UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended June 30, 2008
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-28865
YARRAMAN WINERY, INC.
(Name of small business issuer in its charter)
| Nevada | | 88-0373061 |
| (State or other jurisdiction of | | (I.R.S.Employer |
| incorporation or organization) | | Identification Number) |
700 YARRAMAN ROAD, WYBONG
UPPER HUNTER VALLEY
NEW SOUTH WALES, AUSTRALIA 2333 (Address of principal executive offices, Zip code)
(61) 2 6547-8118 (Issuer’s telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No x
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 o No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 o Accelerated filer o Non-accelerated filer o Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of the issuer’s voting and non-voting common equity held by non-affiliates (9,878,588 shares) was approximately $14,817,882, based on the average closing bid and ask price of $1.50 for such common equity as of June 30, 2008.
As of May 1, 2009, there were outstanding 38,000,000 shares of the issuer’s Common Stock, par value $0.001.
DOCUMENTS INCORPORATED BY REFERENCE
None
FORWARD LOOKING STATEMENTS
Some of the statements under “Management’s Discussion and Analysis of Financial Condition or Plan of Operations,” and “Description of Business” in this Annual Report on Form 10-K are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Annual Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results.
Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These factors include among others:
• The risks associated with the production and sale of wines;
• Our ability to raise capital to fund capital expenditures;
• Grape and other fruit price volatility;
• Our ability to find and retain skilled personnel;
• Regulatory developments; and
• General economic conditions.
All references in this Form 10-KSB to the “Company,” “Yarraman,” “we,” “us” or “our” are to Yarraman Winery, Inc. and its subsidiary, Yarraman Estate Pty Limited.
YARRAMAN WINERY, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
INDEX
| PART I | Page |
| Item 1 | Business | 4 |
| Item 1A. | Risk Factors | 18 |
| Item 2 | Properties | 26 |
| Item 3 | Legal Proceedings | 26 |
| Item 4 | Submission of Matters to a Vote of Security Holders | 26 |
| PART II | |
| Item 5 | Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 27 |
| Item 6 | Selected Financial Data | 29 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 |
| Item 7A | Quantitative and Qualitative Disclosures about Market Risk | |
| Item 8 | Financial Statements | 34 |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 35 |
| Item 9A. | Controls and Procedures | 35 |
| PART III | |
| Item 10 | Directors, Executive Officers and Corporate Governance | 37 |
| Item 11 | Executive Compensation | 41 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 43 |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 45 |
| Item 14 | Principal Accounting Fees and Services | 46 |
| PART IV | |
| Item 15 | Exhibits, Financial Statement Schedules | 48 |
PART I
ITEM 1. BUSINESS
General
We were incorporated as a Nevada corporation on December 6, 1996 under the name Dazzling Investments, Inc. From January 1, 1997 until December 22, 2005, we were in the developmental stage and had no operations. On October 7, 2005, we caused to be formed a corporation under the laws of the State of Nevada called Yarraman Winery, Inc. and acquired one hundred shares of its common stock for cash. As such, Yarraman Winery, Inc. (“Merger Sub”) became our wholly-owned subsidiary. On December 6, 2005, Merger Sub was merged with and into us. As a result of the merger, our corporate name was changed to “Yarraman Winery, Inc.” Prior to the merger, Merger Sub had no liabilities and nominal assets and, as a result of the merger the separate existence of Merger Sub ceased. We were the surviving corporation in the merger and, except for the name change provided for in the Agreement and Plan of Merger, there was no change in our directors, officers, capital structure or business.
On December 22, 2005, we entered into a Share Exchange Agreement (the “Exchange Agreement”) with Yarraman Estate Pty Ltd (“Yarraman Australia”), the shareholders of Yarraman Australia, Delta Dawn Pty Limited, as trustee of the Yarraman Road Trust (the “Trustee” or “Delta Dawn”) and our shareholders, pursuant to which we acquired all of the issued and outstanding shares of stock of Yarraman Australia in exchange for the issuance in the aggregate of 15,000,000 shares of our common stock (the “Shares”) to the Trustee. Yarraman Australia became our wholly-owned subsidiary and, upon the issuance of the Shares, the Trustee owned 60% of our issued and outstanding common stock. Through our wholly-owned subsidiary, Yarraman Australia, we operate our primary business, which consists of the operation of vineyards and wine production in Australia and distribution of our wine products in Australia, United States, Canada, New Zealand, Hong Kong and throughout Europe.
On November 26, 2008, we made an offer to the shareholders of Asia Distribution Solutions Ltd. (“ADSL”), a Cayman Islands company, to purchase all of the issued and outstanding shares of ADSL. As of May 1, 2009, approximately 96% of the ADSL shareholders had accepted our offer.
In November, 2008, we agreed to acquire the Jugiong Vineyard in New South Wales, Australia, comprising 475 acres of vineyard and a grape supply contract which has 4 years remaining, from certain of the shareholders of Delta Dawn (who are also shareholders in YRMN). The consideration for the acquisition of the Jugiong Vineyard amounts to US$6 million to be satisfied by way of a two-year redeemable convertible note to be issued by YRMN, bearing interest at 6 per cent per annum and the assumption of US$5 million of outstanding debt against the property.
Overview
We produce and sell premium (up to US$14), super-premium (up to US$20) and ultra-premium (over US$20) wines. Our wines are made at our winery in New South Wales, Australia, where grapes are crushed, fermented and made into wine or blended with wines purchased from other vineyards for production of varietals. Wines are sold both in Australia and internationally, principally under our “Yarraman” label. The vineyards from which we produce our wines are located on land in two regions in the State of New South Wales, Australia - the Upper Hunter Valley and Gundagai.
Opened in 1967 on the Upper Hunter Wybong property, our winery currently has a 2,300 ton processing facility with the capacity to yield 160,000 cases. The winery utilizes current technology in its harvesting, production and packaging of its products. Over US$10 million has been spent since 1994 on capital improvements to the winery and vineyard.
The Wirrilla Vineyard is located over two blocks of land comprising the Wirrilla Homestead and Wirrilla Point Block, with 470 acres under vines. The Wirrilla Vineyard produces wines including Sauvignon Blanc, Semillon, Verdelho, Chardonnay, Merlot, Cabernet Sauvignon and Shiraz. The wines produced from this vineyard are used in our premium range of wines.
Product Overview
We offer a variety of wine for sale to retail customers. Our product line consists of:
Yarraman Range
Under the Yarraman label we produce and sell the following wines in 750mL bottles; Semillon, Chardonnay, Rose, Chambourcin, Merlot and Shiraz. These wines sell for approximately US$16 - $24. This new range of wine was recently released for sale in the Australian market and will progressively be launched into our various export markets
Red Horse Range
In May 2006, we exported our first shipment of wines to our new distributor, Robert Whale Selections, in the United States. This range of wines comprises Shiraz Cabernet, Cabernet Merlot, Chardonnay and Semillon Verdelho and retail for approximately US$13 per bottle. This range continues to be successfully distributed in the US market.
The Bolter
The Bolter collection is a range of wines which was released in November 2005 targeting domestic and international markets. These wines are currently distributed by a broad range of liquor retailers in Australia and exported to a number of countries throughout Europe and Asia. The suggested retail price for these wines is approximately US$10. During the year ended June 30, 2008 we shipped approximately 25,000 cases.
The Bolter range sells the following types of wines in 750 ml bottles: Shiraz, Cabernet Merlot, Chardonnay, and Classic Dry White
Yarraman Race Club
Following the successful launch of the “Red Horse” range in the USA, Yarraman has recently released a similar series of wines in the Australian market. This range of wines has been released in conjunction with a promotional offer whereby consumers who purchase a dozen of these wines become members of the Yarraman Race Club, and receive ownership shares in four Thoroughbred Race Horses. Members of the Yarraman Race Club receive many benefits, including a proportional share of the prize money won by the horses and invitations to attend race meetings when the horses are running.
The Market
Overview
The Australian Bureau of Statistics (ABS) reported that 1.83 million tons of grapes were harvested for winemaking purposes in 2008. This was an increase of 31% over the 2007 harvest. The reasons behind the increased harvest are primarily the easing of the continuing drought conditions and slightly improved availability of irrigation water. ABS has estimated that there were 173,000 hectares of vineyard cultivated for wine, drying and table grapes in 2008, a decrease of 0.6% over 2007.
Domestic Wine Sales
Data published by the Australian Wine & Brandy Corporation (AWBC) shows that Australian wine accounted for 89% of domestic wine sales in Australia for 2008. Domestic sales of Australian wine decreased to 426 million litres - a decline of 4.8% compared to 2007. Red wine sales decreased to 155 million litres, to account for 36.3% of total domestic sales, white wine sales decreased to 206 million litres, or 48.3% of total domestic wine sales. The balance is made up of sparkling and fortified wines. Yarraman Australia’s sales account for less than 1% of the domestic market.
We utilize a system of self distribution, employing three full-time sales representatives. We have a central distribution depot at our Wybong winery along with a third party warehouse in Sydney which services same or next day delivery in Sydney and New South Wales.
In addition, we market and sell our wines through retail outlets in New South Wales, through mailing lists, and through distributors and wine brokers who sell in specific targeted areas outside of the state of New South Wales.
Export Wine Sales
In 2008 Australian wine exports declined to 715 million litres, a fall of 9.8% from 2007. The average price per litre increased from AUD$3.66 to AUD$3.75, the second consecutive year that the average price has risen. The overall dollar value of these exports declined by 6.9% to AUD$2.7 billion. The United Kingdom remains the largest overseas market at 268 million litres (37.5%), however the average value per litre is well below the overall average, at AUD$3.34. The United States is the second largest overseas market at 185 million litres (25.9%). The average value per litre in this market is above the overall average, at AUD$3.96 per litre. Yarraman Australia ships approximately 7,500 cases per year to the United States market and approximately 250 cases per year to the United Kingdom.
With continuing investment and development in our brands, we plan to capitalize on consumer demand in our primary export markets of the United States, European Union and Asia. We have also as a result of the acquisition of Asia Distribution Solutions Ltd, established a major market presence in mainland China and we see this market as the major source of our export sales growth over the next few years.
Our wines are distributed and sold in the following countries:
s Australia | | s Canada | | s China |
s USA | | s Poland | | s Japan |
| | s Singapore | | |
| | | s Germany | | |
| | | s United Kingdom | | |
We export approximately 27% of our annual volume production The grape production for a particular year will be reflected in sales revenue in approximately two years due to the fact that we record product from upon bottling and sales following the ageing time necessary in winemaking.
We appoint agents or distributors in export markets to facilitate importation of wines to the desired markets. Agents or distributors provide sales representation and facilitate or directly distribute wines within their designated regions.
All markets, with the exception of Canada, purchase “Yarraman” branded wines in Australian dollars with shipping from Australia paid for by and at the risk of the purchaser. These wines are then sold wholesale.
Our Canadian distributor acts as a commissioned agent facilitating the importation wines into the Canadian provinces and provides sales representation in government controlled and privatized markets. Exports to Canada are also shipped from Australia at the purchaser’s risk and cost, although such sales are made in Canadian dollars.
Seasonal and Quarterly Results
We have historically experienced and expect to continue experiencing seasonal fluctuations in our revenues and net income. Sales volumes increase progressively beginning in the fourth quarter through to the second quarter with declines in the first six weeks of the third quarter for the domestic market. In the export market we have traditionally seen increases in orders in the third quarter progressively increasing to the second quarter of the following financial year due to substantial lead times to meet seasonal sales requirements.
Recent Developments
As of June 30, 2008, our winery had approximately 870,000 liters of wine in tank and barrel. We elected to take in a reduced volume of grapes for vintage 2008 to enable us to balance our inventory levels with forecast requirements.
On March 25, 2009 Michael Kingshott and Stephen Kulmar were appointed to our Board of Directors. Our Chairman of the Board of Directors also subsequently resigned on March 25, 2009 and Michael Kingshott was elected as our new Chairman of the Board.
On September 1, 2006, Andrew Lyon resigned as our Chief Executive Officer and President, and we appointed Wayne Rockall as our Chief Executive Officer. On September 20, 2007 Wayne Rockall resigned. On September 25, 2008 Ian Long was appointed Chief Executive Officer and President.
On April 27, 2007 John Wells resigned as our Chief Financial Officer and Secretary. On May 18, 2007 Mark Valencic was appointed as Secretary and on October 1, 2007 Raymond Brien was appointed as Chief Financial Officer. On September 20, 2007 Mark Valencic resigned as Secretary and Lawrence Lichter was appointed as Secretary. On June 30, 2008 Raymond Brien resigned as Chief Financial Officer. On September 25, 2008 Lawrence Lichter was appointed Chief Financial Officer.
On April 2, 2007 John J. Moroney resigned as a Director and on September 20, 2007 Brian Johnson and Frank Starr resigned as Directors. On May 1, 2008 Gary Blom was appointed to the Board of Directors and William Middleton resigned from the Board. On June 24, 2008 Ian Long was appointed to the Board of Directors. None of the foregoing resignations are the result of any disagreements between us and the resigning person on any matters related to our operations, policies or practices.
On December 21, 2006 we submitted an offer to merge by scheme of arrangement with Evans & Tate, Ltd., a company publicly traded in Australia. The terms of the offer included a combination of issuance of shares of our common stock and issuance of convertible notes. On February 14, 2007, we submitted a revised offer, which offer was conditionally accepted pending the results of due diligence by Evans & Tate, Ltd. Our revised offer was rejected on March 16, 2007. In connection with this transaction we entered into a Conditional Sale Deed to purchase 18,387,998 shares of Evans & Tate, Ltd. stock from a third party. Upon rejection of our offer by Evans & Tate, Ltd., the Conditional Sale Deed was terminated. Related to this acquisition we incurred $312,009 of expenses as of June 30, 2007.
As of May 1, 2009 96% of the issued and outstanding shareholders of Asia Distribution Solutions, Ltd.(ADSL) have approved our proposed merger.
ADSL Overview
ADSL provides distribution services for foreign and Chinese companies to sell branded beverages in the People’s Republic of China. ADSL provides procurement and logistic solutions to supermarkets, hotels, high-end restaurants and bars, cafes/bakeries, and beverage wholesalers/retailers. ADSL is the distributor of branded beverages, including beers, soft drinks, wines and spirit. The company operates in 4 different sectors:
| | • | Production and Distribution of proprietary branded labels |
| | • | Distribution of non-proprietary branded labels |
ADSL is one of the only Wholly Owned Foreign Enterprises (WOFE) in the beverage industry with a staff count of 93 employees and is headquartered in Shanghai, with operations in: Shanghai / Chengdu / Beijing / Shenzhen
Distribution network
ADSL distributes its products to hotel, restaurant and catering (HORECA) accounts throughout China. Our points of sale are currently focused on the larger, urban and affluent regions of China, serving 3,500+ different points of sale. We have a varied client base, including:
| | • | Wholesalers / Bars / Karaoke Bars / Pubs / Cafes / Golf Clubs / Hotels / Restaurants / Bakeries |
| | • | ADSL Value add: Reliable distribution and “one stop shopping” for smaller accounts |
| | • | Branded Stores: Supermarkets / hypermarkets / chain stores |
| | • | ADSL Value add: Quality, scale and professionalism of organization |
Brands represented
Core wines
| | • | Trios (Australia, Italy) |
Core beers
Core spirits
| | • | The Speyside Single Highland Malt Whisky |
| | • | Drumguish Single Highland Malt Whisky |
Core other beverages)
| | • | Snapple – (Teas & Juice Drinks) |
| | • | Jia Jia Liang Teh - (Herbal Drinks) |
| | • | Kelsoloch - (Mixers, Tonics and Soda) |
| | • | Private Label Sodas and Teas |
Wine Mall
Brief Overview
We expect ADSL’s Wine Mall to be the market leader in China by continually pioneering the retail experience for its consumers by offering a range of over 700 labels of quality local and imported wines, beers and spirits, as well as professional advice on wines selection, regular promotions and wine-tasting events. ADSL will spearhead this effort via her subsidiary, Shanghai Wine Mall Trading Co Ltd, together with our 49% equity partners comprising of a group of Wenzhou investors.
