UNITED STATES | |
SECURITIES AND EXCHANGE COMMISSION | |
Washington, D.C. 20549 | |
FORM 10-Q | |
x QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
FOR THE QUARTERLY PERIOD ENDED September 30, 2009 | |
OR | |
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 000-53162
ICONIC BRANDS, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
1174 Route 109
Lindenhurst, New York 11757
(Address of principal executive offices, including zip code.)
(631) 991-3174
(Registrant’s telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 last 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ |
Non-accelerated Filer | ¨ | Smaller Reporting Company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 42,310,301 as of November 12, 2009
ICONIC BRANDS INC.
FORM 10-Q
September 30, 2009
TABLE OF CONTENTS
PART I— FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22 |
Item 4T. | Controls and Procedures | 22 |
PART II— OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 23 |
Item 1A. | Risk Factors | 23 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 23 |
Item 3. | Defaults Upon Senior Securities | 23 |
Item 4. | Submission of Matters to a Vote of Security Holders | 23 |
Item 5. | Other Information | 23 |
Item 6. | Exhibits | 23 |
SIGNATURES | ||
Part I Financial Information
Iconic Brands, Inc. and Subsidiary | ||||||||
Consolidated Balance Sheets | ||||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 75,875 | $ | 10,970 | ||||
Accounts receivable, net of allowance for doubtful | ||||||||
accounts of $ 35,000 and $ 35,000, respectively | 100,967 | 484,164 | ||||||
Inventories | 505,423 | 738,507 | ||||||
Prepaid expenses and other current assets | 410,583 | 595,769 | ||||||
Total current assets | 1,092,848 | 1,829,410 | ||||||
Property, plant and equipment, net | 9,906 | 6,294 | ||||||
Restricted cash and cash equivalents | 75,000 | 100,000 | ||||||
Total assets | $ | 1,177,754 | $ | 1,935,704 | ||||
Liabilities and Stockholders' Equity (Deficiency) | ||||||||
Current liabilities: | ||||||||
Current portion of debt | $ | 495,000 | $ | 4,422,393 | ||||
Accounts payable | 1,364,326 | 1,481,916 | ||||||
Accrued expenses and other current liabilities | 1,338,698 | 938,494 | ||||||
Total current liabilities | 3,198,024 | 6,842,803 | ||||||
Long term debt | 1,806,409 | 2,292,380 | ||||||
Total liabilities | 5,004,433 | 9,135,183 | ||||||
Stockholders' equity (deficiency): | ||||||||
Preferred stock, $.00001 par value; | ||||||||
authorized 100,000,000 shares: | ||||||||
Series A, designated 1 share, issued and outstanding | ||||||||
1 and 0 shares, respectively | 1 | - | ||||||
Series B, $2.00 per share stated value; designated | ||||||||
1,000,000 shares, issued and outstanding | ||||||||
916,603 and 0 shares, respectively | 1,833,206 | - | ||||||
Common stock, $.00001 par value; authorized 100,000,000 | ||||||||
shares, issued and outstanding 43,810,411 | ||||||||
and 24,909 shares, respectively | 438 | - | ||||||
Additional paid-in capital | 7,055,902 | 1,278,656 | ||||||
Retained earnings (deficit) | (12,716,226 | ) | (8,478,135 | ) | ||||
Total stockholders' equity (deficiency) | (3,826,679 | ) | (7,199,479 | ) | ||||
Total liabilities and stockholders' equity (deficiency) | $ | 1,177,754 | $ | 1,935,704 | ||||
See notes to consolidated financial statements.
-3-
Iconic Brands, Inc. and Subsidiary | ||||||||||||||||
Consolidated Statements of Operations | ||||||||||||||||
(Unaudited) | ||||||||||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Sales | $ | 497,549 | $ | 1,058,363 | $ | 161,379 | $ | 252,322 | ||||||||
Cost of goods sold | 327,947 | 817,694 | 99,576 | 167,725 | ||||||||||||
Gross profit | 169,602 | 240,669 | 61,803 | 84,597 | ||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Selling, marketing and promotion | 231,103 | 350,619 | 107,308 | 110,595 | ||||||||||||
Administrative compensation and benefits | 841,228 | 1,120,691 | 234,730 | 552,055 | ||||||||||||
Stock-based compensation issued in connection with merger | 2,063,411 | - | - | - | ||||||||||||
Professional fees | 389,418 | 296,278 | 100,900 | 108,729 | ||||||||||||
Occupancy and warehousing | 133,927 | 200,331 | 32,719 | 61,148 | ||||||||||||
Travel and entertainment | 90,707 | 216,195 | 54,470 | 25,051 | ||||||||||||
Office | 31,677 | 33,210 | 11,901 | (30,398 | ) | |||||||||||
Licenses and permits | 2,873 | 36,484 | 1,203 | 4,694 | ||||||||||||
Other | 33,179 | 21,283 | 9,959 | 6,219 | ||||||||||||
Total | 3,817,523 | 2,275,091 | 553,190 | 838,093 | ||||||||||||
Income (loss) from operations | (3,647,921 | ) | (2,034,422 | ) | (491,387 | ) | (753,496 | ) | ||||||||
Interest expense | (590,170 | ) | (751,825 | ) | (17,962 | ) | (167,574 | ) | ||||||||
Income (loss) before income taxes | (4,238,091 | ) | (2,786,247 | ) | (509,349 | ) | (921,070 | ) | ||||||||
Income taxes | - | - | - | - | ||||||||||||
Net income (loss) | $ | (4,238,091 | ) | $ | (2,786,247 | ) | $ | (509,349 | ) | $ | (921,070 | ) | ||||
Net income (loss) per common share - basic and diluted | $ | (0.24 | ) | $ | (150.14 | ) | $ | (0.01 | ) | $ | (41.12 | ) | ||||
Weighted average number of common shares | ||||||||||||||||
outstanding - basic and diluted | 17,640,565 | 18,557 | 43,060,356 | 21,913 |
See notes to consolidated financial statements.
