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EX-32.1 - DRINKS AMERICAS HOLDINGS, LTDv215487_ex32-1.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



FORM 10-Q


 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended January 31, 2011

OR

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to ____________

Commission File Number: 33-55254-10
 

 
Drinks Americas Holdings, Ltd.
 (Exact name of registrant as specified in its charter)
 
Delaware
 
87-0438825
(State or other jurisdiction of incorporation or
 
(I.R.S. Employer Identification No.)
organization)
   
     
372 Danbury Road
   
Suite 163
   
Wilton, CT
 
06897
(Address of principal executive offices)
 
(Zip Code)
 
(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.
 
¨   Large accelerated filer
 
¨    Accelerated filer
 
¨   Non-accelerated filer
 
x   Smaller reporting company
  
  
  
  
(Do not check if smaller reporting
company)
  
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   ¨           No x

As of March 15, 2011, the number of shares outstanding of the registrant’s common stock, $0.001 par value, was 190,384,990.
 
 

 
 
DRINKS AMERICAS HOLDINGS, LTD. AND AFFILIATES

FORM 10-Q

FOR THE QUARTER ENDED JANUARY 31, 2011

 
TABLE OF CONTENTS
 
   
Page
PART I – FINANCIAL INFORMATION
   
     
Item 1.
Financial Statements:
 
F-1
       
 
Consolidated Balance Sheets as of January 31, 2011 (unaudited) and April 30, 2010
 
F-1
       
 
Consolidated Statements of Operations for the three and nine months ended January 31, 2011 and 2010 (unaudited)
 
F-2
       
 
Consolidated Statements of Cash Flows for the nine months ended January 31, 2011 and 2010 (unaudited)
 
F-3
       
 
Notes to Consolidated  Financial Statements (unaudited)
 
F- 4 - 26
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
3
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
8
       
Item 4.
Controls and Procedures
 
8
       
PART II – OTHER INFORMATION
   
     
Item 1.
Legal Proceedings
 
9
       
Item 1A.
Risk Factors
 
11
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
11
       
Item 3.
Defaults Upon Senior Securities
 
11
       
Item 4.
(Removed and Reserved)
 
11
       
Item 5.
Other Information
 
11
       
Item 6.
Exhibits
 
11
       
SIGNATURES
 
12
 
 
2

 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
  
 
JANUARY 31,
   
APRIL 30,
 
  
 
2011
   
2010
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and equivalents
  $ 70,420     $ 203,552  
Accounts receivable, net of allowance for doubtful accounts of $117,072 and $127,846, respectively.
    118,864       66,346  
Inventories, net of allowances
    121,291       222,608  
Other current assets
    92,965       19,789  
Total current assets
    403,540       512,295  
                 
Property and equipment, net of  accumulated depreciation
    17,316       32,309  
                 
Investment in equity investees
    102,345       73,593  
Intangible assets, net of accumulated amortization
    1,845,987       1,971,300  
Deferred loan costs, net of accumulated amortization
    273,567       437,973  
Other assets
    24,898       85,735  
                 
Total assets
  $ 2,667,653     $ 3,113,205  
                 
Liabilities and Shareholders' Deficiency
               
Accounts payable
  $ 1,776,027     $ 2,199,665  
Accrued expenses
    2,014,600       2,744,058  
Investor note payable
    450,000       -  
Notes and loans payable, net of long – term portion
    926,890       437,196  
Derivative liability
    40,375       -  
Loans payable to related party     5,587       -  
Deferred revenue
    -       63,730  
Total current liabilities
    5,213,478       5,599,319  
                 
Notes and loans payable, net of current portion
    200,000       400,000  
                 
Total liabilities
    5,413,478       5,999,319  
                 
Commitments and Contingencies
               
                 
Shareholders' deficiency:
               
Preferred stock, $0.001 par value; 1,000,000 shares authorized:
               
Series A Convertible: $0.001 par value; 10,544 shares issued and outstanding at January 31, 2011 and April 30, 2010.
    11       11  
Series B: $10,000 par value; 13.837 issued and outstanding, at January 31, 2011 and April 30, 2010.
    138,370       138,370  
Series C: $1.00  par value; 635,835 shares issued and outstanding, at January 31, 2011 and -0- at April 30, 2010.
    635,835          
Common stock, $0.001 par value; 500,000,000 and 100,000,000, respectively, authorized; issued and outstanding 98,470,000 shares and 18,873,000 shares at January 31, 2011 and April 30, 2010
    98,470       18,873  
Treasury stock, 738,333 and 1,738,333  common shares held at January 31, 2011and April 30, 2010
           
Additional paid-in capital
    41,803,152       40,111,695  
Accumulated deficit
    (45,498,274 )     (43,217,597 )
Total Drinks Americas Holdings, Ltd. shareholders' deficiency
    (2,822,436 )     (2,948,648 )
Equity attributable to non-controlling interests
    76,611       62,534  
Total shareholders’ deficiency
    (2,745,825 )     (2,886,114 )
Total liabilities and shareholders’ deficiency
  $ 2,667,653     $ 3,113,205  

See notes to unaudited consolidated financial statements
 
 
F-1

 
 
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
  
 
Nine months ended
   
Three months ended
 
  
 
January 31,
   
January 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 387,781     $ 846,020     $ 141,883     $ 396,742  
                                 
Cost of sales
    345,750       609,256       133,797       287,547  
                                 
Gross margin
    42,031       236,764       8,086       109,195  
                                 
Selling, general & administrative expenses
    1,987,877       3,840,716       661,767       630,659  
                                 
Loss from Operations
    (1,945,846 )     (3,603,952 )     (653,681 )     (521,464 )
                                 
Other income (expense)
                               
Interest
    (733,576 )     (906,888 )     (264,527 )     (389,404 )
Other
    412,822       96,228       412,822       12,751  
Net other income (expense)
    (320,754 )     (810,660 )     148,295       (376,653 )
                                 
Net loss before allocation to non-controlling interests
    (2,266,600 )     (4,414,612 )     (505,386 )     (898,117 )
Net loss  attributable to non-controlling interests
    (14,077 )     -       (26,438 )     -  
Net loss attributable to Drinks Americas Holdings, Ltd.
  $ (2,280,677 )   $ (4,414,612 )   $ (531,824 )   $ (898,117 )
Net loss per share  (basic and diluted)
  $ (0.06 )   $ (0.60 )   $ (0.0 1 )   $ (0.10 )
Weighted average number of common shares (basic and diluted)
    35,683,980       7,354,823       59,880,720       9,255,533  
See notes to unaudited consolidated financial statements
 
F-2

 
 
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
  
 
NINE MONTHS ENDED
 
   
JANUARY 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net loss
  $ (2,280,677 )   $ (4,414,612 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    142, 944       545,803  
Addition to inventory allowance
          271,116  
Reduction in note receivable
          828,547  
Derivative liability     40,375        
Stock and warrants issued for services of vendors,                
promotions, directors, interest payments and stock compensation     163,926       1,157,805  
Investor return of collateral     450,000        
Increase in deferred loan costs
    915,991        
Non-controlling interest in net loss of consolidated subsidiary
    14,077       (12,751 )
Accounts payable settlements
    (420,205 )     270,298  
Changes in operating assets and liabilities:
               
Accounts receivable
    (52,518 )     (157,305 )
Due from factor
          31,786  
Inventories
    101,317       169,031  
Other current assets
    (73,176 )     62,075  
Other assets
    60,837       353,569  
Accounts payable
    778,016       (431,029 )
Accrued expenses
    (46,734 )     1,051,467  
Deferred revenue
    (63,730 )      
Net cash (used in) operating activities
    (269,557 )     (274,200 )
                 
Cash Flow from Investing Activities:
               
Equity investment     (28,752      
Net Cash (used in) investing activities     (28,752        
Cash Flows From Financing Activities:
               
Proceeds from issuance of debt
    294,130       674,408  
Proceeds from issuance of preferred stock
          138,370  
Repayment of debt
    (149,083 )     (541,314 )
Other
    (20,130 )      
Net cash  provided by financing activities
    165,177       271,464  
                 
Net decrease in cash and equivalents
    (133,132 )     (2,736 )
                 