Wine Mall Concept
The retail concept sets new standards in experience and immersion and cleverly builds a sense of being ‘guided’ through the store and experiencing all it has to offer. Wine Mall will have a multi-functional format embracing all consumer segments, from self-service and full service and encourages the consumer to explore further within the store. The store is cleverly divided into supermarket, exhibition and seminar spaces. Dan Murphy’s big box liquor is the benchmark used in the development of the Wine Mall concept
Wine mall sites
| | • | Wenzhou - the Wenzhou store opened in early January 2009. This store is the largest format to date with floor space totaling 1200 square meters. |
| | • | Shanghai - the Shanghai store is scheduled to open in late May 2009 and will have a total floor space of 600 square meters |
Yarraman and Delta Dawn have agreed to enter into an agreement for Yarraman to acquire the Jugiong Vineyard from Delta Dawn.
The consideration for the purchase of the Jugiong vineyard is US$11 million which is to be satisfied by the issue by Yarraman to Delta Dawn of a redeemable convertible 2 year loan note in the principal amount of US$6million, bearing interest at 6 per cent. per annum and, in addition, Yarraman will assume US$5million of debt from Delta Dawn.
The Jugiong Vineyard property was established by a group of private investors in 1998 and is located over two blocks of land totaling 650 acres (approximately 263 hectares) comprising the Wirrilla Homestead and Wirrilla Point Block, with 181 hectares under vines. The property is located just outside the township of Jugiong, a small rural town on the Hume Highway approximately 65 km from Yass, 124 km from Canberra and 340 km from Sydney.
The Jugiong Vineyard is situated within the Gundagai region which is one of four prescribed viticultural regions in southern New South Wales, as defined by the Australian Wine and Brandy Corporation’s Geographic Indications.
Gundagai is a newly developed wine region, situated on what is known locally as the “south-west slopes” of New South Wales. It is here that the landscape and its mountain streams run down from the western heights of the Snowy Mountains towards the plains of the Riverina area. It is an undulating region varying between 200 and 300 metres in altitude, which is warm to hot in temperature with an even year-round rainfall though greater in the east but with relatively low humidity.
Pursuant to the terms of its acquisition agreement with Delta Dawn, Yarraman has agreed to take approximately 20 per cent. of the anticipated growth in grape production of the Jugiong Vineyard for its own private labels which it has been developing for the China market. The acquisition of Jugiong will be a significant development for the Enlarged Group as the Board believes that the wine made from the Jugiong grapes will be well suited to the Chinese market.
The vine planting summary as follows:
| Varietal | | Wirilla Homestead area (Ha) | | | Wirilla Point area (Ha) | | | Total vine planting area (Ha) | |
| Shiraz | | | 75 | | | | 15 | | | | 90 | |
| Cabernet sauvignon | | | 27 | | | | 21 | | | | 48 | |
| Merlot | | | 10 | | | | 1 | | | | 11 | |
| Semillon | | | 10 | | | | — | | | | 10 | |
| Chardonnay | | | 9 | | | | — | | | | 9 | |
| Verdelho | | | — | | | | 7 | | | | 7 | |
| Sauvignon blanc | | | — | | | | 6 | | | | 6 | |
| Total Area | | | 131 | | | | 50 | | | | 181 | |
Other well known wine brands produced within the Gundagai region include Clonakilla, Lark Hill, Brindabella Hills, Barwang Vineyard and Chalkers Crossing.
Climatic averages from the Australian Bureau of Meteorology site in the neighboring township of Gundagai indicate average rainfall is approximately 700 mm with rainfall during the growing season, between October and April, of 376 mm. The mean January temperature is approximately 23°C.
Research and Development
Our research and development focuses on the following four areas:
Fermentation
We engage in research and development in a number of areas, including implementing fermentation practices using yeast strains specific for different varieties of wine. We have completed extensive research and development with micro-oxygenation of wines. This system ultimately enables the acceleration of red wine production, achieving premium wine styles within a shorter time frame.
Barrels and Oak Alternatives
All of our French and American oak barrels are custom made by a select group of cooperages to match the exact requirements for our wine styles. These barrels provide oak characters to our products and integrate the oak characters into its super and ultra-premium wines. In addition, after successfully completing extensive trials with oak alternatives, we have implemented these practices in our wine making process for premium wines.
Viticulture
Viticulture practices are constantly being reviewed at both vineyards.
During the years ended June 30, 2008 and 2007 we did not incur any research and development expenses.
Customers
For the years ended June 30, 2008 and 2007 the Company’s largest customer accounted for 20% and 12% of sales, respectively. Receivable from these customers was $158,412 and $0 as of June 30, 2008 and 2007, respectively.
Suppliers
We use materials and supplies, such as glass bottles, closures, labels, boxes and chemicals, that we currently obtain from a number of long standing suppliers. The supplies are purchased for specific needs and there are no long-term supplier agreements. Management monitors supply costs to maintain cost effectiveness. Bottling of the wines is performed by a third party in the town of Pokolbin that management believes offers product quality and prompt service, thus minimizing holding times for finished goods as we use just-in-time bottling and packaging for premium wine exports.
Competition
The 2008 Australian Wine Industry Directory lists 1,165 wine producers that export wine, more than half of all producers. Fosters Group and Hardy Wine Company (Constellation) account for 49% of all exports by volume, while the top 20 exporters account for 91%. The remaining 1,145 exporters compete for 9% of the export volume. The Australian wine industry is highly competitive, with all regions of Australia having producers of Premium, Super Premium and Ultra Premium wines that will compete with the Company’s own products. Wine production in Australia is dominated by large wineries that have significantly greater financial, production, distribution and marketing resources than the Company. Management believes that the principal competitive factor in the Premium, Super Premium and Ultra Premium markets are product quality, price and label recognition. We have received positive reviews of our wines and believe our prices are competitive with other producers. Increasingly, the competition is also coming from other wine producing countries. Wine imports into Australia grew by 48% in volume, to 65 million litres during 2008.
Note Sales
On December 22, 2005, we entered into a stock purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 5,253,500 shares of common stock (the “Share Sale”) for aggregate gross proceeds in the form of promissory notes with an aggregate principal amount equal to $2,000,000 (the “Notes”). Principal was payable in approximately quarterly installments, with interest accruing on the original principal amount at the rate of prime plus 2.5%, payable at maturity. Pursuant to the Purchase Agreement, we granted the Investors rights of first refusal on financings we may do in the future. The principal balance of the notes was collected as of December 31, 2006. In connection with the Share Sale, we issued 1,250,000 shares of common stock to MillhouseIAG Limited (“Millhouse”) as a finder’s fee.
Charter Amendment
On February 3, 2006, our Board of Directors and the holders of a majority of our outstanding common stock voted to increase the number of our authorized shares of capital stock. Pursuant to this authorization, on or about March 17, 2006, we increased the number of authorized shares of our capital stock to 100,000,000 shares, of which ninety million (90,000,000) shares are common stock, par value of $0.001, and ten million (10,000,000) shares are Preferred Stock, par value of $0.001, which may be issued in one or more series or classes as designated by the Board of Directors, from time to time, without the approval of stockholders.
Loans
On December 21, 2005 we entered into a loan agreement with Provident Capital (Provident), a financial institution located in Australia. The amount of the loan was $4,071,000 with monthly interest payments due on the 15th of each month at the rate of 10% per annum, rising to 16% per annum if we are late in our payments. The principal balance was originally due and payable on December 31, 2007 but has been extended to July 6, 2009. The loan is secured by certain of our property, plant and equipment and is guaranteed by the Trust. As of June 30, 2008, the loan balance was $5,511,308 inclusive of accrued and unpaid interest.
On December 21 2005, prior to the Exchange Agreement and in connection with the Asset Purchase, Yarraman Australia entered into a loan agreement with the Yarraman Road Trust (Trust), the nominal holder of all of Yarraman Australia’s shares. The outstanding principal balance of this loan was $1,832,795 as of June 30, 2008. This loan advance is non-interest bearing. The loan is secured by the fixed assets of the Company, subordinated to all other loans of the Company collateralized by the fixed assets. A total of 50% of the loan payable, or $916,398, was to be repaid in thirty-six monthly installments and was scheduled to commence on the first business day of the twenty-fifth month following the loan agreement, or approximately February 1, 2008. On the thirty-sixth month of payment, in January 2011, the remaining 50% of the loan payable or $916,398 was due and payable. The initial repayment date of February 2008 was extended to June 30, 2008.
On May 1, 2006 Yarraman Australia entered into a loan agreement with the Trust in the principal amount of $826,020. Originally, this loan agreement had an interest rate of 8%, with the same repayment terms of the December 21, 2005 loan. During the year ended June 30, 2006 a total of $10,910 in interest expense was recorded on this loan, until the Trust waived the interest requirement on this loan.
On May 25, 2006 the Trust extended to Yarraman Australia an additional $13,767, to be repaid in accordance with the same terms as the December 21, 2005 loan. This loan advance is also non-interest bearing.
On June 30, 2008 the Trust agreed to convert the $1,832,795 and the $826,020 loans into equity of the Company and received 6,559,524 shares of common stock. The loans at such time of conversion were approximately $2,755,000 USD.
As of June 30, 2008 the Company is indebted to a private company that is owned by one of the Company’s majority shareholders, Geoffrey White, in the amount of $2,334,733. This related party has made various advances, loans and payments on behalf of the Company, all of which are unsecured, and due on demand. These advances and loans accrued interest on their outstanding balance ranging between 0% and 10% per annum.
On July 1, 2007 these advances and loans were restructured into one loan agreement for approximately $3,289,000. This new loan included approximately $689,000 related to a sale of wine by the related party to the Company during the year ended June 30, 2008. This portion of the new loan was to be repaid commencing December 7, 2007 with receipts from the proceeds of the re-sale of this wine by the Company until it was repaid in full. As of June 30, 2008 the balance on this portion of the loan was $689,000. The entire new loan accrues interest at 6.5% per annum. This new loan is secured by the fixed assets of the Company, subordinate to the loan from the commercial bank, such loan totaling $5,511,308 as of June 30, 2008. This new loan, together with outstanding interest, was to be repaid for any amounts still outstanding on September 30, 2008. On June 30, 2008 a total of AUD $2,400,000 or USD $2,280,000, of the above loan was converted into 5,440,476 shares of the Company’s common stock, at a market price of approximately $0.42 per share. On October 15, 2008, the lender extended the repayment date on the balance of the loan remaining, subsequent to the $2,280,000 portion of the loan that had converted into common stock, from September 30, 2008 to September 30, 2009.
Regulatory Matters
In nearly all the countries that we market our wines, such as the United States, United Kingdom and Canada, there are statutory authorities which exercise varying degrees of market regulation. Management believes that we are substantially in compliance with all regulations.
Australian Regulatory Board
Wine quality control and distribution is regulated by the Australian Wine and Brandy Corporation. The Australian Wine and Brandy Corporation is the Australian Government authority responsible for the promotion and regulation of the Australian wine and brandy industry and the provision of wine sector information to wineries throughout Australia. It provides the regulatory role in quality control and its goal is to maintain the integrity of wines originating from Australian vineyards. It also has a role of providing industry-wide knowledge through published literature and market development. Our business has been regulated by the Australian Wine and Brandy Corporation since our formation.
Trademarks and Intellectual Property
All trademarks and intellectual property are licensed to us by Delta Dawn Pty Ltd. Delta Dawn advises us that its material trademarks and intellectual property are protected in all material respects by the law of the governments which regulate the markets in which they are used.
Environmental Matters
We believe that our operations are in substantial compliance with all applicable environmental requirements of Australia. With regard to its control of production and waste management, management believes we operate within all international standards.
Insurance
We maintain liability insurance which, in the view of management, is adequate protection for any damages arising out of our activities. The amount of the liability insurance coverage is approximately AUD$13 million for industrial special risk coverage, approximately AUD$20 million for general liability coverage and AUD$2 million for Directors and Officers liability insurance. The insurance is provided by outside insurance companies. Insurance is provided for physical loss or damage to assets owned by the Company, for business interruption and equipment breakdown, for loss due to employee fraud, computer crime, legal liability and directors’ and officers’ liability.
Consulting Agreements
On February 24, 2006 we entered into a consulting agreement with Madison One Group, Ltd.(“ Madison One”), a strategic planning consulting firm to assist us to identify potential candidates for acquisition purposes and assist in the negotiation and execution of such transactions. As compensation, we agreed to pay the firm a monthly, nonrefundable, fee of $6,500. The original term of the contract was from March 1, 2006 until July 1, 2006, but it was continued past that date on a month-to-month basis. This agreement was terminated in April 2007.
On January 1, 2006 we entered into a consulting agreement with the Trust to provide business consulting services related to the wine industry for a term of two years or until such time as their ownership percentage in us is reduced to less than 15%. Thereunder, we were paying the Trust an annual fee of approximately $82,100. This agreement was terminated as of June 30, 2008.
Employees
As of June 30, 2008, we had ten full-time employees and seven part-time employees. During May to July we employ additional part-time, seasonal employees for vine pruning. There are also additional seasonal employees used during harvest in the winery. None of the employees are members of a union or labor organization. All of the full time employees have entered into employment contracts with Yarraman Australia.
Significant Subsidiaries
Our subsidiaries are Yarraman Australia.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file with the Commission at the Commission's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our Commission filings are also available to the public from the Commission's Website at www.sec.gov.
We make available free of charge our annual, quarterly and current reports, proxy statements and other information upon request. To request such materials, please contact our Chief Financial Officer at 16133 Ventura Boulevard, Suite 425, Encino, CA, USA 91436, or call (818)789-0265 extension 13.
ITEM 1A. RISK FACTORS
Our business may be adversely affected by competition.
The wine industry is highly competitive. Within the wine industry we believe that our principal competitors include wineries in the Hunter Valley, Victoria and South Australia, which produce premium, super premium and ultra premium wines. Wine production in Australia is dominated by large wineries that have significantly greater financial, production, distribution and marketing resources than us. Currently no Hunter Valley winery dominates the New South Wales wine market. Several Hunter Valley wineries, however, are older and better established and have greater label recognition than we do. We believe that the principal competitive factors in the premium, super premium and ultra premium segment of the wine industry are product quality, price, label recognition and product supply. We believe that we compete favorably with respect to each of these factors; however, larger scale production is necessary to satisfy retailers’ and on premise demand.
An inability to respond quickly and effectively to new trends could adversely impact our competitive position.
Any failure to maintain the superiority of our winemaking capabilities or to respond effectively to market changes in the wine industry could adversely affect our ability to retain existing business and secure new business. We will need to constantly seek out new products and develop new solutions to maintain in our existing quality. If we are unable to keep current with new trends, our competitors’ services, technologies or products may render us noncompetitive.
Increases in staffing costs could adversely affect our business.
Our business is labor intensive and we are dependent on the provision of services by highly qualified personnel. These resources are scarce and we may face competition for these services which could result in increased expenses for the business. These labor expenses constitute a significant component of our overall cost of doing business and increases in these expenses may adversely impact our business.
Increases in distribution expenses and/or decreases in the effectiveness of our distributors could result in higher expenses with no corresponding increase in revenue.
Our current business model is reliant upon distribution and changes to the costs associated with that distribution or a decrease in the effectiveness of those distributors could have a significant adverse impact on the revenue and/or profitability of our business.
Increases in cost for grapes and other fruit could adversely affect our business.
We may purchase grapes and fruit from other sources. Significant increases in the price of grapes or other fruit used to make our wine could increase the overall expense of the Company doing business and reduce its profitability.
We may be subject to product liability claims which could negatively impact our profitability.
We sell alcoholic beverages for consumption, which involves risks such as product contamination or spoilage, product tampering and other adulteration of products. We may be subject to liability if the consumption of any of our products causes injury, illness or death. A significant product liability judgment against us may negatively impact our profitability for a period of time depending on product availability, competitive reaction and consumer attitudes. Even if a product liability claim is unsuccessful or is not fully pursued, any negative publicity surrounding such assertion that products provided through our treatment programs caused illness or injury could adversely affect our reputation with existing and potential customers and including irreparable harm to our corporate and brand image.
We have limited business liability insurance coverage.
We have limited business liability insurance coverage for our operations. Any loss due to business disruption, litigation or natural disaster may exceed or may be excluded from the insurance coverage we have and could result in substantial expenses and a diversion of resources. We do not have liability insurance to cover any operations outside of Australia.
We may experience negative results from our plans for expansion.