-4-
Iconic Brands, Inc. and Subsidiary | ||||||||||||||||||||||||||||||||||||
Consolidated Statement of Changes in Stockholders' Equity(Deficiency) | ||||||||||||||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||||||||||||||
Series A Preferred Stock, | Series B Preferred Stock, | Common Stock, | ||||||||||||||||||||||||||||||||||
$0.00001 par value | $2.00 stated value | $0.00001 par value | Additional Paid-in | Retained Earnings | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | (Deficit) | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2008 | - | $ | - | - | $ | - | 24,909 | $ | - | $ | 1,278,656 | $ | (8,478,135 | ) | $ | (7,199,479 | ) | |||||||||||||||||||
Issuance of stock to management | ||||||||||||||||||||||||||||||||||||
and employees on June 10, 2009 | 1 | 1 | - | - | 19,634,112 | 196 | 2,063,214 | - | 2,063,411 | |||||||||||||||||||||||||||
Issuance of stock to Danny DeVito | ||||||||||||||||||||||||||||||||||||
and affiliates on June 10,2009 | - | - | - | - | 2,086,973 | 21 | 208,676 | - | 208,697 | |||||||||||||||||||||||||||
Issuance of stock to Noteholders | ||||||||||||||||||||||||||||||||||||
on June 10, 2009 in satisfaction of | ||||||||||||||||||||||||||||||||||||
debt and accrued interest | - | - | - | - | 4,606,307 | 46 | 2,303,108 | - | 2,303,154 | |||||||||||||||||||||||||||
Issuance of stock to Capstone on | ||||||||||||||||||||||||||||||||||||
June 10, 2009 in connection with | ||||||||||||||||||||||||||||||||||||
Termination Agreement | - | - | 916,603 | 1,833,206 | 1,000,000 | 10 | 499,990 | - | 2,333,206 | |||||||||||||||||||||||||||
Acquisition of Harbrew Imports, Ltd. | ||||||||||||||||||||||||||||||||||||
on June 10, 2009 | - | - | - | - | 15,158,000 | 152 | (152 | ) | - | - | ||||||||||||||||||||||||||
Issuance of stock to Noteholders | ||||||||||||||||||||||||||||||||||||
in July and August 2009 | ||||||||||||||||||||||||||||||||||||
in satisfaction of debt and accrued | ||||||||||||||||||||||||||||||||||||
interest. | - | - | - | - | 300,110 | 3 | 150,644 | - | 150,647 | |||||||||||||||||||||||||||
Sale of Units at $.50 per unit on | ||||||||||||||||||||||||||||||||||||
August 19,2009, less placement | ||||||||||||||||||||||||||||||||||||
costs of $55,000 | - | - | - | - | 1,000,000 | 10 | 444,990 | - | 445,000 | |||||||||||||||||||||||||||
Fair value of warrants included in sale | ||||||||||||||||||||||||||||||||||||
of convertible promissory note in | ||||||||||||||||||||||||||||||||||||
August, 2009 | - | - | - | - | - | - | 82,440 | - | 82,440 | |||||||||||||||||||||||||||
Stock options and warrants | ||||||||||||||||||||||||||||||||||||
compensation expense | - | - | - | - | - | - | 24,336 | - | 24,336 | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (4,238,091 | ) | (4,238,091 | ) | |||||||||||||||||||||||||
Balance September 30, 2009 | 1 | $ | 1 | 916,603 | $ | 1,833,206 | 43,810,411 | $ | 438 | $ | 7,055,902 | $ | (12,716,226 | ) | $ | (3,826,679 | ) | |||||||||||||||||||
See notes to consolidated financial statements.
-5-
Iconic Brands, Inc. and Subsidiary | ||||||||
Consolidated Statements of Cash Flows | ||||||||
(Unaudited) | ||||||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (4,238,091 | ) | (2,786,247 | ) | |||
Adjustments to reconcile net income | ||||||||
(loss) to net cash provided by (used in) | ||||||||
operating activities: | ||||||||
Depreciation | 1,538 | 700 | ||||||
Amortization of debt discounts | ||||||||
charged to interest expense | 268,125 | 64,440 | ||||||
Stock-based compensation | 2,474,965 | 546,004 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 383,197 | 371,483 | ||||||
Inventories | 233,084 | 588,417 | ||||||
Prepaid expenses and other current assets | 6,665 | (130,199 | ) | |||||
Restricted cash and cash equivalents | 25,000 | - | ||||||
Negative bank account balance | - | 57,627 | ||||||
Accounts payable | (117,590 | ) | (144,070 | ) | ||||
Accrued expenses and other current | ||||||||
liabilities | 610,969 | 428,003 | ||||||
Net cash provided by (used in) | ||||||||
operating activities | (352,138 | ) | (1,003,842 | ) | ||||
Cash flows from investing activities: | ||||||||
Property, plant and equipment additions | (5,150 | ) | - | |||||
Cash flows from financing activities: | ||||||||
Increases in debt, net | 310,000 | 1,366,540 | ||||||
Repayment of debt | (332,807 | ) | (404,851 | ) | ||||
Sale of Units of common stock and | ||||||||
warrants, net of placement costs | 445,000 | - | ||||||
Net cash provided by (used in) | ||||||||
financing activities | 422,193 | 961,689 | ||||||
Increase (decrease) in cash and | ||||||||
cash equivalents | 64,905 | (42,153 | ) | |||||
Cash and cash equivalents, beginning of period | 10,970 | 43,664 | ||||||
Cash and cash equivalents, end of period | $ | 75,875 | $ | 1,511 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Interest paid | $ | 248,470 | $ | 577,486 | ||||
Income taxes paid | $ | - | $ | - | ||||
Non-cash financing activities: | ||||||||
Shares of common stock issued to noteholders in | ||||||||
satisfaction of debt and accrued interest | $ | 2,453,801 | $ | - | ||||
Securities issued to Capstone in connection with | ||||||||
Termination Agreement and satisfaction of debt: | ||||||||
Unsecured promissory note | $ | 500,000 | $ | - | ||||
Series B preferred stock | 1,833,205 | - | ||||||
Common stock | 500,000 | - | ||||||
Total | $ | 2,833,205 | $ | - | ||||
See notes to consolidated financial statements.