Cash and equivalents at beginning of period
    203,552       30,169  
                 
Cash and equivalents at end of period
  $ 70,420     $ 27,433  
                 
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
  $ 5,075     $ 204,293  
Payment of accounts payable and accrued expenses with shares of common stock
  $ 1,624,666     $ 700,302  
Increase in other current assets equal to increase in notes payable
  $     $ 100,000  
Increase in deferred charges equal to decrease in note receivable, net
  $ 915,991     $ 1,316,908  
Increase in note payable from return of common stock
  $ 450,000     $  
Increase in notes receivable equal to increase in note payable
  $     $ 2,400,000  
Satisfaction of note payable by issuance of common stock
          1,278,547  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 6,061     $ 503  

See notes to consolidated financial statements
 
F-3

 
 
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1. Basis of Presentation and Nature of Business

Description of Business
 
Drinks Americas Holdings, Ltd,. (the “Company”, “we” 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 pre-reverse split shares of Company common stock equivalent to $800,000 post-reverse split 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 2011 fiscal year. Selling, general and administrative expenses for the nine months ended January 31, 2011 were approximately $1,988,000 or approximately $1,853,000 (48%) lower than selling, general and administrative expenses for the nine months ended January 31, 2010 of approximately $3,840,000. Additionally, selling, general and administrative expenses for the three months ended January 31, 2011 of approximately $662,000 remained relatively flat compared to the same three month period one year ago.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared by the Company, in accordance with generally accepted accounting principles pursuant to Regulation S-X of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in audited consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Accordingly, these interim financial statements should be read in conjunction with the Company’s financial statements and related notes as contained in Form 10-K for the year ended April 30, 2010.  In the opinion of management, the interim consolidated financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of the operations for the nine and three months ended January 31, 2011 are not necessarily indicative of the results of operations to be expected for the full year.

Reverse Stock Split

On November 15, 2010, the Company amended its certificate of incorporation to affect a 15-to-1 reverse stock split, which was approved by Financial Industry Regulatory Authority and became effective. As a result of the reverse split, each 15 shares of Common Stock (the “Old Shares”) became and converted into one share of Common Stock (the “New Shares”), with stockholders who would receive a fractional share to receive such additional fractional shares as l resulted in the holder having a whole number of shares. All references to shares of common stock in the following financial statements have been retroactively restated in accordance with FASB ASC 260-10-55-12. Issued and outstanding and treasury shares as reported on the balance sheets at January 31, 2011 and April 30, 2010 have been retroactively restated to the earliest period presented to give effect for the reverse stock split. Earnings per share calculations for the nine and three months ended at January 31, 2011 and 2010 are based on the New Shares. As such, the total number of the common stock shares outstanding as of January 31, 2011 and 2010 were 98,470,000 and 18,873,000 shares, respectively.

 
 
F-4

 
 
2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated balance sheets as of  January 31, 2011 and April 30, 2010, the consolidated results of operations for the nine and three months ended January 31, 2011 and 2010, and consolidated cash flows for the nine months ended January 31, 2011 and 2010 , 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 January 31, 2011 and April 30, 2010 are those of Holdings. Common shares issued and outstanding have been restated to give effect to a 15-1 reverse stock split which became effective November 15, 2010.
 
Going Concern
 
The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of January 31, 2011, the Company has a shareholders' deficiency of approximately $2,746,000 applicable to controlling interests compared with $2,886,000 applicable to controlling interests at April 30, 2010, and working capital deficiency of $4,810,000 as of January 31, 2011 and has incurred significant operating losses and negative cash flows since inception. For the nine and three months ended January 31, 2011, the Company sustained a net loss after allocation of non-controlling interest of approximately $2,281,000 and $532,000 , respectively compared to a net loss of $4,415,000 and $898,000, respectively for the nine and three months ended January 31, 2010 and used cash of approximately $274,000 in operating activities for the nine months ended January 31, 2011 compared with approximately $274,000 for the nine months ended January 31, 2010. 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 provide 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 January 31, 2011 and April 30, 2010, 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 concluded that there was no impairment as the Company actively invested in the launch of Rheingold Beer in August 2010.
  
For the nine months ended January 31, 2011, 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 and New York markets, New Jersey, Connecticut, Pennsylvania, Michigan, Ohio, Kentucky and Georgia as of January 2011. By April 30, 2011, the Company plans additional shipments of Rheingold beer into Massachusetts, Maryland, Florida, Texas, Oklahoma, West Virginia and Washington, D.C.
 
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 nine and three months ended January 31, 2011. 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 January 31, 2011, the consolidated net operating loss carry forward available to offset future years’ taxable income is in excess of approximately $36,600,000 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 nine and three months ended January 31, 2011 and 2010, 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates.
 
Recent accounting pronouncements
 
In July 2010, the FASB issued Accounting Standard Update (“ASU”) 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”.  This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force.  The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  Earlier application is permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial position, results of operations or cash flows of the Company.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s Consolidated Financial Statements upon adoption.
 
3. Accounts Receivable
 
Accounts Receivable as of January 31, 2011 and April 30, 2010, consist of the following:
 
  
 
January 31, 2011
   
April 30, 2010
 
   
(Unaudited)
       
             
Accounts receivable
 
$
235,936
   
$
194,192
 
                 
Allowances
   
(117,072
)
   
(127,846
)
   
$
118,864
   
$
66,346
 
 
For the nine months ended January 31, 2011, $23,390 was written-off as uncollectible.
 
 
F-7

 
 
4. Inventories
 
Inventories as of January 31, 2011 and April 30, 2010 consist of the following:
  
 
January 31, 2011
(Unaudited)
   
April 30, 2010
 
Raw Materials
 
$
87,546
   
$
87,546
 
Finished goods
   
33,744
     
168,948
 
Reserves for excess and slow-moving inventories
   
     
(33,886
)
   
$
121,291
   
$
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. For the quarter ended January 31, 2011, the Company charged $40,000 to cost of goods sold.
 
5. Other Current Assets
 
Other Current Assets as of January 31, 2011and April 30, 2010 consist of the following:
 
  
 
January 31, 2011
(Unaudited)
   
April 30, 2010
 
Employee advances
 
$
56,179
   
$
 
Prepaid Other
   
36,786
     
19,789
 
   
$
92,965
   
$
19,789
 
 
Prepaid other are comprised of prepaid marketing fees, employee travel advances and expenses.
 
6. Property and Equipment
 
Property and equipment as of January 31, 2011 and April 30, 2010 consist of the following:
 
  
     
January 31,
       
  
 
Useful
Life
 
2011
(Unaudited)
   
April 30,
2010
 
Computer equipment
 
5 years
 
$
23,939
   
$
23,939
 
Furniture & fixtures
 
5 years
   
10,654
     
10,654
 
Automobiles
 
5 years
   
70,975
     
68,337
 
Leasehold Improvements
 
5 years
   
66,259
     
66,259
 
Production molds & tools
 
5 years
   
122,449
     
122,449
 
         
294,276
     
291,638
 
Accumulated depreciation
       
(276,960
)
   
(259,329
)
       
$
17,316
   
$
32,309
 
 
Depreciation expense for the nine and three months ended January 31, 2011 and 2010, was $17,631 and $5,877 and $24,157 and $8,052, respectively.  Depreciation expense for the year ended April 30, 2010 was $26,591.
 
 
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 January 31, 2011 and April 30, 2010, intangible assets are comprised of the following:
 
  
 
January 31,
2011
(Unaudited)
   
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
   
(532,346
)
   
(407,033
)
   
$
1,845,987
   
$
1,971,300
 
 
Amortization expense for the nine and three months ended January 31, 2011 and 2010, was $125,313 and $41,771 and $121,012 and $40,338, respectively. Amortization expense for the year ended April 30, 2010 was $161,350.
 
