Attached files
| file | filename |
|---|---|
| EX-31.2 - DRINKS AMERICAS HOLDINGS, LTD | v196997_ex31-2.htm |
| EX-32.1 - DRINKS AMERICAS HOLDINGS, LTD | v196997_ex32-1.htm |
| EX-31.1 - DRINKS AMERICAS HOLDINGS, LTD | v196997_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
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x
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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 July 31, 2010
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OR
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¨
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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)
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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
Suite
163
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||
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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 ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
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¨
Large accelerated filer
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¨
Accelerated filer
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¨
Non-accelerated filer
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x
Smaller reporting company
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(Do not check if smaller reporting
company)
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
¨
No x
As of
September 3, 2010, the number of shares outstanding of the registrant’s common
stock, $0.001 par value, was 394,610,278.
DRINKS
AMERICAS HOLDINGS, LTD. AND AFFILIATES
FORM10-Q
FOR
THE QUARTER ENDED JULY 31, 2010
TABLE
OF CONTENTS
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Page
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|||
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PART
I – FINANCIAL INFORMATION
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Item
1.
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Financial
Statements:
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F-1
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Consolidated
Balance Sheets (unaudited)
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F-1
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||
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Consolidated
Statements of Operations (unaudited)
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F-2
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||
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Consolidated
Statements of Cash Flows (unaudited)
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F-3
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||
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Notes
to Consolidated Financial Statements
(unaudited)
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F-4
- F-22
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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3
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Item
3.
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Quantitative
and Qualitative Disclosures about Market Risk
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6
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Item
4.
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Controls
and Procedures
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6
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PART
II – OTHER INFORMATION
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|||
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Item
1.
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Legal
Proceedings
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7
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Item
1A.
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Risk
Factors
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8
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
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8
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Item
3.
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Defaults
Upon Senior Securities
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8
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Item
4.
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(Removed
and Reserved)
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8
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Item
5.
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Other
Information
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8
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Item
6.
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Exhibits
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8
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SIGNATURES
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9
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2
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
Consolidated
Balance Sheets
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JULY 31,
2010
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APRIL 30,
2010
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|||||||
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(Unaudited)
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||||||||
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Assets
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||||||||
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Current
assets:
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||||||||
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Cash
and equivalents
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$
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3,286
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$
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203,552
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||||
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Accounts
receivable, net of allowance for doubtful accounts of $127,846 for
the period ended July 31, 2010 and April 30, 2010
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110,788
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66,346
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||||||
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Inventories,
net of allowances
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162,190
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222,608
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||||||
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Other
current assets
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51,322
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19,789
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||||||
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Total
current assets
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327,586
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512,295
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||||||
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Property
and equipment, net of accumulated depreciation
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26,432
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32,309
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||||||
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Investment
in equity investees
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73,593
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73,593
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||||||
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Intangible
assets, net of accumulated amortization
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1,929,529
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1,971,300
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||||||
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Deferred
loan costs, net of accumulated amortization
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555,156
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437,973
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||||||
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Other
assets
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58,710
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85,735
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||||||
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$
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2,971,006
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$
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3,113,205
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|||||
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Liabilities and Shareholders'
Deficiency
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||||||||
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Accounts
payable
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$
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2,162,816
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$
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2,199,665
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||||
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Accrued
expenses
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2,849,854
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2,744,058
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||||||
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Short – term
debt, net of long – term portion
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432,760
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437,196
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||||||
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Loan
payable – related party
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87,735
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154,670
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||||||
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Deferred
revenue
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42,485
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63,730
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||||||
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Total
current liabilities
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5,575,650
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5,599,319
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||||||
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Long-term
debt, net of current portion
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400,000
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400,000
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||||||
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Total
liabilities
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5,975,650
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5,999,319
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||||||
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Commitments
and Contingencies
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||||||||
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Shareholders'
deficiency:
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||||||||
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Preferred
stock, $0.001 par value; 1,000,000 shares authorized:
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||||||||
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Series
A Convertible: $0.001 par value; 10,544 shares issued and
outstanding at July 31, 2010 and April 30, 2010
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11
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11
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||||||
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Series
B: $10,000 par value; 13.837 issued and outstanding, at July 31, 2010
and April 30, 2010
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138,370
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138,370
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||||||
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Common
stock, $0.001 par value; 500,000,000 and 100,000,000, respectively,
authorized; issued and outstanding 357,386,000 shares and
283,091,000 shares at July 31, 2010 and April 30, 2010
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357,386
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283,091
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||||||
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Treasury
stock, 11,075,000 and 26,075,000 shares held at July 31, 2010
and April 30, 2010
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—
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—
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||||||
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Additional
paid-in capital
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40,555,322
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39,847,477
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||||||
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Accumulated
deficit
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(44,116,035
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)
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(43,217,597
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)
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||||
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Total
shareholders' deficiency
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(3,064,946
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)
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(2,948,648
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)
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||||
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Non-controlling
Interests
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60,302
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62,534
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||||||
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Total
deficiency
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(3,004,644
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)
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(2,886,114
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)
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||||
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$
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2,971,006
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$
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3,113,205
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|||||
See notes
to consolidated financial statements
F-1
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
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THREE MONTHS ENDED JULY 31,
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||||||||
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2010
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2009
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|||||||
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Net
sales
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$
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102,256
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$
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433,972
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||||
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Cost
of sales
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97,919
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305,907
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||||||
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Gross
margin
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4,337
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128,065
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||||||
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Selling,
general & administrative expenses
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640,170
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1,623,617
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||||||
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Loss
from operations
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(635,833
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)
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(1,495,552
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)
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||||
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Interest
expense
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(264,837
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)
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(437,705
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)
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||||
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Net
loss before non-controlling interests
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$
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(900,670
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)
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$
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(1,933,257
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)
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||
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Net income
attributable to non controlling interests
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2,232
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56,931
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||||||
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Net
loss attributable to shareholders
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$
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(898,438
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)
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$
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(1,876,326
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)
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||
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Net
loss per share (basic and diluted)
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$
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(0.00
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)
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$
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(0.02
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)
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||
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Weighted
average number of common shares (basic and diluted)
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323,390,267
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90,232,045
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||||||
See notes
to consolidated financial statements
F-2
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
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THREE MONTHS ENDED JULY 31,
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||||||||
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2010
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2009
|
|||||||
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Cash
Flows From Operating Activities:
|
||||||||
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Net
Loss
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$ | (898,438 | ) | $ | (1,876,326 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
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Depreciation
and amortization
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47,648 | 376,890 | ||||||
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Allowance
for doubtful accounts
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— | 41,981 | ||||||
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Stock
compensation
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123,926 | 61,545 | ||||||
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Increase
in deferred loan costs, net
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425,017 | — | ||||||
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Non-controlling
interest in loss of consolidated subsidiary
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(2,232 | ) | (56,931 | ) | ||||
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Accounts
payable settlements
|
116,013 | — | ||||||
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Changes
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(44,442 | ) | (327,252 | ) | ||||
|
Due
from factor
|
— | 2,559 | ||||||
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Inventories
|
60,419 | 163,722 | ||||||
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Other
current assets
|
(31,533 | ) | 208,439 | |||||
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Other
assets
|
27,025 | 111,524 | ||||||
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Accounts
payable
|
(36,849 | ) | 198,056 | |||||
|
Accrued
expenses
|
105,796 | 644,494 | ||||||
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Deferred
revenue
|
(21,245 | ) | — | |||||
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Net
cash used in operating activities
|
(128,894 | ) | (451,299 | ) | ||||
|
Cash
Flows From Financing Activities:
|
||||||||
|
Proceeds
from debt
|
— | 534,619 | ||||||
|
Repayment
of debt
|
(71,372 | ) | (147,535 | ) | ||||
|
Increase
in working capital facility
|
— | 48,637 | ||||||
|
Net
cash (used in) provided by financing activities
|
(71,372 | ) | 435,721 | |||||
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Net
decrease in cash and equivalents
|
(200,266 | ) | (15,578 | ) | ||||
|
Cash
and equivalents at beginning of period
|
203,552 | 30,169 | ||||||
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Cash
and equivalents at end of period
|
$ | 3,286 | $ | 14,591 | ||||
|
Supplemental
disclosure of non-cash investing and financing
transactions:
|
||||||||
|
Increase
in other current assets, other assets and additional paid in
capital equal to the value of stock and warrants
issued
|
$ | — | $ | 210,000 | ||||
|
Accrued
interest capitalized to debt principal
|
$ | 3,387 | $ | 9,149 | ||||
|
Payment
of accounts payable and accrued expenses with shares of common
stock
|
$ | 116,013 | $ | 170,000 | ||||
|
Payments
of notes by issuance of common stock
|
$ | — | $ | 450,000 | ||||
|
Increase
in other current assets equal to increase in notes payable
|
$ | — | $ | 100,000 | ||||
|
Increase
in deferred charges equal to decrease in note receivable,
net
|
$ | 542,200 | $ | 535,404 | ||||
|
Increase
in note receivable equal to increase in note payable
|
$ | — | $ | 2,625,000 | ||||
|
Supplemental disclosure of cash flow
information:
|
||||||||
|
Interest
paid
|
$ | — | $ | 533 | ||||
See notes
to consolidated financial statements
F-3
DRINKS
AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation and Nature of Business
Description
of Business
Drinks
Americas Holdings, Ltd,. (the “Company” and / or “Holdings”) through our
majority-owned subsidiaries, Drinks Americas, Inc., Maxmillian Mixers, LLC,
Maxmillian Partners, LLC., Drinks Global Imports, LLC, DT Drinks, LLC,
and Olifant U.S.A., Inc. (as of January 15, 2009) import, distribute
and market unique premium wine and spirits and alcoholic
beverages associated with icon entertainers, celebrities and destinations,
to beverage wholesalers throughout the United States and
internationally.
