The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS
Basis of Presentation
On March 9, 2005 the shareholders of Drinks Americas, Inc. ("Drinks") a company engaged in the business of importing and distributing unique, premium alcoholic and non-alcoholic beverages associated with icon entertainers, sports figures, celebrities and destinations, to beverage wholesalers throughout the United States, acquired control of Drinks Americas Holdings, Ltd. ("Holdings" or the "Company "). Holdings and Drinks was incorporated in the state of Delaware on February 14, 2005 and September 24, 2002, respectively. On March 9, 2005 Holdings merged with Gourmet Group, Inc. ("Gourmet"), a publicly traded Nevada corporation, which resulted in Gourmet shareholders acquiring 1 share of Holdings' common stock in exchange for 10 shares of Gourmet's common stock. Both Holdings and Gourmet were considered "shell" corporations, as Gourmet had no operating business on the date of the share exchange, or for the previous three years. Pursuant to the June 9, 2004 Agreement and Plan of Share Exchange among Gourmet, Drinks and the Drinks' shareholders, Holdings, with approximately 4,058,000 shares of outstanding common stock, issued approximately 45,164,000 of additional shares of its common stock on March 9, 2005 (the "Acquisition Date") to the common shareholders of Drinks and to the members of its affiliate, Maxmillian Mixers, LLC ("Mixers"), in exchange for all of the outstanding Drinks' common shares and Mixers' membership units, respectively. As a result Maxmillian Partners, LLC ("Partners") a holding company which owned 99% of Drinks' outstanding common stock and approximately 55% of Mixers' outstanding membership units, became Holdings' controlling shareholder with approximately 87% of Holdings' outstanding common stock. For financial accounting purposes this business combination has been treated as a reverse acquisition, or a recapitalization of Partners' subsidiaries (Drinks and Mixers).
Subsequent to the Acquisition Date, Partners, which was organized as a Delaware limited liability company on January 1, 2002 and incorporated Drinks in Delaware on September 24, 2002, transferred all its shares of holdings to its members as part of a plan of liquidation.
On January 15, 2009 Drinks acquired 90% of Olifant U.S.A Inc. (“Olifant”), a Connecticut corporation, which owns the trademark and brand names and holds the worldwide distribution rights (excluding Europe) to Olifant Vodka and Gin. During the six months ended October 31, 2011, the Company reduced its ownership to 48% of Olifant recognizing a gain on disposal of product line of $280,478. In conjunction with the ownership reduction to 48%, the Company eliminated the remaining outstanding debt obligation of $600,000
Our license agreement with respect to Kid Rock’s BadAss Beer and related trademarks currently requires payments to Drinks Americas based upon volume through the term of the agreement.
Nature of Business
Through our majority-owned subsidiaries, Drinks imports, distributes and markets unique premium wine and spirits and alcoholic beverages to beverage wholesalers throughout the United States and internationally.
On February 11, 2010, the Company signed an agreement with Mexcor, Inc., ("Mexcor") an importer and distributor. Mexcor agreed to manage the sourcing, importing and distribution of our portfolio of brands nationally. This agreement was subsequently amended, see Subsequent Events.
On June of 2011 the company entered into an agreement to license and distribute the brands of Worldwide Beverage Imports in the eastern United States with brands to include KAH Tequila, Agave 99, Ed Hardy Tequila, Mexicali Beer, Chili Beer and Red Pig ale as well as various other products produced and imported by Worldwide Beverage Imports in return for the shares that would be no greater than 49% of the Company.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
On November 1, 2011, the Company amended its agreement with Worldwide Beverage Imports. The company was granted worldwide distribution rights on both the spirits and beer products of WBI. In connection with the amended agreement, the Company agreed to issue $1,500,000 in additional restricted shares of common stock (the “Additional Shares”) to Worldwide at a purchase price of $0.002 per share in exchange for Worldwide forgiving a $300,000 loan owed by the Company to Worldwide and Worldwide delivering $1,200,000 in Inventory to the Company, the sale proceeds of which are to be contributed to the capital of the Company.