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.    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 January 31, 2011 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 166,667 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 223,867 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 80,000 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 311,608 Placement Agent Warrants as follows: effective February 24, 2010, a warrant to purchase 28,334 shares of Company common stock at an exercise price of $0.2391; effective February 11, 2010, a warrant to purchase 1,333,334 shares of Company common stock at an exercise price of $0.015; effective January 15, 2010, a warrant to purchase 66,667 shares of Company common stock at an exercise price of $0.0938 ; effective December 30, 2009, a warrant to purchase 45,455 shares of Company common stock at an exercise price of $0.01375; effective August 28, 2009, a warrant to purchase 12,821  shares of Company common stock at an exercise price of $0.9750  $0.065; effective June 19, 2009, a warrant to purchase 16,667 shares of Company common stock at an exercise price of $1.4063 ; and, effective June 19, 2009, a warrant to purchase 8,334  shares of Company common stock at an exercise price of $6.5625 . 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. For the nine and three months ended January 31, 2011, $15,405 and $5,135, respectively has been expensed. As of April 30, 2010, $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 800,248  shares of our common stock (of which 200,000 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 300,124  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 84,216 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 168,243 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 168,243  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, 200,000 of the Company shares having an aggregate value of $450,000 that were issued in July, 2009 were transferred to the Investor. 
 
 
F-11

 
 
On October 27, 2009, the Investor declared a second default under our $4,400,000 debenture because of the failure of the Pledged shares, to legally secure the debenture that had been acquired by St. George.  The Company has secured an agreement from the Investor not to enforce the default based on any decline in value of the pledge shares that has occurred in the past or that may occur prior to December 31, 2006.  Under the terms of such agreement, the Investor received title to 214,000 of non-Company pledged shares having a fair market value on that date of $160,500.  The fair value of these shares totaled $160,500 and has been reflected as a reduction of the Debenture payable and an addition to additional paid-in capital.
 
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 1,200,373 shares of Company common stock to the individuals at a fair market value of $720,224.   Included in the total shares is 300,124 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 300,124 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 January 31, 2011, the drinks debenture, excluding the return of the 200,000 shares (post-reverse split) issued as collateral to our Investor in July 2009 in the amount of $450,000 that was previously treated as a reduction in our loan balance, was $1,688,813, offset by debenture debt discount of $934,313, investor notes receivable of $532,995 and deferred loan costs of $495,073 resulting in a net asset of deferred loan costs balance of $273,567, which has been reflected as a non-current asset in the accompanying consolidated balance sheet. The returned collateral is  reflected separately in the consolidated balance sheet as an investor note payable in current liabilities. 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 is reflected as a non-current asset in the accompanying consolidated balance sheet.
 
9. Other 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 23,334 shares of Company stock at an exercise price of $7.50. 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. As of January 31, 2011 and April 30, 2010 the warrants were fully amortized. As of January 31, 2011 and April 30, 2010, a warrant to purchase an aggregate of 18,334 shares of Company stock was issued and the balance of 5,000 remains to be issued.
 
On June 14, 2007, in connection with an endorsement agreement, the Company issued warrants to purchase 53,400 shares of the Company’s common stock at a price of $19.26 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 January 31, 2011 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 200  shares of the Company’s common stock per month at the monthly average market price.  At April 30, 2010, warrants to purchase 7,200 shares of the Company’s stock accrued under this agreement, of which a warrant for 3,600  shares was issued at exercise prices ranging from $2.85 to $31.80 per share of common stock. Each warrant issuance has an exercise period of 5 years from date of issuance.  At January 31, 2011, and April 30, 2010, the agreement was terminated and the balance of 3,600 shares will not be issued.
 
 
F-12

 
 
10. Notes and Loans Payable
 
Notes and Loans Payable as of January 31, 2011 and April 30, 2010 consisted of the following: 
 
  
 
January 31, 2011
       
  
 
(Unaudited)
   
April 30, 2010
 
Convertible note (a)
 
$
100,000
   
$
100,000
 
Olifant note (b)
   
620,260
     
695,260
 
Convertible promissory notes (c)
   
177,130
     
-
 
Other (d)
   
229,500
     
41,936
 
     
1,126,890
     
837,196
 
Less current portion
   
926,890
     
437,196
 
                 
Long-term portion
 
$
200,000
   
$
400,000
 
 
(a)
 
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 16,667 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 8,889 shares of common stock with a fair value of $973 as damages for failing to timely register the 16,667 common shares. For the nine and three months ended  January 31, 2011, interest expense of $9787 and $3,296, respectively was accrued and expensed. At April 30, 2010, interest expense of $6,061 was accrued on the note and paid on June 30, 2010.
 
On December 10, 2010, the convertible note payable in the amount of $100,000 was amended and extended for six months, and the Company continues its discussions with the note holder regarding additional consideration to be provided for extending the term of the note.
 
On November 9, 2009, the Company issued the 16,667 shares valued at $10,000, which the Company deemed a loan origination fee. At January 31, 2011 and April 30, 2010, $0 and $5,222, respectively has been recorded as a deferred charge on the balance sheets and $10,000 and $4,778, respectively has 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 1,990,091 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 330,033 shares as payment for the stock portion of the installment, and at the election of the sellers, $63,000 in cash and 138,614 in common stock as payment of the cash and interest portion on the first installment. At April 30, 2010 interest expense of $4,944 was accrued. For the nine and three months ended January 31, 2011, interest expense of $15,333 and $5,111, respectively has been expensed and accrued.
 
In connection with the Olifant Promissory Note, Company and the note holders amended the payment terms of the past due original promissory note regarding the second $200,000 note installment.
 
On January 18, 2011, in connection with the Olifant Promissory Note, the Company amended and restated a portion of the debt under a Wrap Around Agreement dated January 19, 2011, providing for the assignment and issuance of a Restated Convertible Promissory Note (the “First Restated Note) in the principal amount of $75,000 to an investor, such that the Company sold, with the note holders approval, $75,000 of the principal amount to an investor by issuing to the investor an 8% convertible promissory note due June 18, 2011. On January 18, 2011, the investor paid the note holders $75,000. As of January 31, 2011, interest of $217 has been expensed and accrued by the Company. The conversion features of the note require derivative accounting treatment. See note 11 - Derivative Liability.

 The Company and the note holders further amended the payment terms of the second note installment such that the note holders agreed to defer to March 15, 2011, a second payment of $75,000 and to receive $20,000 of Company common stock (2,000,000 shares) which the Company issued on February 3, 2011 as full and final settlement of the second $200,000 installment pending timely receipt of the second $75,000 payment due March 15, 2011. (See Note 17. Subsequent Events.) On March 14, 2011, the Company amended and restated the a portion of the debt under a Wrap Around Agreement dated March 14, 2011, providing for the assignment and issuance of a Restated Convertible Promissory Note (the “Second Restated Note) in the principal amount of $75,000 to an investor. On March 14, 2011, the Company sold, with the note holders approval, the second principal payment of $75,000 to an investor by issuing to the investor an 8% convertible promissory note due September 18, 2011. On March 15, 2011, in accordance with the terms of the amended payment terms, the investor paid the note holders the second $75,000 principal payment.

(c)
On July 12, 2010, the Company settled its lawsuit with James Sokol (“Sokol”) (see Note 18- Litigation) in accordance with the settlement, the Company issued a 6% convertible promissory note in the amount of $47,130. Principal and interest on the note are payable upon the successful completion by the Company of a $1,000,000 financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the principal and interest due on the note for an equivalent value of common shares of the Company. The Company accrued interest payable of $872 and $723, for the nine and three months ended January 31, 2011.  The conversion features of the note require derivative accounting treatment. See note 11 - Derivative Liability.
 
Additionally, on November 17, 2010, the Company borrowed $55,000 from an investor under a convertible promissory note at an annual interest rate of 8%. At January 31, 2011, the Company accrued interest payable of $917. The conversion features of the note require derivative accounting treatment. See note 11 - Derivative Liability.
 
On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At January 31, 2011, the Company accrued interest payable of $1,568.

(d)
On March 4, 2010, the Company issued to a shareholder 133,333 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 January 31, 2011 and April 30, 2010, respectively.
 
 
F-14

 
 
11. Derivative Liability
 
In June 2008, the FASB issued accounting guidance, which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions.  Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 “Derivative and Hedging” and should be classified as a liability and marked-to-market.  The statement was effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings.
 
ASC 815-40 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock.  As disclosed in Note 10, during December of 2010, the Company entered into a convertible loan which contains a variable conversion price.   In accordance with ASC 815-40, this conversion option is classified as a derivative liability. This amount was credited to conversion option liability when the note was issued.  The conversion option liability was revalued at January 31, 2011 at $69,204 and the increase in value of $101,473 was charged to expense during the period. The estimated values of the conversion options were determined using the Black-Scholes pricing model and the following assumptions:  Expected volatility of 67.74%;   Expected life (years) of .38 to 1.92; risk free interest rate of 0.17%; and dividend rate of 0.
 