On
February 11, 2010, the Company signed an agreement with Mexcor, Inc.,
("Mexcor") an importer and distributor for hundreds of high quality brands
nationally and internationally. Mexcor has agreed to manage the sourcing,
importing and distribution of our portfolio of brands nationally. Our Company
will continue to focus its efforts on its core business of marketing and
building a portfolio of iconic brands as well as developing, coordinating and
executing marketing and promotional strategies for its icon brands. We
anticipate that the agreement with Mexcor will rapidly drive additional royalty
revenues and substantially reduce our overhead costs.
Under the
terms of the agreement, the parties have agreed to a 15-year term. Additionally,
the Company has agreed to issue the principal of the business 12 million shares
of Company common stock in exchange for consulting services. Mexcor is
eligible to receive financial incentives provided the parties deliver and attain
certain minimum performance requirements. Mexcor has agreed to
deliver additional new brands to the Company’s brand portfolio, which the
Companies plan to jointly acquire, develop and market.
As a
result of the overhead reductions we initiated in the second quarter of fiscal
2010, our selling, general and administrative expenses for the year ended April
30, 2010 of approximately $3,874,000 reflect a substantial reduction of 32% or
$1,846,000 compared to $5,720,000 for the year ended April 30,
2009. The fiscal year 2010 decrease in selling, general and
administrative expenses is predominately due to our decision to reduce our
operating expenses and thereby sustain our limited working capital. The overhead
reductions resulted in lower payroll and payroll related and travel expenses.
Additionally, our agreement with Mexcor resulted in our ability to transfer of
our field sales force and its associated sales commission costs and travel
expenses to Mexcor. The reduction in selling, general and administrative
expenses continues to benefit our current quarter as selling, general and
administrative expenses for the three months ended July 31, 2010 were
approximately $640,000 or approximately $984,000 or 61% lower than selling,
general and administrative expenses of approximately $1,624,000 for the three
months ended July 31, 2009.
Basis
of Presentation
The
following unaudited interim consolidated financial statements of the Company for
the three months ended July 31, 2010 and 2009 have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
(“GAAP”) have been condensed or omitted pursuant to GAAP for interim financial
information and SEC rules and regulations, although the Company believes that
the disclosures made are adequate to make the information not misleading. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended April 30, 2010. In the
opinion of management, such consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company’s results for the interim periods presented. The results of
operations for the three months ended July 31, 2010 are not necessarily
indicative of the results for the full fiscal year or any future
periods
F-4
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying consolidated balance sheets as of July 31, 2010 and
2009, and the consolidated results of operations, consolidated changes in
shareholders’ deficiency and the consolidated cash flows for the three months
ended July 31, 2010 and 2009 reflect Holdings and its majority-owned
subsidiaries (collectively, the "Company"). All intercompany transactions and
balances in these financial statements have been eliminated in consolidation.
The amounts of common and preferred shares authorized, issued and outstanding as
of July 31, 2010 and 2009 are those of Holdings.
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 July
31, 2010, the Company has a shareholders' deficiency of approximately $3,064,946
applicable to controlling interest compared with $2,948,648 applicable to
controlling interest for at April 30, 2010, and has incurred
significant operating losses and negative cash flows since inception. For the
three months ended July 31, 2010, the Company sustained a net loss of
approximately $898,000 compared to a net loss of $1,876,000 for the
three months ended July 31, 2009 and used cash of approximately $129,000 in
operating activities for the three months ended July 31, 2010 compared with
approximately $451,000 for the three months ended July 31, 2009.
We will need additional financing which may take the form of equity or debt and
we have converted certain liabilities into equity. We anticipate that
increased sales revenues from our newly launched Rheingold
Beer product line and our Mexcor Agreement will contribute
to improving our cash flow and providing additional liquidity from
operations.. In the event we are not able to increase our working
capital, we will not be able to implement or may be required to delay all or
part of our business plan, and our ability to attain profitable operations,
generate positive cash flows from operating and investing activities and
materially expand the business will be materially adversely affected. The
accompanying consolidated financial statements do not include any adjustments
relating to the classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
Revenue
Recognition
The
Company recognizes revenues when title passes to the customer, which is
generally, when products are shipped. The Company recognizes royalty revenue
based on its license agreements with its distributors, which typically is the
greater of either the guaranteed minimum royalties payable under our license
agreement or a royalty rate computed on the net sales of the distributor
shipments to its customers.
The
Company recognizes revenue dilution from items such as product returns,
inventory credits, discounts and other allowances in the period that such items
are first expected to occur. The Company does not offer its clients the
opportunity to return products for any reason other than manufacturing defects.
In addition, the Company does not offer incentives to its customers to either
acquire more products or maintain higher inventory levels of products than they
would in ordinary course of business. The Company assesses levels of inventory
maintained by its customers through communications with them. Furthermore, it is
the Company's policy to accrue for material post-shipment obligations and
customer incentives in the period the related revenue is
recognized.
Accounts
Receivable
Accounts
receivable are recorded at original invoice amount less an allowance for
uncollectible accounts that management believes will be adequate to absorb
estimated losses on existing balances. Management estimates the allowance based
on collectability of accounts receivable and prior bad debt experience. Accounts
receivable balances are written off upon management's determination that such
accounts are uncollectible. Recoveries of accounts receivable previously written
off are recorded when received. Management believes that credit risks on
accounts receivable will not be material to the financial position of the
Company or results of operations at July 31, 2010 and 2009,
respectively.
Inventories
Inventories
are valued at the lower of cost or market, using the first-in first-out cost
method. The Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of the
Company’s forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analysis and
assumptions including, but not limited to, historical usage, expected future
demand and market requirements. A change to the carrying value of inventories is
recorded to cost of goods sold.
F-5
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amounts of such assets may not be
recoverable. The Company's policy is to record an impairment loss at each
balance sheet date when it is determined that the carrying amount may not be
recoverable. Recoverability of these assets is based on undiscounted future cash
flows of the related asset. For the year ended April 30, 2010 , the Company
determined that based on estimated future cash flows, the carrying amount of our
Rheingold license rights exceeded its fair value by $90,000, and accordingly,
recognized an impairment loss of $90,000. For the three months ended July 31,
2010, the Company concluded that there was no impairment as the Company has
actively invested in the Rheingold license and launched Rheingold Beer with
shipments into the Metro New York market in August 2010.
Deferred
Charges and Intangible Assets
The costs
of intangible assets with determinable useful lives are amortized over their
respectful useful lives and reviewed for impairment when circumstances warrant.
Intangible assets that have an indefinite useful life are not amortized until
such useful life is determined to be no longer indefinite. Evaluation of the
remaining useful life of an intangible asset that is not being amortized must be
completed each reporting period to determine whether events and circumstances
continue to support an indefinite useful life. Indefinite-lived intangible
assets must be tested for impairment at least annually, or more frequently if
warranted. Intangible assets with finite lives are generally amortized on a
straight line bases over the estimated period benefited. The costs of trademarks
and product distribution rights are amortized over their related useful lives of
between 15 to 40 years. We review our intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets may not
be recoverable, in which case an impairment charge is recognized
currently. Management has examined our annual impairment evaluation and
the results of our tests indicate that there was no impairment for the
three months ended July 31, 2010. Deferred financing costs are amortized ratably
over the life of the related debt. If debt is retired early, the related
unamortized deferred financing costs are written-off in the period debt is
retired.
Income
Taxes
The
Company accounts for income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
basis. The effect on deferred tax assets and liabilities of a
change in tax laws is recognized in the results of operations in the period the
new laws are enacted. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets unless, it is more likely
than not, that such assets will be realized. The Company has recognized
no adjustment for uncertain tax provisions. As of July
31, 2010, the consolidated net operating loss carry forward available to offset
future years’ taxable income is in excess of approximately $34,900,000 expiring
in various years through 2030.
Stock
Based Compensation
The
Company accounts for stock-based compensation using the modified prospective
approach. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity based compensation issued to
employees and non-employees.
F-6
Earnings
(Loss) Per Share
The
Company computes earnings (loss) per share whereby basic earnings (loss) per
share is computed by dividing net income (loss) attributable to all classes of
common shareholders by the weighted average number of shares of all classes of
common stock outstanding during the applicable period. Diluted earnings (loss)
per share is determined in the same manner as basic earnings (loss) per share
except that the number of shares is increased to assume exercise of potentially
dilutive and contingently issuable shares using the treasury stock method,
unless the effect of such increase would be anti-dilutive. For the periods ended
July 31, 2010 and 2009, the diluted earnings per (loss) share amounts
equal basic earnings (loss) per share because the Company had net losses and the
impact of the assumed exercise of contingently issuable shares would have been
anti-dilutive.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recent
accounting pronouncements
On
September 15, 2010, the Securities and Exchange Commission (“SEC”) published
Release Nos. 33-9142 and 34-62914: “Internal Control Over Financial Reporting in
Exchange Act Periodic Reports of Non-Accelerated Filers”
The
SEC adopted amendments to its rules and forms to conform them to Section 404(c)
of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as added by
Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Section 404(c) provided that Section 404(b) of the Sarbanes-Oxley Act
shall not apply with respect to any audit report prepared for an issuer that is
neither an accelerated filer nor a large accelerated filer as defined in Rule
12b-2 under the Securities Act of 1934.
