereon, and is subject to repurchase by us
at the Fund’s election under certain circumstances, or following the
consummation of certain fundamental transactions by us, at the option of a
majority of the holders of the Series B Preferred Stock.
Holders
of Series B Preferred Stock will be entitled to receive dividends, which will
accrue in shares of Series B Preferred Stock on an annual basis at a rate equal
to 10% per annum from the issuance date. Accrued dividends will be payable upon
redemption of the Series B Preferred Stock. The Series B Preferred Stock ranks,
with respect to dividend rights and rights upon liquidation senior to our common
stock and our Series A Convertible Preferred Stock.
In a
concurrent transaction the Fund will borrow up to 10,000,000 shares of our
common stock from certain of our non-affiliated stockholders.
The
Series B Preferred Stock and warrants, and the shares common stock issuable upon
exercise of the warrants have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements.
Out of
the gross proceeds of this Offering, we are obligated to pay Source Capital
Group (the "Placement Agent") 10% of the amount we realize on the sale of the
Series B Preferred Stock. We will also issue to the Placement Agent, warrants to
acquire 5% of the shares of our Common Stock which we deliver on exercise of the
Warrants with an exercise price equal to the exercise price of the Warrants that
were exercised. (the "Placement Agent Warrants"), which warrants are exercisable
for a five year period, will contain cashless exercise provisions as well as
anti-dilution provisions in the case of stock splits and similar
matters.
In order
to secure amendments to our Certificate of Designation with respect our Series A
Convertible Preferred Stock (“Series A Shares”)which were required in order for
us to enter into the Purchase Agreement, we agreed that that upon any issuance
by the Company of any Common Stock with an effective price per share of Common
Stock of less than $0.35 per share (“Triggering Issuances”)(subject to
adjustment for reverse and forward stock splits and the like), the holders of
the Series A Shares(the “Series A Holders”) may, in their sole discretion, at
any time thereafter, pursuant to the conversion terms set forth in the
Certificate of Designation of the Series A Preferred Stock, convert at the per
share price which applied to the Triggering Issuance, such number of shares of
Preferred Stock as will result, in the aggregate, in the issuance by the Company
of the same number of shares of Common Stock to the Series A Holders as were
issued in the Triggering Issuances, which rights will be exercisable by the
Series A Holders pro rata to the number of shares of Preferred Shares held by
each of them on the date the Triggering Issuances occur.
12. Stock Incentive
Plan
In
January 2009, the Company’s shareholders approved the 2008 Stock Incentive Plan
(the” Plan”) which provides for awards of incentives of non-qualified stock
options, stock, restricted stock and stock appreciation rights for its officers,
employees, consultants and directors in order to attract and retain such
individuals and to enable them to participate in the long-term success and
growth of the Company. There are 10,000,000 common shares reserved for
distribution under the Plan, of which 3,050,000 remain available. Stock options
granted under the Plan are granted with an exercise price at or above the fair
market value of the underlying common stock at the date of grant, generally vest
over a four year period and expire 5 years after the grant date.
On March
12, 2009 the Company granted an aggregate of 5,775,000 options under its 2008
Stock Incentive Plan to various employees, the directors of the Company, and to
two consultants to the Company. The exercise price of the options granted to
employees and directors and one of the consultants was at the market value
(other than those issued to our CEO which was at a 10% premium to the market
value) of the underlying common stock at the date of grant. The exercise price
of the options granted to the other consultant, $0.35, was above the fair market
value of the underlying common stock at the date of grant. The value of the
options on the date of grant was calculated using the Black-Scholes formula with
the following assumptions: risk free frate-2%, expected life of options –5
years, expected stock volatility -67%, expected dividend yield -0%. The Company
issued an aggregate of 4,175,000 options to purchase shares of its common stock
to its employees including 2,500,000 to its CEO, 500,000 to its COO and 300,000
to its former CFO.
The
options granted to employees of the Company vest over a four year period and
expire five years after the grant date. The cost of the options, $375,750, is
expected to be recognized over the four year vesting period of the non-vested
options. The options awarded to the directors (1,000,000) of the Company and the
consultants (600,000) vested immediately upon grant.
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model and is affected by assumptions regarding a
number of highly complex and subjective variables including expected volatility,
risk-free interest rate, expected dividends and expected term. Expected
volatility is based on the historic volatility of the Company’s stock over the
expected life of the option. The expected term and vesting of the option
represents the estimated period of time until the exercise and is based on
management’s estimates, giving consideration to the contractual term, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S . Treasury yield curve in effect at the time of grant
for the expected term of the option. The Company has not paid dividends in the
past and does not plan to pay any dividends in the near future. SFAS 123R,
“Share Based Payment,” also requires the Company to estimate forfeitures at the
time of grant and revise these estimates, if necessary, in subsequent period if
actual forfeitures differ from those estimates. The Company estimates
forfeitures of future experience while considering its historical
experience.
13. Income
Taxes
No
provision for taxes on income is included in the accompanying statements of
operations because of the net operating losses for both the six months ended
October 31, 2009 and 2008. Holdings and Drinks previously filed income tax
returns on a June 30 and December 31 tax year, respectively; however, both
companies applied for and received a change in tax year to April 30 and file a
federal income tax return on a consolidated basis. Olifant files income tax
returns on a February 28 tax year. The consolidated net operating loss carry
forward as of October 31, 2009 is approximately $30,000,000, available to offset
future years' taxable income expiring in various years through
2029.
A
valuation allowance has been provided against the entire deferred tax asset due
to the uncertainty of future profitability of the Company. Management's position
with respect to the likelihood of recoverability of these deferred tax assets
will be evaluated each reporting period.
14. Related Party
Transactions
Related
party transactions, in addition to those referred to in Notes 9, 10, 11 and 12
are as follows:
Consulting
and Marketing Fees
For each
of the six months ended October 31, 2009 and 2008, the Company incurred fees for
services rendered related to sales and marketing
payable
to a limited liability company which was controlled by a member of the Company’s
board of directors, and previous chairman of the
board
aggregating $24,000. As of October 31, 2009 and April 30, 2009 unpaid fees owed
to the chairman's firm, aggregated $215,550 and $174,550,
respectively.