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible securities. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.  Accordingly, sufficient shares are deemed available to satisfy the potential conversion of the conventional convertible notes issued prior to the convertible notes issued under the SPA during the fiscal third quarter of 2011.  
 
12. Accrued Expenses
 
Accrued expenses consist of the following at January 31, 2011 and April 30, 2010:
 
  
 
January 31, 2011
(Unaudited)
   
April 30, 2010
 
Payroll, board compensation and consulting fees owed to officers, directors and shareholders
 
$
899,467
   
$
1,220,392
 
Other payroll and consulting fees
   
 445,509
     
688,740
 
Interest
   
669,624
     
405,394
 
Other
   
 -
     
 429,532
 
   
$
2,014,600
   
$
2,744,058
 
 
At January 31, 2011 and April 30, 2010, other accrued expenses includes accruals for professional legal services , directors and officers liability insurance, public relations, marketing fees and business travel expenses.
 
13. Shareholders' Deficiency
 
Additional transactions affecting the Company's equity for the nine months ended January 31, 2011 are as follows:

On January 24, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert  $49,000 of the outstanding balance of the Debenture in exchange for 7,000,000 shares of our common stock.
 
On January 14, 2011, we issued 3,333,334 shares of our common stock under our 2011 Stock Incentive Plan with a fair value of $25,000 for business consulting services. The shares vested immediately on the date of grant.
 
 
 
F-15

 

On January 11, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert  $48,000 of the outstanding balance of the Debenture in exchange for 6,400,000 shares of our common stock.

On January 10, 2011, we issued 1,000,000 shares of our common stock under our 2011 Stock Incentive Plan with a fair value of $10,000 for business consulting services. The shares vested immediately on the date of grant.

On January 6, 2011, three shareholders returned to the Company 115,680 of shares issued in error. The value of the shares was $134,276 at date of grant.

On January 6, 2011, pursuant to the terms of the Sokol legal settlement (see Note 18. Commitments and Contingencies- Litigation) the Company issued 3,720,479 shares to Mr. Sokol with a fair market value of $50,000.

On January 6, 2011, in connection with the Socius CG II, Ltd. (“Socius”), litigation settlement (See Note 16 –Litigation), we issued 6,300,000 shares of our common stock with a fair value of $63,000 to Socius in compliance with the September 9, 2010 court approved settlement agreement as partial settlement of the outstanding obligation.

On January 4, 2011, we issued 760,744 shares of our common stock under our 2010 Stock Incentive Plan with a fair value of $15,215 for legal services. The shares vested immediately on the date of grant.

On January 4, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $63,780 of the outstanding balance of the Debenture in exchange for 6,000,000 shares of our common stock.

On December 30, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $55,950 of the outstanding balance of the Debenture in exchange for 5,000,000 shares of our common stock.

On December 16, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Chief Financial Officer (“CFO”) in the amount of $40,000, we issued a convertible promissory note to our CFO. The note was purchased by an investor with the consent of the CFO. In connection therewith, the investor submitted a Notice of Conversion, to convert $5,000 of the outstanding principal balance of the Note in exchange for 914,635 shares of our common stock.

On December 17, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $46,000 of the outstanding balance of the Debenture in exchange for 4,000,000 shares of our common stock.

On December 9, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $40,250 of the outstanding balance of the Debenture in exchange for 3,500,000 shares of our common stock.

On December 9, 2010, in connection with the Socius CG II, Ltd. (“Socius”), litigation settlement (See Note 16 –Litigation), we issued 4,300,000 shares of our common stock with a fair value of $81,700 to Socius in compliance with the September 9, 2010 court approved settlement agreement as partial settlement of the outstanding obligation.

On December 3, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $30,780 of the outstanding balance of the Debenture in exchange for 2,700,000 shares of our common stock.

On November 30, 2010, in connection with the November 19, 2010 convertible note purchase agreement with an investor, the investor submitted a Notice of Conversion, to convert $15,000 of the outstanding principal balance of the Note in exchange for 1,538,462 shares of our common stock.

 
 
F-16

 
 
On November 29, 2010 in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $50,325 of the outstanding balance of the Debenture in exchange for 2,500,000 shares of our common stock.
 
On November 23, 2010 in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $60,000 of the outstanding balance of the Debenture in exchange for 1,500,000 shares of our common stock.
 
On November 19, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Chief Financial Officer (“CFO”) in the amount of $40,000, we issued a convertible promissory note to our CFO. The note was purchased by an investor with the consent of the CFO. In connection therewith, the investor submitted a Notice of Conversion, to convert $20,000 of the outstanding principal balance of the Note in exchange for 1,518,989 shares of our common stock.

On November 17, 2010, we issued 280,000 shares of our common stock under our 2010 Stock Incentive Plan with a fair value of $10,360 for marketing consulting services. The shares vested immediately on the date of grant.
 
On November 17, 2010, in connection with the Socius CG II, Ltd. (“Socius”), litigation settlement (See Note 18 –Litigation), we issued 3,300,000 shares of our common stock with a fair value of $122,100 to Socius in compliance with the September 9, 2010 court approved settlement agreement as partial settlement of the outstanding obligation.
 
On November 16, 2010 in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $28,500 of the outstanding balance of the Debenture in exchange for 1,000,000 shares of our common stock.
 
On November 15, 2010, the Company’s amended its certificate of incorporation to effect a 15-to-1 reverse stock split was approved by Financial Industry Regulatory Authority and became effective. As a result of the reverse split, each 15 shares of Common Stock (the “Old Shares”) will become and be converted into one share of Common Stock (the “New Shares”), with stockholders who would receive a fractional share to receive such additional fractional shares as will result in the holder having a whole number of shares. All references to shares of common stock in the financial statements have been retroactively restated. Issued and outstanding shares as reported on the balance sheets at January 31, 2011 and April 30, 2010 have been retroactively restated to give effect for the reverse stock split. Earnings per share calculations for the nine and three months ended January 31, 2011 and 2009 are based on the New Shares. As such, the total number of the common stock shares outstanding as of January 31, 2011 and 2009 were 98, 469,926 and 11,645,325 shares, respectively.
 
 
F-17

 
 
14.  Stock Incentive Plans
 
On January 6, 2011, the Company filed a registration statement on Form S-8 and registered 30,000,000 shares issuable under the 2011 Incentive Stock Plan (the “2011 Plan”).  As of January 31, 2011, the Company has issued 16,986,797 shares of Company common stock under the 2011 Plan as compensation for legal, financial and marketing services at a fair value of $110,215 which vested immediately upon grant As of January 31, 2011, 13,013,203 shares remain available for future issuance under the 2011 Plan.

On April 13, 2010, the Company filed a registration statement on Form S-8 and registered 2,000,000 shares issuable under the 2010 Incentive Stock Plan (the “2010 Plan”).  As of January 31, 2011, the Company has issued 1,506,839 shares of Company common stock under the 2010 Pan as compensation for legal and marketing services at a fair value of $114,272 which vested immediately upon grant. As of January 31, 2011, 493,161shares 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 1,333,333 shares issuable under the 2009 Incentive Stock Plan (the “2009 Plan”). As of April 30, 2009, the Company issued 906,490 shares of Company common stock under the 2009 Plan as compensation for legal and marketing services at a fair value of $316,450 which vested immediately upon grant. As of January 31, 2011, 1,289,163 shares of common stock were issued under the plan as compensation for legal and marketing services at a fair value of $382,117 and 44,170 shares remain available for future issuance under the 2009 Plan.
 
 
F-18

 
 
In January 2009, the Company’s shareholders approved the 2008 Incentive Stock 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, 666,667 common shares were reserved for distribution. As of January 31, 2011, 618,333 shares have been issued and 48,334 remain available for future issuance. Of this amount, 30,000 of the options  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 233,333 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 385,000 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 278,333 options to purchase shares of its common stock to its employees including 166,667 to its CEO; 33,333 to its COO and 20,000 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 (66,667) and the consultants (40,000) 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. ASC 718-10, “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 nine and three months ended January 31, 2011 was $62,859 and $20,953, respectively. Option Expense for the nine and three months ended January 31, 2010 was $70,452 and $23,484, respectively.
 