3.
Accounts Receivable
Accounts
Receivable as of July 31, 2010 and April 30, 2010, consist of the
following:
|
July
31,
|
April 30,
|
|||||||
|
2010
|
2010
|
|||||||
|
Accounts
receivable
|
$
|
238,634
|
$
|
194,192
|
||||
|
Allowances
|
(127,846
|
)
|
(127,846
|
)
|
||||
|
$
|
110,788
|
$
|
66,346
|
|||||
F-7
Inventories
as of July 31, 2010 and April 30, 2010 consist of the following:
|
|
|
July 31, 2010
|
|
|
April 30, 2010
|
|||
|
Finished
goods
|
$
|
74,644
|
$
|
135,062
|
||||
|
Raw
materials
|
87,546
|
87,546
|
||||||
|
$
|
162,190
|
$
|
222,608
|
|||||
All raw
materials used in the production of the Company's inventories are purchased by
the Company and delivered to independent production contractors.
5.
Other Current Assets
Other
Current Assets as of July 31, 2010 and April 30, 2010 consist of the
following:
|
|
July 31, 2010
|
April 30, 2010
|
||||||
|
Employee
advances
|
$ | 13,686 | $ |
—
|
||||
|
Prepaid
Other
|
37,636 | 19,789 | ||||||
| $ | 51,322 | $ | 19,789 | |||||
Prepaid
other are comprised of prepaid marketing fees, employee travel advances and
expenses.
6.
Property and Equipment
Property
and equipment as of July 31, 2010 and April 30, 2010 consist of the
following:
|
Useful
|
||||||||||
|
Life
|
2010
|
2010
|
||||||||
|
Computer
equipment
|
5
years
|
$
|
23,939
|
$
|
23,939
|
|||||
|
Furniture
& fixtures
|
5
years
|
10,654
|
10,654
|
|||||||
|
Automobiles
|
5
years
|
68,337
|
68,337
|
|||||||
|
Leasehold
Improvements
|
5
years
|
66,259
|
66,259
|
|||||||
|
Production
molds & tools
|
5
years
|
122,449
|
122,449
|
|||||||
|
291,638
|
291,638
|
|||||||||
|
Accumulated
depreciation
|
(265,206
|
)
|
(259,329
|
)
|
||||||
|
$
|
26,432
|
$
|
32,309
|
|||||||
Depreciation
expense for the three months ended July 31, 2010 and for the year ended April
30, 2010 was $5,877 and $26,591, respectively.
F-8
7.
Intangible Assets
Intangible
assets include the acquisition costs of trademarks, license rights and
distribution rights for the Company’s alcoholic beverages.
As of
July 31, 2010 and April 30, 2010, intangible assets are comprised of the
following:
|
July 31, 2010
|
April 30, 2010
|
|||||||
|
Trademark
& distribution rights of Olifant vodka acquisition
|
$
|
1,333,333
|
$
|
1,333,333
|
||||
|
Trademark
and license rights of Rheingold beer
|
230,000
|
230,000
|
||||||
|
Mexcor
agreement
|
240,000
|
240,000
|
||||||
|
Other
trademark and distribution rights
|
575,000
|
575,000
|
||||||
|
2,378,333
|
2,378,333
|
|||||||
|
Accumulated
amortization
|
(448,804
|
)
|
(407,033
|
)
|
||||
|
$
|
1,929,529
|
$
|
1,971,300
|
|||||
Amortization expense for the three
months ended July 31, 2010 and for the year ended April 30, 2010 was $41,771 and
$161,350, respectively.
8.
Note receivable
On June
19, 2009, (the "Closing Date") we sold to one investor (the “Investor”) a
$4,000,000 non-interest bearing debenture with a 25% ($1,000,000) original issue
discount, that matures in 48 months from the Closing Date (the Drink’s
Debenture) for $3,000,000, consisting of $375,000 paid in cash at closing and
eleven secured promissory notes, aggregating $2,625,000, bearing interest at the
rate of 5% per annum, each maturing 50 months after the Closing Date (the
“Investor Notes”). The Investor Notes, the first ten of which are in
the principal amount of $250,000 and the last of which is in the principal
amount of $125,000, are mandatorily pre-payable, in sequence, at the rate
of one note per month commencing on January 19, 2010, subject to certain
contingencies. 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, 2010 and be
reduced at the rate of $333,334 per month thereafter. Due to the uncertainty of
the mandatory prepayments by the Investor, the note receivable has been
classified as a long term asset as of July 31, 2010 and April 30,
2010.
One of
the Triggering Events includes the failure of the Company to maintain an average
daily dollar volume of common stock traded per day for any consecutive 10-day
period of at least $10,000 or if the average value of the shares pledged to
secure the Company’s obligation under the Drinks Debenture (as subsequently
described) falls below $1,600,000.
Under the
Drinks Debenture, commencing six months after the Closing Date, the Investor may
request the Company to repay all or a portion of the Drinks Debenture by issuing
the Company’s common stock, $0.001 par value, in satisfaction of all or part of
the Drinks Debenture, valued at the Market Price, (as defined in the Drinks
Debenture), of Drink’s common stock at the time the request is made
(collectively, the “Share Repayment Requests”). The Investor’s may
not request repayment in common stock if, at the time of the request, the amount
requested would be higher than the difference between the outstanding balance
owed under the Drinks Debenture and 125% of the aggregate amount owed under the
Investor Note.
F-9
The
Company may prepay all or part of the Drinks Debenture upon 10-days prior
written notice and are entitled to satisfy a portion of the amount outstanding
under the debenture by offset of an amount equal to 125% of the amount owed
under the Investor Notes, which amount will satisfy a corresponding portion of
the Drinks Debenture.
Also as
part of this financing, the Investor acquired warrants to purchase 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.
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. It was
subsequently agreed with the lead investor that the Company would not be
required to issue shares of our common stock for debt or employee
compensation.
Out of
the gross proceeds of this Offering, the Company paid the placement agent
$37,500 in commissions and we are obligated to pay the placement agent 10% of
the principal balance of the Investor Notes when each note is paid. We will also
issue to the Placement Agent, warrants to acquire 5% of the shares of our Common
Stock which we deliver in response to Share Repayment Requests, at an exercise
price equal to the Market Price related to the shares delivered in response to
the Share Repayment Request (the "Placement Agent Warrants"), which warrants are
exercisable for a five year period, will contain cashless exercise provisions as
well as anti-dilution provisions in the case of stock splits and similar
matters.
In March
2010, the Company delivered to the Placement Agent, in aggregate, 4,674,126
Placement Agent Warrants as follows: effective February 24, 2010, a warrant to
purchase 425,000 shares of Company common stock at an exercise price of
$0.01594; effective February 11, 2010, a warrant to purchase 2,000,000 shares of
Company common stock at an exercise price of $0.001; effective January 15, 2010,
a warrant to purchase 1,000,000 shares of Company common stock at an exercise
price of $0.00625; effective December 30, 2009, a warrant to purchase 681,818
shares of Company common stock at an exercise price of $0.01375; effective
August 28, 2009, a warrant to purchase 192,308 shares of Company common stock at
an exercise price of $0.065; effective June 19, 2009, a warrant to purchase
250,000 shares of Company common stock at an exercise price of $0.09375; and,
effective June 19, 2009, a warrant to purchase 125,000 shares of Company common
stock at an exercise price of $0.4375. The fair value, taken together, of the
warrants determined using Black-Scholes valuation model was determined to be
$101,864 at the dates of grant and is recorded as deferred financing costs a
long-term asset on the balance sheet and additional paid in capital. The
warrants are being amortized over 5 years. As of July 31, 2010 and April 30,
2010, $5,135 and $10,172 has been expensed.
Our CEO
has guaranteed our obligations under the Drinks Debenture in an amount not to
exceed the lesser of (i) $375,000 or (ii) the outstanding balance owed under the
Drinks Debenture. In addition, the Company, our CEO, COO, and three
other members of our Board of Directors, either directly, or through entities
they control, pledged an aggregate of 12,003,720 shares of our common stock (of
which 3,000,000 was pledged by the Company) to secure our obligations under the
Drinks Debenture (the “Pledged Shares”). As a direct result of the guarantees
and shares of common stock provided by the above individuals, the Company agreed
to issue shares of common stock totaling 4,501,860 with an estimated fair value
totaling $675,279. The estimated fair value of the stock commitment
was accounted for as a deferred loan cost and a contribution to capital (due to
shareholders), with deferred loan costs being amortized ratably over 48
months.
F-10
On July
14, 2009, the value of the Pledged Shares fell below the required amount and
consequently the Investor delivered a notice of default to the
Company. On August 31, 2009, the Investor and the Company agreed to the First
Amendment to the Drink’s Debenture, which waived the default. Pursuant to the
First Amendment, the outstanding balance of the debenture was increased by
$400,000 and the debenture will carry an interest rate of 12% per
annum. In addition, a member of the Company’s board of directors
pledged 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.