-6-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Iconic Brands, Inc., formerly Paw Spa, Inc. (“Iconic Brands”), was incorporated in the State of Nevada on October 21, 2005. Our plan was to provide mobile grooming and spa services for cats and dogs. Our services were going to include bathing, hair cutting and styling, brushing/combing, flea and tick treatments, nail maintenance and beautification, ear cleaning, teeth cleaning, hot oil treatments, and massage. We did not have any business operations and failed to generate any revenues. We abandoned this business, as we lacked sufficient capital resources. On June 10, 2009, the Company acquired Harbrew Imports, Ltd. (“Harbrew New York”), a New York corporation incorporated on September 8, 1999 which was a wholly owned subsidiary of Harbrew Imports, Ltd. Corp. (“Harbrew Florida”), a Florida corporation incorporated on January 4, 2007. On the Closing Date, pursuant to the terms of the Merger Agreement, the Company issued to the designees of Harbrew New York 27,151,984 shares of our Common Stock at the Closing, or approximately 64% of the 42,310,301 shares outstanding subsequent to the merger. After the merger, Harbrew New York continued as the surviving company under the laws of the state of New York and became the wholly owned subsidiary of the Company.
In anticipation of the merger between Iconic Brands, Inc. and Harbrew New York, on May 1, 2009 the Board of Directors and a majority of shareholders of Harbrew New York approved the amendment of its Articles of Incorporation changing its name to Iconic Imports, Inc. (“Iconic Imports”). On June 22, 2009, this action was filed with the New York State Department of State.
Prior to the merger on June 10, 2009, Iconic Brands had no assets, liabilities, or business operations. Accordingly, the merger has been treated for accounting purposes as a recapitalization by the accounting acquirer Harbrew New York/Iconic Imports and the financial statements reflect the assets, liabilities, and operations of Harbrew New York/Iconic Imports from its inception on September 8, 1999 to June 10, 2009 and are combined with Iconic Brands thereafter. Iconic Brands and its wholly-owned subsidiary Harbrew New York/Iconic Imports are hereafter referred to as the “Company”.
The Company is a brand owner of self-developed alcoholic beverages. Furthermore, the Company imports, markets and sells these beverages throughout the United States and globally.
Effective June 10, 2009, prior to the merger, Harbrew Florida effected a 1-for-1,000 reverse stock split of its common stock, reducing the issued and outstanding shares of common stock from 24,592,160 to 24,909, which includes a total of 317 shares resulting from the rounding of fractional shares. All share information has been retroactively adjusted to reflect this reverse stock split.
-7-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
2. INTERIM FINANCIAL STATEMENTS
The unaudited financial statements as of September 30, 2009 and for the three and nine months ended September 30, 2009 and 2008 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of September 30, 2009 and the results of operations and cash flows for the periods ended September 30, 2009 and 2008. The financial data and other information disclosed in these notes to the interim financial statements related to those periods are unaudited. The results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ending December 31, 2009. The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date.
Certain information and footnote disclosures normally included in financials statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2008 included in our Form 8-K filed June 16, 2009.
3. INVENTORIES
Inventories consist of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Danny De Vito's Premium Limoncello ( Liqueur) brand | $ | 14,954 | $ | 192,898 | ||||
Hot Irishman (Irish coffee) brand | 126,494 | 127,693 | ||||||
Glen Master (scotch) brand | 111,755 | 119,351 | ||||||
George Vesselle ( champagne) brand | 79,591 | 80,604 | ||||||
Other | 172,629 | 217,961 | ||||||
Total | $ | 505,423 | $ | 738,507 | ||||
-8-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Prepaid inventory purchases | $ | 283,820 | $ | 369,820 | ||||
Prepaid stock compensation paid to consultants | 29,151 | 208,411 | ||||||
Royalty advance | 60,000 | - | ||||||
Other | 37,612 | 17,538 | ||||||
$ | 410,583 | $ | 595,769 | |||||
5. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Vehicles | $ | 126,295 | $ | 126,295 | ||||
Office and warehouse equipment | 20,853 | 15,711 | ||||||
Total | 147,148 | 142,006 | ||||||
Accumulated depreciation | (137,242 | ) | (135,712 | ) | ||||
Net | $ | 9,906 | $ | 6,294 |
-9-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
6. DEBT
Debt consists of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Due under Purchase Order Financing Agreement | $ | - | $ | 2,937,177 | ||||
Due under Discount Factoring Agreement | - | 55,741 | ||||||
Convertible notes, interest at 7% ,due | ||||||||
July 2, 2012 to July 2, 2013-net of unamortized | ||||||||
discounts of $56,910 and $328,875,respectively | 155,590 | 766,750 | ||||||
Convertible debentures, interest at 9%, due | ||||||||
December 10, 2008 to January 23, 2009 - net | ||||||||
of unamortized discounts of $0 and $525, respectively | - | 104,475 | ||||||
Interim loan convertible promissory notes issued from | ||||||||
July 22, 2008 to September 9, 2008, interest at 0%, | ||||||||
due the earlier of (1) one year after the date of issuance | ||||||||
or (2) completion of $3,000,000 minimum new private | ||||||||
placement ( in which case the notes were to be automatically | ||||||||
converted into new units) | - | 1,100,000 | ||||||
Promissory note, interest at 20%, due January 9, 2009 | ||||||||
to January 29, 2009 | 100,000 | 100,000 | ||||||
Unsecured promissory note, interest at 7%, due in | ||||||||
installments until June 10, 2011 | 372,263 | - | ||||||
Convertible promissory note, interest of 7%, due September 13,2014- | ||||||||
net of unamortized discount of $81,717 and $0, respectively | 18,283 | - | ||||||
Loan payable, interest at 0%, due on demand | 100,000 | - | ||||||
Convertible promissory notes, interest at 10% | ||||||||
due October 25, 2007 to November 27, 2007 | 75,000 | 125,000 | ||||||
Due Donald Chadwell ( significant stockholder),interest at 0%, | 763,000 | 763,000 | ||||||
no repayment terms | ||||||||
Due Richard DeCicco ( officer, director, and significant stockholder) | ||||||||
and affiliates, interest at 0%, no repayment terms | 717,273 | 762,630 | ||||||
Total | 2,301,409 | 6,714,773 | ||||||
Less current portion of debt | (495,000 | ) | (4,422,393 | ) | ||||
Long term debt | $ | 1,806,409 | $ | 2,292,380 |
-10-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
The Purchase Order Financing Agreement was dated January 22, 2007, had a term of two years, and provided for advances of credit from Capstone Capital Group I, LLC (the “Secured Party”) to the Company. Among other things, the agreement provided for fees to the Secured Party equal to 2.5% for the first 30 days (or part thereof) that each advance was outstanding and 1.25% for every 14 days (or part thereof) that such advance remained outstanding. On June 10, 2009, the Company entered into a termination agreement with Capstone (the “Termination Agreement”) whereby Capstone agreed to forgive the $2,833,205 balance owed it under the Purchase Order Financing Agreement in exchange for: (i) a $500,000 7% unsecured promissory note (the “Promissory Note”); (ii) 1,000,000 shares of Common Stock; (iii) $1,833,205 worth of Series B Preferred Stock; and (iv) a 3-year warrant to purchase up to 1,000,000 shares of Common Stock at an exercise price of $0.50 per share. The Promissory Note is payable in 24 monthly installments of $10,000 commencing July 10, 2009, $100,000 on or before June 10, 2010, and the remaining $160,000 on or before June 10, 2011. If the Company closes a financing prior to maturity of the Promissory Note, up to 50% of the proceeds are to be used to prepay the remaining balance of the Promissory Note.