In fiscal
2003 we entered into a consulting agreement with a company wholly owned by a
member of the Company's board of directors. Under the agreement the consulting
company is being compensated at a rate of $100,000 per annum. For each of the
six months ended October 31, 2009 and 2008 the Company incurred fees aggregating
$25,000 under this agreement. As of October 31, 2009 and April 30, 2009 we were
indebted to the consulting company in the amount of $306,243 and $256,248,
respectively.
In
December 2002 the Company entered into a consulting agreement with one of its
shareholders which provided for $600,000 in fees payable in five fixed
increments over a period of 78 months. The agreement expired on June 9, 2009.
For the six months ended October 31, 2009 and 2008 the Company incurred fees
aggregating $13,151 and $60,000, respectively, under this agreement. The Company
has an informal agreement with the shareholder pursuant to which he has the
option of converting all or a portion of the consulting fees owed him into
shares of Holding's common stock at a conversion price to be agreed upon. In
March 2009 the consultant elected to convert $120,000 due him for consulting
fees into shares of Company stock at a price of $0.35 per share resulting in the
Company issuing 342,857 shares to him. In February, 2008 the consultant elected
to convert $190,000 due him for consulting fees into shares of Company common
stock at a price of $0.50 per share resulting in the Company issuing 380,000
shares to him. Each of the conversions were at a premium to the market price of
the Company’s common on the date of the elections to convert. As of October 31,
2009 and April 30, 2009, amounts owed to this shareholder aggregated $43,151 and
$30,000, respectively.
Royalty
Fees
In
connection with the Company's distribution and licensing agreements with its
equity investee the Company incurred royalty expenses for the six months ended
October 31, 2009 and 2008 of approximately $2,500 and $18,000, respectively. The
operations and the net assets are immaterial.
Loan
Payable
The
Company is obligated to issue shares of its common stock to several of its
shareholders in connection with its June 2009 debt financing (see Note
5).
From July
2007 through July 2009 the Company borrowed an aggregate of $813,035 from our
CEO for working capital purposes. The borrowings bear interest at 12% per annum.
For six months ended October 31, 2009 and 2008 interest incurred on this loan
aggregated $18,566 and $18,831, respectively. As of October 31, 2009 and April
30, 2009 amounts owed to our CEO on these loans including accrued and unpaid
interest aggregated $ and $305,935, respectively.
15. Customer
Concentration
For the
six months ended October 31, 2009, our largest customer accounted for 15% of our
sales. For the six months ended October 31, 2009, three other customers
accounted for 10% or more of our sales. The Company did not have significant
sales to any single customer during the three months ended October 31, 2009. For
the three and six months ended October 31, 2008, our largest customer accounted
for 16% and 13% of our sales, respectively. For the three and six months ended
October 31, 2008, three other customers accounted for 10% or more of our
sales.
16. Commitments and
Contingencies
Lease
The
Company leases office space under an operating sublease, with minimum annual
rentals of $50,000 through September, 2009 which was renewed for a two year
period through September 2011 with minimum annual rentals of $36,000. The
Company leased additional office space under an operating lease, which expired
in March 2009 that required minimal annual rental payments of
$51,600.
Rent
expense for these leases aggregated approximately $24,000 and $53,000 for the
six months ended October 31, 2009 and 2008, respectively. Rent expense for these
leases aggregated approximately $12,000 and $27,000 for the three months ended
October 31, 2009 and 2008, respectively.
Future
minimum payments for all leases are approximately as follows:
|
Year Ending
|
|
|
|
|
April 30,
|
|
Amount
|
|
|
2010
|
|
$
|
20,333
|
|
|
2011
|
|
|
36,000
|
|
|
2012
|
|
|
15,000
|
|
License
Agreement
In
November 2005 the Company entered into an eight-year license agreement for sales
of Trump Super Premium Vodka. Under the agreement the Company is required to pay
royalties on sales of the licensed product. The agreement requires minimal
royalty payments through November 2012 which if not paid could result in
termination of the license. The Company is currently in default under the terms
of its license agreement with Trump Marks LLC. The licensor has the right to
terminate the license, but at present has not formally asserted that right. The
Company under a non documented arrangement with the licensor is continuing to
sell the product. The Company and licensor are currently in discussion to amend
the agreement under mutually beneficial terms.
In 2008
the Company entered into a licensing agreement with Vetrerie Bruni S.p.A.
(“Bruni”), which has the patent to the Trump Vodka bottle design. The agreement
is retroactive to January 1, 2008 and calls for annual minimum royalties of
$150,000. Royalties are due on a per bottle basis on bottles produced by another
bottle supplier of approximately 18% of the cost of such bottles. The agreement
terminates upon the expiration of the patent or the expiration of the Company’s
license agreement with Trump Marks LLC. As of October 31, 2009 the Company has
accrued $237,500 in fees due Bruni. Due to a dispute with respect to the pricing
and quantities of glass ordered and the source of alternative producers the
company entered into a dispute with Bruni Glass resulting in litigation which
was resolved with a settlement. This settlement resulted in a lowering of the
Company’s annual glass royalty obligation and a settlement of the outstanding
balance the Company owed to Bruni. The settlement results in the Company making
monthly payments of $10,000 per month for 12 months for $120,000 in payments
against the prior accrual of $237,000 by the Company and a lowering of the
annual going forward royalty by as much as 75% depending on utilization
levels.
In
February 2008 we entered into a joint venture with Grammy Award-winning producer
and artist, Dr. Dre. The Company and Dr. Dre have formed the joint venture to
identify, develop, and market premium alcoholic beverages, The deal is under the
umbrella of the agreement between the Company and Interscope Geffen A&M
Records. Our Leyrat Cognac is the joint ventures’ first beverage. In January
2009 the Company launched its Leyrat Estate Bottled Cognac which it imports from
a 200 year old distillery in Cognac France. The Company granted 10% of its 50%
interest in the brand to the producer of the product, leaving us with a 45%
interest, in return for the rights to distribute the product in the United
States. The Company has 5% of the rights for the brand in Europe.
Our
license with respect to the Kid Rock related trademarks currently requires
payment to the licensor of a per case royalty (or equivalent liquid volume),
with certain minimum royalties for years 2 through 5 of the agreement payable on
the first day of the applicable year. Certain aspects of this agreement are
currently being modified.