In
response to the default, the Investor transferred 2,523,645 shares of the
non-Company Pledged Shares into its own name in order to commence sale thereof
to satisfy payment of the Drinks Debenture. Accordingly and upon the Company’s
request, the Investor agreed to waive its right under an Event of Default. The
value of the 2,523,645 shares on the date transferred to the Investor aggregated
$378,547 which when sold by the Investor will reduce the balance of the Drinks
Debenture. The aggregate value of $378,547 of the shares transferred
has been accounted for as a reduction of the Drinks Debenture with a
corresponding increase to additional paid-in capital.
In
addition, as a result of the default, 3,000,000 of the Company shares having an
aggregate value of $450,000 that were issued in July, 2009 were transferred
to the Investor.
F-11
As a
result of the depletion of the non-Company pledged shares, the Company agreed to
issue and did issue in November 2009 and January 2010 an aggregate 18,005,590
shares of Company common stock to the individuals at a fair market value of
$720,224, or $0.04 per share. Included in the total shares is
4,501,860 shares, which represent satisfaction of the original share commitment
to the individuals at the inception of the Debenture agreement (see paragraph
above). The difference in the fair value of the 4,501,860 issued
shares and the original estimated fair value of these shares in July
2009, reduced, as of November 2009 deferred loan costs as originally
recorded, additional paid-in capital, and the related accumulated loan cost
amortization
At July
31, 2010, offsetting of the Drinks Debenture of $2,360,953 was unamortized
Debenture debt discount of $1,127,125 and investor notes receivable of
$1,220,254 and deferred loan costs of $568,730 resulting in a net asset of
deferred loan costs balance of $555,156, which balance has been reflected as a
non-current asset in the accompanying consolidated balance sheet. At
April 30, 2010, offsetting of the Drinks Debenture of $2,835,953 was unamortized
Debenture debt discount of $1,319,938 and investor notes receivable of
$1,444,836 and deferred loan costs of $605,559 resulting in a net asset of
deferred loan costs balance of $437,973, which balance has been reflected as a
non-current asset in the accompanying consolidated balance sheet.
9.
Other long-term assets
In August
2008, the Company entered into a three-year agreement with an unrelated entity
to provide marketing and promotional services for the Company. Under
the terms of the agreement, as consideration for the services to be provided,
the Company is to issue warrants to purchase an aggregate of 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 was being
amortized over the three-year benefit period. At of July 31, 2010 and April 30,
2010 the warrants were fully amortized. As of July 31, 2010 and April 30, 2010,
a warrant to purchase an aggregate of 275,000 shares of Company stock was issued
and the balance of 75,000 remains to be issued.
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 July 31, 2010 and April 30, 2010, the unamortized balance of these
warrants was $-0- and $16,494, respectively. In addition, the
Company has agreed to issue, as partial consideration for monthly consulting
services, to a principal of one of the entities involved in the endorsement
agreement, warrants to purchase 3,000 shares of the Company’s common stock per
month at the monthly average market price. At April 30, 2010, warrants to
purchase 108,000 shares of the Company’s stock accrued under this
agreement, of which a warrant for 54,000 shares was 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. As of
July 31, 2010 and April 30, 2010, the agreement was terminated and the balance
of 54,000 shares will not be issued.
F-12
10.
Notes and Loans Payable
Notes and
Loans Payable as of April 30, 2010 and 2009 consisted of the
following:
|
|
April 30, 2010
|
April 30, 2009
|
||||||
|
Convertible
note(a)
|
$
|
100,000
|
$
|
100,000
|
||||
|
Olifant
note(b)
|
695,260
|
695,260
|
||||||
|
Other
(c)
|
37,500
|
41,938
|
||||||
|
832,760
|
837,198
|
|||||||
|
Less
current portion
|
432,760
|
437,198
|
||||||
|
Long-term
portion
|
$
|
400,000
|
$
|
400,000
|
||||
|
(a)
|
In October 2006, the Company
borrowed $250,000 and issued a convertible promissory note in like amount.
The Company originally extended the due date of the loan to October 2008
from October 2007 in accordance with the terms of the original note
agreement. On March 1, 2009, the note was amended to extend the due date
to October 18, 2009. As of March 1, 2009, the principal amount of the
amended note is $286,623, which includes the original $250,000 of
principal plus accrued and unpaid interest of 36,623 as of March 1, 2009.
The amended note is convertible into shares of our common stock at $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. At of July 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.
|
On August
4, 2009 and on September 29, 2009, the Company issued the note-holder 200,000
and 400,000 shares of its common stock, respectively as payment of interest on
the note with values of $28,000 and $32,000, respectively. In addition, as
consideration for extending the note the Company issued the lender 286,623
shares of Company common stock, which had a value of $42,992 On
November 23, 2009, the Company issued 400,000 shares of common stock, which had
a value of $12,000 in satisfaction of interest payable on the note described
above in Note 10 (a). At July 31, 2010 and April 30, 2010, the value of the
286,623 shares issued was fully amortized.
On
November 9, 2009, the Company issued an unsecured $100,000 convertible note that
matures on November 9, 2010. Interest accrues at a rate of 12.5% per annum and
is payable quarterly. At the option of the note holder, interest can be paid in
either cash or shares of Company common stock based on the convertible note’s
$0.06 conversion price. As additional consideration, the Company granted
the note holder 250,000 shares of the Company’s common stock and agreed to
register the shares by January 8, 2010 or pay to the note holder as damages
additional shares of the Company’s common stock equal to 2.0% of the common
shares issuable upon conversion of the convertible note. The Company also
granted the note holder piggyback registration rights. On June 28, 2010,
the Company issued the note holder 133,333 shares of common stock with a fair
value of $973 as damages for failing to timely register the 250,000 common
shares. At July 31, 2010, interest expense of $3,194 was accrued. At April 30,
2010, interest expense of $6,061 was accrued on the note and paid on June
30, 2010. On November 9, 2009, the Company issued the 250,000 shares valued at
$10,000, which the Company deemed a loan origination fee. As of July 31, 2010
and April 30, 2010, $2,667 and $5,222, respectively have been recorded as a
deferred charges on the balance sheets and $7,333 and $4,778, respectively have
been amortized to interest expense.
F-13
On
November 9, 2009, an investor purchased a $309,839 past due Company Note. On
November 13, 2009, the Company exchanged the past due Company Note for a new
$447,500 Convertible Promissory Note. The new convertible promissory note is
convertible at the note holder’s option using a conversion price based on the
prevailing market prices. As of April 30, 2010, the Company issued the note
holder 29,851,365 shares of Company common stock in satisfaction of conversions
of note principal and interest expense of $7,928.
|
(b)
|
On January 15, 2009, (the
“Closing”), the Company acquired 90% of the capital stock of Olifant
U.S.A, Inc. (“Olifant”), pursuant to a Stock Purchase Agreement
(the “Agreement. The Company has agreed to pay the sellers $1,200,000 for
its 90% interest: $300,000 in cash and common stock valued at $100,000 to
be paid 90 days from the Closing date. The initial cash payment of
$300,000 which was due 90 days from Closing, was reduced to $149,633,
which was paid to the sellers in August 2009 together with Company common
stock having an aggregate value of $100,000 based on the date of the
Agreement. The Company issued a promissory note for the
$800,000 balance. The promissory note is payable in four annual
installments, the first payment is due one year from Closing. Each
$200,000 installment is payable $100,000 in cash and Company stock valued
at $100,000 with the stock value based on the 30 trading days immediately
prior to the installment date. The cash portion of the note accrues
interest at a rate of 5% per annum. On January 15, 2010, the Company paid
the first loan installment in the amount of $200,000 and $5,000 in
interest. The Company issued 4,950,496 shares as payment for the stock
portion of the installment, and at the election of the sellers, $63,000 in
cash and 2,079,208 in common stock as payment of the cash and interest
portion on the first
installment.
|
|
(c)
|
On March 4, 2010, the Company
issued shareholder 2,000,000 shares of its common stock with a fair value
of $40,000 in full payment of the outstanding loan for financial
consulting services.
|
On
November 5, 2009, the Company borrowed $37,500 from an investor under an
informal agreement for working capital purposes. The loan is payable on demand
and is classified under notes and loans payable as a current liability on the
balance sheet as of July 31, 2010 and April 30, 2010, respectively.
Accrued
expenses consist of the following at July 31, 2010 and April 30,
2010:
|
April 30, 2010
|
April 30, 2009
|
|||||||
|
Payroll,
board compensation and consulting fees owed to officers,
directors and
shareholders
|
$
|
1,236,142
|
$
|
1,220,392
|
||||
|
Other
payroll and consulting fees
|
697,574
|
688,740
|
||||||
|
Interest
|
473,158
|
405,394
|
||||||
|
Other
|
442,980
|
429,532
|
||||||
|
$
|
2,849,854
|
$
|
2,744,058
|
|||||
12.
Shareholders' Equity (Deficiency)
In
addition to those referred to in Notes 8, 9, and 10 additional transactions
affecting the Company's equity for the three months ended July 31, 2010 are
as follows:
On May
10, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to
convert $75,000 of the outstanding balance of the Debenture in
exchange for 6,000,000 shares of our common stock.
On May
25, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $116,666 of
the outstanding balance of the Debenture in exchange for 11,111,048 shares of
our common stock.