The Discount Factoring Agreement was dated January 22, 2007 and provides for financing of certain Company accounts received by Capstone Business Credit, LLC (the “Factor”). Among other things, the agreement provides for commissions to the Factor equal to 2% for the first 30 days (or part thereof) that each such account receivable is outstanding and 1% for every 14 days (or part thereof) thereafter that such account receivable remains outstanding.
Fees and commissions charged pursuant to the Purchase Order Financing Agreement and the Discount Factoring Agreement are included in interest expense in the accompanying consolidated statements of operations.
The $387,500 total face value of convertible notes outstanding at September 30, 2009 are convertible into shares of the Company’s common stock at a price of $0.50 per share.
Accrued interest payable on debt (included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets) consisted of:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Convertible notes, interest at 7% | $ | 51,137 | $ | 174,513 | ||||
Convertible debentures, interest at 9% | - | 4,744 | ||||||
Promissory note, interest at 20% | 5,041 | 1,973 | ||||||
Convertible promissory notes, interest at 10% | 22,877 | 36,031 | ||||||
Total | $ | 79,055 | $ | 217,261 | ||||
-11-
Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
7. STOCKHOLDERS’ EQUITY
On June 10, 2009, pursuant to the terms of the Merger Agreement, the Company issued to the designees of Harbrew New York 27,151,984 shares of Common Stock at the Closing. Of this amount;
1) | 24,592 shares were issued to Harbrew Florida stockholders, |
2) | 19,634,112 shares valued at $1,963,411 were issued to Company management and employees for services, including 15,972,359 shares to the Company’s Chief Executive Officer, 100,000 shares to the Company’s Chief Financial Officer, and 2,586,753 shares to Donald Chadwell, |
3) | 2,086,973 shares valued at $208,697 were issued to Danny DeVito and affiliates for services, |
4) | 4,606,307 shares were issued to noteholders in satisfaction of $2,125,625 of debt and $177,529 of accrued interest, and |
5) | 1,000,000 shares were issued to Capstone as part of the Termination Agreement. |
Also, pursuant to the terms of the Merger Agreement, the Company issued 1 share of Series A Preferred Stock valued at $100,000 to the Company’s Chief Executive Officer for services and 916,603 shares of Series B Preferred Stock valued at $1,833,206 to Capstone as part of the Termination Agreement.
The one share of Series A Preferred Stock entitles the holder to two votes for every share of Common Stock Deemed Outstanding and has no conversion or dividend rights. Each share of the Series B Preferred Stock has a liquidation preference of $2.00 per share, has no voting rights, and is convertible into one share of Common Stock at the lower of (1) $2.00 per share or, (2) the volume weighted average price per share (“VWAP”) for the 20 trading days immediately prior to the Conversion Date.
In the three months ended September 30, 2009, a total of $122,500 of debt and $28,147 of accrued interest was converted into a total of 300,110 shares of Company common stock
On August 19, 2009, the Company sold 1,000,000 shares of its common stock at $.50 per share, and a total of 2,000,000 warrants to purchase the Company’s common stock, which consisted of 1,000,000 warrants with an exercise price of $1.00 per share, and 1,000,000 warrants with an exercise price of $1.50 per share, for total proceeds of $500,000.
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Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
8. INCOME TAXES
From September 9, 1999 (inception) to December 31, 2006, the Company filed its Federal and New York income tax returns as an S Corporation. Accordingly, the net income (loss) of the Company for this period was includible in the tax returns of the Company shareholders and the Company was not subject to income tax.
No provision for income taxes was recorded in the three and nine months ended September 30, 2009 and 2008 since the Company incurred a net loss in these periods.
Based on management’s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of $2,476,081 attributable to the future utilization of the $7,074,518 net operating loss carryforward as of December 31, 2008 will be realized. Accordingly, the Company has provided a 100% allowance against the deferred tax asset in the financial statements at December 31, 2008. The Company will continue to review this valuation allowance and make adjustments as appropriate. The $7,074,518 net operating loss carryforward expires $3,395,185 in 2027 and $3,679,333 in 2028.
Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
9. COMMITMENTS AND CONTINGENCIES
Rental agreements – The Company occupied its facilities in Freeport, New York up until March 2009 under a month to month agreement at a monthly rent of $14,350. In March 2009, the Company moved its facilities to Lindenhurst, New York pursuant to a three year lease agreement providing for annual rentals ranging from $85,100 to $90,283. Provided certain conditions are met, the Company has an option to renew the lease for an additional two years at annual rentals ranging from $92,991 to $95,781.
For the nine months ended September 30, 2009 and 2008, rent expense was $99,115 and $128,726, respectively.
License agreement – On April 26, 2007 and as amended November 1, 2007, the Company entered into an exclusive License Agreement with Seven Cellos, LLC (“DDV”), pursuant to which the Company was granted a limited license of certain rights in and to Danny DeVito’s name, likeness and biography for use by the Company in connection with the Danny DeVito Premium Limoncello brand. The term of the Agreement continues through perpetuity unless the agreement is terminated. In consideration for the license, the Company agreed to pay royalties as follows: (a) 5% of Net Profits (as defined) to Behr Abrahamson & Kaller, LLP (“BAK”), (b) a payment of 50% of the remaining Net Profits to DDV after the payment described above; and (c) a payment of 2% of Net Profits to Sichenzia Ross Friedman Ference LLP after payment of 50% of Net Profits to DDV.