Other
Agreements
The
Company has modified its agreement with a foreign distributor, through December
2023, to distribute our products in their country. The agreement requires the
distributor to assume procurement of component parts, production, distribution
and funding for approved marketing and promotion for the term of the agreement.
The distributor is to pay the Company a quarterly fee no less than one fourth of
$150,000 and certian incremental payments for set volume levels. In return for
the fee and assumption of all financial support in the territory, the Company
will be the exclusive distributor in Israel over the term of the agreement with
the rights to be the exclusive distributor in their country. The distributor in
in the process of purchasing component parts for its own production. It is also
anticipated that the Company may purchase up to five containers of product or
5,000 cases from the Company's current inventory as a precursor to its
own production in order to accelerate market entry.
Litigation
In June
2009, Richard Shiekman, a former employee of the Company, filed an application
for prejudgment remedy against the Company and our chief Executive Officer in
Superior Court of Connecticut, Judicial District of Fairfield (Docket Number CV
09 4028895 S). The plaintiff has not commenced litigation however in his request
for prejudgment he seeks $127,250 of unpaid wages and commissions and, $1,500
for reimbursement of expenses. The maximum exposure to the Company and our CEO
is approximately $260,000 for double damages plus attorneys’ fees and costs. In
the first quarter of the year, the plaintiff was arrested for theft from the
Company. The Company believes that the claims made by the plaintiff are
completely inaccurate and false and plans to vigorously defend this suit. In
addition, the Company plans to commence a countersuit for damage and theft of
services. As of November 30, 2009, we pledged 10,325,000 shares of Company
common stock in lieu of a prejudgment remedy that the Plaintiff had sought
against the Company and its Chief Executive Officer.
In
October 2009, James Sokol, a former consultant for the Company, filed an
application for prejudgment remedy against the Company and its Chief Executive
Officer in the Superior Court for the Judicial District of Fairfield (Docket
Number CV 09 5027925 S) claiming unpaid commissions and compensation of
$256,000.00. The plaintiff has not commenced litigation. The maximum exposure to
the Company and our CEO is approximately $520,000.00 for double damages plus
attorney's fees and costs. The Company believes that the claims made by the
plaintiff are inaccurate and false and plans to vigorously defend this suit. As
of November 30, 2009, we pledged 15,000,000 shares of Company common stock in
lieu of a prejudgment remedy that the Plaintiff had sought against the Company
and its Chief Executive Officer. Discussions are planned to resolve this
matter.
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company which has the patent
to the Trump Vodka bottle design filed a complaint against us in the U.S.
District Court, Southern District of New York for alleged breach of contract and
seeking $225,000 for alleged past due invoices and royalties. The Company filed
a counterclaim. The case was settled with Drinks agreeing to pay $10,000 per
month for 12 months commencing in February 2010 and an agreement for the Company
to receive a reduction in the gross royalty amount to be paid to Bruni based
upon usage amounts that would cap the companies fees at 50% of the prior
agreement.
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”) a company which provided
distribution services for us in several states filed a claim for damages against
us in Duval County Florida for alleged damages including breach of contract and
is seeking approximately $2 million in damages. It is the Company’s strong
opinion that the claim arose out of our termination of the agreements we had
with them for their nonperformance, nonpayment, failure of the plaintiff to
accurately report sales to the Company and their withholding of information
required by the agreements. The Company believes it asserted its right not to
extend credit beyond the capacity of Liquor Group to provide documentation of
sales and marketing or proof of the ability to pay for quantities of product
ordered in light on accumulated nonpayment of invoices. The Company filed a
counterclaim of $500,000 for damages against Liquor Group and has denied their
claimed breach of contract claim previously made against it. The Company
contends that it is owed money by Liquor Group under the agreements. Liquor
Group has not filed a response to the counterclaim for damages. Liquor Group has
until the end of September to submit the fee for its claim to proceed to
arbitration.
Other
than the above we believe that the Company is currently not subject to
litigation, which, in the opinion of our management, is likely to have a
material adverse effect on us.
17. Subsequent
Events
In
addition to those referred to in Note 6, 7, 8, and 9, subsequent events which
have been reviewed through December 21, 2009 include the following:
On
November 9, 2009, the Company filed a registration statement on Form S-8 filed
to register 20,000,000 shares issuable pursuant to an Incentive Stock Plan. The
Company has issued a total of 7,715,000 shares of Company common stock under the
plan as compensation for legal and marketing services.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. At the option of the note holder, interest can be paid in
either cash or shares of Company common stock based on the convertible note’s
$0.06 conversion price. As additional consideration, the Company granted the
note holder 250,000 shares of Company’s common and agreed to register the shares
by January 8, 2010 or pay to the note holder as damages additional shares of the
Company’s common stock equal to 2.0% of the common shares issuable upon
conversion of the convertible note. The Company also granted the note holder
piggyback registration rights. On November 23, 2009, the Company issued the
250,000 shares.
On
November 9, 2009, an investor purchased a $311,176.00 past due Company Note
described above in Note 9(a). On November 13, 2009, the Company exchanged a new
$447,500.00 Convertible Promissory Note for the past due Company Note. The new
convertible promissory note is convertible at the note holder’s option using a
conversion price based on the prevailing market prices. Subsequent to issuance
of the note, the Company has issued the note holder a total of 8,700,000 shares
of Company common stock in satisfaction of conversions of note
principal.
On
November 17, 2009, the Company issued a total of 12,003,720 shares of Company
common stock to certain officers and directors as a replacement for the
12,003,720 shares they lent pursuant to a financing transaction. See Note 6
above.
On
November 18, 2009, the Company retained a business advisory consultant and
agreed to issue 2,000,000 shares of Company Common Stock in exchange for
services to be rendered.
On
November 23, the Company issued 400,000 shares of common stock in satisfaction
of interest payable on a note.
Subsequent
to October 31, 2009, the Company issued 23,000,000 shares of Company common
stock that are pledged in lieu of prejudgment remedies on two litigation
matters.