Upon the completion of the purchase of the Initial Issuance and the Additional Shares and until one (1) year from the date of the completion of the close of the transaction, the Company agreed not to issue any additional shares of the Company without prior written consent of the Purchaser, provided that the Company may issue certain exempt issuances without the prior written consent of the Purchaser in accordance with the terms of the Purchase Agreement.
During the six months ended October 31, 2011, the Company issued 100,000,000 shares of its common stock to acquire the right to sell and distribute the products that Worldwide Beverages licensed to the company. The trademarks were recorded at the fair value of the issued underlying common stock of $240,000. In addition, the Company received $1.5 million in product at no cost as capital contribution for 49% of the Company and additional forward going inventory at substantially reduced pricing with ongoing and extended credit terms. The inventory is credited as a payment towards WBI acquiring up to 49% ownership of the Company's common stock. The fair value of the product received is recorded as inventory with the offset recorded as a common stock subscription.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
Principles of consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Rule S-X of the Securities and Exchange Commission (the “SEC”) and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, the results from operations for the six months ended October 31, 2011, are not necessarily indicative of the results that may be expected for the year ending April 30, 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated April 30, 2011 financial statements and footnotes thereto included in the Company's Form 10-K filed with the SEC.
The condensed consolidated financial statements as of April 30, 2011 have been derived from the audited consolidated financial statements at that date but do not include all disclosures required by the accounting principles generally accepted in the United States of America.
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and Partners (collectively, the "Company"). All significant inter-company transactions and balances have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues when title passes to the customer, which is generally when products are shipped. The Company recognizes royalty revenue based on its license agreements with its distributors which typically is the greater of either the guaranteed minimum royalties payable under our license agreement or a royalty rate computed on the net sales of the distributor shipments to its customers.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
The Company recognizes revenue dilution from items such as product returns, inventory credits, discounts and other allowances in the period that such items are first expected to occur. The Company does not offer its clients the opportunity to return products for any reason other than manufacturing defects. In addition, the Company does not offer incentives to its customers to either acquire more products or maintain higher inventory levels of products than they would in ordinary course of business. The Company assesses levels of inventory maintained by its customers through communications with them. Furthermore, it is the Company's policy to accrue for material post shipment obligations and customer incentives in the period the related revenue is recognized.
Accounts Receivable
Accounts receivable are recorded at original invoice amount less an allowance for uncollectible accounts that management believes will be adequate to absorb estimated losses on existing balances. Management estimates the allowance based on collectability of accounts receivable and prior bad debt experience. Accounts receivable balances are written off upon management's determination that such accounts are uncollectible. Recoveries of accounts receivable previously written off are recorded when received. Management believes that credit risks on accounts receivable will not be material to the financial position of the Company or results of operations at October 31, 2011 and April 30, 2011, the allowance for doubtful accounts was $131,414 and $170,657, respectively.
Inventories
Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amounts of such assets may not be recoverable. The Company's policy is to record an impairment loss at each balance sheet date when it is determined that the carrying amount may not be recoverable. Recoverability of these assets is based on undiscounted future cash flows of the related asset. For the six months ended October 31, 2011, the Company concluded that there was no impairment.
Deferred Charges and Intangible Assets
The costs of intangible assets with determinable useful lives are amortized over their respectful useful lives and reviewed for impairment when circumstances warrant. Intangible assets that have an indefinite useful life are not amortized until such useful life is determined to be no longer indefinite. Evaluation of the remaining useful life of an intangible asset that is not being amortized must be completed each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets must be tested for impairment at least annually, or more frequently if warranted. Intangible assets with finite lives are generally amortized on a straight line bases over the estimated period benefited. The costs of trademarks and product distribution rights are amortized over their related useful lives of between 15 to 40 years. We review our intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable, in which case an impairment charge is recognized currently.
Deferred financing costs are amortized ratably over the life of the related debt. If debt is retired early, the related unamortized deferred financing costs are written-off in the period debt is retired.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
During the year ended April 30, 2011 the Company management performed an evaluation of its recorded book value of its intangible assets for purposes of determining the implied fair value of the assets at April 30, 2011. The test indicated that the recorded remaining book value of certain intangible assets exceeded its fair value for the year ended April 30, 2011. As a result, upon completion of the assessment, management recorded a non-cash impairment charge of $1,422,440, net of tax, or $0.02 per share during the year ended April 30, 2011 to reduce the carrying value to $0. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless, it is more likely than not, that such assets will be realized. The Company has recognized no adjustment for uncertain tax provisions.