 
F-19

 
 
15. Income Taxes
 
No provision for income taxes is included in the accompanying statements of operations because of net operating losses for the nine and three months ended January 31, 2011 and 2010, respectively. Holdings and Drinks previously filed income tax returns on a June 30 and December 31 tax year, respectively; however, both companies applied for, and received a change in tax year to April 30, and file a federal income tax return on a consolidated basis. Olifant files income tax returns on a February 28 tax year. The consolidated net operating loss carry forward as of January 31, 2011 to offset future years' taxable income is approximately $36,600,000, 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.
 
16.  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 January 31, 2011, and April 30, 2010, unpaid fees owed to a director and his firm aggregated $-0- and $91,000, respectively. As of January 31, 2011, the Company issued 293,333 in full satisfaction of the unpaid fees owed to the 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 January 31, 2011 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 January 31, 2011 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 January 31, 2011, we were indebted to the consulting company in the amount of $76,500.

Royalty Fees
 
In connection with the Company's distribution and licensing agreements with its equity investee the Company incurred royalty expenses for the nine and three months ended January 31, 2011 and 2010 of approximately $22,884 and $4,724, respectively and $53,682 and $42,912, respectively.  The operations and the net assets are immaterial.
 
Loan Payable
 
From July 2007 through January 31, 2011, 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 January 31, 2011 and April 30, 2010, amounts owed to our CEO on these loans including accrued and unpaid interest aggregated $5,587 and $154,670, respectively. For the nine and three months ended January 31, 2011 and 2009, interest incurred on these loans aggregated $5,075 and $312, respectively and $29,051 and $9,183, respectively.
 
17. Customer Concentration
 
For the nine and three months ended January 31, 2011, the Company earned royalty revenue under its agreement with Mexcor, Inc. that represented 34% and 29% of the its revenue, respectively.  For the nine months ended January 31, 2011, one customer accounted for 16% of the Company’s revenue and for the three months ended January 31, 2011 two customers accounted for 14% and 12%, respectively of the Company’s revenue. For the nine months ended January 31, 2010, three customers accounted for 19%, 12% and 11%, respectively of the Company’s revenue and for the three months ended January 31, 2010 three customers accounted for 32%, 18% and 14%, respectively of the Company’s revenue.

 
 
F-20

 
 
18. 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 nine and three months ended January 31, 2011, was approximately $27,000 and $9,000, respectively. Rent expense for the nine and three months ended January 31, 2010 was approximately $15,000 and $28,000, respectively. Rent expense for the three and nine months ended January 31, 2010 is net of a landlord credit of approximately $13,000.
 
Future minimum payments as of January 31, 2011for all leases are approximately as follows:
 
Years Ending
     
April 30,
 
Amount
 
2011
 
$
9,000
 
2012
   
15,000
 
   
$
33,000
 
 
License Agreements
 
In November 2005, the Company entered into an eight-year license agreement for sales of Trump Super Premium Vodka. Under the agreement, the Company is required to pay royalties on sales of the licensed product. The agreement requires minimal royalty payments through November 2012 which if not paid could result in termination of the license. The Company is currently 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 October 31, 2010 and April 30, 2010, the outstanding unpaid balance was $-0- and $125,000.  On August 13, 2010, we issued 786,667 shares of our common stock with a fair value of $28,320 and on August 25, 2010, we issued 1,020,279 shares of our common stock with a fair value of $28,313 as payments in full and final settlement of our obligation.

 
 
F-21

 
 
In February 2008, we entered into a joint venture with Grammy Award-winning producer and artist, Dr. Dre. The Company and Dr. Dre have formed the joint venture to identify, develop, and market premium alcoholic beverages. The deal is under the umbrella of the agreement between the Company and Interscope Geffen A&M Records.  Our Leyrat Cognac is the joint ventures’ first beverage. In January 2009, the Company launched its Leyrat Estate Bottled Cognac, which it imports from a 200-year-old distillery in Cognac, France. The Company granted 10% of its 50% interest in the brand to the producer of the product, leaving us with a 45% interest, in return for the rights to distribute the product in the United States. The Company has 5% of the rights for the brand in Europe. The Company continues to work toward a major product launch agreeable between the parties.
 
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 $63,730 for the nine months and $21,243 for the three months ended January 31, 2011. As of January 31, 2011 and April 30, 2010, deferred revenue on the balance sheet amounted to $0 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 pre-reverse split shares of Company common stock equivalent to 800,000 post-reverse split  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 15th day of that month.

Additionally, the Company will issue to Mexcor, warrants to acquire 2,000,000 pre-reverse split shares of the Company’s common stock equivalent to 133,334 post-reverse split 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 pre-reverse split shares of Company common stock equivalent to 133,334 post-reverse split 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-22

 
 
Litigation
 
On March 15, 2011, the parties reached an agreement to the December 2009 matter of Niche Media, Inc., an advertising vendor, that 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 of approximately $150,000. The case has been withdrawn and the Company has agreed to pay $3,200 per month for 28 months ($90,000 total) to resolve this claim. Final definitive settlement documents are being drafted. On March 7, 2011, the Company received notice of an award from the arbitrator in the Matter of Arbitration 33 154 00283 09 between Liquor Group Holding , LLC (“LG”) and the Company.    In the Award, the arbitrator found that the Company did not breach its contract with LG and that there was no tortuous interference by the Company with LG’s business and thus did not award LG any damages. The arbitrator found that the liquidation and failure to pay for products sold by LG constituted a breach of contract.  The arbitrator found that the Company was damaged by LG’s breach in the amount of $180,058.62 and that pursuant to the contract between the Company and LG such damages were to be tripled such that the damages became $540,175.86. The arbitrator also found that pursuant to the contract between the Company and LG, LG was to pay any and all costs and expenses incurred by the Company in enforcing or establishing its rights under the agreement including reasonable attorney’s fees.  The arbitrator awarded the Company $120,605.15 in reasonable attorney’s fees along with an additional $3,878.04 in costs, for a total of $124,483.19. In summary, the arbitrator found that the total owed by LG to the Company for damages, fees, expenses and costs to be paid to the Company is $664,659.05.

The administrative fees and expenses of the American Arbitration Association, totaling $7,000 was to be borne equally between the Company and LG. The other administrative fees of the American Arbitration Association totaling $5,775 and the compensation and expense of the arbitrator totaling $19,085 were to be borne equally. Therefore, the Company was to reimburse LG the sum of $1,762 representing that portion of said fees and expenses in excess of the apportioned costs previously incurred by LG.

On July 29, 2010, we entered into a settlement agreement with Socius CG II, Ltd. (“Socius”) pursuant to which we agreed to issue 2,586,667 shares of our common stock with a fair value of $131,920, 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 2,586,667  shares to Socius as exempt from registration pursuant to the Section 3(a)(10) registration exemption. On November 17, 2010, since we could only deliver partial payment in shares, as we had attained the limit of our authorized shares, we delivered 3,300,00 shares with a fair value of $122,100 to Socius in partial settlement of the outstanding obligation. On December 9, 2010, we delivered 4,300,000 shares with a fair value of $81,700 to Socius in partial settlement of the outstanding obligation. On January 6, 2011, we delivered 6,300,00 shares with a fair value of $63,000 to Socius in partial settlement of the outstanding obligation. On February 10, 2011, we delivered 8,925,000 shares with a fair value of $48,195 to Socius in partial settlement of the outstanding obligation. (See Subsequent Event Note – 17.)
 
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) and thereafter commenced the civil action. 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 defend vigorously this suit.  In addition, the Company has commenced a countersuit for damage and theft of services.  As of November 30, 2009, we pledged 688,334 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.  The Company intends to defend vigorously against this claim and pursue its counterclaims to judgment.

 
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 1,000,000 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 1,000,000 shares of the Company’s common stock to the Company. Additionally, in accordance with the settlement, the Company issued a 6% convertible promissory note in the amount of $47,130. Principal and interest on the note are payable upon the Company’s successful completion of a $1,000,000 financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the principal and interest due on the note for an equivalent value in common shares of the Company. The Company accrued interest payable of $872 and $723, for the nine and three months ended January 31, 2011.