We may, in the future, acquire other wineries and vineyards or expand our business beyond Australia. Entering into any expansion transaction entails many risks, any of which could have a negative impact on our business, including: (a) diversion of management’s attention from other business concerns; (b) failure to integrate the acquired company with our existing business; (c) additional operating expenses not offset by additional revenue; and (d) dilution of our stock as a result of issuing equity securities. Any expansion globally also entails additional risks relating to operating our business in environments with different legal and regulatory systems and business customs than those in Australia, incurring additional costs in locating and retaining those professionals with expertise in these area. There is also the likelihood that significant start up costs will be incurred and that it may take time to achieve successful market penetration in new markets. We may discover that such expanded operations are less profitable than existing operations and that losses may be incurred.
We may have future capital needs for which we will need to access additional financing. Additional financing could dilute our current stockholders’ equity interests.
If additional funds are raised through the issuance of equity or debt securities, our current stockholders may experience dilution and any such securities may have rights, preferences or privileges senior to those of the rights of our common stock.
There can be no assurance that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or not available on acceptable terms, we may not be able to fund our expansion, promote our brand name as we desire, take advantage of unanticipated acquisition opportunities, develop or enhance products or respond to competitive pressures. Any such inability could have a material adverse effect on our business, results of operations and financial condition.
We may not be able to retain our key management and staff.
We are highly dependent on the services of the principal members of our management. The loss of one or more of such individuals could substantially impair the quality of our products and affect our ongoing research and development programs. Our success depends in large part upon our ability to attract and retain highly qualified personnel. We compete in our hiring efforts with other wineries and wine marketing companies and we may have to pay higher salaries to attract and retain personnel.
Our stock price is highly volatile.
There is a significant risk that the market price of our common stock could decrease in the future in response to any of the following factors, some of which are beyond our control:
| | · | variations in our quarterly operating results; |
| | · | general economic slowdowns; |
| | · | changes in market valuations of similar companies; |
| | · | sales of large blocks of our common stock; |
| | · | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; and |
| | · | fluctuations in stock market prices and volumes, which are particularly common among highly volatile securities of internationally-based companies. |
Efforts to comply with securities laws and regulations have required substantial financial and personnel resources and we still may fail to comply.
As directed by the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the Company’s internal controls over financial reporting in their annual reports. The formal process of evaluating our internal controls over financial reporting, which has required the devotion of substantial financial and personnel resources, is continuing. Given the status of our efforts, coupled with the fact that guidance from regulatory authorities in the area of internal controls continues to evolve, uncertainty exists regarding our ability to comply by applicable deadlines. Due to changes in our personnel over the last fiscal year we were unable to timely file our financial reports. Steps have been taken to rectify this situation.
We are subject to the risks associated with doing business in Australia.
As most of our current operations are conducted in Australia, we are subject to special considerations and significant risks not typically associated with companies operating in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. Our results may be adversely affected by changes in the political and social conditions in Australia, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Yarraman Estate Pty, Ltd., our wholly-owned subsidiary, is incorporated in Australia. Some of our executive officers and all of our directors are non-residents of the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal securities laws in an Australian court against us or any of those persons or to effect service of process upon these persons in the United States.
Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions instituted in Australia. It may be difficult to enforce a judgment in the United States against us and most of our officers and directors or to assert U.S. securities laws claims in Australia or serve process on most of our officers and directors.
We may experience an impact of the United States Foreign Corrupt Practices Act on our business.
We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Compliance with the Foreign Corrupt Practices Act could adversely impact our competitive position and failure to comply could subject us to penalties and other adverse consequences. We have attempted to implement safeguards to prevent and discourage non-compliant conduct by our employees and agents. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse affect on our business, financial condition and results of operations.
Effects of International Sales.
We intend to continue to market our current and future products in most major world markets. A number of risks are inherent in international transactions. In order for us to market our products in the U.S., Europe, Canada, Asia and certain other foreign jurisdictions, we may have to obtain required regulatory approvals or clearances and otherwise comply with extensive regulations regarding safety, manufacturing processes and quality, distribution and advertising rules and regulations. There can be no assurance that we will be able to obtain or maintain regulatory approvals or clearances in such countries or that we will not be required to incur significant costs in obtaining or maintaining foreign regulatory approvals or clearances.
Fluctuations in currency exchange rates may adversely affect the demand for our products by increasing the price of our products in the currency of the countries in which the products are marketed.
Our consolidated financial statements are presented in Australian and U.S. dollars. Fluctuations in the rates of exchange between U.S. dollar and other foreign currencies may negatively impact our financial condition and results of operations. As we expand our presence into the U.S. and other international markets, we expect the percentage of both our revenues and expenditures denominated in non-Australian dollars to increase, with particular emphasis on U.S. dollars. For the foreseeable future, we expect our expenditures to be predominantly denominated in Australian dollars, resulting primarily from our activities in Australia, and expect capital expenditures to be denominated in Australian dollars.
We may experience a risk of revenue reduction due to currency conversions.
At this time, all of our revenue, expenses and capital purchasing activities are transacted in Australian Dollars. Capital transactions will always be reported based on the current exchange rates, and resulting gains and losses from historical rates are charged or credited directly to stockholders’ equity. Revenues and expenses will be converted using the weighted-average exchange rates for the periods being reported. Any major fluctuation in the average exchange rate between the Australian Dollar and the U.S. Dollar during a period will affect our results of operations reported as reported in U.S. Dollars.
To the extent future revenue is denominated in foreign currencies, we would be subject to increased risks relating to foreign currency exchange rate fluctuations that could have a material adverse affect on our financial condition and operating results. To date, we have not engaged in any hedging transactions in connection with our operations.
We may not achieve the widespread brand recognition necessary to succeed outside of Australia.
We believe it is imperative to our long term success that we obtain meaningful market share for our products in international markets. Therefore, we must quickly establish recognition of our brands. This will require us to make substantial expenditures on product development, strategic relationships and marketing initiatives in new markets. In addition, we must devote significant resources to ensure that our customers are provided with a high quality product and a high level of customer service. Many of our potential competitors may have substantially greater financial, marketing and other resources and potentially greater access to content and distribution channels than us. We cannot be certain that we will have sufficient resources to achieve the early and widespread brand recognition we believe necessary to realize commercial acceptance of our products.
Regulations in international markets relating to alcoholic beverages could adversely affect our business.
Our business model is dependent upon the distribution of alcoholic beverages. In certain countries, we may be subject to state or national laws governing the distribution of alcoholic beverages. We may be required to expend substantial unforeseen resources to comply with such regulations. Failure to comply with such regulations could cause a significant disruption in our business domestically and internationally as it could distract management attention and have a material adverse effect on our business and financial condition or results of operations.
Inability to hire experienced and capable employees or executives or enter into distributor agreements in non-Australian markets could adversely affect our business in such markets.
We rely heavily on the performance of our officers and key employees in Australia as well as distributor agreements in foreign markets. Any growth will be dependent on our ability to retain and motivate qualified personnel in those markets and find retail market distributors with a broad base for re-sale of our products in the market. If we do not succeed in attracting new qualified employees or entering into an agreement with a distributor, our business could suffer significantly. Competition for qualified personnel is intense in certain markets, and we may be unable to identify, attract, hire, train, assimilate, or retain a sufficient number of highly skilled managerial, marketing and technical personnel necessary to implement our business plan. We may not be able to enter into distribution agreements in certain markets which could have a significant impact on our retail market penetration.
We have a limited operating history.
We have received only modest revenues and may experience many of the problems, delays, expenses and difficulties commonly encountered by smaller companies, many of which are beyond our control. These include, but are not limited to, unanticipated problems related to product development, regulatory compliance, manufacturing, marketing, additional costs and competition, product obsolescence, as well as problems associated with sales or operations in foreign countries. There can be no assurance that we will be able to market its products or that products will meet with customer acceptance or generate any revenue, or that we will ultimately achieve profitability. We have incurred significant development and marketing operating losses to date and there can be no assurance of future revenues or profits.
The success of our plan of operation is uncertain.
Our proposed plan of operation and prospects will be largely dependent upon our ability to successfully attract distributors and build brand awareness with customers. There can be no assurance that we will be able to successfully implement our business plan or that unanticipated expenses, problems, or difficulties will not occur which would result in material delays in its implementation. There are no assurances that we will be able to generate sufficient revenues from sales to distributors to become profitable.
We may rely upon our relationships with distributors, alliance partners and customers.
We believe that to be successful we may need to establish on-going partnership/support relationships with certain customers and distributors. Our reliance on these relationships may involve risks including among other things, the risk of bankruptcy of the partner, the inability of such partner to undertake necessary financial obligations, possible inconsistent business goals or interests or a possible conflict on business decisions or positions.
Enforceability or claims for civil liability is uncertain.
The majority of our officers and directors reside outside the United States. We anticipate that a substantial portion of the assets that may be developed or acquired by us will be located outside the United States and, as a result, it may not be possible for investors to effect service of process within the United States upon our officers or directors, or to enforce against our assets or against such person judgments obtained in United States courts predicated upon the liability provisions, and most particularly the civil liability provisions, of the United States securities laws or state corporation or other law.
We may have risks due to our foreign operations and dependence on foreign sales representatives.
As a substantial portion of our operation will be subject to various factors characteristic of conducting business outside the United States, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, export controls or license requirements, political or economic instability, impositions of government controls and other factors, any or all of which could have a material adverse effect on our business. Agreements may also be more difficult to enforce and receivables more difficult to collect through a foreign country’s legal or currency expatriation systems. In addition, the laws of certain countries relating to proprietary rights do not protect our products and intellectual property rights to the same extent as do the laws of the United States and Australia.
We may experience risks relating to our growth and expansion.
Growth of our business may place significant pressures on our management, operation and technical resources. We believe that for competitive reasons, it is important to obtain a customer base as early as possible and accordingly, the failure to expand operations in the early years of our business may hinder or preclude significant future growth. If we are successful in obtaining customers for our products, we may be required to raise substantial additional funds and deliver large volumes of products to our customers on a timely basis at a reasonable cost to us. We may be required to obtain additional financing in order to pursue additional business opportunities. Our success will also depend in part upon our ability to provide customers with timely service and support. We will also be required to develop and improve operational, management and financial systems and control. Failure to manage growth would have a material adverse effect on our business and expenses arising from our activities to increase market penetration and support growth may have a negative impact on operating results.
ITEM 2. PROPERTIES
The following table lists details of our properties at June 30, 2008:
We own approximately 632 acres in the Upper Hunter Valley, New South Wales. The Upper Hunter Wybong vineyard has a total of approximately 632 acres, of which 187 acres are under vine and approximately 13 acres are utilized for the winery. The land mostly comprises of black, sandy loam, alluvial soils along the creek frontage and adjacent slopes, rising to arable red loams with well drained plains and sandy slopes which extend to the sandstone ridges on the perimeter. The surplus acreage is used for pastures used primarily to produce mulch covers under the vines. Located on the property is the Wybong Creek, a perennial stream. Because of climate, soil and other grown conditions, the Upper Hunter Valley is ideally suited to growing superior quality Shiraz, Chardonnay, Merlot and Semillon wine grapes.
The Company’s executive offices and administrative offices are located on the Wybong property at the vineyard.
We believe our properties are adequate for our current needs and will be sufficient to serve the needs of our operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings from time to time in the ordinary course of business, none of which is currently required to be disclosed under this Item 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to shareholders to vote on during the fourth fiscal quarter ended June 30, 2008.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Yarraman’s shares of common stock are publicly traded by brokers, without market makers, and the resulting trade data (price and volume) are posted by the Pink Sheets (www.pinksheets.com) a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities that is published by Pinks Sheets LLC. Trade data for YRMN Shares may be found under the symbol ‘YRMN.PK’. The following table sets forth the range of high and low sales prices for the Company’s common stock for the periods indicated:
| | | High | | | Low | |
| Fiscal 2008: | | | | | | |
1st Quarter | | $ | 2.35 | | | $ | 2.35 | |
2nd Quarter | | $ | 2.35 | | | $ | 2.35 | |
3rd Quarter | | $ | 2.35 | | | $ | 2.35 | |
4th Quarter | | $ | 2.35 | | | $ | 1.50 | |
| | | | | | | | | |
| Fiscal 2007: | | | | | | | | |
1st Quarter | | $ | 2.35 | | | $ | 2.35 | |
2nd Quarter | | $ | 2.35 | | | $ | 2.35 | |
3rd Quarter | | $ | 2.35 | | | $ | 2.35 | |
4th Quarter | | $ | 2.35 | | | $ | 2.35 | |
Our stock is thinly traded. Such prices above represent quotations between dealers, without dealer markup, markdown or commissions, and may not represent actual transactions. During the fiscal year ended June 30, 2008 transactions for the issuance of our common shares related to debt conversion and payment of services were recorded at values between $0.42 and $0.45 per share.
Record Holders
As of April 27, 2009, there were 38,000,000 shares of common stock issued and outstanding, held by approximately 62 holders of record as indicated on the records of the Company’s transfer agent.
Dividends
The Company has not declared or paid dividends on its capital stock to date and intends to retain any earnings for use in the business for the foreseeable future.
Equity Compensation Plan Information
We do not currently have any equity compensation plans authorized.
Recent Sales of Unregistered Securities
During the year ended June 30, 2008 we issued the following securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):
| Party | | Shares | |
| Delta Dawn Pty., Ltd. | | | 6,561,524 | |
| Whinners Pty., Ltd. | | | 5,440,476 | |
| William Middleton | | | 315,000 | |
| Ian Long | | | 275,000 | |
| William Stubbs | | | 100,000 | |
| Lichter, Yu and Associates | | | 90,000 | |
| Warrick Duthy | | | 50,000 | |
| Landmark Financial | | | 50,000 | |
| Frank Starr | | | 50,000 | |
| Brian Johnston | | | 50,000 | |
| Gottbetter Partners | | | 18,000 | |
| | | | 13,000,000 | |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no repurchases of equity securities by the issuer or affiliated purchasers during the fourth quarter of the fiscal year ended June 30, 2008.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with other sections of this Form 10-K including Part 1, “Item 1: Business” and Part II, “Item 8: Financial Statements.” Various sections of management’s discussion and analysis (“MD&A”) contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially due to factors discussed in this report, as well as factors not within our control. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations.
Our MD&A is provided as a supplement to our audited financial statements to help provide an understanding of our financial condition, changes in financial condition and results of operations. The MD&A section is organized as follows:
| · | Overview. This section provides a general description of the Company's business, as well as recent developments that we believe are important in understanding our results of operations as well as anticipating future trends in our operations. |
| · | Critical Accounting Policies. This section provides an analysis of the significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosure of contingent assets and liabilities. |
| · | Results of Operations. This section provides an analysis of our results of operations for the fiscal year ended June 30, 2008 (“Fiscal 2008”) compared to the fiscal year ended June 30, 2007 (“Fiscal 2007”). A brief description of certain aspects, transactions and events is provided, including related-party transactions that impact the comparability of the results being analyzed. |
| · | Liquidity and Capital Resources. This section provides an analysis of our financial condition as of June 30, 2008 and our cash flows for Fiscal 2008 compared to Fiscal 2007. |
Overview
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the years ended June 30, 2008 and 2007, we incurred losses of $3,628,825 and $4,452,780 , respectively. In addition, we have suffered recurring losses from operations, cash deficiencies and the inability to meet our maturing obligations without borrowing from related parties and selling shares of our stock. These issues raise substantial concern about our ability to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow to meet our obligations on a timely basis, to retain our current financing, to obtain additional financing, and ultimately to attain profitability. As of June 30, 2008 we were able to convert approximately $5,035,000 of debt into equity by issuing shares of our common stock.
We produce and sell premium, super-premium and ultra-premium wines from our winemaking operations located outside of Sydney, Australia. Our revenues are generated by selling our wines through distributors located both inside and outside of Australia pursuant to agreements that generally obligate the distributor to use its commercially reasonable efforts to arrange for the purchase of our products by retail and wholesale venders of wines in our target markets. We recognize revenue upon the shipment of the relevant wine (whether bottled or in bulk form) to the purchaser under circumstances that give rise to a binding obligation on the part of the purchaser to make payment to us.
On December 22, 2005, we entered into a Share Exchange Agreement with Yarraman Estate Pty Limited, a privately owned Australian company (“Yarraman Australia”), the beneficial owners of all of Yarraman Australia’s shares, and Delta Dawn Pty Limited as trustee of the Yarraman Road Trust (“Delta Dawn”), the nominal holder of such shares, pursuant to which we acquired all of the issued and outstanding shares of stock of Yarraman Australia in exchange for the issuance in the aggregate of 15,000,000 shares of our common stock to Delta Dawn for the benefit of such beneficial owners, which were subsequently distributed to each such owner.