Stock Based Compensation
The Company accounts for stock-based compensation using the modified prospective approach. The Company recognizes in the statement of operations the grant-date fair value of stock options and other equity based compensation issued to employees and non-employees.
Earnings (Loss) Per Share
The Company computes earnings (loss) per share whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share except that the number of shares is increased to assume exercise of potentially dilutive and contingently issuable shares using the treasury stock method, unless the effect of such increase would be anti-dilutive. For the three and six months ended October 31, 2011 and 2010, the diluted earnings per (loss) share amounts equal basic earnings (loss) per share because the Company had net losses and the impact of the assumed exercise of contingently issuable shares would have been anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying amount reported in the consolidated balance sheets for accounts receivables, accounts payable and accrued expenses approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount reported in the accompanying consolidated balance sheets for notes payable approximates fair value because the actual interest rates do not significantly differ from current rates offered for instruments with similar characteristics.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Derivative liabilities are recorded at fair value on a recurring basis. In accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company groups its assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.
Reclassification
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year. The Company reclassified capitalized financing costs as other assets in the Company's balance sheet previously recorded as an offset to related notes payable.
Recent accounting pronouncements
There are various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
3. GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of October 31, 2011, the Company has a shareholders' deficiency of $2,833,224 applicable to controlling interest compared with $4,444,066 applicable to controlling interest for the year ended April 30, 2011, and has incurred significant operating losses and negative cash flows since inception. For the six months ended October 31, 2011, the Company sustained a net loss of $730,471 compared to a net loss of $1,761,214 for the six months ended October 31, 2010 and used cash of approximately $1,647,000 in operating activities for the six months ended October 31, 2011 compared with approximately $121,000 for the six months ended October 31, 2010. With our relationship with WBI, we believe our liquidity will improve. In addition, the increased sales revenues have helped. In the event, if we are not able to increase our working capital, we will not be able to implement or may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence.
4. ACCOUNTS RECEIVABLE AND DUE FROM FACTORS
Accounts Receivable and Due from Factors as of October 31, 2011 and April 30, 2011 consist of the following:
| | | October 31, | | | | |
| | | 2011 (unaudited) | | | April 30, 2011 | |
| Accounts receivable | | $ | 843,987 | | | $ | 234,386 | |
| Accounts receivable-factor | | | - | | | | 5,196 | |
| Allowances | | | (131,414 | ) | | | (170,657 | ) |
| | | $ | 712,573 | | | $ | 68,925 | |
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
5. INVENTORIES
Inventories as of October 31, 2011 and April 30, 2011 consist of the following:
| | | October 31, 2011 (unaudited) | | | April 30, 2011 | |
| Raw Materials | | $ | 13,001 | | | $ | 33,960 | |
| Finished goods | | | 684,790 | | | | 28,890 | |
| | | $ | 697,791 | | | $ | 62,850 | |
All raw materials used in the production of the Company's inventories are purchased by the Company and delivered to independent production contractors.
6. OTHER CURRENT ASSETS
Other Current Assets as of October 31, 2011 and April 30, 2011 consist of the following:
| | | October 31, 2011 (unaudited) | | | April 30, 2011 | |
| Employee advances | | $ | 99,558 | | | $ | 81,258 | |
| Prepaid Other | | | 9,716 | | | | 36,786 | |
| | | $ | 109,274 | | | $ | 118,044 | |
Prepaid other are comprised of prepaid marketing fees, employee travel advances and expenses.
7. PROPERTY AND EQUIPMENT
Property and equipment as of October 31, 2011 and April 30, 2011consist of the following:
| | | | October 31, | | | | |
| | Useful Life | | 2011 (unaudited) | | | April 30, 2011 | |
| Computer equipment | 5 years | | $ | 23,939 | | | $ | 23,939 | |
| Furniture & fixtures | 5 years | | | 10,654 | | | | 10,654 | |
| Automobiles | 5 years | | | 70,975 | | | | 70,975 | |
| Leasehold Improvements | 5 years | | | 66,259 | | | | 66,259 | |
| Production molds & tools | 5 years | | | 122,449 | | | | 122,449 | |
| | | | | 294,276 | | | | 294,276 | |
| Accumulated depreciation | | | | (290,481 | ) | | | (282,837 | ) |
| | | | $ | 3,795 | | | $ | 11,439 | |
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of 5 years.