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Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
Danny DeVito agreed to use reasonable efforts to be available for a reasonable number of promotional appearances during each consecutive 12 month period, the duration of which shall not exceed 2 days. Pursuant to the agreement, Danny DeVito granted the Company a right of first refusal for a period of 5 years to license any other liquor, spirit or alcoholic beverage which Danny DeVito may determine to endorse or develop. A condition precedent to Danny DeVito’s performance under the agreement are subject to the Company applying for a trademark for the brand name “Danny DeVito’s Premium Limoncello” with Danny DeVito being designated as 50% co-owner of such trademark. The Company has filed for this trademark with the U.S. Patent and Trademark Office and, as of September 30, 2009, is awaiting disposition.
For the nine months ended September 30, 2009 and 2008, the Company calculated cumulative “Net Profits” from the brand to be negative and thus did not pay or accrue any royalty expense under the License Agreement.
Merchandising license agreement-On June 12, 2009, Iconic Imports, Inc., the wholly-owned subsidiary of the Company, entered into a merchandising license agreement (the “License Agreement”) with Paramount Licensing Inc., (“PLI”) granting Iconic Imports the right to use the title of the theatrical motion picture “The Godfather” in connection with the development, importation, marketing, and distribution of an Italian organic vodka and Scotch whiskey throughout the United States. Under the terms of the License Agreement, the Company agreed to pay PLI a royalty fee of five percent (5%) and guarantee a total of $400,000 in royalties due as follows; (1) $60,000 as an advance payment due upon signing of the License Agreement, (2) $100,000 due on or before November 1, 2010, (3) $100,000 due on or before November 1, 2011, and (4) $140,000 due on or before November 1, 2012. In addition, PLI was granted warrants to purchase shares of the Company’s common stock in substantially to same form as other warrants previously issued, which is (a) a five-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $1.00 per share; and (b) a five-year warrant to purchase 1,333,334 shares of our common stock at an exercise price of $1.50 per share. On August 12, 2009, the Company paid $60,000 to PLI as the advance royalty due under the Licensing Agreement. The Licensing Agreement became effective on this date as the advance payment was a condition precedent to the effectiveness of the Licensing Agreement.
Employment agreement with chief executive officer - On January 23, 2008, the Company entered into an employment agreement with its chief executive officer Richard DeCicco. The agreement provides for a term of 5 years, commencing on January 1, 2008. The term can be extended by a written agreement of the parties. The agreement provides for annual compensation ranging from $265,000 to $350,000. In addition, if the Company enters into an agreement and further sells any brand in the company’s portfolio, Mr. DeCicco will receive 5% of such sale. Mr. DeCicco is also entitled to incentive bonus compensation, stock and/or options in accordance with Company policies established by the Board of Directors. The agreement provides for the grant of a non-qualified ten year option to purchase up to 1,000,000 shares of common stock of the Company at an exercise price which shall represent a discount to the market price. The options shall be granted pursuant to the 2008 incentive and non-qualified stock option plan which the Company intends to implement. Mr. DeCicco has the right to terminate the agreement upon 60 days notice to the Company for any reason. Pursuant to the terms of the agreement, if Mr. DeCicco is absent from work because of illness or incapacity cumulatively for more than 2 months in addition to vacation time in any calendar year, the Company may terminate the agreement upon 30 days written notice. The agreement also provides that the agreement may be terminated upon 90 days notice to Mr. DeCicco if: (A) there is a sale of substantially all of the Company’s assets to a single purchaser or group of associated purchasers; (B) there is a sale, exchange or disposition of 50% of the outstanding shares of the Company’s outstanding stock; (C) the Company terminates its business or liquidates its assets; or (D) there is a merger or consolidation of the Company in which the Company’s shareholders receive less than 50% of the outstanding voting shares of the new or continuing corporation. Mr. DeCicco shall be entitled to severance pay in the amount of 2 years compensation and medical and other benefits in the event of a termination of the agreement under certain circumstances.
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Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
Employment agreement with chief financial officer - On October 1, 2007, the Company entered into an employment agreement with its chief financial officer William Blacker. The agreement provides for a term of 3 years, commencing on October 1, 2007. The term can be extended by a written agreement of the parties. The Company agreed to issue options to purchase shares of its common stock to Mr. Blacker if and when the common stock becomes publicly traded, as follows: (A) upon execution of the agreement, 100,000 options at an exercise price of $0.05 per share; (B) on October 1, 2008, 100,000 options at an exercise price of $0.15 per share; and (C) on October 1, 2009, 100,000 options at an exercise price of $.75 per share. Pursuant to the terms of the agreement, Mr. Blacker is to receive an annual salary of $150,000. Mr. Blacker has the right to terminate the agreement upon 60 days notice to the Company for any reason. The agreement further provides that if the agreement is terminated for any reason other than willful malfeasance by Mr. Blacker, Mr. Blacker shall be entitled to receive severance pay in the amount of 6 months or the balance of the agreement’s term of existence, whichever is greater, and shall receive all benefits under the agreement.
The $16,850 estimated fair value of the 300,000 options (using the Black-Scholes option pricing model and the following assumptions: $0.10 stock price, 4% risk free interest rate, 100% volatility, and term of 3.5 years) is being amortized over the 3 year term of the employment agreement as compensation and benefits.
Legal proceedings – The Company is party to a variety of legal proceedings that arise in the normal course of business. We accrue for these items as losses become probable and can be reasonably estimated. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on the Company’s consolidated results of operations or financial position.