F-14
On June
25, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $150,000 of
the outstanding balance of the Debenture in exchange for 26,785,714 shares of
our common stock
On July
19, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an
investor, the investor submitted a Notice of Conversion, to convert $133,334 of
the outstanding balance of the Debenture in exchange for 26,666,800 shares of
our common stock.
On June
24, 2010, the Company entered into an agreement (the “Agreement”) with Enable
Growth Partners, LP, Enable Opportunity Partners, LP and Pierce Diversified
Strategy Master Fund, LLC (the “Holders”) pursuant to which the Company agreed,
in part, to issue the Holders an aggregate 12,000,000 shares of its Common Stock
with a fair value of $67,200, in accordance with the terms of the Agreement
which permitted the waiver and lifting of certain various provisions from prior
agreements.
On June
2, 2010, we issued 2,208,481 shares to our CEO in exchange for $25,000 payment
of past due and accrued salary due him.
On June
2, 2010, we issued 2,000,000 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $22,640 for marketing consulting services.
The shares vested immediately on the date of grant.
On May
25, 2010, we issued 1,547,717 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $17,706 for marketing consulting services.
The shares vested immediately on the date of grant.
On May
26, 2010, we issued 4,993,589 shares of our common stock under our 2009 Stock
Incentive Plan with a fair value of $57,127 for legal services. The shares
vested immediately on the date of grant.
On May
26, 2010, we issued 746,503 shares of our common stock under our 2009 Stock
Incentive Plan with a fair value of $8,540 for legal services. The shares vested
immediately on the date of grant.
On July
19, 2010, we issued 2,000,000 shares of our common stock under our 2010 Stock
Incentive Plan with a fair value of $10,000 for marketing consulting services.
The shares vested immediately on the date of grant.
On July
16, 2010, we issued 4,400,000 of our common stock with a fair value of $77,000
to a director for financial consulting services.
On April
13, 2010, the Company filed a registration statement on Form S-8 and
registered 30,000,000 shares issuable under the 2010 Plan. At
July 31, the Company has issued 5,547,717 shares of Company common stock under
the plan as compensation for legal and marketing services at a fair value of
$50,346 and 24,452,283 shares remain available for future issuance under
the 2010 Plan.
On
November 6, 2009, the Company filed a registration statement on Form S-8 and
registered 20,000,000 shares issuable under the 2009 Stock Incentive Plan
(the “2009 Plan”). The Company has issued 13,597,353 shares of Company common
stock under the plan as compensation for legal and marketing services as of
April 30, 2009 at a fair value of $316,450, which vested immediately upon grant.
At July 31, 2010, 5,740,092 shares of common stock were issued under the plan as
compensation for legal and marketing services at a fair value of $65,667 and
662,555 shares remain available for future issuance under the 2009
Plan.
F-15
In
January 2009, the Company’s shareholders approved the 2008 Stock Incentive Plan
(the “2008 Plan”) which provides for awards of incentives of non-qualified stock
options, stock, restricted stock and stock appreciation rights for its officers,
employees, consultants and directors in order to attract and retain such
individuals and to enable them to participate in the long-term success and
growth of the Company. , Under the 2008 Plan, 10,000,000 common
shares were reserved for distribution. As of July 31, 2010, 9,275,000 have been
issued and 725,000 remain available for future issuance. Of this amount, 450,000
of shares issued to employees were subsequently canceled when the employees
terminated their service with the Company. Stock options granted under the Plan
are granted with an exercise price at or above the fair market value of the
underlying common stock at the date of grant, generally vest over a four-year
period and expire 5 years after the grant date.
On
November 9, 2009, the Company granted 3,500,000 shares under the 2008 Plan at
fair value of $132,000 to several consultants, which vested immediately upon
grant, as compensation for legal and marketing services.
On March
12, 2009, the Company granted an aggregate of 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 of the
Company (1,000,000) and the consultants (600,000) at fair value of $129,000
vested immediately on the grant date.
The fair
value of each option award is estimated on the date of grant using
the Black-Scholes option pricing model and is affected by assumptions regarding
a number of highly complex and subjective variables including
expected volatility, risk-free interest rate, expected dividends and expected
term. Expected volatility is based on the historic volatility of the Company’s
stock over the expected life of the option. The expected term and vesting of the
option represents the estimated period until the exercise and is based on
management’s estimates, giving consideration to the contractual term, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant
for the expected term of the option. The Company has not paid dividends in the
past and does not plan to pay any dividends in the near future. 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. Option expense for the three
months ended July 31, 2010 was $20,953.
F-16
14.
Income Taxes
No
provision for income taxes is included in the accompanying statements of
operations because of the net operating losses for the three months ended
July 31, 2010 and 2009, respectively. Holdings and Drinks previously filed
income tax returns on a June 30 and December 31 tax year, respectively; however,
both companies applied for, 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 July 31, 2010 to offset future years' taxable income is
approximately $34,900,000, expiring in various years through
2030. A valuation allowance has been provided against the
entire deferred tax asset due to the uncertainty of future profitability of the
Company. Management's position with respect to the likelihood
of recoverability of these deferred tax assets will be evaluated each reporting
period.
15. Related
Party Transactions
Related
party transactions, in addition to those referred to in Notes 9 and 10 are as
follows:
Consulting
and Marketing Fees
The
Company incurred fees for services rendered related to sales and marketing
payable to a limited liability company, which was controlled by a member of the
Company’s board of directors and previous chairman of the board. As of July
31, 2010, and April 30, 2010, unpaid fees owed to a director and his firm
aggregated $-0- and $91,000. As of July 31, 2010, the Company issued
4,400,000 in full satisfaction of the unpaid fees owed to a director and his
firm.
In fiscal
2003, we entered into a consulting agreement with a company wholly owned by a
member of the Company's board of directors. Under the agreement, the consulting
company is compensated at the rate of $100,000 per annum. As of July 31, 2010
and April 30, 2010, we were indebted to the consulting company in the amount of
$50,000.
In
December 2002, the Company entered into a consulting agreement with one of its
shareholders, which provided for $600,000 in fees payable in five fixed
increments over a period of 78 months. The agreement expired on June 9,
2009. Under this agreement, as of July 31, 2010 and April 30, 2010, amounts
owed to this shareholder aggregated $43,151.
In
October 2009, upon the resignation of Brian Kenny as VP Marketing of the
Company, we entered into a marketing consulting agreement with a company
controlled by him to provide marketing services to the Company at the annual
rate of $144,000. Brian Kenny is the son of our CEO, J. Patrick
Kenny. At July 31, 2010, we were indebted to the consulting company in the
amount of $36,000.
Royalty
Fees
In
connection with the Company's distribution and licensing agreements with its
equity investee the Company incurred royalty expenses for the three months
ended July 31, 2010 and 2009 of approximately $4,265 and $2,500,
respectively. The operations and the net assets are
immaterial.
Loan
Payable
From July
2007 through July 31, 2010, the Company has borrowed and our CEO has loaned
various amounts up to $813,035 to the Company for working capital purposes at an
annual interest rate of 12%. As of July 31, 2010 and April 30, 2010,
amounts owed to our CEO on these loans including accrued and unpaid interest
aggregated $87,735 and $154,670 , respectively. For the three months ended July
31, 2010 and 2009, interest incurred on these loans aggregated $3,387 and
$9,149, respectively.
16.
Customer Concentration
For the
three months ended July 31, 2010, the Company earns royalty revenue under its
agreement with Mexcor, Inc. which represents 100% of the Company’s accounts
receivable. For the three months ended July 31, 2009, four customers accounted
for approximately 12%, 19%, 16% and 14%, of our net sales.
F-17
16.
Commitments and Contingencies
Lease
The
Company leases office space under an operating lease for a two-year period
through September 2011 with minimum annual rentals of $36,000. Rent expense for
the three months ended July 31, 2010 and 2009 was approximately $9,000 and
$12,000, respectively.
Future
minimum payments for all leases are approximately as follows:
|
Years Ending
|
||||
|
April 30,
|
Amount
|
|||
|
2011
|
$
|
36,000
|
||
|
2012
|
15,000
|
|||
|
$
|
51,000
|
|||
License
Agreement
In
November 2005, the Company entered into an eight-year license agreement for
sales of Trump Super Premium Vodka. Under the agreement, the Company is required
to pay royalties on sales of the licensed product. The agreement requires
minimal royalty payments through November 2012 which if not paid could result in
termination of the license. The Company is currently in default under the terms
of its license agreement with Trump Marks LLC. The Company under a
non-documented arrangement with the licensor is continuing to sell the product
both domestically and internationally. The Company and licensor are currently
engaged in active discussion to both enhance the marketing of the brand and to
amend the agreement under mutually beneficial terms.
In 2008,
the Company entered into a licensing agreement with Vetrerie Bruni S.p.A.
(“Bruni”), which has the patent to the Trump Vodka bottle design. The
agreement is retroactive to January 1, 2008, and calls for annual minimum
royalties of $150,000. Royalties are due on a per bottle basis on bottles
produced by another bottle supplier of approximately 18% of the cost of such
bottles. The agreement terminates upon the expiration of the patent
or the expiration of the Company’s license agreement with Trump Marks
LLC. Due to a dispute with respect to the pricing and quantities of glass
ordered and the source of readily available and more efficient alternative
producers the Company entered into a dispute with Bruni Glass resulting in
litigation which was resolved with a settlement in October 2009. This
settlement resulted in the reduction of the Company’s annual glass royalty
obligation on a going forward basis by as much as 75% depending on utilization
levels and a settlement of the outstanding balance the Company owed Bruni.