 
 
F-23

 
 
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 786,667 shares of our common stock with a fair value of $28,320 and on August 25, 2010, we issued 1,020,279 shares of our common stock with a fair value of $28,313 as payments in full and final settlement of our obligation.
 
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-24

 

19. Subsequent Events

The Company has evaluated events subsequent to January 31, 2011 to assess the need for potential recognition or disclosure in this report. As a result of this evaluation, the Company has identified the following subsequent events: 
 
On March 15, 2011, the parties reached an agreement to the December 2009 matter of Niche Media, Inc., an advertising vendor, that 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 of approximately $150,000. The case has been withdrawn and the Company has agreed to pay $3,200 per month for 28 months ($90,000 total) to resolve this claim. Final definitive settlement documents are being drafted. (See Note 18-Litigation)

On March 7, 2011, the Company received notice of an award from the arbitrator in the Matter of Arbitration 33 154 00283 09 between Liquor Group Holding , LLC (“LG”) and the Company.  In the Award the arbitrator found that the Company did not breach its contract with LG and that there was no tortuous interference by the Company with LG’s business and thus did not award LG any damages. (See Note 18-Litigation). The arbitrator found that the liquidation and failure to pay for products sold by LG constituted a breach of contract.  The arbitrator found that the Company was damaged by LG’s breach in the amount of $180,058.62 and that pursuant to the contract between the Company and LG such damages were to be tripled such that the damages became $540,175.86. The arbitrator also found that pursuant to the contract between the Company and LG, LG was to pay any and all costs and expenses incurred by the Company in enforcing or establishing its rights  under the agreement including reasonable attorney’s fees.  The arbitrator awarded the Company $120,605.15 in reasonable attorney’s fees along with an additional $3,878.04 in costs, for a total of $124,483.19. In summary, the arbitrator found that the total owed by LG to the Company for damages, fees, expenses and costs to be paid to the Company is $664,659.05.
 
The administrative fees and expenses of the American Arbitration Association, totaling $7,000 was to be borne equally between the Company and LG.  The other administrative fees of the American Arbitration Association totaling $5,775 and the compensation and expense of the arbitrator totaling $19,085 were to be borne equally. Therefore, the Company was to reimburse LG the sum of $1,762 representing that portion of said fees and expenses in excess of the apportioned costs previously incurred by LG.
On March 11, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert  $28,170 of the outstanding balance of the Debenture in exchange for 9,000,000 shares of our common stock.

On March 7, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert  $40,800 of the outstanding balance of the Debenture in exchange for 12,000,000 shares of our common stock.

On February 25, 2011, an investor who purchased our 8% convertible promissory note dated October 1, 2010, in the amount of $45,980, submitted a second Notice of Conversion to convert $4,800 of the principal amount of the convertible promissory note for 2,400,000 shares of our common stock.

On February 18, 2011, we issued 4,000,000 shares of our common stock under our 2011 Stock Incentive Plan with a fair value of $20,000 for marketing services. The shares vested immediately on the date of grant.

On February 18, 2011, we issued 2,000,000 restricted shares of our common stock with a fair value of $10,000 for marketing consulting services.

On February 17, 2011, we issued 4,444,444 shares of our common stock under our 2011 Stock Incentive Plan with a fair value of $20,000 for business consulting services. The shares vested immediately on the date of grant.

On January 18, 2011, in connection with the Olifant Promissory Note (See Note 10 (b) Notes and Loans Payable) the Company amended and restated the a portion of the debt under a Wrap Around Agreement dated January 19, 2011, providing for the assignment and issuance of the Restated Convertible Promissory Note (the “Restated Note) in the principal amount of $75,000 to an investor.

 
 
F-25

 
 
On February 3, 2011, in connection with the Olifant Promissory Note (See Note 10 (b) Notes and Loans Payable), the Company issued to the original note holders 2,000,000 shares (1,000,000 shares each) of its common stock with a fair market value in the aggregate of $20,000.
 
On February 4, 2011, the investor submitted a first Notice of Conversion to convert $10,000 of the principal amount of the Restated Note for 3,448,376 shares of our common stock.
 
On February 9, 2011, the investor submitted a second Notice of Conversion to convert $6,000 of the principal amount of the Restated Note for 2,068,966 shares of our common stock.
 
On February 14, 2011, the investor submitted a third Notice of Conversion to convert $10,000 of the principal amount of the Restated Note for 3,571,429 shares of our common stock.
 
On February 23, 2011, the investor submitted a fourth Notice of Conversion to convert $6,000 of the principal amount of the Restated Note for 2,400,000 shares of our common stock.
 
On March 1, 2011, the investor submitted a fifth Notice of Conversion to convert $9,000 of the principal amount of the Restated Note for 3,750,000 shares of our common stock.

On March 8, 2011, the investor submitted a sixth Notice of Conversion to convert $10,000 of the principal amount of the Restated Note for 4,761,905 shares of our common stock.

On March 11, 2011, the investor submitted a seventh Notice of Conversion to convert $6,000 of the principal amount of the Restated Note for 3,157,895 shares of our common stock.

On March 14, 2011, in connection with the Olifant Promissory Note (See Note 10 (b) Notes and Loans Payable) the Company amended and restated the a portion of the debt under a Wrap Around Agreement dated March 14, 2011, providing for the assignment and issuance of the Restated Convertible Promissory Note (the “Second Restated Note) in the principal amount of $75,000 to an investor.

On February 14, 2010, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert  $50,670 of the outstanding balance of the Debenture in exchange for 9,000,000 shares of our common stock.

On February 10, 2011, in connection with the Socius CG II, Ltd. (“Socius”), litigation settlement (See Note 18 –Litigation), we issued 8,925,000 shares of our common stock with a fair value of $48,195 to Socius in compliance with the September 9, 2010 court approved settlement agreement as partial settlement of the outstanding obligation.

On February 10, 2011, we issued 3,448,275 shares of our common stock under our 2011 Stock Incentive Plan with a fair value of $20,000 for business consulting services. The shares vested immediately on the date of grant.

On February 3, 2011, an investor who purchased our 8% convertible promissory note, in the amount of $45,980, submitted a first Notice of Conversion to convert $5,482 of the principal amount of the convertible promissory note for 2,300,140 shares of our common stock.

On February 3, 2011, in connection with the June 18, 2009 Drinks Debenture financing by an investor, the investor submitted a Notice of Conversion, to convert $46,750 of the outstanding balance of the Debenture in exchange for 8,500,000 shares of our common stock.

 
 
F-26

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Unless otherwise indicated or the context otherwise requires, all references in this Report on Form 10-Q to “we”, “us”, “our” and the “Company” are to Drinks Americas Holdings, Ltd., a Delaware corporation and formerly Gourmet Group, Inc., a Nevada corporation, and its majority owned subsidiaries Drinks Americas, Inc., Drinks Global Imports, LLC, D.T. Drinks, LLC, Olifant USA, Inc. (as of January 15, 2009), and Maxmillian Mixers, LLC and Maxmillian Partners, LLC.
 
Cautionary Notice Regarding Forward Looking Statements
 
The disclosure and analysis in this Report contains some forward-looking statements. Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance and financial condition, in particular, future sales, product demand, competition and the effect of economic conditions include forward-looking statements within the meaning of section 27A of the Securities Act of 1933, referred to herein as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, referred to herein as the Exchange Act.
 
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations and other projections, and statements expressing general optimism about future operating results, and non-historical information, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved.
 
Readers are cautioned that our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements.
 
As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended April 30, 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 nine and three months ended January 31, 2011, compared to the nine and three months ended January 31, 2010, 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
 
Comparison of the Three and Nine Months Ended January 31, 2011 and 2010

Net Sales: For the nine months ended January 31, 2011, net sales were approximately $388,000 under our revised royalty revenue business model compared to net sales of approximately $846,000 for the nine months ended January 31, 2010 which level of volume was driven by the Company's wholesale business model. The decrease of 54% reflects 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 well as the delay in the second quarter of 2009 in replacing our working capital financing following the termination of our financing facility with Sovereign Bank. Our business continues to be impacted by a shortage of working capital and the continuing weak economy.