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Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
10. STOCK OPTIONS AND WARRANTS
A summary of stock option and warrant activity for the year ended December 31, 2008 and for the nine months ended September 30, 2009 follows:
Stock | ||||||||
Options | Warrants | |||||||
Outstanding at January 1, 2008 | 300,000 | 3,887,500 | ||||||
Granted and issued | 1,000,000 | 1,870,000 | ||||||
Exercised | - | - | ||||||
Forfeited/expired/cancelled | - | - | ||||||
Outstanding at December 31, 2008 | 1,300,000 | 5,757,500 | ||||||
Granted and issued | - | 1,000,000 | ||||||
Exercised | - | - | ||||||
Forfeited/expired/cancelled | - | (120,000 | ) | |||||
Outstanding at June 30, 2009 | 1,300,000 | 6,637,500 | ||||||
Granted and issued | - | 5,173,334 | ||||||
Exercised | - | - | ||||||
Forfeited/expired/cancelled | - | - | ||||||
Outstanding at September 30, 2009 | 1,300,000 | 11,810,834 |
Stock options outstanding at September 30, 2009 consist of:
Date | Number | Number | Exercise | Expiration | ||||||||||
Granted | Outstanding | Exercisable | Price | Date | ||||||||||
October 1, 2007 | 100,000 | 100,000 | $ | 0.05 | April 1, 2011 | |||||||||
October 1, 2007 | 100,000 | 100,000 | $ | 0.15 | April 1, 2011 | |||||||||
October 1, 2007 | 100,000 | - | $ | 0.75 | April 1, 2011 | |||||||||
January 1, 2008 | 1,000,000 | - | $ | 0.10 | (a) | June 30, 2018 | ||||||||
Total | 1,300,000 | 200,000 |
(a) Estimated since exercise price is to be determined based on future stock price.
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Iconic Brands, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2009
(Unaudited)
The 300,000 options granted on October 1, 2007 vest 100,000 on October 1, 2007, 100,000 on October 1, 2008, and 100,000 on October 1, 2009. As of September 30, 2009, there was $64,573 of total unrecognized compensation cost relating to unexpired stock options. That cost is expected to be recognized $5,939 in 2009, $22,352 in 2010, $18,140 in 2011, and $18,142 in 2012.
Warrants outstanding at September 30, 2009 consist of:
Date | Number | Number | Exercise | Expiration | |||||||||
Issued | Outstanding | Exercisable | Price | Date | |||||||||
July 2, 2007 | 500,000 | 500,000 | $ | 1.00 | July 2, 2012 | ||||||||
July 2, 2007 | 500,000 | 500,000 | $ | 1.50 | July 2, 2012 | ||||||||
August 27,2007 | 550,000 | 550,000 | $ | 1.00 | August 27,2012 | ||||||||
August 27,2007 | 550,000 | 550,000 | $ | 1.50 | August 27,2012 | ||||||||
November 1, 2007 | 45,000 | 45,000 | $ | 0.50 | November 1, 2009 | ||||||||
November 8 2007 | 811,250 | 811,250 | $ | 1.00 | November 8 2012 | ||||||||
November 8 2007 | 811,250 | 811,250 | $ | 1.50 | November 8 2012 | ||||||||
March 5, 2008 | 192,500 | 192,500 | $ | 1.00 | March 5, 2013 | ||||||||
March 5, 2008 | 192,500 | 192,500 | $ | 1.50 | March 5, 2013 | ||||||||
June 10, 2008 | 27,500 | 27,500 | $ | 1.00 | June 10, 2013 | ||||||||
June 10, 2008 | 27,500 | 27,500 | $ | 1.50 | June 10, 2013 | ||||||||
June 10, 2008 | 25,000 | 25,000 | $ | 1.00 | December 10, 2013 | ||||||||
June 10, 2008 | 25,000 | 25,000 | $ | 1.50 | December 10, 2013 | ||||||||
June 11, 2008 | 30,000 | 30,000 | $ | 1.00 | December 10, 2013 | ||||||||
June 11, 2008 | 30,000 | 30,000 | $ | 1.50 | December 10, 2013 | ||||||||
July 2, 2008 | 110,000 | 110,000 | $ | 1.00 | January 2, 2014 | ||||||||
July 2, 2008 | 110,000 | 110,000 | $ | 1.50 | January 2, 2014 | ||||||||
July 23, 2008 | 50,000 | 50,000 | $ | 1.00 | January 23, 2014 | ||||||||
July 23, 2008 | 50,000 | 50,000 | $ | 1.50 | January 23, 2014 | ||||||||
August 11, 2008 | 1,000,000 | 1,000,000 | $ | 1.00 | August 11, 2013 | ||||||||
June 10, 2009 | 1,000,000 | 1,000,000 | $ | 0.50 | June 10, 2014 | ||||||||
July 23, 2009 | 20,000 | 20,000 | $ | 1.00 | July 23, 2014 | ||||||||
July 23, 2009 | 20,000 | 20,000 | $ | 1.50 | July 23, 2014 | ||||||||
August 12, 2009 | 1,000,000 | 1,000,000 | $ | 1.00 | June 12, 2014 | ||||||||
August 12, 2009 | 1,333,334 | 1,333,334 | $ | 1.50 | June 12, 2014 | ||||||||
August 19, 2009 | 1,000,000 | 1,000,000 | $ | 1.00 | August 19, 2014 | ||||||||
August 19, 2009 | 1,000,000 | 1,000,000 | $ | 1.50 | August 19, 2014 | ||||||||
September 14, 2009 | 200,000 | 200,000 | $ | 1.00 | September 14. 2014 | ||||||||
September 14, 2009 | 200,000 | 200,000 | $ | 1.50 | September 14. 2014 | ||||||||
September 16,2009 | 200,000 | 200,000 | $ | 1.00 | July 2, 2014 | ||||||||
September 16,2009 | 200,000 | 200,000 | $ | 1.50 | July 2, 2014 | ||||||||
Total | 11,810,834 | 11,810,834 |
11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing date of this Form 10-Q and has determined that there were no subsequent events to recognize or disclose in these financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion is an overview of the important factors that management focuses on in evaluating our business, financial condition and operating performance and should be read in conjunction with the financial statements included in this Current Report on Form 8-K. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward looking statements as a result of any number of factors, including those set forth under the section entitled “Risk Factors” and elsewhere in this Current Report on Form 8-K.