In conjunction with the legal settlement, as of July 31, 2010 and April 30,
2010, the outstanding unpaid balance was $125,000. On August 13, 2010, we
issued 11,800,000 shares of our common stock with a fair value of $28,320 and on
August 25, 2010, we issued 15,304,190 shares of our common stock with a fair
value of $28,313 as payments in full and final settlement of our
obligation.
F-18
Our
license with respect to the Kid Rock related trademarks currently requires
payments to Drinks Americas based upon volume through the term of the
agreement.
Other
Agreements
The
Company has modified its agreement with a foreign distributor, through December
2023, to distribute our products in their country. The agreement requires the
distributor to assume procurement of component parts, production, distribution
and funding for approved marketing and promotion for the term of the agreement.
The distributor is to pay the Company a quarterly fee no less than one fourth of
$150,000 and certain incremental payments for set volume levels. In return for
the fee and assumption of all financial support in the territory, the Company
will be the exclusive distributor in Israel over the term of the agreement with
the rights to be exclusive distributor in their country. The distributor is in
the process of purchasing component parts for its own production. It is also
anticipated that the Company may purchase up to five containers of product or
5,000 cases from the Company’s current inventory as a precursor to its own
production in order to accelerate market entry. The Company received a
prepayment $84,970 and recognized $21,243 for shipments in the fourth
quarter-ended April 30, 2010 and for the three months ended July 31, 2010. As of
July 31, 2010 and April 30, 2010, deferred revenue on the balance sheet amounted
to $42,485 and $63,730, respectively.
Effective
February 15, 2010, the Company entered into an exclusive agreement with Mexcor,
Inc., to promote and distribute in the United States, the Company’s portfolio of
brands, as defined. The initial term of the agreement is for five years,
requires a minimum net sales performance by Mexcor, which when attained, will
automatically renew for an additional ten years. Under the terms of the
agreement, the Company has agreed to issue the principal of the business 12
million shares of Company common stock in exchange for consulting
services.
Furthermore,
the Company shall earn and Mexcor shall pay, a royalty fee on a per case or case
equivalent basis on all Company products distributed by Mexcor which royalty fee
will increase by ten percent on August 12, 2011, with additional ten percent
increases (compounded) on August 15th of each successive year during the initial
term of the agreement. Additionally, the Company shall earn $10.00 for each case
of Damiana product, as defined, distributed by Mexcor. For the first full
twenty-one calendar months following the effective date, Mexcor will pay the
Company the greater of the per case royalty fees described above or the
following monthly minimum royalties; $20,000, for the first six months; $35,000,
for months 7-9 and $50,000 for months 10-21. The minimum monthly royalties are
payable on the 15 th day of
that month.
Additionally,
the Company will issue to Mexcor, warrants to acquire 2,000,000 shares of the
Company’s common stock at such time Mexcor realizes the minimum net sales
requirements under the initial term. The Company has further agreed to issue
Mexcor a warrant to acquire an additional 2,000,000 shares of Company common
stock at such time Mexcor attains a second net sales performance level based on
a twelve-month look-back period provided such performance criteria are satisfied
during the initial term. Finally, the Company has agreed to issue Mexcor
additional financial incentives payable in cash or stock and warrants for the
attainment of certain volume or business metrics.
F-19
Litigation
On July
29, 2010, we entered into a settlement agreement with Socius CG II, Ltd.
(“Socius”) pursuant to which we agreed to issue 38,800,000 shares of our common
stock in exchange for satisfaction of the claim by Socius for $334,006. This
settlement agreement required court approval before the issuance of such stock
because it involved the payment of the settlement in the form of the Company’s
common stock in reliance upon the Section 3(a) (10) exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended. On September 9, 2010, the court approved the settlement agreement and
the issuance of the 38,800,000 shares to Socius as exempt from registration
pursuant to the Section 3(a) (10) registration exemption.
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 seeks $127,250 of unpaid wages and commissions and,
$1,500 for reimbursement of expenses. The maximum exposure to the Company and
our CEO is approximately $260,000 for double damages plus attorneys’ fees and
costs. The Company believes that the claims made by the plaintiff are false and
plans to 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 2009, as a matter of public record the former
employee was arrested and charged with alleged theft of Company property. Mr.
Shiekman has filed suit in court in July 2010 and the Company intends to
vigorously defend against this claim.
In
October 2009, James Sokol, a former salesperson for the Company, filed suit
against the Company and its Chief Executive Officer in the Superior Court for
the Judicial District of Fairfield (Docket Number CV 09 5027925 S) claiming
unpaid compensation of $256,000. In November 30, 2009, we
pledged 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. On July 12, 2010, the Company and Mr. Sokol reached a settlement
of the suit pursuant to which Mr. Sokol withdrew the suit on July 16, 2010 and
thereafter returned the 15,000,000 shares of the Company’s common stock to
the Company.
F-20
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company that has the patent to
the Trump Vodka bottle design filed a complaint against us in the U.S. District
Court, Southern District of New York for alleged breach of contract and sought
$225,000 for alleged past due invoices and royalties. The Company filed a
counterclaim. In October 2009, the case was settled, This settlement resulted in
the reduction of the Company’s annual glass royalty obligation on a going
forward basis by as much as 75% depending on utilization levels and a settlement
of the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, as of July 31, 2010 and April 30, 2010, the outstanding unpaid
balance was $125,000. On August 13, 2010, we issued 11,800,000 shares of
our common stock with a fair value of $28,320 and on August 25, 2010, we issued
15,304,190 shares of our common stock with a fair value of $28,313 as payments
in full and final settlement of our obligation.
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”), a company which provided
distribution services for us in several states, filed a claim against us in
Duval County, Florida for alleged damages including breach of contract.
Liquor Group asserted damages in excess of $1,000,000. The claim was filed
against Drinks Americas Holding Limited, not Drink Americas, Inc., the
contracting party. Drinks America, Inc. has counter claimed against
the initial Liquor Group claimants, and has included several other Liquor Group
entities because of the considerable confusion Liquor Group has created through
the use of multiple entities with the same or virtually identical names. The
counter claim is for $500,000, and it includes claims concerning breach of
contract, civil conspiracy, fraudulent concealment and civil theft. There is
currently pending an arbitration before the American Arbitration Association
involving the dispute between Liquor Group and Drinks Americas. The arbitration
was originally set for June 22, 2010, but was suspended by the Arbitrator due to
Liquor Group’s failure to pay all appropriate fees and deposits by May 24, 2010.
The Arbitrator gave an extension of time until June 10, 2010 for all fees and
deposits to be paid, which deadline Liquor Group again missed. Liquor Group has
apparently subsequently paid the requisite deposits and it is anticipated that
an arbitration hearing to be held in Jacksonville, Florida, will shortly be
rescheduled.
In
December 2009, Niche Media, Inc., an advertising vendor, filed suit against the
Company in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk (Docket Number FST-CV09-6002627-S) claiming unpaid invoices for
the approximate amount of $130,000. The Company believes that it has
defenses to this action and is attempting to reach a resolution.
Other
than the items discussed above, we believe that the Company is currently not
subject to litigation, which, in the opinion of our management, is likely to
have a material adverse effect on the Company.
F-21
17.
Subsequent Events
The
Company has evaluated subsequent events through the issuance of the
interim consolidated financial statements, and which occured on
September 20, 2010 and identified the following subsequent
events:
In August
2010, we shipped Rheingold Beer, launched at first in the Northeast
predominately in the tri-state areas of New York, New Jersey and
Connecticut. The Rheingold Brewery website is: www.rheingoldbrewingcompany.com.
In August
2010, we have entered into agreements with certain of our employees,
including our Chief Executive Officer and certain members of our Board of
Directors to satisfy accrued debt obligations aggregating
approximately $640,000 owed to them for salary and consulting fees by issuing to
them our Preferred Series C Stock in exchange and satisfaction of those accrued
expenses.
Socius CG
II, Ltd., (“Socius”), a creditor of the Company due to the purchase of various
claims from various creditors of the Company, filed a complaint against the
Company for breach of contract to recover on the claims against the Company on
June 18, 2010 in the Supreme Court of the State of New York. On July 29, 2010,
we entered into a settlement agreement with Socius pursuant to which we agreed
to issue 38,800,000 shares of our common stock in exchange for satisfaction of
the claim for $364,006. This settlement agreement required court approval before
the issuance of such stock because it involved the payment of the settlement in
the form of the Company’s common stock in reliance upon the Section 3(a) (10)
exemption from the registration requirements of Section 5 of the Securities Act
of 1933, as amended. On July 30, 2010, a Notice of Motion for Court Order
Approving Stipulation for Settlement of Claims was submitted to the court, which
moved for an order to enforce the terms of our proposed settlement with Socius.
On September 9, 2010, the court approved the settlement agreement and the
issuance of the 38,800,000 shares to Socius as exempt from registration pursuant
to the Section 3(a)(10) registration exemption.
In
connection with litigation matter discussed above, Mr. Shiekman has filed suit
in court in July 2010 and the Company intends to vigorously defend against this
claim.