Depreciation expense for the three and six months ended October 31, 2011 was $1,767 and $7,644, respectively and $5,877 and $11,754 for the three and six months ended October 31, 2010, respectively.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
8. INTANGIBLE ASSETS
Intangible assets include the acquisition costs of trademarks, license rights and distribution rights for the Company’s alcoholic beverages.
As of October 31, 2011 and April 30, 2011, intangible assets are comprised of the following:
| | | October 31, 2011 (unaudited) | | | April 30, 2011 | |
| Trademark and license rights of Rheingold beer | | | 230,000 | | | | 230,000 | |
| Worldwide Beverages agreement | | | 240,000 | | | | - | |
| Other trademark and distribution rights | | | 475,000 | | | | 475,000 | |
| | | | 945,000 | | | | 705,000 | |
| Accumulated amortization | | | (352,630 | ) | | | (323,224 | ) |
| | | $ | 592,370 | | | $ | 381,776 | |
Amortization expense for the three and six months ended October 31, 2011 $14,703 and $29,406, respectively and $41,771and $83,542 for the three and six months ended October 31, 2010, respectively.
During the year ended April 30, 2011 the Company management performed an evaluation of its recorded book value of its intangible assets for purposes of determining the implied fair value of the assets at April 30, 2011. The test indicated that the recorded remaining book value of certain intangible assets exceeded its fair value for the year ended April 30, 2011. As a result, upon completion of the assessment, management recorded a non-cash impairment charge relating to those certain impaired intangible assets of $1,422,440, net of tax, or $0.02 per share during the year ended April 30, 2011 to reduce the carrying value to $0. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management’s estimates.
During the six months ended October 31, 2011, the Company issued 100,000,000 shares of its common stock to acquire trademark rights with Worldwide Beverages. The fair value of $240,000 was determined based on the underlying fair value of the common stock issued.
Investment in equity investees represents the Company's investment in Old Whiskey Rivers and is recorded at fair value. There were immaterial changes in valuation for the six months ended October 31, 2011.
9. NOTE RECEIVABLE
On June 19, 2009, (the "Closing Date") we sold to one investor (the “Investor”) a $4,000,000 non-interest bearing debenture with a 25% ($1,000,000) original issue discount, that matures in 48 months from the Closing Date (the "Drink’s Debenture") for $3,000,000, consisting of $375,000 paid in cash at closing and eleven secured promissory notes, aggregating $2,625,000, bearing interest at the rate of 5% per annum, each maturing 50 months after the Closing Date (the “Investor Notes”). The Investor Notes, the first ten of which are in the principal amount of $250,000 and the last of which is in the principal amount of $125,000, are mandatorily pre-payable, in sequence, at the rate of one note per month commencing on January 19, 2010, subject to certain contingencies. As a practical matter, the interest rate on the Investor Notes serves to lessen the interest cost inherent in the original issue discount element of the Drinks Debenture. For the mandatory prepayment to occur no Event of Default or Triggering Event as defined under the Drinks Debenture shall have occurred and be continuing and the outstanding balance due under the Drinks Debenture must have been reduced to $3,500,000 on January 19, 2010 and be reduced at the rate of $333,334 per month thereafter. Due to the uncertainty of the mandatory prepayments by the Investor, the note receivable has been classified as a long term asset as of October 31, 2011 and April 30, 2011.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
One of the Triggering Events includes the failure of the Company to maintain an average daily dollar volume of common stock traded per day for any consecutive 10-day period of at least $10,000 or if the average value of the shares pledged to secure the Company’s obligation under the Drinks Debenture (as subsequently described) falls below $1,600,000.