On
November 25, 2009, the Company received gross proceeds of $87,037 from the
issuance to an investor of 8.7037 shares of Series B preferred stock at
$10,000.00 per share and a warrant for 4,701,167 shares of common stock with an
exercise price based on prevailing market prices. The warrant is exercisable
upon the earlier of (a) May 25, 2010, or (b) the date a registration statement
covering the warrant shares is declared effective, but not after November 25,
2014, that number of duly authorized, validly issued, fully paid and
non-assessable shares of common stock set forth above; provided, however, that
this warrant may only be exercised for warrant shares equal in value to not more
than 135.0% of the initial $0.025 initial exercise price.
On
December 17, 2009, the Company received gross proceeds of $51,333 from the
issuance to an investor of 5.133333 shares of Series B preferred stock at
$10,000.00 per share and a warrant for 4,200,000 shares of common stock with an
exercise price based on prevailing market prices. The warrant is exercisable
upon the earlier of (a) June 17, 2010, or (b) the date a registration statement
covering the warrant shares is declared effective, but not after December 17,
2014, that number of duly authorized, validly issued, fully paid and
non-assessable shares of common stock set forth above; provided, however, that
this warrant may only be exercised for warrant shares equal in value to not more
than 135.0% of the initial $0.0165 initial exercise price.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of
Operations
Introduction
The
following discussion and analysis summarizes the significant factors affecting
(1) our consolidated results of operations for the six months ended October 31,
2009, compared to the six months ended October 31, 2008, and (2) our liquidity
and capital resources. This discussion and analysis should be read in
conjunction with the consolidated financial statements and notes included in
Item 1 of this Report, and the audited consolidated financial statements and
notes included in Form 10-K, which Report was filed on August 13,
2009.
RESULTS
OF OPERATIONS
Comparison
of Three and Six Month Periods Ended October 31, 2009 to October 31,
2008
Net
Sales: Net sales were $449,278 for the six months ended October 31, 2009
compared to net sales of $1,649,557 for the six months ended October 31, 2008.
Net sales were $15,308 for the three months ended October 31, 2009 compared to
net sales of $580,980 for the three months ended October 31, 2008. As has been
announced by the Company, delay in financing, now in place, has caused various
second quarter orders and inventories to have shipment dates pushed to our
current third quarter. The second quarter decrease is predominantly due to
inventory shortfalls as a result of timing on letters of credit and insufficient
working capital and the resulting delay of certain shipments.
The
Company believes these impediments have been alleviated in the subsequent
quarter and has previously announced the resumption of production and
shipment.
The Company’s management believes, and customer demand
indicates, that with adequate working capital
and our
current production and receivable letters of credit now in place
and our
national distribution already in place sales of our products will improve
in subsequent quarters, particularly in the improving economic
environment.
Gross
margin: Gross profit was $127,569 (28% of net sales) for the six months ended
October 31, 2009 compared to gross profit of $379,523 (23.0% of net sales) for
the six months ended October 31, 2008. Gross loss was ($496) (-3.2% of net
sales) for the three months ended October 31, 2009 compared to gross profit of
$41,890 (7.2% of net sales) for the three months ended October 31, 2008. For the
six months ended October 31, 2009 we wrote-off Newman’s Own related inventory
resulting in a charge of approximately $40,000 to cost of goods sold and
resulted in the negative gross margin for the three months ended October 31,
2009. The inherent low margins for the Newmans’ Own products, the increased
costs in production lead to our decision to discontinue to sell the products.
Selling,
general and administrative: Selling, general and administrative expenses totaled
$3,210,057 for the six months ended October 31, 2009, compared to $2,706,583 for
the six months ended October 31, 2008, an increase of 19%. Selling, general and
administrative expenses totaled $1,586,440 for the three months ended October
31, 2009, compared to $1,089,462 for the three months ended October 31, 2008, an
increase of 46%. For the six months ended October 31, 2009 marketing expenses
included $567,500 of fees relating to the Olifant Summer Concert Series. Local
marketing expenses decreased from the prior year because many customers were out
of inventory of our brands. Legal and finance fees have increased from the prior
year due to our June 2009 financing and increase in litigation. The Company has
made reductions during the six months ended in selling, general and
administrative expenses in the areas of payroll and overhead costs that will
result in reduced operating cost levels starting in the Company’s fiscal third
quarter.
Other
Income (expense): Interest expense totaled $517,485 for the six months ended
October 31, 2009 compared to expense of $157,144 for the six months ended
October 31, 2008. Interest expense totaled $79,780 for the three months ended
October 31, 2009 compared to expense of $135,847 for the three months ended
October 31, 2008. The increase in interest expense for the six months ended
October 31, 2009 resulted from the increased debt outstanding in 2009 as
compared to 2008.
Income
Taxes: We have incurred substantial net losses from our inception and as a
result, have not incurred any income tax liabilities. Our federal net operating
loss carry forward is approximately $28,000,000, which we can use to reduce
taxable earnings in the future. No income tax benefits were recognized for the
six months ended October 31, 2009 and 2008 as we have provided valuation
reserves against the full amount of the future carry forward tax loss benefit.
We will evaluate the reserve every reporting period and recognize the benefits
when realization is reasonably assured.
IMPACT
OF INFLATION
Although
management expects that our operations will be influenced by general economic
conditions we do not believe that inflation has had a material effect on our
results of operations.
SEASONALITY
As a
general rule, the second and third quarters of our fiscal year (August-January)
are the periods that we realize our greatest sales as a result of sales of
alcoholic beverages during the holiday season. During the fourth quarter of our
fiscal year (February-April) we generally realize our lowest sales volume as a
result of our distributors working off inventory which remained on hand after
the holiday season. Given our lack of working capital, the effects of
seasonality on our sales have been lessened.
FINANCIAL
LIQUIDITY AND CAPITAL RESOURCES
Although
we expect that our working capital position will benefit from our June 2009
sales of our debentures and our August 2009 agreement relating to our Series B
Preferred Stock, our business continues to be effected by insufficient working
capital. We will need to continue to carefully manage our working capital and
our business decisions will continue to be influenced by our working capital
requirements. Lack of liquidity continues to negatively affect our business and
curtail the execution of our business plan.