As a result of the share exchange, Yarraman Australia became our wholly-owned subsidiary and Delta Dawn acquired approximately 60% of our issued and outstanding stock. Contemporaneously, Yarraman Australia purchased certain assets relating to the Yarraman winery operations from Delta Dawn. In connection with these transactions, we entered into certain financing arrangements described in this Annual Report and began to operate as a reporting company in the United States.
In May 2009, we completed the acquisition of 96% of the outstanding shares of capital stock of Asia Distribution Solutions Ltd.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” following this section of our MD&A. Some of our accounting policies require us to make difficult and subjective judgments, often resulting from the need to make estimates on matters that are inherently uncertain.
We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Revenue Recognition
Revenues consist of sales of finished goods, which are bottled and labeled wine, and bulk wine, which is larger quantities of unbottled wine. Revenue is recognized when the product is shipped or delivered and the risks, rewards and title of ownership have transferred to the customer. We recognize some shipping and handling fees as revenue, and the related expenses as a component of cost of sales. All internal handling charges are included with selling and marketing expense. Historically, sales returns have not been significant. As such, we do not record a reduction to revenue for estimated product returns in the same period that the related revenue is recorded.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Company determines its allowance for doubtful accounts based on the aging of accounts receivable balances, its historic write-off experience, and the financial condition of its customers. Changes in the financial condition of the Company's major customers could result in significant accounts receivable write-offs. The Company's allowance for doubtful accounts at June 30, 2008 and 2007 was $104,213 and $42,440 respectively.
INVENTORY VALUATION - The Company continually assesses the valuation of its inventories and reduces the carrying value of those inventories that may have a cost in excess of the current market value or may be obsolete or in excess of the Company's forecasted usage to their estimated net realizable value. Net realizable value is estimated using historic experience, current market conditions and assumptions about future market conditions and expected demand. If actual market conditions and future demand are less favorable than projected, inventory write-downs, which are charged to costs of goods sold, may be required.
IMPAIRMENT OF INTANGIBLE ASSETS - The Company has intellectual materials and water usage rights associated with its business. The Company reviews these assets for impairment at least annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value. If the fair value of these assets is less than their carrying value, then an impairment loss would be recognized equal to the excess of the carrying value over the fair value of the asset. As of June 30, 2008, the Company does not believe there has been any impairment of these assets. Intangible assets at June 30, 2008 and 2007 totaled $249,990 and $212,220, respectively.
Related-Party Transactions
We have related-party transactions and agreements, which we believe have been accounted for at fair value. We utilized our best estimate of the value of these transactions and agreements. Had alternative assumptions been used, the values obtained may have been different.
Income Taxes
We utilize the liability method of accounting for income taxes. Deferred income tax assets and liabilities are calculated as the difference between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we consider all positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court rulings. Therefore, the actual income taxes may be materially different from our estimates. As a result of our analysis, we concluded that a full valuation allowance against our net deferred tax assets is appropriate at June 30, 2008 and 2007.
Contingencies
From time to time, we are involved in disputes, litigation and other legal proceedings. We record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. However, the actual liability in any such litigation may be materially different from our estimates, which could result in the need to record additional costs. Currently, we have no outstanding legal proceedings or claims that require a loss contingency.
Stock-Based Compensation Expense
Effective January 1, 2006, we adopted SFAS 123R, Share-Based Payments (“SFAS 123R”). SFAS 123R requires all share-based payments, including grants of employee stock options and warrants, be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The Black-Scholes model meets the requirements of SFAS 123R; however, the fair values generated by the model may not be indicative of the actual fair values of our awards as the model does not consider certain factors important to our awards, such as continued employment, periodic vesting requirements and limited transferability.
The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We use the historical volatility for our common stock as the expected volatility assumption required in the Black-Scholes model, which could be significantly different than actual volatility. The expected life of the awards is based on historical and other economic data trended into the future. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and expectation of dividend payouts. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based compensation expense recognized in our financial statements beginning January 1, 2006 and thereafter is based on awards that are ultimately expected to vest. We evaluate the assumptions used to value our awards on a quarterly basis. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards to employees.
Results of Operations
The following table sets forth, for the periods indicated, certain operating information expressed as a percentage of revenue. All amounts in the following presentation are in U.S. Dollars unless otherwise indicated.
| | | Twelve Months ended June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | | | | | | | |
| Revenue | | $ | 2,318,719 | | | | 100 | % | | $ | 2,012,445 | | | | 100 | % |
| Cost of Revenue | | $ | 2,747,800 | | | | 118 | % | | $ | 2,997,698 | | | | 149 | % |
| Gross Profit | | $ | (429,081 | ) | | | (18 | ) % | | $ | (985,253 | ) | | | (49 | ) % |
| Other (Income) Expense | | $ | 1,446,667 | | | | 62 | % | | $ | 881,799 | | | | (44 | ) % |
| General and Administrative Expenses | | $ | 1,753,077 | | | | 76 | % | | $ | 2,585,728 | | | | 128 | % |
| Income (Loss) Before Income Tax | | $ | (3,628,825 | ) | | | (157 | ) % | | $ | (4,452,780 | ) | | | (221 | ) % |
| Income Tax Expenses | | $ | 0 | | | | 0 | % | | $ | 0 | | | | 0 | % |
| Net Income (loss) | | $ | (3,628,825 | ) | | | (157 | ) % | | $ | (4,452,780 | ) | | | (221 | ) % |
Twelve Months Ended June 30, 2008 Compared to Twelve Months Ended June 30, 2007
Revenue . Revenue was $2,318,719 in the twelve months ended June 30, 2008 compared to $2,012,445 in the twelve months ended June 30, 2007. The increase in revenues of $306,274 or approximately 15%, was primarily related to the following items: (1) an increase in our domestic sales of $888,692 and an increase our bulk wine sales of $321,037, (2) a decrease in our retail sales of $224,534 and a decrease in our sales of grapes of $421,075, and (3) the effect of fluctuation in the exchange rate between the Australian Dollar and the US Dollar of approximately $195,000.
Cost of Revenue . Cost of revenue was $2,747,800 in the twelve months ended June 30, 2008 compared to $2,997,698 in the twelve months ended June 30, 2007, a decrease of $249,898. As a percentage of revenue, cost of revenue was 118% in the twelve months ended June 30, 2008 compared to 149% in the twelve months ended June 30, 2007. The decrease in cost of revenue is primarily due to adjustments to the valuation of our inventory of $1,781,599 that were made in the year ended June 30, 2007 and the effect of the fluctuation in the exchange rate between the Australian Dollar and the US Dollar of approximately $196,000.
During the year ended June 30, 2008, the management of the Company sold approximately 341,300 liters of unbottled wine at below cost. The Company recorded approximately $920,000 in cost of sales to reflect this inventory at lower of cost or market at June 30, 2007 and for the year then ended. Per Company management this reduction in inventory is not indicative of impairment to any other inventory product at June 30, 2007 and 2008. The sale during the year ended June 30, 2008, per management, was to infuse working capital for ongoing operations.
Gross Profit (Loss) . Gross loss was $429,081 in the twelve months ended June 30, 2008 compared to gross loss of $985,253 in the twelve months ended June 30, 2007. As a percentage of revenues, gross loss was 18% in the twelve months ended June 30, 2008 from 49% in the twelve months ended June 30, 2007 for the reasons discussed above.
Other Income (Expense). Other expense was $1,446,667 in the twelve months ended June 30, 2008 compared to $881,799 in the twelve months ended June 30, 2007. The increase in other expense of $564,868 was primarily attributable to an increase in our interest expense of $621,547. Our interest expense increased due to increased borrowings as described in our financial statements, and due to the amortization of the remaining imputed interest on loans payable from related parties that converted into common stock during the twelve months ended June 30, 2008. Such amortization for the years ended June 30, 2008 and 2007 was $763,133, and $205,905, respectively.
Sales, General and Administrative Expenses . Sales, general and administrative expenses were $1,753,077 in the twelve months ended June 30, 2008 compared to $2,585,728 in the twelve months ended June 30, 2007. This is a decrease of $832,651 or approximately 32% from the 2007 period to the 2008 period. This decrease was primarily attributable to a decrease in our expenses related to leasing and operating the Wirrila vineyard of $392,390, .
As a percentage of revenues, sales, general and administrative expenses decreased to approximately 76% in the twelve months ended June 30, 2008 from 128% in the twelve months ended June 30, 2007 due to the reasons as discussed above.
Net Income (Loss) . Our net loss was $3,628,825 in the twelve months ended June 30, 2008 compared to a net loss of $4,452,780 in the twelve months ended June 30, 2007. This decrease in loss was primarily attributable to an increase in our sales as described above combined with the decrease in cost of sales and sales, general and administrative costs outlined above.
Liquidity and Capital Resources
As of June 30, 2008, we had $0 of cash and cash equivalents and $1,327,335 of working capital as compared to $150,072 and $1,067,047, respectively, at June 30, 2007. Cash flow from operations is expected to improve as a result of our cost cutting measures, including the termination of the Wirrilla lease and related operating costs and improved sales. Cash flow from financing activities is expected to improve as the Company converted approximately $5,035,000 of debt into equity by issuing 12,000,000 shares of common stock.
During the years ended June 30, 2008 and 2007, net cash used in operating activities was $(1,113,356) and $(2,931,163), respectively. Net cash used in investing activities totaled $60,108 for the year ended June 30, 2008, compared with $0 for the same period ended June 30, 2007. Net cash provided by financing activities totaled $276,521 for the year ended June 30, 2008, compared to $2,791,278 for the same period ended June 30, 2007. The net change in our cash balance was $(150,072) and $39,634 for the years ended June 30, 2008 and 2007, respectively.
Management has been exploring options to refinance its long term loan from Provident, currently with an outstanding balance of $5,511,308. Any refinancing transaction will seek terms that provide a lower interest rate, which management believes will further increase the amount cash flow as a result of savings because of lower interest payments.
Management has also been exploring additional investment capital alternatives with professional investment bankers in the United States to raise an additional $5,000,000.
Inflation and Changing Prices
Management believes our operations have not been and, in the foreseeable future, will not be adversely affected by inflation or changing prices.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
ITEM 8. FINANCIAL STATEMENTS
The information required by Item 8 is included herein Appendix A beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
We maintain "disclosure controls and procedures" as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Our management, including our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-KSB. Based on such evaluation, and as discussed in greater detail below, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were not effective:
| • | to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and |
| • | to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and our Treasurer, to allow timely decisions regarding required disclosure. |
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. Our internal control over financial reporting includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, |
| • | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of management and directors, and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Based on the assessment using those criteria, our management concluded that the internal control over financial reporting was not effective at June 30, 2008.
While we have designed a system of internal controls to supplement our existing controls during our implementation of Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX 404"), which has not been fully implemented, we have been unable to complete testing of these controls and accordingly lack the documented evidence that we believe is necessary to support an assessment that our internal control over financial reporting is effective. Without such testing, we cannot conclude that there are any significant deficiencies or material weaknesses, nor can we appropriately remediate any such deficiencies that might have been detected. In addition, during the analysis of our internal controls in connection with our implementation of SOX 404, we did identify a number of controls, the adoption of which are material to our internal control environment and critical to providing reasonable assurance that any potential errors could be detected. Those identified controls include:
| • | Inventory - we did not maintain adequate procedures to timely record and reconcile inventory, including any necessary reserves, |
| • | Notes payable - we did not maintain adequate procedures to properly record the associated amortization of debt discounts timely nor the timely reconciliation of note balances, |
| • | Journal Entries – We did not maintain an adequate list of recurring closing entries which would help insure all required closing entries are reviewed and recorded properly. |
| • | Period Closing – We did not maintain an adequate checklist to insure that all period closing procedures are recorded properly and completely. |
Due to the nature of these material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur that would not be prevented or detected.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth the names, ages, years elected and principal offices and positions of our current directors and executive officers as of May 1, 2009.
| Name | | Year First Elected As Officer or Director | | Age | | Office |
| Michael Kingshott | | 2009 | | 62 | | Chairman, Board of Directors |
| Ian Long | | 2008 | | 43 | | Board Member, President |
| Gary Blom | | 2008 | | 58 | | Board Member |
| Stephen Kulmar | | 2009 | | 56 | | Board Member |
| Lawrence P. Lichter | | 2008 | | 46 | | Chief Financial Officer, Secretary |
None of the members of the Board of Directors or executive officers of the Company are related to one another. Each year the stockholders elect the members of our Board of Directors. We do not have a standing nominating committee or compensation committee as our entire board of directors currently serves these functions. There were no changes in procedures for nominating directors during the year ended June 30, 2008.
Michael Kingshott, Chairman, Board of Directors
Mr. Kingshott is a prominent business executive in the City of London with over 37 years experience in property, shipping, transportation and logistics with considerable trading and management experience with Asia. Between 1981 and 1993, Mr. Kingshott was managing director at Sally UK Holdings plc and was chairman between 1993 and 1995. Subsequently he became non-executive chairman of Embassy Property Group plc, which was acquired by Jacobs Holdings plc in 1995. He left Jacobs Holdings plc in 2002. He is currently Chairman of Serviced Office Group plc and Non Executive Chairman of Global Beverage Asia.
Stephen Kulmar, Board Member
Mr. Kulmar has spent the last 28 years of his career building a leading retail marketing agency in Australia. His experience covers all retail categories from fashion apparel to liquor. He has worked with some of the most successful retail businesses in Australia and New Zealand from Westfield to Woolworths to the Warehouse Group. He recently retired from this agency to concentrate on establishing a consulting business - Retail Oasis. He is also a nonexecutive board member of two public companies and a shareholder/director in two successful privately owned retail businesses.
Ian Long, Chief Executive Officer, President and Director.
Ian Long has over 20 years experience in winemaking and wine business management, including 10 years as Senior Winemaker at Rosemount Estate and 5 years as Group Operations Winemaker for Southcorp Wines. In the role at Southcorp Mr. Long was responsible for production optimization across the Southcorp Group of 11 company wineries and 6 contract processors, being accountable for developing the overall vision for winemaking facilities & the transition plan to achieve this vision. The Southcorp Group produced brands such as Penfolds, Lindemans, Rosemount, Seppelt & Wynns. Mr. Long has been a member of the Board of Directors since June 2008 and our Chief Executive officer and President since September 25, 2008.
Lawrence Lichter, Chief Financial Officer and Secretary.
Lawrence Lichter has been serving as Secretary since September 20, 2007 and as Chief Financial Officer since September 25, 2008. Mr. Lichter has been a certified public accountant since 1984. In 1991 he founded Lichter, Yu & Associates, a certified public accounting firm for which he still works that provides consulting services to public companies and assists them with the preparation of their financial statements and with their SEC and Sarbanes Oxley compliance matters. From December 1999 through March 2008 Mr. Lichter served as the chief financial officer for Pacific American Services Group, LLC, a company which owns an institutional securities firm and a financial services firm and which specializes in income tax preparation and business management.
Gary Blom
Gary Blom has spent over 25 years as an investment banker in the United States and Australia. After spending 12 years on Wall Street as Managing Partner of an International Investment Bank which specialized in Corporate Finance, Mergers and Acquisitions he returned to Australia in 1994 to successfully launch the Imax theatres in Australia, New Zealand and Asia. Since 1994 he has been an investor in Yarraman Estate. In recent years he has joined as a partner of Barrack & York, an Australian corporate advisory firm that specializes in providing a full service platform integrating and coordinating investment banking, tax, accounting and legal services to corporations in the global market.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, as well as persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership. Directors, executive officers, and greater than 10% shareholders are required by Securities and Exchange Commission regulation to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, we believe all Forms 3, 4 and 5 were timely filed with the SEC by such reporting persons during the year ended June 30, 2008.
Code of Ethics
On February 3, 2006, we adopted a code of ethics that applies to our officers, employees and directors, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), and other persons who perform similar functions. A copy of our Code of Ethics was filed as Exhibit 14.1 to our Annual Report on Form 10-KSB for the fiscal year ended June 30, 2006. Our Code of Ethics is intended to be a codification of the business and ethical principles which guide us, and to deter wrongdoing, to promote honest and ethical conduct, to avoid conflicts of interest, and to foster full, fair, accurate, timely and understandable disclosures, compliance with applicable governmental laws, rules and regulations, the prompt internal reporting of violations and accountability for adherence to this Code. A copy of our Code of Ethics will be provided to any person requesting same without charge.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past five years:
| | · | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| | · | had any bankruptcy petition filed by or against any business or property of such person or any business of which he or she was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time; |
| | · | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities, futures, commodities or banking activities; or |
| | · | been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated. |
Board of Directors Meetings and Subcommittees
Attendance at Board Meetings and Annual Shareholders’ Meeting
The Board held three meetings in Fiscal 2008. We expect each director to attend every meeting of the Board as well as the annual meeting. All directors attended 100% of the meetings of the Board in Fiscal 2008.