Net sales for the three months ended January 31, 2011 were approximately $142,000 compared to approximately, $397,000 for the three months ended January 31, 2010 reflecting a 64% decrease resulting from the managements decision transition the operating business model to a predominately royalty based operation from a wholesale distribution operation.

During the second quarter of 2010, we launched the sale of Rheingold beer, which sales accounted for approximately 48% of our total nine month sales and 55% of our total three month sales as of January 31, 2011.

Trump Super Premium Vodka sales aggregated 2,134 cases and accounted for approximately 34% of total dollar sales for the nine months ended January 31, 2011. For the comparable nine month period of the prior year, Trump Super Premium Vodka net sales aggregated 1,417 cases which accounted for 30% of the total dollar sales. For the three months ended January 31, 2011, sales of Trump Super Premium Vodka amounted to 805 cases or 33% of total dollar sales. For the same period of the prior year, the Company recorded sales of 1,417 cases of Trump Super Premium Vodka or 31% of the third quarter sales as of January 31, 2010. Sales of Trump Super Premium Vodka for the nine and three months ended January 31, 2011 continued to be negatively impacted by the weak economy and consumer preference for lower cost alternative vodka brand offerings.
 
For the nine months ended January 31, 2011, Old Whiskey River Bourbon totaled 1,180 cases sold which accounted for approximately 8% of total dollar sales.  For the three months ended January 31, 2011, Old Whiskey River Bourbon totaled 277 cases or 5% of total dollar sales. For the nine and three months ended January 31, 2010, sales of Old Whiskey Bourbon totaled 1,278 and 979 cases, respectively or approximately, 18% and 30% of sales, respectively.
 
For the nine and three months ended January 31, 2011, sales of Aquila Tequila were not material. Due to the previously mentioned limited availability of sufficient working capital, we decided to allocate our limited resources to the acquisition of inventory that we could sell at higher margins. There were no sales of Aquila Tequila during the nine and three month periods of the prior year.

For the nine months ended January 31, 2011, Damiana Liqueur aggregated 1,346 cases sold or approximately 3% of total dollar sales. For the same period of the prior year, Damiana Liqueur totaled 214 cases sold or approximately 3% of total dollar sales. For the three months ended January 31, 2011, Damiana Liqueur totaled 216 cases sold or approximately 2% of total dollar sales. There were no sales of Damiana Liqueur for the three months ended January 31, 2010.

There were no sales of our premium-imported wines for the nine and three months ended January 31, 2011 as the Company exited the wine import business in the second quarter of fiscal 2010. Sales of our premium-imported wines totaled 796 cases or approximately 2% of our sales for the nine months ended January 31, 2010. 

For the nine months ended January 31, 2011, Olifant Vodka amounted to 6,279 cases sold or approximately 6% of total net sales which compared to 8,604 cases sold or approximately 46% of total net sales for the same nine month period of the prior year. We believe, and continuing customer demand and sales indicate, that sales of our economy priced Olifant Vodka products continue to be very successful in the current economic environment.

 
 
4

 
 
Net sales of Olifant Vodka for the three months ended January 31, 2011, totaled approximately 2151 cases sold or approximately 4% of total net sales. Net sales of Olifant Vodka for the three months ended January 31, 2010, totaled approximately 3,174 cases sold or approximately 40% of total net sales.
 
Gross Margin:  Gross margin for the nine months ended January 31, 2011, was approximately $42,000 or 11% of net sales under the royalty business model compared to gross margin of approximately $237,000, or 28% of net sales for the nine months ended January 31, 2010 under the wholesale business model. This decrease in gross margin is attributable to the transition of our business model to a royalty-based revenue operation from a wholesale revenue model and the associated start-up production costs involved in launching of Rheingold beer in the second quarter of 2010 as well as the $40,000 charge to write-off  non-saleable Olifant vodka products.

Gross margin for the three months ended January 31, 2011, was approximately $8,000 or 6% of net sales compared to gross margin of approximately $109,000 or 28% of net sales for the three months ended January 31, 2010. The decrease of approximately $101,000 reflects the impact of transitioning the business to a royalty based operation, the one-time production start-up costs of launching Rheingold beer and a one-time $40,000 write-off of non-saleable Olifant vodka product in the third quarter.

Selling, General and Administrative Expenses: Selling, general and administrative expenses for the nine months ended January 31, 2011 amounted to approximately $1,988,000 compared to approximately $3,841,000 for the same period of the prior year, a decrease of approximately $1,853,000, or 48%, 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 travel and marketing expenses. Additionally, our distribution and importation agreement with Mexcor, Inc. (“Mexcor”) resulted in our ability to transfer our field sales force and the associated sales commission costs and travel expenses to Mexcor, as we restructured our business-operating model in fiscal 2010. The cost reductions we obtained from restructuring our business plus additional working capital enabled us to launch successfully Rheingold beer in our second quarter. Additionally, for the nine months ended January 31, 2010, selling, general and administrative expenses included $567,500 of marketing fees associated with the 2009 Olifant Summer Concert Series.

For the three months ended January 31, 201, selling, general and administrative expenses amounted to approximately $662,000 compared to approximately $631,000 for the same period of the prior year, which reflects a marginal 5% increase of approximately $31,000, attributable to liquor licensing costs associated with the launch of Rheingold beer in several states.
 
 
5

 
 
Other income (expense): For the nine and three months ended January 31, 2011, other income of $413,000 is predominately comprised of certain liabilities which have been forgiven offset by a loss from revaluation of conversion option liability.  Other expense is comprised of interest expense totaling approximately $734,000 for the nine  months ended January 31, 2011 compared to interest expense of approximately $907,000 for the nine months ended January 31, 2010. This decrease is predominantly due to a reduction in the cost of financing our outstanding liabilities which we have systematically reduced by approximately $2,056,000 to $5,413,000 at January 31, 2011 from approximately $7,469,000 at January 31, 2010. This decrease in our outstanding debt is mostly attributable to our repayment of $275,000 or nearly 98% of the outstanding loan payable to our CEO; the reduction of our outstanding accrued expenses and accounts payable of approximately $2,367,000; offset by the addition of $450,000 from the return of collateral by an investor previously treated as a reduction in our loan balance; and the restructuring by amendment and deferral and of our $200,000 Olifant debt re-payment.
 
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 $36,600,000, which we can use to reduce future taxable earnings. No income tax benefits were recognized for the nine and three months ended January 31, 2011 and 2010 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
 
Our accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of January 31, 2011, the Company has a shareholders' deficiency of approximately $2,746,000 applicable to controlling interests compared with $2,886,000 applicable to controlling interests at April 30, 2010, and working capital deficiency of $4,810,000 as of January 31, 2011 and has incurred significant operating losses and negative cash flows since inception. For the nine and three months ended January 31, 2011, the Company sustained a net loss of approximately $2,281,000 and $532,000, respectively compared to a net loss of $4,415,000 and $898,000, respectively for the nine and three months ended January 31, 2010 and used cash of approximately $270,000 in operating activities for the nine months ended January 31, 2010 compared with approximately $274,000 for the nine months ended January 31, 2010. 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 provide 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.

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 nine months ended January 31, 2011 was approximately $270,000. 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 provided by Financing Activities: Net cash provided by in financing activities for the nine months ended January 31, 2011 was approximately $165,000.
 
On March 15, 2011, the parties reached an agreement to the December 2009 matter of Niche Media, Inc., an advertising vendor, that 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 of approximately $150,000. The case has been withdrawn and the Company has agreed to pay $3,200 per month for 28 months ($90,000 total) to resolve this claim. Final definitive settlement documents are being drafted. (See Note 18-Litigation)

On March 7, 2011, the Company received notice of an award from the arbitrator in the Matter of Arbitration 33 154 00283 09 between Liquor Group Holding , LLC (“LG”) and the Company.  In the Award the arbitrator found that the Company did not breach its contract with LG and that there was no tortuous interference by the Company with LG’s business and thus did not award LG any damages. The arbitrator found that the liquidation and failure to pay for products sold by LG constituted a breach of contract.  The arbitrator found that the Company was damaged by LG’s breach in the amount of $180,058.62 and that pursuant to the contract between the Company and LG such damages were to be tripled such that the damages became $540,175.86. The arbitrator also found that pursuant to the contract between the Company and LG, LG was to pay any and all costs and expenses incurred by the Company in enforcing or establishing its rights under the agreement including reasonable attorney’s fees.  The arbitrator awarded the Company $120,605.15 in reasonable attorney’s fees along with an additional $3,878.04 in costs, for a total of $124,483.19.
 