We have
experienced net losses and negative cash flows from operations and investing
activities since our inception in 2003. Our net loss for the six months ended
October 31, 2009 was $3,543,710. Cash used in operating activities for the six
months ended October 31, 2009 was $151,372. We have to date funded our
operations predominantly through factoring, vendor credit, loans from
shareholders and investors, and proceeds from the sale of our common stock,
preferred stock, and warrants.
As of
August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the “Fund”),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time to time
until August 16, 2011 and at our sole discretion, we may present the Fund with a
notice to purchase such Series B Preferred Stock (the “Notice”). The Fund is
obligated to purchase such Series B Preferred Stock on the tenth trading day
after the Notice date, subject to satisfaction of certain closing conditions.
The Fund will not be obligated to purchase the Series B Preferred Stock (i) in
the event the closing price of our common stock during the nine trading days
following delivery of a Notice falls below 75% of the closing price on the
trading day prior to the date such Notice is delivered to the Fund, or (ii) to
the extent such purchase would result in the Fund and its affiliates
beneficially owning more than 9.99% of our common stock. On November 25, 2009,
the Company received gross proceeds of $87,037 from the issuance of 8.7037
shares of Series B preferred stock at $10,000.00 per share and a warrant for
4,701,167 shares of common stock with an exercise price based on prevailing
market prices. The warrant is exercisable upon the earlier of (a) May 25, 2010,
or (b) the date a registration statement covering the warrant shares is declared
effective, but not after November 25, 2014, that number of duly authorized,
validly issued, fully paid and non-assessable shares of common stock set forth
above; provided, however, that this warrant may only be exercised for warrant
shares equal in value to not more than 135.0% of the initial $0.025 initial
exercise price.
On
December 17, 2009, the Company received gross proceeds of $51,333 from the
issuance of 5.133333 shares of Series B preferred stock at $10,000.00 per share
and a warrant for 4,200,000 shares of common stock with an exercise price based
on prevailing market prices. The warrant is exercisable upon the earlier of (a)
June 17, 2010, or (b) the date a registration statement covering the warrant
shares is declared effective, but not after December 17, 2014, that number of
duly authorized, validly issued, fully paid and non-assessable shares of common
stock set forth above; provided, however, that this warrant may only be
exercised for warrant shares equal in value to not more than 135.0% of the
initial $0.0165 initial exercise price.
Our
ability to send additional notices is also subject to certain conditions.
Therefore, the actual amount of the Fund’s investment is not
certain.
In June,
2009 (the "Closing Date") we sold to one investor (the “Investor”) a $4,000,000
non interest bearing debenture with a 25% ($1,000,000) original issue discount,
that matures in 48 months from the Closing Date (the Drink’s Debenture) for
$3,000,000, consisting of $375,000 paid in cash at closing and eleven secured
promissory notes, aggregating $2,625,000, bearing interest at the rate of 5% per
annum, each maturing 50 months after the Closing Date (the “Investor Notes”).
The Investor Notes, the first ten of which are in the principal amount of
$250,000 and the last of which is in the principal amount of $125,000, are
mandatorily pre-payable, in sequence, at the rate of one note per month
commencing on the seven month anniversary of the Closing Date. If the prepayment
occurs, the entire aggregate principal balance of the Investor Notes (less the
$200,000 August prepayment) in the amount of $2,425,000, together with the
interest outstanding thereon, will be paid in eleven monthly installments (ten
in the amount of $230,000 and one the amount of $125,000) such that the entire
amount would be paid to us by November 26, 2010. These monthly payments if made
will help fund operations over their eleven month period.
The
Company has an agreement with a factor entered into April 2009, pursuant to
which a substantial portion of the Company’s accounts receivable, is sold to the
factor with recourse to bad debts and other customer claims. The Company
receives a cash advance equal to 80% of the invoice amount and is paid the
balance of the invoice less fees incurred at the time the factor receives the
final payment from the customer. The factor fee is 1.75% for the first 30 days
the invoice remains unpaid and 0.07% for each day thereafter. The facility shall
remain open until a 30 day notice by either party of termination of the
agreement The facility is secured by all assets of the Company.
In
October 2006, the Company borrowed $250,000 and issued a convertible promissory
note in like amount. The due date of the loan was originally extended by the
Company to October 2008 from October 2007 in accordance with the terms of the
original note agreement. On March 1, 2009 the note was amended to extend the due
date to October 18, 2009. As consideration for extending the note in March 1,
2009 the Company issued the lender 286,623 shares of Company common stock. On
November 9, 2009, an investor purchased the past due convertible note from the
note-holder. On November 13, 2009, the Company exchanged a new $447,500.00
Convertible Promissory Note for the past due convertible note. The new
convertible promissory note is convertible at the note holder’s option using a
conversion price based on the prevailing market prices. Subsequent to issuance
of the note, the Company has issued the note holder a total of 8,700,000 shares
of Company common stock in satisfaction of conversions of note
principal.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. At the option of the note holder, interest can be paid in
either cash or shares of Company common stock based on the convertible note’s
$0.06 conversion price. As additional consideration, the Company granted the
note holder 250,000 shares of Company’s common and agreed to register the shares
by January 8, 2010 or pay to the note holder as damages additional shares of the
Company’s common stock equal to 2.0% of the common shares issuable upon
conversion of the convertible note. The Company also granted the note holder
piggyback registration rights. On November 23, 2009, the Company issued the
250,000 shares.
On
December 18, 2007 (the "Closing Date") the Company sold to three related
investors (the "December Investors") an aggregate of 3,000 shares of our Series
A Preferred Stock, $.001 par value (the "Preferred Stock"), at a cash purchase
price of $1,000 per share, generating gross proceeds of $3,000,000 (the
“December Financing”). The Preferred Stock has no voting or dividend rights. Out
of the gross proceeds of the December Financing, we paid Midtown Partners &
Co., LLC (the "Placement Agent") $180,000 in commissions and $30,000 for
non-accountable expenses. We also issued, to the Placement Agent, warrants to
acquire 600,000 shares of our Common Stock for a purchase price of $.50 per
share (the "Placement Agent Warrants"), which warrants are exercisable for a
five year period and contain anti-dilution provisions in the events of stock
splits and similar matters. Both the commissions and expenses were accounted for
as a reduction of Additional Paid in Capital.