OUR BUSINESS
Prior to the consummation of the Merger Agreement, Harbrew New York was a wholly-owned subsidiary of Harbrew Florida. Harbrew Florida was incorporated in the state of Florida on January 4, 2007, under the former name Stassi Harbrew Imports Corp., pursuant to the Bankruptcy Court Approved Reorganization Plan for the Stassi Interaxx, Inc. (“Stassi”) reorganization confirmed on December 20, 2006. On May 17, 2007, Harbrew Florida acquired Harbrew New York, a New York corporation incorporated on September 8, 1999 engaged in importing and wholesaling spirits, wine and beer. As a result, Harbrew New York became a wholly-owned subsidiary of Harbrew Florida.
On June 10, 2009, Merger Sub, Harbrew Florida, Harbrew New York and we entered into a Merger Agreement which resulted in Harbrew New York becoming our wholly owned subsidiary (the “Merger”). The Merger was accomplished by means of a Merger Agreement in which Harbrew New York merged with and into Merger Sub and each share of Harbrew’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into one share of Iconic Brands’ common stock. Under the terms of the Merger Agreement and as a result of the Merger:
· | Harbrew New York became our wholly owned subsidiary; |
· | In exchange for all of the shares of Harbrew common stock, each share of Harbrew’s common stock issued and outstanding immediately prior to the closing of the Merger was converted into one share of Iconic Brands’ common stock; |
This transaction closed on June 10, 2009.
Prior to the merger on June 10, 2009, we had no assets, liabilities, or business operations. Accordingly, the merger has been treated for accounting purposes as a recapitalization by the accounting acquirer, Harbrew New York, and the financial statements reflect the assets, liabilities, and operations of Harbrew New York from its inception on September 8, 1999 to June 10, 2009 and us thereafter. References to our company are with respect to Harbrew New York to June 10, 2009 and us thereafter.
We are in the business of importing and wholesaling spirits, wine and beer to distributors in the United States on a national basis and to retail licensees both on and off premise in New York, through our wholesale license. We are federally licensed, maintaining licenses to both import and sell to wholesale licensed distributors in 51 markets in the United States. In addition to the federal import and wholesale licenses, we maintain a federal customs bonded facility license for our premises in Lindenhurst, New York. Within the licensing category, we also maintain a New York State wholesale license and a New York State warehousing license, permitting us to warehouse products of other companies.
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RESULTS OF OPERATIONS
Results of Operations for the Nine Month Period ended September 30, 2009 Compared to the Nine Month Period ended September 30, 2008
The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars. The discussion following the table is based on these results.
Six Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Unaudited) | (Unaudited) | |||||||
Sales | $ | 497,549 | $ | 1,058,363 | ||||
Cost of goods sold | 327,947 | 817,694 | ||||||
Gross profit | 169,602 | 240,669 | ||||||
Selling, general and administrative expenses: | ||||||||
Selling, marketing and promotion | 231,103 | 350,619 | ||||||
Administrative compensation and benefits | 841,228 | 1,120,691 | ||||||
Stock based compensation issued in connection with merger | 2,063,411 | - | ||||||
Professional fees | 389,418 | 296,278 | ||||||
Occupancy and warehousing | 133,927 | 200,331 | ||||||
Travel and entertainment | 90,707 | 216,195 | ||||||
Office | 31,677 | 33,210 | ||||||
Licenses and permits | 2,873 | 36,484 | ||||||
Other | 33,179 | 21,283 | ||||||
Total | 3,817,523 | 2,275,091 | ||||||
Income (loss) from operations | (3,647,921 | ) | (2,034,422) | ) | ||||
Interest expense | (590,170 | ) | (751,825 | ) | ||||
Income (loss) before income taxes | (4,238,091 | ) | (2,786,247 | ) | ||||
Income taxes | - | - | ||||||
Net income (loss) | $ | (4,238,091 | ) | $ | (2,786,247 | ) |
Sales:
Sales decreased by approximately $560,814 or 53% from $1,058,363 for the nine month period ended September 30, 2008 to $497,549 for the nine month period ended September 30, 2009. This decrease in sales reflects the Company’s re-focus on its celebrity branded products as it directs resources to its organically developed brand portfolio as opposed to the distribution of the products of others.
Cost of goods sold:
Cost of revenue decreased by $489,847, or 60%, from $817,694 for the nine month period ended September 30, 2008 to $327,947 for the nine month period ended September 30, 2009. This decrease in COGS is consistent with the decrease in sales for the period as the Company shifts its focus and resources towards its organically developed brand portfolio
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Gross profit:
Gross profit decreased by $71,067, or 30%, from $240,669 for the nine month period ended September 30, 2008 to $169,602 for the nine month period ended September 30, 2009 mainly due to the decrease in sales as the Company refocuses its resources to its organically developed brands.
Selling, general and administrative expenses:
Selling general and administrative expenses for the nine month period ended September 30, 2009 and 2008 were $231,103 and $350,619, respectively, a decrease of $119,516, or 34%.
Income (loss) from Operations:
Loss from operations was $3,647,921 for the nine month period ended September 30, 2009 and $2,034,422 for the nine month period ended September 30, 2008. The increase in the loss from operations for the period resulted from the decrease in sales and the increase in expenses, principally the costs associated with stock based compensation expense, as previously described.
Interest Expense:
Interest expense for the nine month period ended September 30, 2009 and 2008 was $590,170 and $751,825, respectively, a decrease of $161,655, or 22%. The decrease in interest expense for the period was a result of a rate reset by our largest creditor, and the conversion of convertible debt to equity.
Net Income (loss):
Net loss was $4,238,091 for the nine month period ended September 30, 2009, compared to $2,786,247 for the nine month period ended September 30, 2008, an increase of $1,451,844, or 52%. The increase in the net loss for the period was a result of decreased sales, increased professional fees incurred relating to financing activities, increased costs associated with stock based compensation.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2009, we had negative working capital of $2,105,176 compared to negative working capital of $4,150,407 at December 31, 2008. Our balance of cash and cash equivalents at September 30, 2009 was $75,875.