 
6

 
 
In summary, the arbitrator found that the total owed by LG to the Company for damages, fees, expenses and costs to be paid to the Company is $664,659.05.
 
The administrative fees and expenses of the American Arbitration Association, totaling $7,000 was to be borne equally between the Company and LG.  The other administrative fees of the American Arbitration Association totaling $5,775 and the compensation and expense of the arbitrator totaling $19,085 were to be borne equally. Therefore, the Company was to reimburse LG the sum of $1,762 representing that portion of said fees and expenses in excess of the apportioned costs previously incurred by LG.  (See Note 18-Litigation)

On July 29, 2010, we entered into a settlement agreement with Socius CG II, Ltd. (“Socius”) pursuant to which we agreed to issue 2,586,667 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 2,586,667 shares to Socius as exempt from registration pursuant to the Section 3(a) (10) registration exemption. On November 17, 2010, since we could only deliver partial payment in shares, as we had attained the limit of our authorized shares, we delivered 3,300,00 shares with a fair value of $122,100 to Socius in partial settlement of the outstanding obligation. On November 17, 2010, since we could only deliver partial payment in shares, as we had attained the limit of our authorized shares, we delivered 3,300,00 shares with a fair value of $122,100 to Socius in partial settlement of the outstanding obligation. On December 9, 2010, we delivered 4,300,000 shares with a fair value of $81,700 to Socius in partial settlement of the outstanding obligation. On January 6, 2011, we delivered 6,300,000 shares with a fair value of $63,000 to Socius in partial settlement of the outstanding obligation. On February 10, 2011, we delivered 8,925,000 shares with a fair value of $48,195 to Socius in partial settlement of the outstanding obligation. (See Subsequent Event, Note – 19.)
 
On August 30 2010, the Company entered into a series of securities exchange agreements with four directors of the Company, pursuant to which the directors each agreed to return for cancellation, warrants to purchase an aggregate of $655,920 shares of the Company's common stock, and on October 14, 2010, the Company issued, upon receipt of the warrants, an aggregate of 59,743 shares of the Company's Series C Preferred Stock to its four directors.
 
Additionally, on August 30 2010, the Company entered into an agreement with its Chairman and Chief Executive Officer,  pursuant to which, the Company agreed to issue 576,091 shares of its Series C Preferred Stock as payment of $576,091 or 90% of the aggregate salary of $640,101 owed and accrued by the Company to its Chairman and CEO as of that date. On October 14, 2010, the Company issued 576,091 shares of its Series C Preferred Stock to its Chairman and CEO.
 
On September 15, 2010, the Company authorized the issuance of 650,000 shares of preferred stock designated Series C Preferred Stock (the “Series C Preferred Stock”). Each share of the Series C Preferred Stock will be convertible into the number of shares of the Common Stock equal to the Stated Value of $1.00 divided by the Conversion Price of $0.10 subject to adjustment for stock splits, stock dividends and similar transactions. The Series C Preferred Stock will vote as a single class with the common stock and the holders of the Series C Preferred Stock will have the number of votes equal to 165 times the number of shares of Series C Preferred Stock. Upon liquidation, the holders of the Series C Preferred Stock will have the right to receive, prior to any distribution with respect to the common stock, but subject to the rights of the holders of the Series A Preferred Stock and Series B Preferred Stock, the stated value (plus any other fees or liquidated damages payable thereon).
 
Based on our current operating activities and revenue growth plans noted above regarding the expansion of our Rheingold beer distribution and the revenue growth under our Mexcor Agreement, 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 think that inflation has had a material effect on our results of operations.

 
 
7

 
 
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. Given our decreased 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 Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of January 31, 2011, 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 January 31, 2011, our Chief Executive Officer and 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. 

 
 
8

 
 
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 March 15, 2011, the parties reached an agreement to the December 2009 matter of Niche Media, Inc., an advertising vendor, that 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 of approximately $150,000. The case has been withdrawn and the Company has agreed to pay $3,200 per month for 28 months ($90,000 total) to resolve this claim. Final definitive settlement documents are being drafted.

On March 7, 2011, the Company received notice of an award from the arbitrator in the Matter of Arbitration 33 154 00283 09 between Liquor Group Holding , LLC (“LG”) and the Company. In the Award the arbitrator found that the Company did not breach its contract with LG and that there was no tortuous interference by the Company with LG’s business and thus did not award LG any damages. The arbitrator found that the liquidation and failure to pay for products sold by LG constituted a breach of contract.  The arbitrator found that the Company was damaged by LG’s breach in the amount of $180,058.62 and that pursuant to the contract between the Company and LG such damages were to be tripled such that the damages became $540,175.86. The arbitrator also found that pursuant to the contract between the Company and LG, LG was to pay any and all costs and expenses incurred by the Company in enforcing or establishing its rights  under the agreement including reasonable attorney’s fees.  The arbitrator awarded the Company $120,605.15 in reasonable attorney’s fees along with an additional $3,878.04 in costs, for a total of $124,483.19. In summary, the arbitrator found that the total owed  by LG to the Company for damages, fees, expenses and costs to be paid to the Company is $664,659.05.

The administrative fees and expenses of the American Arbitration Association, totaling $7,000 was to be borne equally between the Company and LG. The other administrative fees of the American Arbitration Association totaling $5,775 and the compensation and expense of the arbitrator totaling $19,085 were to be borne equally. Therefore, the Company was to reimburse LG the sum of $1,762 representing that portion of said fees and expenses in excess of the apportioned costs previously incurred by LG.
 
 
9

 
 
As reported previously in our quarterly report on Form 10-Q for the quarter ended October 31, 2010, on July 29, 2010, we entered into a settlement agreement with Socius CG II, Ltd. (“Socius”) pursuant to which we agreed to issue 2,586,667 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 2,586,667 shares to Socius as exempt from registration pursuant to the Section 3(a)(10) registration exemption. On November 17, 2010, since we could only deliver partial payment in shares, as we had attained the limit of our authorized shares, we delivered 3,300,000 shares with a fair value of $122,100 to Socius in partial settlement of the outstanding obligation. On November 17, 2010, since we could only deliver partial payment in shares, as we had attained the limit of our authorized shares, we delivered 3,300,000 shares with a fair value of $122,100 to Socius in partial settlement of the outstanding obligation. On December 9, 2010, we delivered 4,300,000 shares with a fair value of $81,700 to Socius in partial settlement of the outstanding obligation. On January 6, 2011, we delivered 6,300,000 shares with a fair value of $63,000 to Socius in partial settlement of the outstanding obligation. On February 10, 2011, we delivered 8,925,000 shares with a fair value of $48,195 to Socius in partial settlement of the outstanding obligation.

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) and thereafter commenced the civil action. 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 defend vigorously this suit.  In addition, the Company has commenced a countersuit for damage and theft of services.  As of November 30, 2009, we pledged 688,334 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.  The Company intends to defend vigorously against this claim and pursue its counterclaims to judgment.

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 1,000,000 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 1,000,000 shares of the Company’s common stock to the Company. Additionally, in accordance with the settlement, the Company issued a 6% convertible promissory note in the amount of $47,130. Principal and interest on the note are payable upon the Company’s successful completion of a $1,000,000 financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the principal and interest due on the note for an equivalent value of in common shares of the Company. The Company accrued interest payable of $872 and $723, for the nine and three months ended January 31, 2011.
 
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 786,667 shares of our common stock with a fair value of $28,320 and on August 25, 2010, we issued 1,020,279 shares of our common stock with a fair value of $28,313 as payments in full and final settlement of our obligation.

 
 
10

 
 
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.

Not Applicable.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
Not Applicable.
  
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

 
11

 
 
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.
 
March 22, 2011

 
 
DRINKS AMERICAS HOLDINGS, LTD.
     
 
By: 
/s/ J. Patrick Kenny
   
J. Patrick Kenny
   
President and Chief Executive Officer and Chief Accounting Officer

 
 
12

 
 
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
 
 
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