The
financing that we consummated in January 2007 (the “January Financing”) provided
participating investors (the “January Investors”) rights to exchange the common
stock they acquired for securities issued in subsequent financings which were
consummated at a common stock equivalent of $2.00 per share or less. Under this
provision, the January Investors have exchanged 4,444,445 shares of common stock
for 8,000 shares of Preferred Stock. The 4,444,445 shares returned were
accounted for as a reduction of Additional Paid in Capital and a reduction of
Common Stock since the shares have been cancelled. Also in the January
Financing, the January Investors acquired warrants to purchase 3,777,778 shares
of our common stock at an exercise price of $3.00 per share (the “January
Warrants”). These warrants were exercised at $.20 per share of common
stock.
Each of
our December Investors participated in the January Financing but not all of our
January Investors participated in the December Financing.
The
December Investors may allege that certain penalties are owed to them by the
Company based on certain time requirements in the documentation relating to the
December Financing. If such claim is successfully made, we may lack the
liquidity to satisfy such claim.
On
January 15, 2009 (the “Closing”), the Company acquired 90% of the capital stock
of Olifant U.S.A, Inc. (“Olifant”) , pursuant to a Stock Purchase Agreement (the
“Agreement. As security for the balance due to the sellers the Company issued a
promissory note for the $800,000 balance. The promissory note is payable in four
annual installments, the first payment is due one year from Closing. Each
$200,000 installment is payable $100,000 in cash and Company stock valued at
$100,000 with the stock value based on the 30 trading days immediately prior to
the installment date. The cash portion of the note accrues interest at a rate of
5% per annum.
From July
2007 through October 2009 the Company has borrowed from our CEO for working
capital purposes. The borrowings bear interest at 12% per annum. As of October
31, 2009 and April 30, 2009, amounts owed to our CEO on these loans including
accrued and unpaid interest aggregated $361,463 and $305,935, respectively.
Based on an understanding we reached with our CEO on October 20, 2009, we plan
to satisfy obligations owed to him for a portion of his outstanding
salary and a portion of an
outstanding loan by issuing him shares of our common stock and warrants to
acquire shares of our common stock valued at $0.15 per share. The shares and
warrant have not yet been issued.
As of
October 31, 2009 the Company has a shareholders' deficiency of $3,882,044,
including $41,117,349 in accumulated losses since its inception in 2002. For the
six months ended October 31, 2009, the Company sustained a net loss of
$3,516,495, and used $151,372 in operating activities. We will need additional
financing which may take the form of equity or debt and we will seek to convert
liabilities into equity. Business judgments have been substantially affected by
the availability of working capital. We expect that our working capital position
and our cash balance will benefit from financing agreement we have in place,
however our business continues to be effected by insufficient working capital.
We will need to continue to carefully manage our working capital and our
business decisions will continue to be influenced by our working capital
requirements. Therefore, our short term business strategy will rely heavily on
our cost efficient icon brand strategy and the resources available to us from
current and new strategic partners we may attract. We will continue to focus on
those of our products which we believe will provide the greatest return per
dollar of investment with the expectation that as a result of increases in sales
and the resulting improvement in our working capital position, we will be able
to focus on those products for which market acceptance might require greater
investments of time and resources. To execute this strategy, our short-term
focus, for beer and spirits, will be on Olifant, Trump Super Premium Vodka, Old
Whiskey River Bourbon, Damiana andLeyrat Cognac. In order for us to continue and
grow our business, we will need additional financing which may take the form of
equity or debt. There can be no assurance we will be able to secure the
financing we require, and if we are unable to secure the financing we need, we
may be unable to continue our operations. We anticipate that increased sales
revenues will help to some extent, but we will need to obtain funds from equity
or debt offerings, and/or from a new or expanded credit facility. In the event
we are not able to increase our working capital, we will not be able to
implement or may be required to delay all or part of our business plan, and our
ability to attain profitable operations, generate positive cash flows from
operating and investing activities and materially expand the business will be
materially adversely affected.
ROYALTIES/LICENSING
AGREEMENTS
In
November 2005 the Company entered into an eight-year license agreement for sales
of Trump Super Premium Vodka. Under the agreement the Company is required to pay
royalties on sales of the licensed product. The agreement requires minimal
royalty payments through November 2012 which if not paid could result in
termination of the license. The Company is currently below volume minimums under
the terms of its license agreement with Trump Marks LLC. The licensor has the
right to terminate the license, but at present has not formally asserted that
right. The Company under a non documented arrangement with the licensor is
continuing to sell the product. The Company and licensor are currently in
discussion to amend the agreement under mutually beneficial terms.
Under our
license agreement for Old Whiskey River, we are obligated to pay royalties of
between $10 and $33 per case, depending on the size of the bottle.
Under our
license agreement for Damaina Liqueur we pay $3 per case.
Under our
license agreement with Aguila Tequila we are obligated to pay $3 per
case.
Under our
joint venture agreements with Dr. Dre and Interscope Records, which includes our
Leyrat Cognac, we are obligated to pay a percentage of gross profits, less
certain direct selling expenses.
The
license agreement with respect to the BadAss Beer related trademarks
currently requires the payment of a per case royalty (or equivalent liquid
volume), with certain minimum royalties for years 2 through 5 of the agreement
payable on the first day of the applicable year. The Company and Kid Rock are
currently in discussions with respect to certain modifications to be determined.
The beer is currently successfully selling in Michigan in kegs.
OTHER
AGREEMENTS
The
Company has modified its agreement with a foreign distributor, through December
2023, to distribute our products in their country. The agreement requires the
distributor to assume procurement of component parts, production, distribution
and funding for approved marketing and promotion for the term of the agreement.
The distributor is to pay the Company a quarterly fee no less than one fourth of
$150,000 and certian incremental payments for set volume levels. In return for
the fee and assumption of all financial support in the territory, the Company
will be the exclusive distributor in Israel over the term of the agreement with
the rights to be the exclusive distributor in their country. The distributor in
in the process of purchasing component parts for its own production. It is also
anticipated that the Company may purchase up to five containers of product or
5,000 cases from the Company's current inventory as a precursor to its
own production in order to accelerate market entry.