Our primary uses of cash have been for selling and marketing expenses, employee compensation, new product development and working capital. The main sources of cash have been from the financing of purchase orders and the factoring of accounts receivable. In addition, we issued convertible notes and promissory notes to bridge the gap between our primary lender and our working capital requirements. All funds received have been expended in the furtherance of growing the business and establishing the brand portfolios. The following trends are reasonably likely to result in a material decrease in our liquidity over the near to long term:
· | An increase in working capital requirements to finance higher level of inventories and accounts receivable, |
· | Addition of administrative and sales personnel as the business grows, |
· | Increases in advertising, public relations and sales promotions for existing and new brands as the company expands within existing markets or enters new markets, |
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· | Development of new brands to complement our current celebrity portfolio, and |
· | The cost of being a public company and the continued increase in costs due to governmental compliance activities. |
Net Cash Used in Operating Activities
A substantial portion of our available cash has been used to fund operating activities. In general, these cash funding requirements are based on operating losses, driven principally by our sizeable investment in selling and marketing, and general expenses. The business has incurred significant losses since inception.
For the nine month period ended September 30, 2009, net cash used in operating activities was $352,138, consisting primarily of losses from operations of $(4,238,091), offset by a non-cash charge for stock-based compensation of $2,474,965, decreases in receivables of $383,197, decreases in inventories of $233,084 increases in accrued expenses of $610,969.The uses of cash consisted mainly of a reduction in accounts payable of $117,590.
Net Cash Used in Investing Activities
For the nine month period ended September 30, 2009 and 2008, net cash used in investing activities was $5,150 and $0, respectively.
Net Cash Provided by Financing Activities
For the nine month period ended September 30, 2009, funds provided from financing activities amounted to $422,193 resulting from $332,807 replayment of debt offset by $445,000 raised from the sale of common stock, and increases in Debt.
We anticipate that we will need to make significant expenditures during the next 12 months, contingent upon raising capital. These anticipated expenditures are for advertising, marketing, promotional items, overhead and working capital purposes. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. We anticipate that we will require up to $7,500,000 for funding our plan of operations for the next twelve months, depending on revenues, if any, from operations.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
We will still need additional investments in order to continue operations to cash flow break even. We are seeking additional investments, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the a downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.
Impact of Inflation
We expect to be able to pass inflationary increases for raw materials and other costs on to our customers through price increases, as required, and do not expect inflation to be a significant factor in our business.
Seasonality
Although our operating history is limited, we do not believe our products are seasonal.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4(T). CONTROLS AND PROCEDURES.
a) Evaluation of Disclosure Controls. Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On or about January 24, 2008, Connecticut Container Corp., a wholesale distributor of packaging materials, initiated litigation against us in the Supreme Court of the State of New York in Nassau County (Docket No. 1458/08). The plaintiff had demanded payment of an aggregate of $31,693 in connection with certain amounts allegedly owed by us. On August 7, 2008, we settled the litigation for the full amount. We agreed to pay one-half of such amount on each of August 20, 2008 and September 20, 2008. We paid $24,500 and due to non-payment of the remaining amount a judgment for $7,443 was issued against us by the court.
On February 14, 2008, Chester Stewart, an individual, initiated a lawsuit in the State of Connecticut Superior Court (Docket No. D.N. HHD CV08-5018180S) alleging breach of a promissory note in the amount of $100,000. A judgment was entered in Connecticut, and will be defended when the action is entered in New York. .
On or about July 24, 2008, Elite Marketing Concepts, a wholesale distributor of wine, initiated litigation against us in the Supreme Court of New York in Nassau County (Docket No. 08-009338). The plaintiff has demanded payment in the amount of $32,270 for goods sold and delivered to us by the plaintiff. On August 15, 2008, we reached an agreement to pay Elite $29,000 in two equal payments. We paid the first $14,500 and due to non-payment a judgment was issued against us on June 5, 2009 in the amount of $9,679. On May 6, 2009 a payment of $4,129.12 was made bringing the balance to $2,549.88
On October 23, 2008, Thermo Plastic Tech, Inc., a manufacturer of thermo plastic material, initiated litigation against us in the Superior Court of New Jersey Law Division, Civil Part, Union County (Docket No. UNN-L-3062-08). The plaintiff has demanded payment in the amount of $30,292 for goods sold and delivered to us by the plaintiff. The court issued a judgment against us in the amount of $30,292.
On August 5, 2009, The Estate of Mercer K Ellington initiated litigation claiming the company used the name Duke Ellington without permission. The company has retained counsel, answered all the accusations, and has initiated a counter claim against the estate.
On October 29, 2009, Fred and Joseph Scalamandre Real Estate initiated litigation claiming non payment of rent in the amount of $238,000 plus interest and fees for a specific time period. The company has recognized the total obligation on its books as of September 30, 2009, and has retained counsel to file an answer.
We believe that the ultimate resolution of these matters will not have a material adverse effect on our financial condition or operations. Apart from the legal proceedings noted in the previous paragraphs, we are not party to any legal proceedings, nor are we aware of any contemplated or pending legal proceedings against us.
Item 1A. Risk Factors
Not applicable because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 19, 2009, the Company sold 1,000,000 shares of its common stock at $0.50 per share, and a total of 2,000,000 warrants to purchase the Company’s common stock, which consisted of 1,000,000 warrants with an exercise price of $1.00 per share, and 1,000,000 warrants with an exercise price of $1.50 per share, for total proceeds of $500,000. These securities are issued in reliance on the exemption under Section 4(2) of the Securities Act of 1933, as amended (the “Act”). These securities qualified for exemption under Section 4(2) of the Securities Act of 1933 since the issuance securities by us did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the deal, size of the offering, manner of the offering and number of securities offered. We did not undertake an offering in which we sold a high number of securities to a high number of investors. In addition, these shareholders had the necessary investment intent as required by Section 4(2) since they agreed to and received share certificates bearing a legend stating that such securities are restricted pursuant to Rule 144 of the 1933 Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, we have met the requirements to qualify for exemption under Section 4(2) of the Securities Act of 1933 for this transaction.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 24, 2009, the shareholders voted to approve the amendment to the Articles of Incorporation to change its name to Iconic Brands, Inc. This name change was in accordance with the reverse merger that closed on June 10, 2009.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following documents are included herein:
Exhibit No. | Document Description |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e), promulgated under the Securities and Exchange Act of 1934, as amended. |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e), promulgated under the Securities and Exchange Act of 1934, as amended. |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities on this 16th day of November 13, 2009.
Iconic Brands, Inc. | |
By: /s/Richard DeCicco | |
Richard DeCicco | |
President, Principal Executive Officer | |
By: /s/William Blacker | |
William Blacker | |
Principal Financial Officer |
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