On August
11, 2010, the Company entered into a Purchase and Satisfaction Agreement with
Frederick Schulman, Esq. (the “Seller”) and E-Lionheart Associates, LLC (the
“Purchaser”). Pursuant to the agreement, the Purchaser purchased from the Seller
the debt owed by the Company to the Seller in the amount of $56,6335 (the
“Debt”) in the form of a convertible note (the “Note”) in connection with legal
fees owed by the Company to the Seller. The purchase price and payment for the
Debt was $42,500. On August 12, 2010, the Purchaser converted 11,800,000
free-trading shares of the Company's common stock underlying the Note at a
conversion price of $0.0024 per share for an aggregate amount of $28,320 of debt
converted. On August 25, 2010, the Purchaser converted 15,304,190 free-trading
shares of the Company's common stock underlying the Note at a conversion price
of $0.00185 per share for an aggregate amount of $28,313 of debt converted. Both
transactions have resulted in the full and final payment of our obligation under
the Brunei litigation settlement discussed above.
F-22
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.
|
Cautionary
Notice Regarding Forward Looking Statements
The
disclosure and analysis in this Report contains some forward-looking statements.
Certain of the matters discussed concerning our operations, cash flows,
financial position, economic performance and financial condition, in
particular, future sales, product demand, competition and the effect of economic
conditions include forward-looking statements within the meaning of section 27A
of the Securities Act of 1933, referred to herein as the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, referred to herein as the
Exchange Act.
Statements
that are predictive in nature, that depend upon or refer to future events or
conditions or that include words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates" and similar expressions, are forward-looking
statements. Although we believe that these statements are based upon reasonable
assumptions, including projections of orders, sales, operating margins,
earnings, cash flow, research and development costs, working capital, capital
expenditures, distribution channels, profitability, new products, adequacy of
funds from operations and other projections, and statements expressing general
optimism about future operating results, and non-historical information, they
are subject to several risks and uncertainties, and therefore, we can give no
assurance that these statements will be achieved.
Readers
are cautioned that our forward-looking statements are not guarantees of future
performance and the actual results or developments may differ materially from
the expectations expressed in the forward-looking statements.
As for
the forward-looking statements that relate to future financial results and other
projections, actual results will be different due to the inherent uncertainty of
estimates, forecasts and projections and may be better or worse than projected.
Given these uncertainties, you should not place any reliance on these
forward-looking statements. These forward-looking statements also represent our
estimates and assumptions only as of the date that they were made. We expressly
disclaim a duty to provide updates to these forward-looking statements, and the
estimates and assumptions associated with them, after the date of this filing to
reflect events or changes in circumstances or changes in expectations or the
occurrence of anticipated events.
We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future events or otherwise. In addition,
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from our Company's historical
experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described in Part II, "Item
1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form
10-K for the year ended April 30, 2010, and those described from time to time in
our future reports filed with the Securities and Exchange
Commission. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
Introduction
The
following discussion and analysis summarizes the significant factors affecting:
(1) our consolidated results of operations for the three months ended July
31, 2010, compared to the three months ended July 31, 2009, and (2)
our liquidity and capital resources. This discussion and analysis should be read
in conjunction with the consolidated financial statements and notes included in
Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated
financial statements and notes included in our Annual Report Form
10-K, filed on August 13, 2010.
3
Results
of Operations
Three
Months Ended July 31, 2010 Compared to Three Months Ended July 31,
2009
Net Sales: Net sales were
approximately $102,000 under our revised royalty revenue business model for
the three months ended July 31, 2010 compared to net sales of approximately
$434,000 driven by the Company's wholesale business model for the three
months ended July 31, 2009, a decrease of 76% reflective of the transition of
our business model in February 2010 from a wholesale operation to a royalty
based operation under our distribution and importation agreement with Mexcor,
Inc. As we announced previously, our business continues to be
impacted by a shortage in working capital and a weak economy.
Trump
Super Premium Vodka sales aggregated 1,145 cases, which accounted for
approximately 38% of total dollar sales for the quarter ended July 31, 2010. For
the quarter ended July 31, 2009, Trump Super Premium Vodka net sales aggregated
$85,000, which accounted for 20% of total dollar sales. Sales of
Trump for the quarter ended July 31, 2010 continued to be effected by issues
relating to distributors affiliated with the Liquor Group, who represented us in
several “controlled states” and with whom we have an ongoing litigation,
although we have corrected most of these issues through the appointment of new
replacement distributors.
For the
quarter ended July 31, 2010, Old Whiskey River Bourbon totaled 579 cases sold
which accounted for approximately 17% of total dollar sales, which exceeded the
first quarter sales of the prior year, by 98% or 286 cases. For
the quarter ended July 31, 2009, Old Whiskey River Bourbon net sales were
$38,000 on 293 cases sold. For Aquila Tequila, we did not record any sales for
the quarter ended July 31, 2010 and 2009, because due to the previously
mentioned insufficient working capital, we decided to allocate our limited
resources to the acquisition of inventory in other brands. Subsequently, through
our agreement with Mexcor, Inc. we have re-launched Aguila Tequila in fiscal
2011 and begun making restocking shipments in the second quarter of fiscal 2011.
Damiana Liqueur aggregated 844 cases sold or 7% of total dollar sales for the
quarter ended July 31, 2010, a 294% increase in cases shipped compared to 214
cases sold for net sales of $29,400 for the quarter ended July 31,
2009. There were no sales of our premium-imported wines for the
quarter ended July 31, 2010 as the Company exited the business in the second
quarter of fiscal 2010. Net sales of our premium-imported wines totaled $17,000
on 796 cases sold for the quarter ended July 31, 2009. For the
quarter ended July 31, 2010, Olifant vodka amounted to 3,631 cases sold or
approximately 12% of total net sales. Net sales of Olifant vodka totaled
approximately $234,000 on 5,514 cases sold for the quarter ended July 31,
2009. We believe, and continuing customer demand and sales
indicate, that sales of our economy priced Olifant vodka products continue
to be very successful in this economic environment. The Company did not record
any sales of Leyrat Cognac during the first quarter ended July 31, 2010 due to
management’s decision to allocate scarce working capital resources to other
brands. Net sales of for Leyrat Cognac were $4,500 on 30 cases sold for the
quarter ended July 31, 2009. For the quarter ended July 31, 2010, Kid Rock Bad
Ass Beer totaled 2,694 equivalent cases sold which compared to 2,325 equivalent
cases sold or $21,970 for the first quarter ended July 31, 2009.
Gross Margin: Gross
margin under the royalty business model was $4,337, or 4.2% of net
sales for the three months ended July 31, 2010 compared to gross margin of
$128,000, or 29% of net sales under the wholesale business model for the
three months ended July 31, 2009. This decrease in gross margin is attributable
to the transition of
our business model to a royalty-based operation from a wholesale model, coupled
with our working capital shortfall, which resulted in a curtailment in certain
product supply inventories.
Selling, General and Administrative
Expenses: Selling, general and administrative expenses totaled
approximately $640,000 for the three months ended July 31, 2010, compared to
$1,624,000 for the three months ended July 31, 2009, a decrease
of approximately $984,000, or 61%, attributable to our decision to reduce
our operating and marketing expenses and thereby sustain our limited working
capital. The overhead reductions resulted in lower payroll and payroll related
and travel expenses. Additionally, our agreement with Mexcor, Inc. resulted in
our ability to transfer our field sales force and its associated sales
commission costs and travel expenses to Mexcor, Inc. as we restructured our
business-operating model in fiscal 2010 under our distribution and importation
agreement with Mexcor, Inc. For the quarter, ended July 31,
2009, selling, general and administrative expenses included $290,000 of
marketing fees associated with the 2009 Olifant Summer Concert
Series.
4
Other expense:
Other expense is comprised of interest expense totaling approximately
$265,000 for the three months ended July 31, 2010 compared to interest expense
of $438,000 for the three months ended July 31, 2009. This decrease is
predominantly due to a reduction in the cost of financing our outstanding
liabilities which we have systematically reduced by approximately $2,300,000 to
$5,931,000 at July 31, 2010 from approximately $8,186,000 at July 31, 2009. This
decrease in our outstanding debt is attributable to a decrease in our notes and
loans payable of approximately $498,000; our repayment of $248,000 or nearly 74%
of the outstanding loan payable to our CEO; a reduction of our outstanding
accrued expenses and accounts payable of approximately $1,371,000 and the
re-payment of $200,000 of our long-term debt.
Income Taxes: From our
inception, we have incurred substantial net losses and as a result, have not
incurred any income tax liabilities. Our federal net operating loss
carry-forward is approximately $34,900,000, r. which we can use to
reduce taxable earnings in the future. No income tax benefits were recognized
for the three months ended July 31, 2010 and 2009 as we have provided valuation
reserves against the full amount of the future carry forward tax loss benefit.
We will evaluate the reserve every reporting period and recognize the benefits
when realization is reasonably assured.
Financial
Liquidity and Capital Resources
While our
working capital position has benefited from our June 2009 sales of
our debentures, our August 2009 agreement relating to our Series B Preferred
Stock and our February 2010 Agreement with Mexcor, our business still continued
to be effected by insufficient working capital. We will need to continue to
manage carefully our working capital and our business decisions will continue to
be influenced by our working capital requirements. Lack of liquidity continued
to negatively affect our business and curtail the execution of our business
plan.