Under the Drinks Debenture, commencing six months after the Closing Date, the Investor may request the Company to repay all or a portion of the Drinks Debenture by issuing the Company’s common stock, $0.001 par value, in satisfaction of all or part of the Drinks Debenture, valued at the Market Price, (as defined in the Drinks Debenture), of Drink’s common stock at the time the request is made (collectively, the “Share Repayment Requests”). The Investor’s may not request repayment in common stock if, at the time of the request, the amount requested would be higher than the difference between the outstanding balance owed under the Drinks Debenture and 125% of the aggregate amount owed under the Investor Note.
The Company may prepay all or part of the Drinks Debenture upon 10-days prior written notice and are entitled to satisfy a portion of the amount outstanding under the debenture by offset of an amount equal to 125% of the amount owed under the Investor Notes, which amount will satisfy a corresponding portion of the Drinks Debenture.
Also as part of this financing, the Investor acquired warrants to purchase 166,667 shares of our common stock at an exercise price of $0.35 per share (the “Investor Warrants”). The Investor Warrants are exercisable for a five-year period. Management has determined that the aggregate value of the warrants was $142,500 based on the market price per share of the Company’s common stock on the date of the agreement.
Out of the gross proceeds of this offering, the Company paid the placement agent $37,500 in commissions and we are obligated to pay the placement agent 10% of the principal balance of the Investor Notes when each note is paid. We also issued to the Placement Agent (see paragraph below), warrants to acquire 5% of the shares of our Common Stock which we deliver in response to Share Repayment Requests, at an exercise price equal to the Market Price related to the shares delivered in response to the Share Repayment Request (the "Placement Agent Warrants"), which warrants are exercisable for a five year period, will contain cashless exercise provisions as well as anti-dilution provisions in the case of stock splits and similar matters.
In March 2010, the Company delivered to the Placement Agent, in aggregate 311,608 Placement Agent Warrants as follows: effective February 24, 2010, a warrant to purchase 28,334 shares of Company common stock at an exercise price of $0.2391; effective February 11, 2010, a warrant to purchase 1,333,334 shares of Company common stock at an exercise price of $0.015; effective January 15, 2010, a warrant to purchase 66,667 shares of Company common stock at an exercise price of $0.0938 ; effective December 30, 2009, a warrant to purchase 45,455 shares of Company common stock at an exercise price of $0.01375; effective August 28, 2009, a warrant to purchase 12,821 shares of Company common stock at an exercise price of $0.9750 $0.065; effective June 19, 2009, a warrant to purchase 16,667 shares of Company common stock at an exercise price of $1.4063 ; and, effective June 19, 2009, a warrant to purchase 8,334 shares of Company common stock at an exercise price of $6.5625 . The fair value, taken together, of the warrants determined using Black-Scholes valuation model was determined to be $101,864 at the dates of grant and is recorded as deferred financing costs a long-term asset on the balance sheet and additional paid in capital. The warrants are being amortized over 5 years. For the three and six months ended October 31, 2011 and 2010, the Company amortized to expense $5,135 and $10,270, respectively.
Our CEO has guaranteed our obligations under the Drinks Debenture in an amount not to exceed the lesser of (i) $375,000 or (ii) the outstanding balance owed under the Drinks Debenture. In addition, the Company, our CEO, COO, and three other members of our Board of Directors, either directly, or through entities they control, pledged an aggregate of 800,248 shares of our common stock (of which 200,000 was pledged by the Company) to secure our obligations under the Drinks Debenture (the “Pledged Shares”). As a direct result of the guarantees and shares of common stock provided by the above individuals, the Company agreed to issue shares of common stock totaling 300,124 with an estimated fair value totaling $675,279. The estimated fair value of the stock commitment was accounted for as a deferred loan cost and a contribution to capital (due to shareholders), with deferred loan costs being amortized ratably over 48 months.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
At October 31, 2011, the drinks debenture was $877,185, offset by investor notes receivable of $531,786 resulting in a net liability of $345,399. In addition the Company reflects deferred loan costs of $179,617 as a non-current asset in the accompanying consolidated balance sheet. The returned collateral is reflected separately in the consolidated balance sheet as an investor note payable in current liabilities. At April 30, 2011, the drinks debenture was $887,061, offset by investor notes receivable of $506,557 resulting in a net liability of $380,504. In addition the Company reflects deferred loan costs of $267,575 as a non-current asset in the accompanying consolidated balance sheet.