Audit Committee
Our Board of Directors has adopted an Audit Committee Charter. Our Board of Directors had appointed William Stubbs to the Audit Committee. William Stubbs meets the independence requirements and standards currently established by the SEC. The Board of Directors has designated William Stubbs to serve on the Audit Committee member as Chairman and “audit committee financial expert” within the meaning of the rules and regulations of the SEC.
The Audit Committee assists the Board by overseeing the performance of the independent auditors and the quality and integrity of our internal accounting, auditing and financial reporting practices. The Audit Committee is responsible for retaining (subject to stockholder ratification) and, as necessary, terminating, the independent auditors, annually reviews the qualifications, performance and independence of the independent auditors and the audit plan, fees and audit results, and pre-approves audit and non-audit services to be performed by the auditors and related fees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have a standing compensation committee as our entire board of directors currently serves these functions. Our Board of Directors makes decisions concerning salaries and incentive compensation for our officers, including our Chief Executive Officer, Chief Financial Officer and employees. The Board of Directors has designated William Stubbs to serve on the Compensation Committee member as Chairman.
None of the members of the Compensation Committee have any relationship with the Company or any of its officers or employees other than in connection with their role as a director.
COMPENSATION OF DIRECTORS
Prior to May 1, 2008 members of our Board Directors received fees in the sum of AU$20,000 per year, with a wine allowance to the value of AU$5,000 and accommodation entitlements at Yarraman Estate in the Upper Hunter Valley, Australia. Our Board of Directors resolved that these fees were based on each Director attending and preparing for no fewer than four Board meetings per year and in addition providing additional assistance to us as required.
William Stubbs was paid an additional fee of AU$5,000 in recognition of his role and responsibilities as Chairman of the Board of Directors of the Company.
As of May 1, 2008 the only Director that will receive a fee for his services is the Chairman, William Stubbs. The fee will be AUD 10,000 per year, approximately US$8,500.
For the year ended June 30, 2008 director compensation was as follows:
| Name | | Fees Earned or Paid in Cash | | | Stock Awards | | | Option Awards | | | Non-Equity Incentive Plan Compensation | | | Non-Qualified Deferred Compensation Earnings | | | All Other Compensation | | | Total | |
| William Stubbs | | $ | 22,500 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 22,500 | |
| William Middleton | | $ | 16,666 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 16,666 | |
For the year ended June 30, 2007 director compensation was as follows:
| Name | | Fees Earned or Paid in Cash | | | Stock Awards | | | Option Awards | | | Non-Equity Incentive Plan Compensation | | | Non-Qualified Deferred Compensation Earnings | | | All Other Compensation | | | Total | |
| William Stubbs | | $ | 20,700 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 20,700 | |
| William Middleton | | $ | 16,420 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 16,420 | |
Nominating Committee
At this time, we do not have a separate nominating committee as this function is performed by our full Board of Directors. Our entire Board of Directors is active in the nominating process. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of directors. The Board of Directors carefully considers nominees regardless of whether they are nominated by shareholders or existing board-members.
Securities Authorized for Issuance under Equity Compensation Plans
None.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth, for the years indicated, all compensation awarded to, paid to or earned by the following type of executive officers for the fiscal year ended June 30, 2008: (i)individuals who served as, or acted in the capacity of, our principal executive officer and principal financial officer for the fiscal years ended June 30, 2008 and 2007
SUMMARY COMPENSATION TABLE(1)
Name and Principal Position | | Year | | Salary ($) | | | Bonus ($) | | | Stock Awards ($) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compen-sation ($) | | | Change in Pension Value and Non-qualified Deferred Compen-sation Earnings ($) | | | All Other Compensation ($) | | | Total ($) | |
| (a) | | (b) | | (c) | | | (d) | | | (e) | | | (f) | | | (g) | | | (h) | | | (i) | | | (j) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wayne Rockall (1) , | | 2008 | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Chief Executive | | 2007 | | | 92,363 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 92,363 | |
| Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Raymond Brien (2) , | | 2008 | | | 69,356 | | | | | | | | | | | | | | | | | | | | | | | | 8,964 | | | | 78,320 | |
| Chief Financial | | 2007 | | | 4,038 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 538 | | | | 4,576 | |
| Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
John Wells (3) , Chief Financial Officer | | 2007 | | | 77,333 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 4,167 | | | | 81,500 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ian Long, Chief Executive Officer | | 2008 | | | 108,382 | | | | 11,250 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 8,631 | | | | 128,263 | |
| (1) | Mr. Rockall served as our Chief Executive Officer from September 1, 2006 until September 20, 2007 and did not collect any compensation from us during the 2008 fiscal year. |
| | (2) | Mr. Brien served as our Chief Financial Officer from October 1, 2007 until June 30, 2008. |
| | (3) | Mr. Wells served as our Chief Financial Officer from December 22, 2005 until April 27, 2007. |
We have not issued any stock options or maintained any stock option or other incentive plans since our inception. We have no plans in place and have never maintained any plans that provide for the payment of retirement benefits or benefits that will be paid primarily following retirement including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans. Similarly, we have no contracts, agreements, plans or arrangements, whether written or unwritten, that provide for payments to the named executive officers or any other persons following, or in connection with the resignation, retirement or other termination of a named executive officer, or a change in control of us or a change in a named executive officer’s responsibilities following a change in control.
Outstanding Equity Awards at Fiscal Year End
None.
SARS/Long-Term Incentive Plans – Awards in Last Fiscal Year
None.
Employment Contracts
Yarraman Australia has an employment agreement with Ian Long that provides for an annual salary of AU$125,000 and an annual bonus structure of up to AU$25,000 by achieving key performance criteria. In addition an annual auto allowance of AU$10,000 is provided.
Yarraman Australia had an employment agreement with Wayne Rockall that commenced on September 1, 2006 and was terminated on September 20, 2007. The agreement provided for his total annual compensation for serving as Chief Executive Officer and President of AU$200,000. Wayne Rockall was also entitled to a bonus of up to 100% of base salary on achieving key budget and performance criteria, which were never met.
Yarraman Australia had an employment agreement with Mr. John Wells which commenced on May 9, 2005 and was terminated on April 27, 2007. The agreement provided for his total annual compensation of AU$75,000 for serving as Chief Financial Officer.
Yarraman Australia had an employment agreement with Mr. Raymond Brien which commenced on June 12, 2007 and was terminated on June 20, 2008. The agreement provided for his total annual compensation to be AU$75,000 and an auto allowance of AU$10,000 for serving as Chief Financial Officer.
The Company has an agreement with Mr. Lawrence Lichter that provides for annual compensation of US$25,000 for serving as company Secretary.
Report on Repricing of Options/SARs
We did not re-price any options or SARS during the fiscal year ended June 30, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of April 27, 2009, certain information concerning the beneficial ownership of our Common Stock by:
| | · | each stockholder known by us to own beneficially five percent or more of our outstanding common stock; |
| | · | each executive officer; and |
| | · | all of our executive officers and directors as a group, and their percentage ownership and voting power. |
Name and Address of Beneficial Owner | | Shares Beneficially Owned (1) | | | Percent of Class† | |
| | | | | | | |
Delta Dawn Pty Ltd., as trustee for the Yarraman Road Trust (2) | | | 7,617,237 | (3) | | | 20.05 | % |
| | | | | | | | | |
Huntleigh Investment Fund Limited 49 Micoud Street Castries, St. Lucia | | | 3,534,012 | (4) | | | 9.30 | % |
| | | | | | | | | |
William J. Stubbs, Director 58 Terry Road Box Hill, New South Wales Australia 2765 | | | 100,000 | | | | . | * |
| | | | | | | | | |
Whinners Pty., Ltd Sydney, NSW Australia | | | 8,399,163 | | | | 22.10 | % |
| | | | | | | | | |
Stephen Kulmar 1a Rialto Lane Manly, NSW Australia | | | 275,800 | | | | | * |
Name and Address of Beneficial Owner | | Shares Beneficially Owned (1) | | | Percent of Class† | |
| | | | | | | |
Ian Long, CEO, President, Director 700 Yarraman Road Wybong, NSW Australia 2333 | | | 275,000 | | | | * | |
| | | | | | | | | |
Gary Blom, Director Mallfame Pty., Ltd. Sydney, NSW Australia | | | 6,045,200 | | | | 15.91 | % |
| | | | | | | | | |
Lawrence Lichter, CFO and Secretary 16133 Ventura Boulevard, #425 Encino, CA 91436 USA | | | 90,000 | | | | * | |
| | | | | | | | | |
Menala Pty., Ltd. Sydney, NSW Australia | | | 2,060,800 | | | | 5.42 | % |
| | | | | | | | | |
Total Held by Directors and Executive Officers | | | 6,786,000 | | | | 17.86 | % |
† As of April 27, 2009 there were 38,000,000 shares of our common stock, par value $0.001 per share, issued and outstanding.
* Less than one percent.
| (1) | Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of the Common Stock beneficially owned by them. A person is deemed to be the beneficial owner of securities which may be acquired by such person within sixty (60) days from the date indicated above upon the exercise of options, warrants or convertible securities. Each beneficial owner’s percentage of ownership is determined by assuming that options, warrants or convertible securities that are held by such person (not those held by any other person) and which are exercisable within sixty (60) days of the date indicated above, have been exercised. To date, we have not granted any options, warrants or any other form of securities convertible into our common stock. |
| (2) | The address of the beneficial owner is c/o Yarraman Estate, 700 Yarraman Road, Wybong, Upper Hunter, New South Wales, 2333 Australia. |
| (3) | Delta Dawn Pty Ltd. is trustee of Yarraman Road Trust, an Australian unit trust created by a declaration of trust contained in a deed poll dated September 26, 2002. Interests in the trust property are evidenced by the issuance of units to the trust beneficiaries, with each unitholder entitled to the benefit of the assets of the Trust in the proportion in which they are registered as holding units from time to time. While the unitholders do not have the ability to direct the disposition and the voting of securities of the Registrant held in the name of Delta Dawn Pty Ltd as trust property, they may be deemed to beneficially own the securities as a result of their rights under the Trust documents. All unitholders have disclaimed any beneficial ownership that may be imposed due to interpretations of unitholders’ ownership of the trust property. |
| (4) | Based on information reported by Huntleigh Investment Fund Limited on a Form 4 filed on June 5, 2006. |
Equity Compensation Plan Information
We do not have any equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During the year ended June 30, 2008, we entered into the following transactions required to be reported under Item 404 of Regulation S-K (“Item 404”):
Yarraman Australia leased vineyards and related plant and equipment from the Trust. Terms of the agreement included annual payment of approximately $239,000. The lease began on July 1, 2003 and terminated on December 22, 2005 when Yarraman Australia purchased the vineyard and related plant and equipment.
The Company paid the Trustee approximately $35,000 per month for the use of additional vineyard land also located in Australia. On January 1, 2006 the Company entered into a written agreement to lease this vineyard land for approximately $35,000 per month. The term was from January 1, 2006 through June 30, 2006. As of July 1, 2006 this lease was on a month-to-month basis with the same payment terms. This leasing arrangement was terminated in May 2007. During the years ended June 30, 2007 total lease expense was approximately $359,000.
Stockholders and Directors of the Company and of the Trust were provided wine during the years ended June 30, 2008, June 30, 2007 valued at $8,844 and $24,505 respectively.
The Company had wine sales to entities related to various Stockholders, Officers and Directors totaling $9,866 and $4,734 during the years ended June 30, 2008 and 2007, respectively.
On February 1, 2008 Yarraman Australia entered into a consulting agreement whereby it agreed to pay AUD$5,000 per month to a wholly owned entity of one of our Board Members, Gary Blom, for his consulting services to the Company related to the wine business. During the year ending June 30, 2008 this entity was paid AUD$20,000, approximately USD$19,200.
On January 1, 2006 Yarraman Australia entered into a consulting agreement with the Trustee to provide business consulting services related to the wine industry for a term of two years or until such time as their ownership percentage in the Company is reduced to less than 15%. Under this agreement the Company must pay the Trustee $100,000AUD (Australian Dollars) or approximately $96,150 USD (US Dollars) annually. This agreement was terminated in June 2008. During the years ended June 30, 2008 and 2007 the Company paid the Trustee approximately $66,063 and $126,860 , respectively.
On December 21 2005, prior to the Exchange Agreement and in connection with the Asset Purchase, Yarraman Australia entered into a loan agreement with the Trust, the nominal holder of all of Yarraman Australia’s shares. The outstanding principal balance of this loan was $1,832,795. This loan advance was non-interest bearing. The loan was secured by the fixed assets of the Company, subordinated to all other loans of the Company collateralized by the fixed assets. A total of 50% of the loan payable, or $916,398, was to be repaid in thirty-six monthly installments commencing on the first business day of the twenty-fifth month following the loan agreement, or approximately February 1, 2008. On the thirty-sixth month of payment, in January 2011, the remaining 50% of the loan payable or $916,398 was to be due and payable. The initial repayment date of February 2008 was extended to June 30, 2008.
On May 1, 2006 Yarraman Australia entered into a loan agreement with the Trust in the principal amount of $826,020. Originally, this loan agreement had an interest rate of 8%, with the same repayment terms of the December 21, 2005 loan. During the year ended June 30, 2006 a total of $10,910 in interest expense was recorded on this loan, until the Trust waived the interest requirement on this loan. On May 25, 2006 the Trust extended to Yarraman Australia an additional $13,767 to be repaid in accordance with the same terms as the December 21, 2005 loan. This loan advance was also non-interest bearing.
As of June 30, 2008 both the loan advances above totaling $1,832,795 and the $826,020 loan payable were converted into 6,559,524 shares of the Company common stock at the market price of approximately $0.42 per share.
As the entire above loan advances, totaling $2,672,582 were non-interest bearing, the Company recorded an imputed interest of $871,307 which is recorded as discount on debt and a contribution of capital to the Company. This discount on debt is being amortized over the term that these loan advances are outstanding. As the loan advance was converted into common stock during the year ended June 30, 2008, the remaining unamortized debt discount was fully amortized upon conversion. During the years ended June 30, 2008 and 2007, the Company amortized this discount on debt, recorded as an interest expense of $763,133 and $205,905, respectively, at the prevailing exchange rates for the years then ended.
As of June 30, 2008 the Company is indebted to a private company that is owned by one of the Company’s majority shareholders, Geoffrey White, in the amount of $2,334,733. This related party has made various advances, loans and payments on behalf of the Company, all of which are unsecured, and due on demand. These advances and loans accrued interest on their outstanding balance ranging between 0% and 10% per annum.
On July 1, 2007 these advances and loans were restructured into one loan agreement for approximately $3,289,000. This new loan included approximately $689,000 related to a sale of wine by the related party to the Company during the year ended June 30, 2008. This portion of the new loan was to be repaid commencing December 7, 2007 with receipts from the proceeds of the re-sale of this wine by the Company until it was repaid in full. As of June 30, 2008 the balance on this portion of the loan was $689,000. The entire new loan accrues interest at 6.5% per annum. This new loan is secured by the fixed assets of the Company, subordinate to the loan from the commercial bank, such loan totaling $5,511,308 as of June 30, 2008. This new loan, together with outstanding interest, was to be repaid for any amounts still outstanding on September 30, 2008. On June 30, 2008 a total of AUD $2,400,000 or USD $2,280,000, of the above loan was converted into 5,440,476 shares of the Company’s common stock, at a market price of approximately $0.42 per share. On October 15, 2008, the lender extended the repayment date on the balance of the loan remaining, subsequent to the $2,280,000 portion of the loan that had converted into common stock, from September 30, 2008 to September 30, 2009.
Director Independence
Mr. Stubbs qualifies as “independent” in accordance with Rule 10A-3 of the Exchange Act. Messrs. Long, Blom Kingshott, Kulmar and Lichter do not qualify as independent. Mr. Long is employed by the Company. Mr. Blom is a beneficiary of the Yarraman Road Trust and a consultant to the Company. Mr. Lichter’s firm, Lichter, Yu and Associates provides accounting consulting services to the Company. Mr. Kulmar is a beneficiary of the Yarraman Road Trust. Mr. Kingshott is a major stockholder and employee of ADSL.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees ..
