NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(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 to beverage wholesalers throughout the United States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings" or the "Company "). Holdings and Drinks were incorporated in the State of Delaware on February 14, 2005 and September 24, 2002, respectively. On March 9, 2005 Holdings merged with Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were considered "shell" corporations, as Gourmet had no operating business on the date of the share exchange, or for the previous three years. Pursuant to the June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the Drinks' shareholders, Holdings, with approximately 16,232 shares of outstanding common stock, issued approximately 180,656 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, incorporated Drinks in Delaware on September 24, 2002, transferring all its shares of holdings to its members as part of a plan of liquidation.
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. During the year ended April 30, 2012, the Company reduced its ownership to 48% of Olifant recognizing a gain on disposal of product line of $280,478. In conjunction with the ownership reduction to 48%, the Company eliminated the remaining outstanding debt obligation of $600,000 and transitioned to the equity method of accounting.
Nature of Business
Through our wholly owned subsidiary, Drinks Americas Holdings, Inc. (“Drinks”), Drinks distributes and markets unique premium alcoholic beverages to beverage wholesalers throughout the United States and internationally.
In June of 2011, the Company entered into an agreement to license and distribute the brands of Worldwide Beverage Imports ("WBI") in the eastern United States with brands to include KAH Tequila, Agave 99, Ed Hardy Tequila, Mexicali Beer, Chili Beer and Red Pig ale as well as various other products produced and imported by Worldwide Beverage Imports in return for the shares in the Company that would be no greater than 49% of the Company.
On November 1, 2011, the Company amended its agreement with Worldwide Beverage Imports. The Company was granted worldwide distribution rights on both the spirits and beer products of WBI. In connection with the agreement, the Company agreed to issue 1,500,000 in additional restricted shares of common stock (the “Additional Shares”) to Worldwide at a purchase price of $0.50 per share in exchange for Worldwide forgiving a $300,000 loan owed by the Company to Worldwide and Worldwide delivering $1,200,000 in Inventory to the Company, the sale proceeds of which are to be contributed to the capital of the Company.
Upon the completion of the purchase of the Initial Issuance and the Additional Shares and until one (1) year from the date of the completion of the close of the transaction, the Company agreed not to issue any additional shares of the Company without prior written consent of the Purchaser, provided that the Company may issue certain exempt issuances without the prior written consent of the Purchaser in accordance with the terms of the Purchase Agreement.
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
As of January 31, 2013, the Company defaulted on its license agreement with WBI and subsequently WBI stopped shipping its KAH tequila products as of January 31, 2013.
As of February 15, 2013, the Company entered into a Beer brokerage agreement with WBI to distribute Rio Bravo and other future brands nationally. Rio Bravo is a craft brewed beer that meets the current growing demand for IPA’s and other highly sought after beer styles. Rio Bravo is one of the first craft brewed beers to be imported from Mexico.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the nine months ended January 31, 2013, are not necessarily indicative of the results that may be expected for the year ending April 30, 2013. These unaudited consolidated financial statements should be read in conjunction with the consolidated April 30, 2012 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.
The consolidated financial statements as of April 30, 2012 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.
The unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidary, Drinks Americas, Inc. (collectively, the "Company"). All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues when title passes to the customer, which is generally when products are shipped. The Company recognizes royalty revenue based on its license agreements with its distributors, which typically is the greater of either the guaranteed minimum royalties payable under our license agreement or a royalty rate computed on the net sales of the distributor shipments to its customers.
The Company recognizes revenue dilution from items such as product returns, inventory credits, discounts and other allowances in the period that such items are first expected to occur. The Company does not offer its clients the opportunity to return products for any reason other than manufacturing defects. In addition, the Company does not offer incentives to its customers to either acquire more products or maintain higher inventory levels of products than they would in the 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 the original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations at January 31, 2013 and April 30, 2012. The allowance for doubtful accounts was $0 and $138,491 at January 31, 2013 and April 30, 2012, respectively.
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
Inventories
Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold. During the nine months ended January 31, 2013, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.
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. During the nine months ended January 31, 2013, the Company recorded impairment losses of $5,193,355 and $102,345 for intangible assets and investment in equity investees, respectively.
Intangible Assets
The costs of intangible assets with determinable useful lives are amortized over their respective 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.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless, it is more likely than not, that such assets will be realized. The Company has recognized no adjustment for uncertain tax provisions.
Stock Based Compensation
The Company recognizes stock-based compensation in accordance with ASC Topic 718 “
Stock Compensation
”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
For non-employee stock-based compensation, we have adopted ASC Topic 505 “
Equity-Based Payments to Non-Employees
”, which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with ASC Topic 718.