During the six months ended October 31, 2011, the Company's board of directors determined not to issue additional shares of its common stock as payment towards the Debentures. As such, the Company is in default as of October 31, 2011.
10. LINE OF CREDIT, RELATED PARTY
As of October 31, 2011, the Company has outstanding $286,019 on a $400,000 line of credit, unsecured at 15% per annum, due upon demand. The line of credit is provided by a current note holder and board member of the Company. For the six months ended October 31, 2011, the Company paid $8,005 as interest expense.
11. NOTES AND LOANS PAYABLE
Notes and Loans Payable as of October 31, 2011and April 30, 2011 consisted of the following:
| | | October 31, 2011 (unaudited) | | | April 30, 2011 | |
| Convertible note (a) | | $ | 100,000 | | | $ | 100,000 | |
| Olifant note (b) | | | - | | | | 620,260 | |
| Convertible promissory notes (c) | | | 47,130 | | | | 102,130 | |
| Other (d) | | | 454,184 | | | | 252,024 | |
| | | | 601,314 | | | | 1,074,414 | |
| Less current portion | | | 601,314 | | | | 874,414 | |
| | | | | | | | | |
| Long-term portion | | $ | - | | | $ | 200,000 | |
(a):
On November 9, 2009, the Company issued an unsecured $100,000 convertible note that matured on November 9, 2010. Interest accrues at a rate of 12.5% per annum and is payable quarterly. At the option of the note holder, interest can be paid in either cash or shares of Company common stock based on the convertible note’s $0.06 conversion price. As additional consideration, the Company granted the note holder 16,667 shares of the Company’s common stock and agreed to register the shares by January 8, 2010 or pay to the note holder as damages additional shares of the Company’s common stock equal to 2.0% of the common shares issuable upon conversion of the convertible note. The Company also granted the note holder piggyback registration rights. On June 28, 2010, the Company issued the note holder 8,889 shares of common stock with a fair value of $973 as a penalty for failing to timely register the 16,667 common shares.
On November 9, 2009, the Company issued the 16,667 shares valued at $10,000, which the Company deemed a loan origination fee. At October 31, 2011 and 2010, $Nil has been recorded as a deferred charge on the balance sheets and $10,000 had been amortized to interest expense.
On December 10, 2010, the convertible note payable in the amount of $100,000 was amended and extended for six months, and the Company continues its discussions with the note holder regarding additional consideration to be provided for extending the term of the note.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
(b):
On January 15, 2009, (the “Closing”), the Company acquired 90% of the capital stock of Olifant U.S.A, Inc. (“Olifant”), pursuant to a Stock Purchase Agreement (the “Agreement. The Company has agreed to pay the sellers $1,200,000 for its 90% interest: $300,000 in cash and common stock valued at $100,000 to be paid 90 days from the Closing date. The initial cash payment of $300,000 which was due 90 days from Closing, was reduced to $149,633, which was paid to the sellers in August 2009 together with Company common stock having an aggregate value of $100,000 based on the date of the Agreement. The Company issued a promissory note for the $800,000 balance. The promissory note is payable in four annual installments, the first payment is due one year from Closing. Each $200,000 installment is payable $100,000 in cash and Company stock valued at $100,000 with the stock value based on the 30 trading days immediately prior to the installment date. The cash portion of the note accrues interest at a rate of 5% per annum. On January 15, 2010, the Company paid the first loan installment in the amount of $200,000 and $5,000 in interest. The Company issued 330,033 shares as payment for the stock portion of the installment, and at the election of the sellers, $63,000 in cash and 138,614 in common stock as payment of the cash and interest portion on the first installment.
During the six months ended October 31, 2011, the Company agreed to return 42% of the capital stock of Olifant reducing ownership interest to 48%, in exchange for the cancellation of the outstanding debt obligation and related accrued interest. As such, the Company recorded a gain on disposal of a product line of $280,478 and recorded an investment of $Nil for their remaining 48% interest.
(c):
On July 12, 2010, the Company settled its lawsuit with James Sokol (“Sokol”) and in accordance with the settlement; the Company issued a 6% convertible promissory note in the amount of $47,130. Principal and interest on the note are payable upon the successful completion by the Company of a $1,000,000 financing or on January 1, 2013. In lieu of cash, Sokol may elect to receive the principal and interest due on the note for an equivalent value of common shares of the Company.