In April
2009 the Company entered into a sponsorship agreement with concert producer and
promoter to promote Olifant Vodka in its concert tour which runs from July 10,
thru August 8, 2009. In consideration for their services the Company has given
the promoter the following: 4,700,000 shares of its common stock that have been
issued; 3% of the net profits of Olifant for each fiscal year beginning
following the third anniversary of the agreement (years beginning May 2012) and
ending the earlier of Olifant’s fiscal year ending in 2018 or when Olifant is
sold, if that were to occur. If Olifant is sold prior to expiration the promoter
will receive 3% of the consideration received from the sale. The Company has
agreed to grant an additional 2% (of Olifant or a future brand) for promotion in
the 2010 concert tour; and warrants to purchase 200,000 shares of Company stock
at an exercise price of $.50 per share which shall be issued at the end of the
2009 tour. In accordance with the agreement the amount of cash and stock based
consideration issued by the Company shall not be less than $400,000. In
accordance with the agreement, in May 2009, the Company issued a promissory note
to the promoter for a loan in the same amount to cover expenses relating to the
tour. The note, which bears no interest, was repaid with shares of Company
stock.
In fiscal
2003 we entered into a consulting agreement with a company, Marvin Traub &
Associates (“MTA”), owned 100% by Marvin Traub, a member of the Board of
Directors. Under the agreement, MTA is being compensated at the rate of $100,000
per annum. As of October 31, 2009, we were indebted to MTA in the amount of
$306,243.
In
December 2002 the Company entered into a consulting agreement with one of its
shareholders which provides for $600,000 in fees payable in five fixed
increments over a period of 78 months. The agreement expired on June 9, 2009.
The Company has an informal agreement with the shareholder pursuant to which he
has the option of converting all or a portion of the consulting fees owed him
into shares of Holding's common stock at a conversion price to be agreed upon.
In March 2009 the consultant elected to convert $120,000 due him for consulting
fees into shares of Company stock at a price of $0.35 per share resulting in the
Company issuing 342,857 shares to him. In February, 2008 the consultant elected
to convert $190,000 due him for consulting fees into shares of Company common
stock at a price of $0.50 per share resulting in the Company issuing 380,000
shares to him. Each of the conversions were at a premium to the market price of
the Company’s common stock on the date of the elections to convert. As of
October 31, 2009 this shareholder has aggregated $43,151 in compensation owed to
him.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We do
participate in certain transactions which are settled in foreign currencies.
Such transactions are short term in nature and any corresponding fluctuation in
foreign exchange rates have not been material. We do not hold instruments that
are sensitive to changes in interest rates or commodity prices. Therefore, we
believe that we are not materially exposed to market risks resulting from
fluctuations from such rates or prices.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
We have
adopted and maintain disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") that are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Exchange Act,
is recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) and Chief Financial Officer (Principal Financial Officer), as
appropriate, to allow for timely decisions regarding required
disclosure.
Our Chief
Executive Officer and our former Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures as of July 31, 2009 as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of July 31, 2009, our Chief Executive
Officer, who also is our principal executive officer, and our former Chief
Financial Officer, who was our principal financial officer, concluded that, as
of such date, our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be declared by us in reports
that we file with or submit to the SEC is (1) recorded, processed, summarized,
and reported within the periods specified in the SEC’s rules and forms and (2)
accumulated and communicated to our management, including our Chief Executive
Officer and our former Chief Financial Officer, to allow timely decisions
regarding required disclosure.
On
November 2, 2009, our former Chief Financial Officer resigned in order to pursue
other opportunities. Our Chief Executive Officer has assumed the duties of
Principal Financial Officer. The number of full-time Company employees is
substantially reduced. The Company has engaged a consultant to assist with
handling some of the former CFO’s responsibilities. The Company is assessing the
effects of these developments on its internal accounting controls and may
determine that material weaknesses in internal controls may or may not
exist.
PART II
OTHER INFORMATION
Item
1. Legal Proceedings
In June
2009, Richard Shiekman, a former employee of the Company, filed an application
for prejudgment remedy against the Company and our chief Executive Officer in
Superior Court of Connecticut, Judicial District of Fairfield (Docket Number CV
09 4028895 S). The plaintiff has not commenced litigation however in his request
for prejudgment he seeks $127,250 of unpaid wages and commissions and, $1,500
for reimbursement of expenses. The maximum exposure to the Company and our CEO
is approximately $260,000 for double damages plus attorneys’ fees and costs. In
the first quarter of the year, the plaintiff was arrested for theft from the
Company. The Company believes that the claims made by the plaintiff are
completely inaccurate and false and plans to vigorously defend this suit. In
addition, the Company plans to commence a countersuit for damage and theft of
services. As of November 30, 2009, we pledged 10,325,000 shares of Company
common stock in lieu of a prejudgment remedy that the Plaintiff had sought
against the Company and its Chief Executive Officer.
In
October 2009, James Sokol, a former consultant for the Company, filed an
application for prejudgment remedy against the Company and its Chief Executive
Officer in the Superior Court for the Judicial District of Fairfield (Docket
Number CV 09 5027925 S) claiming unpaid commissions and compensation of
$256,000. The plaintiff has not commenced litigation. The maximum exposure to
the Company and our CEO is approximately $520,000 for double damages plus
attorney's fees and costs. The Company believes that the claims made by the
plaintiff are inaccurate and false and plans to vigorously defend this suit. As
of November 30, 2009, we pledged 15,00,000 shares of Company common stock in
lieu of a prejudgment remedy that the Plaintiff had sought against the Company
and its Chief Executive Officer. Discussions are planned to resolve this
matter.
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company which has the patent
to the Trump Vodka bottle design filed a complaint against us in the U.S.
District Court, Southern District of New York for alleged breach of contract and
seeking $225,000 for alleged past due invoices and royalties. The Company filed
a counterclaim. The case was settled with Drinks agreeing to pay $10,000 per
month for 12 months commencing in February 2010 and an agreement for the Company
to receive a reduction in the gross royalty amount to be paid to Bruni based
upon usage amounts that would cap the companies fees at 50% of the prior
agreement.