Net Cash Used in Operating
Activities: Net cash used in operating activities for the quarter ended
July 31, 2010 was approximately $129,000. We have to date funded our operations
predominantly through loans from shareholders, officers and investors and
additionally through the issuance of our common stock as payment for outstanding
obligations.
Net Cash use in Financing
Activities: Net cash used in financing activities for the quarter
ended July 31, 2010 was approximately $71,000 primarily related to the
repayment of loans.
On July
29, 2010, we entered into a settlement agreement with Socius CG II, Ltd.
(“Socius”) pursuant to which we agreed to issue 38,800,000 shares of our common
stock in exchange for satisfaction of the claim by Socius for $364,006. This
settlement agreement required court approval before the issuance of such stock
because it involved the payment of the settlement in the form of the Company’s
common stock in reliance upon the Section 3(a) (10) exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended. On September 9, 2010, the court approved the settlement agreement and
the issuance of the 38,800.000 shares to Socius as exempt from registration
pursuant to the Section 3(a) (10) registration exemption.
In August
2010, we entered into agreements with certain of our employees, including
our Chief Executive Officer and certain members of our Board of Directors to
satisfy accrued
debt obligations
aggregating approximately $630,000 owed to them for salary and consulting fees
by issuing to them our Preferred Series C Stock in exchange and satisfaction
of those accrued
expenses.
Based on
our current operating activities and plans, we believe our existing financings
will enable us to meet our anticipated cash requirements for at least the next
twelve months.
Impact
of Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has had a material effect on our
results of operations.
5
Seasonality
Generally,
the second and third quarters of our fiscal year (August-January) are the
periods that we realize our greatest sales as a result of sales of alcoholic
beverages during the holiday season. During the fourth quarter of our fiscal
year (February-April), we generally realize our lowest sales volume as a result
of our distributors decreasing their inventory levels, which typically remain on
hand after the holiday season. Given our lack of working capital, the effects of
seasonality on our sales have been lessened.
Royalties/Licensing
Agreements
In
November 2005, the Company entered into an eight-year license agreement for
sales of Trump Super Premium Vodka. Under the agreement, the Company
is required to pay royalties on sales of the licensed product. The agreement
provides for certain minimum royalty payments through November 2012 which if not
satisfied could result in termination of the license.
Under our
license agreement for Old Whiskey River, we are obligated to pay royalties of
between $10 and $33 per case, depending on the size of the bottle.
Under our
license agreement with Aguila Tequila, we are obligated to pay $3 per
case.
Under our
joint venture agreements with Dr. Dre and Interscope
Records, which includes our Leyrat Cognac, we are obligated to
pay a percentage of gross profits, less certain direct selling
expenses.
The license
agreement with respect to the Kid Rock related trademarks requires the
payment of a per case royalty (or equivalent liquid
volume), with certain minimum royalties for years 2 through 5 of the agreement
payable on the first day of the applicable year.
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
Not
applicable to smaller reporting companies
|
Item
4.
|
Controls
and Procedures.
|
Disclosure
Controls and Procedures
We have
adopted and maintain disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)) that are designed to provide reasonable assurance
that information required to be disclosed in our reports under the Exchange Act,
is recorded, processed, summarized and reported within the time periods required
under the SEC's rules and forms and that the information is gathered and
communicated to our management, including our Chief Executive Officer (Principal
Executive Officer) who is also our Chief Financial Officer (Principal
Financial Officer), as appropriate, to allow for timely decisions regarding
required disclosure.
Our Chief
Executive Officer and our Chief Financial Officer evaluated the
effectiveness of our disclosure controls and procedures as of July 31, 2010, as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of July 31, 2010, our Chief Executive
Officer and our Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be declared by us in reports that we file
with or submit to the Securities and Exchange Commission (the “SEC”) is (1)
recorded, processed, summarized, and reported within the periods specified in
the SEC’s rules and forms and (2) accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure.
6
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting as defined in
Rule 13a-15 under the Exchange Act that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings.
|
On July
29, 2010, we entered into a settlement agreement with Socius CG II, Ltd.
(“Socius”) pursuant to which we agreed to issue 38,800,000 shares of our common
stock in exchange for satisfaction of the claim by Socius for $364,006. This
settlement agreement required court approval before the issuance of such stock
because it involved the payment of the settlement in the form of the Company’s
common stock in reliance upon the Section 3(a)(10) exemption from the
registration requirements of Section 5 of the Securities Act of 1933, as
amended. On September 9, 2010, the court approved the settlement agreement and
the issuance of the 38,800,000 shares to Socius as exempt from registration
pursuant to the Section 3(a)(10) registration exemption.
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 seeks $127,250 of unpaid wages and commissions and,
$1,500 for reimbursement of expenses. The maximum exposure to the Company and
our CEO is approximately $260,000 for double damages plus attorneys’ fees and
costs. The Company believes that the claims made by the plaintiff are false and
plans to 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 2009, as a matter of public record the former
employee was arrested and charged with alleged theft of Company property. Mr.
Shiekman has filed suit in court in July 2010 and the Company intends to
vigorously defend against this claim.
In
October 2009, James Sokol, a former salesperson for the Company, filed suit
against the Company and its Chief Executive Officer in the Superior Court for
the Judicial District of Fairfield (Docket Number CV 09 5027925 S) claiming
unpaid compensation of $256,000. In November 30, 2009, we
pledged 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. On July 12, 2010, the Company and Mr. Sokol reached a settlement
of the suit pursuant to which Mr. Sokol withdrew the suit on July 16, 2010 and
thereafter returned the 15,000,000 shares of the Company common stock to the
Company.
In
February 2009, Vetrerie Bruni S.p.A (“Bruni”) the company that has the patent to
the Trump Vodka bottle design filed a complaint against us in the U.S. District
Court, Southern District of New York for alleged breach of contract and sought
$225,000 for alleged past due invoices and royalties. The Company filed a
counterclaim. In October 2009, the case was settled, This settlement resulted in
the reduction of the Company’s annual glass royalty obligation on a going
forward basis by as much as 75% depending on utilization levels and a settlement
of the outstanding balance the Company owed Bruni. In conjunction with the
legal settlement, as of July 31, 2010 and April 30, 2010, the outstanding unpaid
balance was $125,000. On August 13, 2010, we issued 11,800,000 shares of
our common stock with a fair value of $28,320 and on August 25, 2010, we issued
15,304,190 shares of our common stock with a fair value of $28,313 as payments
in full and final settlement of our obligation.
7
In June
2009, Liquor Group Wholesale, Inc. (“Liquor Group”), a company which provided
distribution services for us in several states, filed a claim against
us in Duval County, Florida for alleged damages including breach of contract.
Liquor Group asserted damages in excess of $1,000,000. The claim was filed
against Drinks Americas Holding Limited, not Drink Americas, Inc., the
contracting party. Drinks America, Inc. has counter claimed against
the initial Liquor Group claimants, and has included several other Liquor Group
entities because of the considerable confusion Liquor Group has created through
the use of multiple entities with the same, or virtually identical names. The
counter claim is for $500,000, and it includes claims concerning breach of
contract, civil conspiracy, fraudulent concealment and civil theft. There is
currently pending an arbitration before the American Arbitration Association
involving the dispute between Liquor Group and Drinks Americas. The arbitration
was originally set for June 22, 2010, but was suspended by the Arbitrator due to
Liquor Group’s failure to pay all appropriate fees and deposits by May 24, 2010.
The Arbitrator gave an extension of time until June 10, 2010 for all fees and
deposits to be paid, which deadline Liquor Group again missed. Liquor Group has
apparently subsequently paid the requisite deposits and it is
anticipated that an arbitration hearing to be held in Jacksonville, Florida,
will shortly be rescheduled.
In
December 2009, Niche Media, Inc., an advertising vendor, filed suit against the
Company in the Connecticut Superior Court for the Judicial District of
Stamford/Norwalk (Docket Number FST-CV09-6002627-S) claiming unpaid invoices for
the approximate amount of $130,000. The Company believes that it has
defenses to this action and is attempting to reach a resolution.
Other
than the items discussed above, we believe that the Company is currently not
subject to litigation, which, in the opinion of our management, is likely to
have a material adverse effect on the Company.
|
Item 1A.
|
Risk
Factors.
|
There have
been no material changes from the risk factors previously disclosed in our
Annual Report on Form 10-K for the year ended April 30, 2010.
|
Item 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds.
|
None.
|
Item 3.
|
Defaults Upon Senior
Securities.
|
None.
|
Item 4.
|
(Removed and
Reserved).
|
|
Item
5.
|
Other
Information.
|
None
.
|
Item 6.
|
Exhibits.
|
|
31.1
|
Certification of Principal
Executive Officer
|
|
31.2
|
Certification of Principal
Financial Officer
|
|
32.1
|
Certification
of J. Patrick Kenny, Chief Executive Officer and Chief Accounting Officer,
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
8
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
September
20, 2010
|
DRINKS
AMERICAS HOLDINGS, LTD.
|
||
|
By:
|
/s/ J.
Patrick Kenny
|
|
|
J.
Patrick Kenny
President
and Chief Executive Officer and Chief Accounting
Officer
|
||
9
EXHIBIT
INDEX
|
31.1
|
Certification of Principal
Executive Officer
|
|
31.2
|
Certification of Principal
Financial Officer
|
|
32.1
|
Certification of J. Patrick
Kenny, Chief Executive Officer and Chief Accounting Officer, pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
10