Additionally, on November 17, 2010, the Company borrowed $55,000 from an investor under a convertible promissory note at an annual interest rate of 8%. During the six months ended October 31, 2011, the Company issued an aggregate of 24,090,909 shares of common stock in settlement of $28,000 of the convertible promissory note. As of October 31, 2011, the Company had paid off the unconverted portion of $27,000 and related accrued interest of $16,428.
(d):
On December 13, 2010, in connection with the settlement of accrued but unpaid salary compensation due to our former Vice President of Sales, we issued a promissory note for $192,000. The note accrues interest at the annual rate of 6% and is due the earliest of thirty business days following the successful completion and receipt of a financing equal to or greater than one million dollars or January 1, 2012. At October 31, 2011, the Company accrued interest payable of $10,176.
On November 5, 2009, the Company borrowed $37,500 from an investor under an informal agreement for working capital purposes. The loan is payable on demand and is classified under notes and loans payable as a current liability on the balance sheet as of October 31, 2011 and April 30, 2011.
As of October 31, 2011, the Company has borrowed an aggregate of $250,000 net of 25,316 of repayments, from an investor under an informal agreement for working capital purposes. The loan is payable on demand and is classified under notes and loans payable as a current liability of $224,684 as of October 31, 2011 and $250,000 as of April 30, 2011. Interest is paid on a monthly basis.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
12. DERIVATIVE LIABILITY
In June 2008, the FASB issued accounting guidance, which requires entities to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock by assessing the instrument’s contingent exercise provisions and settlement provisions. Instruments not indexed to their own stock fail to meet the scope exception of ASC 815 “Derivative and Hedging” and should be classified as a liability and marked-to-market. The statement was effective for fiscal years beginning after December 15, 2008 and is to be applied to outstanding instruments upon adoption with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings.
ASC 815-40 mandates a two-step process for evaluating whether an equity-linked financial instrument or embedded feature is indexed to the entity’s own stock. As disclosed in Note 11, during December of 2010 and January 2011, the Company entered into convertible loans which contain a variable conversion price. In accordance with ASC 815-40, this conversion option is classified as a derivative liability. This amount was credited to conversion option liability when the note was issued.
As of October 31, 2011, the Company had paid the remaining equity-linked financial instruments with embedded conversion features indexed to the Company's own stock. Therefore the derivative liability was reduced to Nil.
13. ACCRUED EXPENSES
Accrued expenses consist of the following at October 31, 2011 and April 30, 2011:
| | | October 31, 2011 (unaudited) | | | April 30, 2011 | |
| Payroll, board compensation and consulting fees owed to officers, directors and shareholders | | $ | 994,838 | | | $ | 1,272,479 | |
| Other payroll and consulting fees | | | 141,702 | | | | 201,054 | |
| Interest | | | 837,173 | | | | 730,110 | |
| Other | | | 171,624 | | | | 62,500 | |
| | | $ | 2,145,337 | | | $ | 2,266,143 | |
14. STOCKHOLDERS' DEFICIENCY
Preferred stock
The Company is authorized to issue 1,000,000 shares of $0.001 par value preferred stock
During the six months ended October 31, 2011, the Company issued an aggregate of 137,662 shares of Series C Preferred stock in settlement of $403,251 of accrued and unpaid compensation.
Common stock
On September 14, 2011, the Company amended its Certificate of Incorporation with the state of Delaware to increase the number of authorized shares of common stock from 500,000,000 to 900,000,000 shares with par value $.001 per share. As of October 31, 2011 and April 30, 2011, the Company had 546,110,314 and 344,366,062 shares of common stock issued and outstanding, respectively.
During the six months ended October 31, 2011, the Company issued an aggregate of 43,410,909 shares of its common stock in settlement of notes payable of $66,640 or approximately $0.0015 per share.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
During the six months ended October 31, 2011, the Company issued an aggregate of 58,333,333 shares of its common stock in settlement of accrued liabilities of $210,001.
During the six months ended October 31, 2011, the Company issued an aggregate of 100,000,000 shares of its common stock to acquire trademark rights valued at $240,000.