The aggregate fees billed to us by our principal accountant for services rendered during the fiscal years ended June 30, 2008 and 2007 are set forth in the table below:
| Fee Category | | Fiscal year ended June 30, 2008 | | | Fiscal year ended June 30, 2007 | |
| Audit fees (1) | | $ | 45,000 | | | $ | 19,855 | |
| Audit-related fees (2) | | $ | 0 | | | $ | 0 | |
| Tax fees (3) | | $ | 0 | | | $ | 0 | |
| All other fees (4) | | $ | 0 | | | $ | 0 | |
| Total fees | | $ | 45,000 | | | $ | 19,855 | |
| (1) | Audit fees consists of fees incurred for professional services rendered for the audit of consolidated financial statements, for reviews of our interim consolidated financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in connection with statutory or regulatory filings or engagements. |
| (2) | Audit-related fees consists of fees billed for professional services that are reasonably related to the performance of the audit or review of our consolidated financial statements, but are not reported under “Audit fees.” |
| (3) | Tax fees consists of fees billed for professional services relating to tax compliance, tax planning, and tax advice. |
| (4) | All other fees consists of fees billed for all other services. |
Audit Committee’s Pre-Approval Practice .
Section 10A(i) of the Securities Exchange Act of 1934 prohibits our auditors from performing audit services for us as well as any services not considered to be “audit services” unless such services are pre-approved by the board of directors (in lieu of the audit committee) or unless the services meet certain de minimis standards. Accordingly, our audit committee pre-approves all services, including audit services, provided by our independent accountants.
ITEM 15. EXHIBITS
| Exhibit Number | | Description |
| | | |
| 2.1 | | Share Exchange Agreement, dated December 22, 2005 (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 3.1 | | Certificate of Incorporation of Yarraman Winery, Inc. (incorporated herewith by reference to Exhibit 3.1 to Yarraman Winery, Inc.’s Registration Statement on Form 10-SB filed with the Securities and Exchange Commission on January 12, 2002) as amended by Certificate of Amendment to Certificate of Incorporation dated (incorporated herewith by reference to Appendix A of Yarraman Winery, Inc.’s Definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission March 16, 2006) |
| | | |
| 3.2 | | Amended and Restated By-laws of Yarraman Winery, Inc. (incorporated herewith by reference to Exhibit A to Appendix B of Yarraman Winery, Inc.’s Definitive Information Statement on Schedule 14C filed with the Securities and Exchange Commission March 16, 2006). |
| | | |
| 10.1 | | Stock Purchase Agreement dated as of December 22, 2005 (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 10.2 | | Promissory Note dated as of December 22, 2005 from Oriental Holdings Limited (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| Exhibit Number | | Description |
| | | |
| 10.3 | | Promissory Note dated as of December 22, 2005 from Glenealy Holdings Limited (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 10.4 | | Promissory Note dated as of December 22, 2005 from Leeds Holdings Limited (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 10.5 | | Promissory Note dated as of December 22, 2005 from Sunvalley Limited (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 10.6 | | Promissory Note dated as of December 22, 2005 from Dragon Enterprises Limited (incorporated herewith by reference to Exhibit 2.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Securities and Exchange Commission on December 22, 2005) |
| | | |
| 10.7 | | Lease Agreement dated May 12, 2006 between Yarraman Estate Pty Ltd and Delta Dawn Pty Limited (incorporated herewith by reference to Exhibit 10.1 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| | | |
| 10.8 | | Heads of Agreement dated March 24, 2006 between Yarraman Estate Pty Ltd. and World Icon International Limited (incorporated herewith by reference to Exhibit 10.2 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| | | |
| 10.9 | | Agreement for Services dated February 24, 2006 between Madison One Data Group Limited and Yarraman Winery, Inc. (incorporated herewith by reference to Exhibit 10.3 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| | | |
| 10.10 | | Consulting Agreement dated as of January 1, 2006 between Yarraman Estate Pty Ltd and Delta Dawn Pty Limited (incorporated herewith by reference to Exhibit 10.4 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| Exhibit Number | | Description |
| 10.11 | | Loan Agreement dated December 21, 2005 between Yarraman Estate Pty Ltd and Delta Dawn Pty Limited (incorporated herewith by reference to Exhibit 10.5 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| | | |
| 10.12 | | Loan Agreement dated May 1, 2006 between Yarraman Estate Pty Ltd and Delta Dawn Pty Limited (incorporated herewith by reference to Exhibit 10.6 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the period ended March 31, 2006 and filed with the Securities and Exchange Commission on May 15, 2006) |
| | | |
| 10.13 | | Loan Agreement dated August 1, 2006 between Yarraman Winery, Inc. and Whinners Pty Ltd (incorporated herewith by reference to Exhibit 10.13 to Yarraman Winery, Inc.’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and filed with the Securities and Exchange Commission on September 28, 2006) |
| | | |
| 10.14 | | Assignment of Debts Agreement dated February 2007 between Yarraman Estate Pty Limited and Whinners Pty Limited (incorporated herewith by reference to Exhibit 10.1 to Yarraman Winery, Inc.’s Quarterly Report on Form 10-QSB for the quarter ended March 31. 2007 and filed with the Securities and Exchange Commission on June 25, 2007) |
| | | |
| 14.1 | | Code of Ethics (incorporated herewith by reference to Exhibit 14.1 to Yarraman Winery, Inc.’s Annual Report on Form 10-KSB for the year ended June 30, 2006 and filed with the Securities and Exchange Commission on September 28, 2006) |
| | | |
| 16.1 | | Letter from Kabani & Company, Inc. regarding change in certifying accountant (incorporated herewith by reference to Exhibit 16.1 to Yarraman Winery, Inc.’s Current Report on Form 8-K dated September 20, 2007 and filed with the Securities and Exchange Commission on November 2, 2007) |
| | | |
| 21.1 | | Subsidiaries of Yarraman Winery, Inc. |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith |
| | | |
| 31.2 | | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith |
| Exhibit Number | | Description |
| 32.1 | | Certification of Chief Executive Officer and the Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith |
| | | |
| 32.2 | | Certification of Chief Financial Officer and the Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith |
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
| Signature | | Title | | Date |
/s/ Ian Long | | Chief Executive Officer and Director | | June 1, 2009 |
| Ian Long | | (Principal Executive Officer | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated.
| Signature | | Title | | Date |
/s/ Ian Long | | Chief Executive Officer and Director | | |
| Ian Long | | (Principal Executive Officer) | | |
/s/ Michael Kingshott | | Chairman of the Board | | |
| Michael Kingshott | | | | |
/s/ Lawrence P. Lichter | | Chief Financial Officer | | |
| Lawrence P. Lichter | | (Principal Financial Officer and Principal Accounting Officer) | | |
/s/ Gary Blom | | Director | | |
Gary Blom | | | | |
/s/ Stephen Kulmar | | Director | | June 1, 2009 |
| Stephen Kulmar | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Yarraman Winery, Inc.
We have audited the accompanying consolidated balance sheets of Yarraman Winery, Inc. (the “Company”) as of June 30, 2008 and 2007 and the related consolidated statement of operations and comprehensive loss, stockholders' equity (deficit) and cash flows for the years ended June 30, 2008 and 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2008 and 2007 and the results of their operations and their cash flows for the years ended June 30, 2008 and 2007, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred operating losses and has negative cash flows from operations for the year ended June 30, 2008 and 2007 as more fully described in Note 2. These issues raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/Sherb & Co., LLP | |
| Certified Public Accountants | |
| New York, NY | |
| May 25, 2009 | |
YARRAMAN WINERY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| | | June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| ASSETS | |
| | | | | | | |
| Current Assets | | | | | | |
| Cash and cash equivalents | | $ | - | | | $ | 150,072 | |
| Accounts receivable, net | | | 555,798 | | | | 775,718 | |
| Inventory | | | 4,409,833 | | | | 4,074,056 | |
| Other receivables | | | 105,842 | | | | 85,931 | |
| Other assets | | | 214,463 | | | | 227,672 | |
| Total Current Assets | | | 5,285,936 | | | | 5,313,449 | |
| | | | | | | | | |
| Property, plant and equipment, net | | | 4,369,644 | | | | 4,235,575 | |
| | | | | | | | | |
| Intangible asset | | | 249,990 | | | | 212,200 | |
| | | | | | | | | |
| | | $ | 9,905,570 | | | $ | 9,761,224 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Cash overdraft | | $ | 37,990 | | | $ | - | |
| Accounts payable and accrued expenses | | | 1,483,157 | | | | 1,199,567 | |
| Capital leases, current portion | | | 102,720 | | | | 140,849 | |
| Due to related party | | | 2,334,734 | | | | 2,905,986 | |
| Total Current Liabilities | | | 3,958,601 | | | | 4,246,402 | |
| | | | | | | | | |
| Long Term Liabilities: | | | | | | | | |
| Capital leases, net of current portion | | | 50,821 | | | | 124,847 | |
| Loans payable - related party | | | - | | | | 1,749,097 | |
| Long-term debt | | | 5,511,308 | | | | 4,818,008 | |
| Total Long Term Liabilities | | | 5,562,129 | | | | 6,691,952 | |
| | | | | | | | | |
| Total Liabilities | | | 9,520,730 | | | | 10,938,354 | |
| | | | | | | | | |
| Stockholder's Equity (Deficit): | | | | | | | | |
| Common stock, $.001 par value, 90,000,000 shares authorized 38,000,000 shares and 25,000,000 shares issued and outstanding | | | 38,000 | | | | 25,000 | |
| Additional paid in capital | | | 11,019,252 | | | | 5,455,252 | |
| Subscription receivable | | | (88,000 | ) | | | - | |
| Other comprehensive (loss) income | | | (287,228 | ) | | | 10,977 | |
| Accumulated deficit | | | (10,297,184 | ) | | | (6,668,359 | ) |
| Total Stockholder's Equity (Deficit) | | | 384,840 | | | | (1,177,130 | ) |
| | | | | | | | | |
| | | $ | 9,905,570 | | | $ | 9,761,224 | |
The accompanying notes are an integral part of these audited consolidated financial statements.
YARRAMAN WINERY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Years Ended June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Sales, net | | $ | 2,318,719 | | | $ | 2,012,445 | |
| Cost of sales | | | 2,747,800 | | | | 2,997,698 | |
| Gross loss | | | (429,081 | ) | | | (985,253 | ) |
| | | | | | | | | |
| Selling, general and administrative expenses | | | 1,753,077 | | | | 2,585,728 | |
| Total operating expenses | | | 1,753,077 | | | | 2,585,728 | |
| | | | | | | | | |
| Loss from operations | | | (2,182,158 | ) | | | (3,570,981 | ) |
| | | | | | | | | |
| Other (Income) Expense | | | | | | | | |
| Interest income | | | (3,730 | ) | | | (1,088 | ) |
| Interest expense | | | 1,493,032 | | | | 871,485 | |
| Other income | | | (5,751 | ) | | | - | |
| (Gain) Loss on sale of fixed asset | | | (6,076 | ) | | | 13,032 | |
| Transaction gain on foreign currency | | | (30,808 | ) | | | (1,630 | ) |
| Total Other Expense | | | 1,446,667 | | | | 881,799 | |
| | | | | | | | | |
| Loss before income taxes | | | (3,628,825 | ) | | | (4,452,780 | ) |
| | | | | | | | | |
| Provision for income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net loss | | | (3,628,825 | ) | | | (4,452,780 | ) |
| | | | | | | | | |
| Other comprehensive loss | | | | | | | | |
| Foreign currency translation | | | (298,205 | ) | | | (141,212 | ) |
| | | | | | | | | |
| Comprehensive Loss | | $ | (3,927,030 | ) | | $ | (4,593,992 | ) |
| | | | | | | | | |
| Net loss per share: | | | | | | | | |
| Basic & diluted | | $ | (0.14 | ) | | $ | (0.18 | ) |
| | | | | | | | | |
| Weighted average number of shares outstanding: | | | | | | | | |
| Basic & diluted | | | 26,083,333 | | | | 25,000,000 | |
Net loss per share diluted and weighted average of dilutive securities has not been calculated since the effect of dilutive securities is anti-dilutive
The accompanying notes are an integral part of these audited consolidated financial statements.
YARRAMAN WINERY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Years Ended June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net Loss | | $ | (3,628,825 | ) | | $ | (4,452,780 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| used in operating activities: | | | | | | | | |
| Shares to be issued for consulting services | | | - | | | | 117,000 | |
| Shares issued for services | | | 315,000 | | | | - | |
| Depreciation and amortization | | | 446,416 | | | | 389,266 | |
| Salary forgiven for stock payment | | | 22,000 | | | | - | |
| Amortization of discount on debt | | | 763,133 | | | | 205,905 | |
| (Increase) / decrease in assets: | | | | | | | | |
| Accounts receivable | | | 301,073 | | | | (205,461 | ) |
| Inventory | | | 191,281 | | | | 757,764 | |
| Other receivables | | | (9,996 | ) | | | 26,647 | |
| Other assets | | | 41,490 | | | | 21,549 | |
| Increase in liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | | 239,477 | | | | 114,768 | |
| Accrued interest related party loan | | | 205,595 | | | | 94,179 | |
| Total Adjustments | | | 2,515,469 | | | | 1,521,617 | |
| | | | | | | | | |
| Net cash used in operations | | | (1,113,356 | ) | | | (2,931,163 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Acquisition of property and equipment | | | (45,685 | ) | | | - | |
| Acquisition of intangible | | | (14,423 | ) | | | - | |
| Net cash provided by (used in) investing activities | | | (60,108 | ) | | | - | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from long-term debt | | | 49,961 | | | | 74,634 | |
| Cash overdraft | | | 37,990 | | | | - | |
| Capital lease payments | | | (137,460 | ) | | | (95,164 | ) |
| Loans payable receipts from related party | | | 427,172 | | | | 3,069,324 | |
| Loans payable repayments to related party | | | (101,142 | ) | | | (257,516 | ) |
| Net cash provided by financing activities | | | 276,521 | | | | 2,791,278 | |
| | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 746,871 | | | | 179,520 | |
| | | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (150,072 | ) | | | 39,634 | |
| | | | | | | | | |
| Cash and cash equivalents, beginning balance | | | 150,072 | | | | 110,438 | |
| | | | | | | | | |
| Cash and cash equivalents, ending balance | | $ | - | | | $ | 150,072 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES: | | | | | | | | |
| Cash paid for: | | | | | | | | |
| Income tax payments | | $ | - | | | $ | - | |
| Interest payments | | $ | 408,440 | | | $ | 282,949 | |
| Non-cash financing and investing activities | | | | | | | | |
| Purchase of equipment under capital leases | | $ | - | | | $ | 144,297 | |
| Discount on debt | | $ | - | | | $ | 871,307 | |
| Conversion of related party debt to common stock | | $ | 5,046,318 | | | $ | - | |
| Sale of common stock for subscription receivable | | $ | 110,000 | | | $ | - | |
| Common shares issued for accrued services | | $ | 117,000 | | | $ | - | |
| Debt issued for inventory | | $ | 727,524 | | | $ | - | |
The accompanying notes are an integral part of these audited consolidated financial statements.