The fair value of options to be granted are estimated on the date of each grant using the Black-Scholes option pricing model and amortized ratably over the option’s vesting periods, which approximates the service period.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the number of shares is increased to assume exercise of potentially dilutive and contingently issuable shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. For the three and nine months ended January 31, 2013 and 2012, the diluted earnings (loss) per share amounts equal basic earnings (loss) per share because the Company had net losses or the impact of the assumed exercise of contingently issuable shares would have been anti-dilutive.
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
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.
Fair Value
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for notes payable approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.
Recent accounting pronouncements
There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of January 31, 2013, the Company has a stockholders' deficit of $(16,404,154) and current liabilities exceeded current assets (working capital deficit) by $16,404,154 as of January 31, 2013. The Company has incurred significant operating losses and negative cash flows from operating activities since inception. For the nine months ended January 31, 2013, the Company sustained a net loss of $11,496,389 compared to a net loss of $547,479 for the nine months ended January 31, 2012 and used cash of approximately $948,676 in operating activities for the nine months ended January 31, 2013 compared with approximately $1,129,010 for the nine months ended January 31, 2012.
Our business plan includes increasing our sales from beverages and the issuance of additional equity securities of the Company for cash. If we are unable to implement our business plan or if we are delayed all or part of our business plan, our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be adversely affected.
The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
4. ACCOUNTS RECEIVABLE
Accounts Receivable as of January 31, 2013 and April 30, 2012 consist of the following:
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January 31,
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April 30,
2012
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DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
5. INVENTORY
Inventory as of January 31, 2013 and April 30, 2012 consist of the following:
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January 31,
2013
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April 30,
2012
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All raw materials used in the production of the Company's inventories are purchased by the Company and delivered to independent production contractors. During the nine months ended January 31, 2013, the Company ceased carrying inventory and ships directly from manufacturer/wholesaler to the customer.
6. OTHER CURRENT ASSETS
Other current assets as of January 31, 2013 and April 30, 2012 consist of the following:
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January 31,
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April 30,
2012
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Prepaid other are comprised of prepaid marketing fees, employee travel advances and expenses.
7. PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 2013 and April 30, 2012 consist of the following:
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Useful
Life
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January 31,
2013
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April 30,
2012
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Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 5 years.
Depreciation expense for the nine months ended January 31, 2013 and 2012 was $13,518 and $8,896, respectively.
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
8. INTANGIBLE ASSETS
Intangible assets include the acquisition costs of trademarks, license rights and distribution rights for the Company’s alcoholic beverages.
As of January 31, 2013 and April 30, 2012, intangible assets are comprised of the following:
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January 31,
2013
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April 30,
2012
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Trademark and license rights of Rheingold beer
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Worldwide Beverages agreement
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Other trademark and distribution rights
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Amortization expense for the nine months ended January 31, 2013 and 2012 was $0 and $44,109, respectively.
9. INVESTMENT IN EQUITY INVESTEES
Investment in equity investees represents the Company's investment in Old Whiskey Rivers and is recorded at fair value. During the nine months ended January 31, 2013, the Company recorded an impairment loss of $102,345 in the investment in equity investees.
10. INVESTOR NOTES PAYABLE
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.
On December 13, 2011, the Company and the Investor entered into a Forbearance Agreement (the “Forbearance Agreement”) whereby the Investor agreed to forbear from enforcing the Investor’s remedial rights under the Loan Documents until January 1, 2013 (the “Forbearance Agreement”). Pursuant to the Forbearance Agreement, the Debenture will remain in full force and effect and, as a result of certain defaults under the Loan Documents, the outstanding amount owed under the Debenture, including interest, fees, penalties and legal fees, was agreed to be no less than $2,000,000, with interest, fees and penalties continuing to accrue (the “Debenture Balance”). Notwithstanding the Debenture Balance, the Company and the Investor agreed to a payoff balance of $1,126,360 (the “Forbearance Amount”), which Forbearance Amount shall accrue interest at a rate of 8% per annum, commencing on December 13, 2011. So long as the Company complies with the terms of the Forbearance Agreement and no further defaults occur under the Loan Documents, the Company’s obligation will be entirely satisfied upon due payment of the Forbearance Amount in accordance with the following schedule of fixed cash payments:
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$285,360 upon execution of the Forbearance Agreement, which payment was made on December 13, 2011;
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$50,000 to be paid on or before March 1, 2012, which payment was made on February 27, 2012;
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$283,000 to be paid on or before June 1, 2012, which payment was made on May 31, 2012;
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$50,000 to be paid on or before September 1, 2012, which payment was made on September 6, 2012;
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$50,000 to be paid on or before November 1, 2012, which payment as of January 31, 2013 has not been made; and
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$408,000 plus all accrued and unpaid interest to be paid on or before January 1, 2013, which payment was not made (See Note 21).