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”) a company which provided
distribution services for us in several states filed a claim for damages against
us in Duval County Florida for alleged damages including breach of contract and
is seeking approximately $2 million in damages. It is the Company’s strong
opinion that the claim arose out of our termination of the agreements we had
with them for their nonperformance, nonpayment, failure of the plaintiff to
accurately report sales to the Company and their withholding of information
required by the agreements. The Company believes it asserted its right not to
extend credit beyond the capacity of Liquor Group to provide documentation of
sales and marketing or proof of the ability to pay for quantities of product
ordered in light on accumulated nonpayment of invoices. The Company filed a
counterclaim of $500,000 for damages against Liquor Group and has denied their
claimed breach of contract claim previously made against it. The Company
contends that it is owed money by Liquor Group under the agreements. Liquor
Group has not filed a response to the counterclaim for damages. Liquor Group has
until the end of September to submit the fee for its claim to proceed to
arbitration.
Other
than the above we believe that the Company is currently not subject to
litigation, which, in the opinion of our management, is likely to have a
material adverse effect on us.
Item
1A. Risk Factors
As a
“small reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide information required by this item.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
In August
2009, a consultant to the Company converted $307,981 of past due and future
consideration into 2,053,210 shares of Company stock.
In
connection with our June 2009 sale of our debenture, we allowed, three of the
investors in our Series A Preferred Stock, to convert an aggregate of $335,800
(335.8 shares) of our preferred stock into 3,358,000 shares of our common stock.
In addition, in August 2009 we allowed the two other holders of our Series A
Preferred Stock to convert an aggregate of $134,625 (134.6 shares) of our Series
A Preferred Stock into 1,200,000 shares of our common stock.
As of
August 17, 2009, we entered into a Preferred Stock Purchase Agreement (the
“Purchase Agreement”) with Optimus Capital Partners, LLC, d/b/a Optimus Special
Situations Capital Partners, LLC an unaffiliated investment fund (the “Fund”),
which provides that, upon the terms and subject to the conditions set forth
therein, the Fund is committed to purchase up to $5,000,000 of our Series B
Preferred Stock. Under the terms of the Purchase Agreement, from time to time
until August 16, 2011 and at our sole discretion, we may present the Fund with a
notice to purchase such Series B Preferred Stock (the “Notice”). The Fund is
obligated to purchase such Series B Preferred Stock on the tenth trading day
after the Notice date, subject to satisfaction of certain closing conditions.
The Fund will not be obligated to purchase the Series B Preferred Stock (i) in
the event the closing price of our common stock during the nine trading days
following delivery of a Notice falls below 75% of the closing price on the
trading day prior to the date such Notice is delivered to the Fund, or (ii) to
the extent such purchase would result in the Fund and its affiliates
beneficially owning more than 9.99% of our common stock. Our ability to send a
notice is also subject to certain conditions. Therefore, the actual amount of
the Fund’s investment is not certain.
In
connection with the Purchaser Agreement, we also issued to the Fund five-year
warrants to purchase 6,750,000 shares of our common stock at an exercise price
equal to the closing price of our common stock on the trading day prior to the
execution of the Purchase Agreement. The number of shares exercisable under the
warrant will be equal in value to 135% of the purchase price of the Series B
Preferred Stock to be issued in respect of the related Notice and the exercise
price of a corresponding number of shares is subject to adjustment to equal the
closing
bid price
of our common stock on the trading day preceding the Notice. Each warrant will
be exercisable on the earlier of (i) the date on which a registration statement
registering for resale the shares of common stock issuable upon exercise of such
warrant becomes effective and (ii) the date that is six months after the
issuance date of such warrant.
The
Series B Preferred Stock is redeemable at Registrant’s option on or after the
fifth anniversary of the date of its issuance. The Series B Preferred Stock also
has a liquidation preference per share equal to the original price per share
thereof plus all accrued dividends thereon, and is subject to repurchase by us
at the Fund’s election under certain circumstances, or following the
consummation of certain fundamental transactions by us, at the option of a
majority of the holders of the Series B Preferred Stock.
Holders
of Series B Preferred Stock will be entitled to receive dividends, which will
accrue in shares of Series B Preferred Stock on an annual basis at a rate equal
to 10% per annum from the issuance date. Accrued dividends will be payable upon
redemption of the Series B Preferred Stock. The Series B Preferred Stock ranks,
with respect to dividend rights and rights upon liquidation senior to our common
stock and our Series A Convertible Preferred Stock.
In a
concurrent transaction the Fund will borrow up to 10,000,000 shares of our
common stock from certain of our non-affiliated stockholders.
The
Series B Preferred Stock and warrants, and the shares common stock issuable upon
exercise of the warrants have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration
requirements.
Out of
the gross proceeds of this Offering, we are obligated to pay Source Capital
Group (the "Placement Agent") 10% of the amount we realize on the sale of the
Series B Preferred Stock. We will also issue to the Placement Agent, warrants to
acquire 5% of the shares of our Common Stock which we deliver on exercise of the
Warrants with an exercise price equal to the exercise price of the Warrants that
were exercised. (the "Placement Agent Warrants"), which warrants are exercisable
for a five year period, will contain cashless exercise provisions as well as
anti-dilution provisions in the case of stock splits and similar
matters.
As part
of our June 2009 sale of our debentures we issued warrants to purchase 2,500,000
shares of our common stock at an exercise price of $0.35 per share (the
“Investor Warrants”). The Investor Warrants contain full ratchet
anti-dilution provisions, as to the exercise price and are exercisable for a
five year period.
Item 3. Defaults
Upon Senior Securities
None
Item 4. Submission
of Matters to a Vote of Security Holders
None
Item 5. Other
Information
None
Item 6. Exhibits
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31.1
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Certification
of J. Patrick Kenny, President and Chief Executive
Officer
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32.1
|
Certification
of J. Patrick Kenny, President and Chief Executive Officer, pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned hereunto
duly authorized.
December
21, 2009
|
|
DRINKS
AMERICAS HOLDINGS, LTD.
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|
|
|
|
|
|
|
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By:
|
/s/
J. Patrick Kenny
|
|
|
|
J.
Patrick Kenny
President,
Chief Executive Officer and Chief Accounting Officer
|
|
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