YARRAMAN WINERY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
| | | | | | | | | | | | | | | | | | | | | Total | |
| | | | | | | | | Additional | | | Other | | | | | | | | | Stockholders' | |
| | | Common Stock | | | Paid | | | Comprehensive | | | Subscription | | | Accumulated | | | Equity | |
| | | Shares | | | Amount | | | in Capital | | | Income (Loss) | | | Receivable | | | Deficit | | | (Deficit) | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance as of June 30, 2006 | | | 25,000,000 | | | $ | 25,000 | | | $ | 4,583,945 | | | $ | 152,189 | | | $ | | | $ | (2,215,578 | ) | | $ | 2,545,556 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | (141,212 | ) | | | | | | - | | | | (141,212 | ) |
| Contribution from shareholders | | | | | | | | | | | 871,307 | | | | | | | | | | | | | | | 871,307 | |
| Net loss for the year ended June 30, 2007 | | | - | | | | - | | | | - | | | | - | | | | | | | (4,452,781 | ) | | | (4,452,781 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of June 30, 2007 | | | 25,000,000 | | | | 25,000 | | | | 5,455,252 | | | | 10,977 | | | | - | | | | (6,668,359 | ) | | | (1,177,130 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss | | | - | | | | - | | | | - | | | | (298,205 | ) | | | - | | | | - | | | | (298,205 | ) |
| Sale of common stock | | | 250,000 | | | | 250 | | | | 109,750 | | | | - | | | | (88,000 | ) | | | - | | | | 22,000 | |
| Common stock issued for services | | | 750,000 | | | | 750 | | | | 431,250 | | | | - | | | | - | | | | - | | | | 432,000 | |
| Conversion of related party debt to common stock | | | 12,000,000 | | | | 12,000 | | | | 5,023,000 | | | | - | | | | - | | | | - | | | | 5,035,000 | |
| Net loss for the year ended June 30, 2008 | | | - | | | | - | | | | - | | | | - | | | | | | | | (3,628,825 | ) | | | (3,628,825 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of June 30, 2008 | | | 38,000,000 | | | $ | 38,000 | | | $ | 11,019,252 | | | $ | (287,228 | ) | | $ | (88,000 | ) | | | (10,297,184 | ) | | $ | 384,840 | |
The accompanying notes are an integral part of these audited consolidated financial statements.
YARRAMAN WINERY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 2008
NOTE 1 - NATURE OF OPERATIONS
On December 16, 2005, Yarraman Estate Pty Limited, a privately owned Australian company engaged in the production of wine (“Yarraman Australia”), purchased from the beneficial owners of all of Yarraman Australia’s shares, (the “Shareholders”) and Delta Dawn Pty Limited as trustee (the Trustee”) of the Yarraman Road Trust (the “Trust”), the nominal holder of such shares, certain assets including land, buildings and equipment and water license rights by assuming certain debt, capital leases, contribution to paid in capital for the Trust and a liability to the Trust (the “Asset Purchase”). The assets and liabilities were recorded at the historical cost of the related party. No cash was exchanged. The following is a summary of the transaction:
| Assets Purchased | | $ | 5,759,740 | |
| Liabilities Assumed | | | (4,384,740 | ) |
| Payable to Former Parent | | | (431,151 | ) |
| Contribution to Capital | | | (943,849 | ) |
| | | $ | - | |
Yarraman Australia’s assets are pledged as collateral for a loan advance owed by Yarraman Australia to a commercial bank. Prior to the Asset Purchase, the Trust was the borrower of this loan; subsequent to the Asset Purchase, Yarraman Australia assumed the loan. As of June 30, 2008 the outstanding balance on this debt was approximately $5,511,308.
On December 22, 2005, Yarraman Australia, the Trustee and the Trust, entered into a Share Exchange Agreement (the “Exchange Agreement”) with Yarraman Winery, Inc. (formerly Dazzling Investments, Inc.), a company incorporated on December 6, 1996 under the laws of the State of Nevada. Under the terms of the Exchange Agreement, Yarraman Winery, Inc. issued 15,000,000 shares of its common stock for all the issued and outstanding shares of Yarraman Australia (the “Share Exchange”). This issuance of Yarraman Winery, Inc.’s common stock is intended to be exempt from registration under the Securities Act of 1933, as amended (“Securities Act”). Henceforth, Yarraman Winery, Inc. or Yarraman Australia are to be referred to collectively as the “Company”, unless reference is made to the respective company for reference to events surrounding that company.
The Share Exchange has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of Yarraman Australia obtained control of the consolidated entity. Accordingly, the acquisition has been recorded as a recapitalization of Yarraman Australia, with Yarraman Australia being treated as the continuing entity. The historical financial statements presented are those of Yarraman Australia. The balance sheet consists of the net assets of Yarraman Australia, the accounting acquirer, at historical cost and the net assets of Yarraman Winery, Inc., the legal acquirer, at historical cost. The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the acquisition. On February 3, 2006, the Company voted to change its fiscal year end from December 31 st to June 30 th to correspond with the fiscal year end of Yarraman Australia.
The Company produces and sells premium, super premium and ultra premium varietal wines. The Company’s wines are made from grapes grown at its vineyard (the “Vineyard”) and from grapes purchased from other Australian vineyards. The grapes are crushed, fermented and made into wine at the Company’s winery and the wines are sold principally under the Company’s Yarraman Estate Vineyard labels. Yarraman Australia’s vineyard and winery are located in the Upper Hunter Valley, approximately 200 miles north of Sydney, Australia.
Prior to the Exchange Agreement, on August 15, 2005, the Company’s Board of Directors’ declared a 4.55 for 1 common stock dividend to the shareholders of record as of August 26, 2005. The number of common stock shares outstanding increased from 2,100,000 shares to 11,655,000 shares. In connection with the Exchange Agreement, certain shareholders of the Company agreed to cancel an aggregate of 8,158,500 shares of the Company’s common stock resulting in 3,496,500 shares of common stock outstanding as a result of the reverse acquisition. All prior year information has been adjusted to reflect the stock cancellation and the stock dividend.
In connection with Exchange Agreement, on December 22, 2005, the Company entered into a stock purchase agreement (the “Purchase Agreement”) with certain investors (the “Investors”) for the sale of an aggregate of 5,253,500 shares of common stock (the “Share Sale”) for aggregate gross proceeds in the form of promissory notes with an aggregate principal amount equal to $2,000,000 (the “Notes”) . The Notes have a maturity of 300 days and principal is payable in approximately quarterly installments, with interest accruing on the original principal amount at the rate of prime plus 2.5%, payable at maturity. Pursuant to the Purchase Agreement, the Company has granted the Investors rights of first refusal on financing the Company may do in the future. This right was relinquished in September 2006. The principal balance of the note has been collected as of December 31, 2006.
In connection with the Share Sale, the Company issued 1,250,000 shares of common stock to MillhouseIAG Limited (“Millhouse”) as a finder’s fee.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not purport to represent their realizable or settlement value. As shown in the financial statements, during the years ended June 30, 2008 and 2007, the Company incurred losses of $3,628,825 and $4,452,780, respectively. In addition to suffering recurring losses from operations and negative cash flows from operations, the Company has a cash overdraft and an inability to meets its maturing obligations without borrowing from related parties and sale of its stock. These issues may raise substantial concern about its ability to continue as a going concern.
The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to retain its current financing, to obtain additional financing, and ultimately to attain profitability.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The functional currency of Yarraman Australia is the Australian Dollar (“AUD”); however, the accompanying consolidated financial statements have been translated and presented in United States Dollars (“USD” or “$”).
Principles of Consolidation
The consolidated financial statements include the accounts of Yarraman Winery, Inc. and its wholly owned subsidiary, Yarraman Estate Pty Limited, Inc, collectively referred to within as “the Company”. All material intercompany accounts, transactions and profits have been eliminated in consolidation.
Revenue Recognition
The Company’s revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104. The Company recognizes revenue when the product is shipped and title passes to the customer, when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. The Company’s standard terms are ‘FOB’ shipping point, with no customer acceptance provisions. No products are sold on consignment. Credit sales are recorded as trade accounts receivable and no collateral is required. Revenue from items sold through the Company’s retail location is recognized at the time of sale. The Company has established an allowance for doubtful accounts based upon factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. Revenues are recognized net of the amount of goods and services tax (GST) payable to the Australian taxing authority.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Allowance for doubtful debts amounted to approximately $104,213 and $42,440 as of June 30, 2008 and June 30, 2007, respectively.
Vineyard Development Costs
Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized until the vineyard becomes commercially productive, at which time annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 30 years. Amortization expense of vineyard development costs aggregated to $2,014 and $3,460 for the years ended June 30, 2008 and 2007, respectively, and is included in inventory costs and ultimately becomes a component of costs of goods sold.
Goods and Services Tax
Revenues, expenses and assets are recognized net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognized as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included.
The net amount of GST recoverable from, or payable to, the Australian Tax Authority (ATO) is included as current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities, which are recoverable from, or payable to, the ATO are classified as operating cash flows. The Company has a net consumption tax receivable of $11,578 and $9,761 as of June 30, 2008 and 2007, respectively.
In addition to GST, the Company is required to collect wine equalisation tax (“WET”) on sales of wine product to non-exempt Australian customers. Revenue is recorded net of WET taxes. The WET taxes payable is offset by a rebate of the WET tax offered by the Australian Taxation Office. The WET rebate of the WET tax is phased out after a statutory amount of Australian sales have been achieved. The Company has a net WET rebate receivable of $7,365 and $13,266 at June 30, 2008 and 2007, respectively.
Inventories
Yarraman Australia’s annual crop and production costs are recognized as work-in-process inventories. Such costs are accumulated with related direct and indirect harvest, wine processing and production costs, and are transferred to finished goods inventories when the wine is produced, bottled, and ready for sale. The cost of finished goods is recognized as cost of sales when the wine product is sold. Inventories are stated at the lower of first-in, first-out (“FIFO”) cost or market by variety. In accordance with general practices in the wine industry, wine inventories are generally included in current assets in the accompanying balance sheet, although a portion of such inventories may be aged for more than one year.
During the year ended June 30, 2008, the management of the Company sold approximately 341,300 liters of unbottled wine at below cost. With regards to this sale, in the year ended June 30, 2008, the Company recorded approximately $920,000 in cost of sales to reflect this inventory at lower of cost or market at June 30, 2007. Per Company management this reduction in inventory is not indicative of impairment to any other inventory product at June 30, 2008 or subsequently. The sales, per management, were completed to infuse working capital into the Company for ongoing operations.
| | | June 30 | |
| | | 2008 | | | 2007 | |
| Winemaking and packaging materials | | $ | 86,507 | | | $ | 97,858 | |
| Work in progress (costs related to unprocessed and / or unbottled products) | | | 3,372,199 | | | | 3,434,408 | |
| Finished goods (bottled wine) | | | 951,127 | | | | 541,790 | |
| | | $ | 4,409,833 | | | $ | 4,074,056 | |
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are expensed as incurred. Whenever an asset is retired or disposed of, its cost and accumulated depreciation or amortizations are removed from the respective accounts and the resulting gain or loss is credited or charged to income.
Depreciation is computed using the straight-line and declining-balance methods over the following estimated useful lives:
| Land improvements | 15 years |
| Winery building | 30 years |
| Equipment | 5-7 years |
Expenditures for repairs and maintenance are charged to operating expense as incurred. Expenditures for additions and betterments are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operations.
As of June 30, 2008 and 2007 Property, Plant and Equipment consist of the following:
| | | June 30 | |
| | | 2008 | | | 2007 | |
| Building improvements | | $ | 66,090 | | | $ | 36,698 | |
| Land | | | 1,017,686 | | | | 898,400 | |
| Plant and equipment | | | 4,535,464 | | | | 4,003,850 | |
| Computer equipment | | | 66,429 | | | | 41,527 | |
| Furniture and fixtures | | | 27,637 | | | | 22,830 | |
| | | | 5,713,306 | | | | 5,003,305 | |
| Accumulated depreciation | | | (1,343,662 | ) | | | (767,730 | ) |
| | | $ | 4,369,644 | | | $ | 4,235,575 | |
Capital Lease Obligations
Included in Property, Plant and Equipment as of June 30, 2008 and 2007 are $302,696 and $292,705, respectively, of net fixed assets that were purchased on capital lease arrangements.
Fair Value of Financial Instruments
Statement of financial accounting standard No. 107, Disclosures about fair value of financial instruments, requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations for a Disposal of a Segment of a Business.” The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. Under SFAS 144 impairment losses are to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of June 30, 2008 there were no significant impairments of its long-lived assets.
Intangible Assets
Effective July 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” The adoption of SFAS No. 142 required an initial impairment assessment involving a comparison of the fair value of trademarks, patents and other intangible assets to current carrying value. No impairment loss was recognized for the years ended June 30, 2008 and 2007. As of June 30, 2008 and 2007 the intangible assets comprised of water licenses valued at $240,375 and $212,200, respectively, which are held in perpetuity.
Intangible assets determined to have indefinite useful lives are not amortized. The Company tests intangible assets with indefinite and definite useful lives for impairment annually, or more frequently if events or circumstances indicate that an asset might be impaired. Intangible assets determined to have definite lives are amortized over their useful lives or the life of the intangible asset, whichever is less. As of June 30, 2008 the intangible assets with a definite useful life is comprised of artwork for Company products and advertising amounting to $9,615.
Contingencies
Certain conditions may exist as of the date the financial statements are issued which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed.
Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain 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 reporting period. Actual results could differ from those estimates. Significant estimates include collectibility of accounts receivable, accounts payable, sales returns, and recoverability of long-term assets.
Basic and Diluted Earnings Per Share
Earnings per share are calculated in accordance with the Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”), “Earnings per share”. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been stated to reflect the adoption of SFAS No. 128. Basic net loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. For the years ended June 30, 2008 and 2007 the Company’s common stock equivalents have not been included for earning per share calculations as they are anti-dilutive.
Translation Adjustment
As of June 30, 2008 and 2007, the accounts of Yarraman Australia were maintained, and their financial statements were expressed, in Australian Dollars (AUD). Such financial statements were translated into U.S. Dollars (USD) in accordance with Statement of Financial Accounting Standards No. 52 (“SFAS No. 52”), “Foreign Currency Translation”, with the AUD as the functional currency. According to SFAS No. 52, all assets and liabilities were translated at the current exchange rate, stockholders’ equity are translated at the historical rates and income statement items are translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with Statement of Financial Accounting Standards No. 130 (“SFAS No. 130”), “Reporting Comprehensive Income” as a component of stockholders’ equity.
Statement of Cash Flows
In accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the Company’s operations is based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, and other receivables arising from their normal business activities. The Company places their cash in what they believe to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in Australia. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
Segment Reporting
Statement of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure About Segments of an Enterprise and Related Information” requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. SFAS 131 has no effect on the Company’s consolidated financial statements as the Company consists of one reportable business segment.
Comprehensive Income
The Company has adopted Financial Accounting Standard No. 130 (“SFAS 130”), “Reporting Comprehensive Income”. This statement establishes rules for the reporting of comprehensive income and its economic components. Comprehensive income consists of net loss to common shareholders and foreign currency translation adjustments and is presented in the consolidated statements of operations and stockholders’ equity.
Advertising
Advertising is expensed as incurred. Advertising expenses for the years ended June 30, 2008 and 2007 were approximately $20,500 and $22,500, respectively.
Shipping Costs
Shipping costs are included in selling and marketing expenses and totaled approximately $124,800 and $80,200 for the years ended June 30, 2008 and 2007, respectively.
Income taxes
The Company files federal and state income tax returns in the United States for its domestic operations, and files separate foreign tax returns for the Company’s Australian subsidiary. Income taxes are accounted for under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns.
Reclassifications
For comparative purposes, prior year’s consolidated financial statements may have been reclassified to conform to report classifications of the current year.
New Accounting Pronouncements
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management of the Company is currently evaluating the effect of this pronouncement on the consolidated financial statements.
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
1. A brief description of the provisions of this Statement
2. The date that adoption is required
3. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management of the Company is currently evaluating the effect of this pronouncement on the consolidated financial statements.
In February 2007, FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. FAS 59 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The management of the Company is currently evaluating the effect of this pronouncement on financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: (a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree , (b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning December 15, 2008. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after June 30, 2009.
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The management of the Company is currently evaluating the effect of this pronouncement on financial statements.
In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. . It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management is currently evaluating the effect of this pronouncement on financial statements.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopted FSP APB 14-1 beginning July 1, 2009, and this standard must be applied on a retroactive basis. The Company is evaluating the impact the adoption of FSP APB 14-1 will have on its consolidated financial position and results of operations.
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162,“TheHierarchy of Generally Accepted Accounting Principles.” The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for non-governmental entities. Management of the Company is currently evaluating the effects, if any, that SFAS No. 162 may have on the Company’s financial reporting.
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the consolidated financial statements.
NOTE 4 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. As of June 30, 2008 and 2007 cash held in Australian Banks are within Australian statutory limits.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of June 30, 2008 and 2007 the accounts payable and accrued expenses comprised of the following:
| | | June 30 | |
| | | 2008 | | | 2007 | |
| Trade creditors | | $ | 1,101,760 | | | $ | 740,545 | |
| Accrued expenses | | | 340,700 | | | | 309,976 | |
| Payroll liabilities | | | 40,697 | | | | 32,046 | |
| Stock to be issued | | | - | | | | 117,000 | |
| | | $ | 1,483,157 | | | $ | 1,199,567 | |
Included in accrued expenses is a provision for annual employee leave, it represents the value of the estimated future cash outflows to be made resulting from employees’ services provided to the reporting dates based on their current wage rate. As of June 30, 2008 and June 30, 2007 annual leave was $23,316 and $33,668, respectively.