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DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
On October 5, 2011 the Company paid the Investor $50,000 and shortly thereafter a final issuance of 77,280 shares of Common Stock which payment and issuance were credited to the Debenture Balance and the Forbearance Amount and were reflected in the amounts owed under the Debenture Balance and the Forbearance Amount.
In the event that the Company does not comply with all of its obligations or a default occurs under the Forbearance Agreement or the Loan Documents (a “Future Default”), the outstanding balance under the Debenture will be deemed to be the Debenture Balance with all accrued interest, fees and penalties, less any payments made in accordance with the payment schedule. In the event of a Future Default, the Investor will have a right to convert all or part of the Debenture Balance for shares of Common Stock. Accordingly, the Company agreed to reserve 400,000 shares of Common Stock for issuance to the lender upon such conversion. In addition, the Company entered into an Escrow Agreement whereby the Company agreed to deliver 400,000 shares (the “Forbearance Conversion Shares”) to be held in escrow. In the event of certain defaults under the Forbearance Agreement or the Debenture, the Investor will have the right to receive the Forbearance Conversion Shares, which right was memorialized in that certain letter containing Irrevocable Instructions to Transfer Agent dated December 13, 2011. Pursuant to the Forbearance Agreement, the Company also consented to a Judgment by Confession whereby the Company agreed to allow a court of proper jurisdiction to enter a Judgment against the Company in favor of the Investor.
The Company failed to make its payment of $408,000 due January 1, 2013. As a result, the Company received a default notice on January 15, 2013, and currently in negotiations with the Investor to remedy any defaults.
11. LINE OF CREDIT, RELATED PARTY
As of January 31, 2013 and April 30, 2012, the Company has outstanding $785,945 and $215,946 on a $660,000 line of credit, unsecured at 15% per annum and due upon demand, respectively. The line of credit is provided by a current note holder and a former director of the Company.
12. CONVERTIBLE DEBENTURE
On October 12, 2012, the Company issued a convertible debenture for total cash proceeds of $250,000 and a face value of $325,000. The face value of $325,000, which includes all principal and interest, is due in full on January 15, 2013. The debenture is convertible, at the option of the holder, into shares of common stock of the Company at a fixed conversion price of $0.50 and is secured under the terms of the Security Interest and Pledge Agreement. The convertible debenture was converted at a 38% discount to market through the issuance of 2,000,000 shares of common stock on January 17, 2013, for a fair value of $180,000. This debenture has been satisfied in full.
On November 1, 2012, the Company issued, in lieu of cash payment for past due accounts payables equal to $1,630,000, two convertible debentures to Worldwide Beverage Imports in the aggregate principal amount of $1,630,000 (the “WBI Debentures”). On January 31, 2013, the Company and WBI memorialized their agreement to cancel $1,630,000 of past due accounts payable owed to WBI in exchange for the issuance of the WBI Debentures. The WBI Debentures accrue interest at 8% per annum. The WBI Debentures, which includes all principal and interest, are due in full on May 1, 2013. The WBI Debentures are convertible, at the option of the holder, into shares of common stock of the Company at the lesser of (i) the closing price of the Company’s common stock on November 1, 2012; or (ii) the closing price of the Company’s common stock on the date immediately prior to the date the holder of the WBI Debentures requests their conversion. However, in the event of a default under the WBI Debentures, the WBI Debentures will be convertible at a 38% discount to market. The WBI Debentures are currently in default.
DRINKS AMERICAS HOLDINGS, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2013
(Unaudited)
13. NOTES AND LOANS PAYABLE
Notes and loans payable as of January 31, 2013 and April 30, 2011 consisted of the following:
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January 31,
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April 30,
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(a)
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On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President of Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At January 31, 2013, the Company accrued interest payable of $15,960.
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(b)
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In December 2011, in connection with the settlement of accrued but unpaid salary compensation due to an ex-employee, we agreed to a payment plan containing fourteen payments with the final payment due September 1, 2012 for a total of $140,000. Balance due under this agreement as of January 31, 2013 and April 30, 2012 was $27,500 and $55,000, respectively.
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(c)
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$280,000 prior quarter adjustments to accommodate advances.
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