At June 30, 2008 and 2007 included in accrued expenses is a net consumption tax receivable of $11,578 and $9,761, respectively and a net WET tax receivable of $7,365 and $13,266, respectively.
NOTE 6 - MAJOR CUSTOMERS AND VENDORS
For the year ended June 30, 2008 the Company had one customer which comprised approximately 20% of their total sales. There was a $158,412 receivable from the customer as of June 30, 2008.
For the year ended June 30, 2007 the Company’s largest customer accounted for 12% of sales. There was no receivable from the customer as of June 30, 2007.
For the years ended June 30, 2008 and 2007 the Company had no vendors that accounted for more than 10% of purchases.
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company entered into various related party transactions with the Trustee and the Trust that is their primary stockholder. The Trust was the sole shareholder of Yarraman Australia prior to the Share Exchange.
The Company paid the Trustee approximately $35,000 per month for the use of additional vineyard land also located in Australia. On January 1, 2006 the Company entered into a written agreement to lease this vineyard land for approximately $35,000 per month. The term was from January 1, 2006 through June 30, 2006. As of July 1, 2006 this lease was on a month-to-month basis with the same payment terms. This leasing arrangement was terminated in May 2007. During the year ended June 30, 2007 total lease expense was approximately $359,000.
On January 1, 2006 Yarraman Australia entered into a consulting agreement with the Trustee to provide business consulting services related to the wine industry for a term of two years or until such time as their ownership percentage in the Company is reduced to less then 15%. Under this agreement the Company must pay the Trustee $100,000 AUD (Australian Dollars) or approximately $96,150 USD (US Dollars) annually. This agreement was terminated on June 30, 2008. During the years ended June 30, 2008 and 2007 the Company paid the Trustee approximately $66,063 and $126,860, respectively.
On February 1, 2008 Yarraman Australia entered into a consulting agreement with an entity that is wholly owned by one of the members of the Company's Board of Directors. This agreement is for $4,800 per month for services related to the wine industry. During the year ending June 30, 2008 approximately $19,200 was paid under this agreement. This agreement was terminated by both parties on June 30, 2008.
NOTE 8 - LOANS PAYABLE - RELATED PARTY / DUE TO RELATED PARTY
Loans payable – related party:
On December 21 2005, prior to the Exchange Agreement and in connection with the Asset Purchase, Yarraman Australia entered into a loan agreement with the Trust, the nominal holder of all of Yarraman Australia’s shares. The outstanding principal balance of this loan was $1,832,795. This loan advance was non-interest bearing. The loan was secured by the fixed assets of the Company, subordinated to all other loans of the Company collateralized by the fixed assets. A total of 50% of the loan payable, or $916,398, was to be repaid in thirty-six monthly installments commencing on the first business day of the twenty-fifth month following the loan agreement, or approximately February 1, 2008. On the thirty-sixth month of payment, in January 2011, the remaining 50% of the loan payable or $916,398 was to be due and payable. The initial repayment date of February 2008 was extended to June 30, 2008.
On May 1, 2006 Yarraman Australia entered into a loan agreement with the Trust in the principal amount of $826,020. Originally, this loan agreement had an interest rate of 8%, with the same repayment terms of the December 21, 2005 loan. During the year ended June 30, 2006 a total of $10,910 in interest expense was recorded on this loan, until the Trust waived the interest requirement on this loan. On May 25, 2006 the Trust extended to Yarraman Australia an additional $13,767 to be repaid in accordance with the same terms as the December 21, 2005 loan. This loan advance was also non-interest bearing.
As of June 30, 2008 loan advances above totaling $1,832,795 and the $826,020 loan payable were converted into 6,559,524 shares of the Company’s common stock at the market price of approximately $0.42 per share, for a total of $2,755,000, the value of these loans based on the currency conversion on the date of conversion.
As the loan advances totaling $1,832,795, the $826,020 loan payable, and the loan of $13,767, all totaling $2,672,582 were non-interest bearing, the Company recorded an imputed interest of $871,307 which is recorded as discount on debt and a contribution of capital to the Company. This discount on debt is being amortized over the term that these loan advances are outstanding. As the loan advance was converted into common stock during the year ended June 30, 2008, the remaining unamortized debt discount was fully amortized upon conversion. During the years ended June 30, 2008 and 2007, the Company amortized this discount on debt, recorded as an interest expense of $763,133 and $205,905, respectively, at the prevailing exchange rates for the years then ended.
Due to related party:
As of June 30, 2008 the Company is indebted to a private company that is owned by one of the Company’s majority shareholders in the amount of $2,334,733. This related party has made various advances, loans and payments on behalf of the Company, all of which are unsecured, and due on demand. These advances and loans accrued interest on their outstanding balance ranging between 0% and 10% per annum.
On July 1, 2007 these advances and loans were restructured into one loan agreement for approximately $3,289,000. This new loan included approximately $689,000 related to a sale of wine by the related party to the Company during the year ended June 30, 2008. This portion of the new loan was to be repaid commencing December 7, 2007 with receipts from the proceeds of the re-sale of this wine by the Company until it was repaid in full. As of June 30, 2008 the balance on this portion of the loan was $689,000. The entire new loan accrues interest at 6.5% per annum. This new loan is secured by the fixed assets of the Company, subordinate to the loan from the commercial bank, such loan totaling $5,511,308 as of June 30, 2008. This new loan, together with outstanding interest, was to be repaid for any amounts still outstanding on September 30, 2008. On June 30, 2008 a total of AUD $2,400,000 or USD $2,280,000, of the above loan was converted into 5,440,476 shares of the Company’s common stock, at a market price of approximately $0.42 per share. On October 15, 2008, the lender extended the repayment date on the balance of the loan remaining, subsequent to the $2,280,000 portion of the loan that had converted into common stock, from September 30, 2008 to September 30, 2009.
NOTE 9 - LONG-TERM DEBT
On December 21, 2005, prior to the Exchange Agreement and in connection with the Asset Purchase, Yarraman Australia assumed the loan facility that the Trust, the then nominal holder of all of Yarraman Australia’s shares, had with a financial institution located in Australia. As of June 30, 2008 the total amount due under this facility, inclusive of interest, is $5,511,308. This loan facility requires monthly interest payments due on the 15th of each month at the rate of 10% per annum, rising to 16% per annum if the Company is late in its payments. The principal balance was due and payable on December 31, 2007. The loan is secured by certain property, plant and equipment of the Company as well as a guaranteed by the Trust. This loan facility has been extended through to July 6, 2009 by the lender.
NOTE 10 - LEASES PAYABLE
As a part of the Asset Purchase agreement in December 16, 2005, the Company assumed capital lease obligation to finance the purchase of plant and equipment. Minimum lease payments relating to the equipment have been capitalized and are being depreciated over the estimated useful lives of the equipment acquired. Assets under capital lease and related accumulated amortization at June 30, 2008 and 2007 are as follows:
| | | June 30, | |
| | | 2008 | | | 2007 | |
| Plant and equipment | | $ | 452,854 | | | $ | 370,324 | |
| Less: Accumulated depreciation | | | (150,157 | ) | | | (77,619 | ) |
| | | $ | 302,697 | | | $ | 292,705 | |
The future minimum lease payments under the capital lease and the net present value of the future minimum lease payments at June 30, 2008 and 2007 are as follows:
| | | June 30, | |
| | | 2008 | | | 2007 | |
| Total minimum lease payments | | $ | 153,541 | | | $ | 345,929 | |
| Amount representing interest | | | - | | | | (80,233 | ) |
| Present value of net minimum lease payments | | | 153,541 | | | | 265,696 | |
| Current portion | | | (102,720 | ) | | | (140,849 | ) |
| Long-term capital lease obligation | | $ | 50,821 | | | $ | 124,847 | |
The future aggregate minimum annual lease payments arising from these lease agreements are as follows:
| Year ended | | | |
| June 30, 2009 | | $ | 102,720 | |
| June 30, 2010 | | | 50,821 | |
| | | $ | 153,541 | |
NOTE 11 - STOCKHOLDERS’ EQUITY
On February 3, 2006, the Board of Directors of the Company and the holders of a majority of the Company’s outstanding common stock voted to increase the number of authorized shares of its capital stock. Pursuant to this authorization, on or about March 17, 2006, the Company increased the number of authorized shares of its capital stock to 100,000,000 shares, of which ninety million (90,000,000) shares are common stock, par value of $0.001, and ten million (10,000,000) shares are Preferred Stock, par value of $0.001, which may be issued in one or more series or classes as designated by the Board of Directors, from time to time, without the approval of stockholders.
On July 16, 2007, as part of an employment agreement with Ian Long, President and Board Member, the Company agreed to sell 250,000 shares of its common stock to Mr. Long at the per share price of $0.44, for a total of $110,000. Mr. Long is paying for these shares over a five year period. As of June 30, 2008 a total of $22,000 has been applied toward this subscription receivable through payroll deductions for the Presidents salary.
On September 20, 2007 the Company issued 750,000 shares of common stock to various Officers, Directors and vendors in payment of services rendered in the years ended June 30, 2008 and 2007. The Company has issued 700,0000 shares of it’s common stock, recorded an expense of $315,000 for services rendered from the year ended June 30, 2008, based on a per share price of $0.45. The Company also issued 50,000 shares of common stock, during the year ended June 30, 2008, for services performed during the year ended June 30, 2007. Such services and shares to be issued upon such service were then valued at a market price of $117,000.
On June 30, 2008 the Company issued 12,000,000 shares of common stock to convert outstanding debt from related parties into equity as described in footnote 8.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Consulting Agreements
| - | On February 24, 2006 the Company entered into a consulting agreement with a company in New York to assist us to identify potential candidates for acquisition purposes and assist in the negotiation and execution of such transactions. As compensation the Company agreed to pay the firm a monthly, nonrefundable, fee of $6,500. In addition, the Company agreed to pay a transaction fee to this consultant that is based on a sliding percentage of any completed acquisition. The original term of the contract was from March 1, 2006 until July 1, 2006, it was subsequently continued on a month-to-month basis. The total monthly fees paid under the agreement may be deducted from the total transaction fee. This agreement was terminated in April 2007. There were no fees paid under this agreement during the year ended June 30, 2008. |
| - | On September 7, 2006 the Company entered into an agreement with a firm in New York to provide the following services: strategic advisory, development and evaluation financing or capital raising alternatives and merger and acquisition services. As compensation the Company agreed to pay a retainer of $35,000, of which $10,000 was paid, plus certain percentages of financing or capital that is raised and merger acquisitions completed. The term of the contract was for six months, ending in February 2007. The agreement was not renewed and the firm waived the remaining $25,000 retainer fee. |
| - | On October 23, 2006 the Company entered into a consulting agreement with a firm in Australia for services in recruiting certain consultants and Board members for us, services in assisting the Company in establishing international distribution arrangements, and for services with a potential business merger. Certain milestones were set in the contract. Upon completion of each milestone an agreement was made for payment to the consultant in shares of the Company stock as follows: |
Milestone 1 - 50,000 shares of stock, or $100,000 in shares, whichever is greater
Milestone 2 - 50,000 shares of stock, or $100,000 in shares, whichever is greater
Milestone 3 - 100,000 shares of stock, or $200,000 in shares, whichever is greater
As of June 30, 2007 Milestone 1 was completed and the Company accrued $117,000 in consulting expense. The Company issued 50,000 shares of common stock related thereto as of September 20, 2008.
In addition to the above, the Company agreed to pay the consultant approximately $4,700 per month starting on November 1, 2006 and ending upon the completion of a potential business merger that was not completed. This agreement was terminated in June 2007. During the year ended June 30, 2007 a total of $22,500 was paid to this consultant.
In connection with this agreement a potential business merger was commenced but not completed. On December 21, 2006 the Company had submitted an offer to merge with Evans & Tate, Ltd., a company publicly traded in Australia. In March 2007 the merger was abandoned, and all conditional offers were terminated. Related to this acquisition the Company has incurred approximately $312,000 in expenses that have been expensed in the year ended June 30, 2007.
Arbitration
The Company had entered into arbitration on a legal matter regarding one of their grape processing arrangements. A dispute had arisen regarding storage charges that were invoiced related to the storage of wine processed under the arrangement. The total amount in dispute was approximately $165,000. This amount has been recorded in income during the fiscal years ended June 30, 2006, 2005 and 2004. No reserve had been accrued for this amount as the Company intended to vigorously defend their position. In the year ended June 30, 2007 this arbitration matter was mutually dropped by both parties.
NOTE 13 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” “SFAS 109”. Under SFAS 109 the Company is required to recognize the deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.
The Company’s subsidiary Yarraman Australia is governed by the income tax laws of Australia. Pursuant to the Australian tax code corporations are subject to tax at a statutory rate of 30%.
The components of loss before income tax consist of the following:
| | | Year ended June 30, | |
| | | 2008 | | | 2007 | |
| U.S. Operations | | $ | 661,629 | | | $ | 225,162 | |
| Australian Operations | | | 2,967,196 | | | | 4227,618 | |
| | | $ | 3,628,825 | | | $ | 4,452,780 | |
The table below summarizes the differences between the US statutory Federal rate and the Company’s effective tax rate as follows:
| | | Year ended June 30, | |
| | | 2008 | | | 2007 | |
| Income tax at Federal statutory rate | | | 34 | % | | | 34 | % |
| U.S. tax rate in excess of foreign tax rate | | | (3 | )% | | | (3 | )% |
| Permanent differences | | | (3 | )% | | | (1 | )% |
| Temporary differences | | | - | | | | (5 | )% |
| Valuation allowance for tax benefits not recognized | | | (28 | )% | | | (25 | )% |
| | | | - | | | | - | |
The Company has a net operating loss (“NOL”) carryforward for United States income tax purposes at June 30, 2008 expiring through the year 2028. Management estimates their US NOL as of June 30, 2008 to be approximately $615,000. The utilization of the Company’s NOL’s may be limited because of a possible change in ownership as defined under Section 382 of Internal Revenue Code. The Company’s Australian operation has NOL carryfowards for Australian Income tax purposes at June 30, 2008 that are available to offset future income for an indefinite period. Management estimates their Australian NOL as of June 30, 2008 to be approximately $10,030,000.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company has recognized, a valuation allowance for those deferred tax assets for which it is more likely than not that realization will not occur. The Company’s deferred tax assets as of June 30, 2008 are as follows:
| NOL carryforwards | | $ | 3,200,000 | |
| Valuation allowance | | | (3,200,000 | ) |
| Deferred tax asset, net of allowance | | $ | - | |
NOTE 14 - SUBSEQUENT EVENTS
On September 5, 2008 the Company entered into an Implementation Agreement with Asia Distributions Solutions, Ltd., (ADSL) a Cayman Island company publicly traded in the United Kingdom on the London Stock Exchange's Alternative Investment Market (AIM) a global market for smaller, growing companies. The Implementation Agreement sets out certain matters relating to the conduct of the Offer and Merger Transaction that has been agreed to by the Company and ADSL whereby ADSL shareholders are to receive 54,959,313 shares of the Company’s common stock in exchange for the entire share capital of ADSL, issued and to be issued, including 30,676,000 ADSL shares currently in issue and approximately 2,143,358 ADSL shares to be issued. The formal Offer was made to ADSL shareholders on November 26, 2008.
On January 19, 2009 the acquisition of ADSL by the Company was approved by a majority of the stockholders of ADSL. As of May 1, 2009 over 96% of the ADSL stockholders have accepted the Offer. The Company is in the process of completing the acquisition of the ADSL shares. Company management has been advised by legal counsel, as ADSL is a Cayman Islands company and pursuant to Cayman Islands law the Company can force the non-accepting ADSL shareholders to accept the offer, which the Company is in the process of completing. Subsequent to February 23, 2009 ADSL ceased trading on the AIM.
Included and contemporaneous with the Offer as outlined in the Implementation Agreement, the Company proposes to acquire assets owned by the Trust. The assets are a vineyard and related plant and equipment that Yarraman Australia previously leased from January 1, 2006 through May 31, 2007. The purchase price is $11,000,000 and will be paid by the assumption of approximately $5,000,000 of debt related to the property and the issuance of a two year convertible note with interest of six percent per annum for approximately $6,000,000.