15. WARRANTS AND OPTIONS
Warrants
The following table summarizes the warrants outstanding and related prices for the shares of the Company’s common stock issued as of October 31, 2011:
| | | | | | | Warrants Outstanding Weighted Average | | | | | | | | | Warrants Exercisable | |
| | | | | | | Remaining | | | Weighted | | | | | | Weighted | |
| | | | Number | | | Contractual | | | Average | | | Number | | | Average | |
| Exercise Price | | | Outstanding | | | Life (years) | | | Exercise price | | | Exercisable | | | Exercise Price | |
| $ | 0.09 | | | | 53,333 | | | | 3.21 | | | $ | 0.09 | | | | 53,333 | | | $ | 0.09 | |
| | 0.21 | | | | 45,455 | | | | 3.17 | | | | 0.21 | | | | 45,455 | | | | 0.21 | |
| | 0.24 | | | | 161,667 | | | | 3.14 | | | | 0.24 | | | | 161,667 | | | | 0.24 | |
| | 0.34 | | | | 280,000 | | | | 3.13 | | | | 0.34 | | | | 280,000 | | | | 0.34 | |
| | 0.38 | | | | 313,411 | | | | 3.07 | | | | 0.38 | | | | 313,411 | | | | 0.38 | |
| | .094 | | | | 13,333 | | | | 3.21 | | | | 0.94 | | | | 13,333 | | | | 0.94 | |
| | 0.98 | | | | 12,821 | | | | 2.83 | | | | 0.98 | | | | 12,821 | | | | 3.33 | |
| | 1.41 | | | | 16,667 | | | | 5.62 | | | | 1.41 | | | | 16,667 | | | | 1.41 | |
| | 2.25 | | | | 655,918 | | | | 8.50 | | | | 2.25 | | | | 655,918 | | | | 2.25 | |
| | 5.25 | | | | 166,667 | | | | 2.64 | | | | 5.25 | | | | 166,667 | | | | 5.25 | |
| | 6.56 | | | | 8,333 | | | | 2.64 | | | | 6.56 | | | | 8,333 | | | | 6.56 | |
| | 7.50 | | | | 155,000 | | | | 1.65 | | | | 7.50 | | | | 155,000 | | | | 7.50 | |
| | 19.26 | | | | 53,400 | | | | 5.62 | | | | 19.26 | | | | 53,400 | | | | 19.26 | |
| | 45.00 | | | | 29,630 | | | | .025 | | | | 45.00 | | | | 29,630 | | | | 45.00 | |
| Total | | | | 1,965,635 | | | | 4.57 | | | | | | | | 1,965,635 | | | | | |
Transactions involving the Company’s warrant issuance are summarized as follows:
| | | Number of Shares | | | Weighted Average Price Per Share | |
| | | | | | | | | |
| Outstanding at April 30, 2010 | | | 2,157,235 | | | $ | 3.21 | |
| Issued | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Canceled or expired | | | (101,043 | ) | | | (0.47 | ) |
| Outstanding at April 30, 2011 | | | 2,056,192 | | | | 3.25 | |
| Issued | | | - | | | | - | |
| Expired | | | (90,557 | ) | | | (2.79 | ) |
| Canceled | | | - | | | | - | |
| Outstanding at October 31, 2011(unaudited) | | | 1,965,635 | | | $ | 3.25 | |
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
Options
The following table summarizes the options outstanding and related prices for the shares of the Company’s common stock issued as of October 31, 2011:
| | | | | | | Options Outstanding Weighted Average | | | | | | | | | Warrants Exercisable | |
| | | | | | | Remaining | | | Weighted | | | | | | Weighted | |
| | | | Number | | | Contractual | | | Average | | | Number | | | Average | |
| Exercise Price | | | Outstanding | | | Life (years) | | | Exercise price | | | Exercisable | | | Exercise Price | |
| $ | 2.40 | | | | 155,000 | | | | 2.37 | | | $ | 2.40 | | | | 114,167 | | | $ | 2.40 | |
| | 2.64 | | | | 166,667 | | | | 2.37 | | | | 2.64 | | | | 83,333 | | | | 2.64 | |
| | 5.25 | | | | 33,334 | | | | 2.37 | | | | 5.25 | | | | 33,334 | | | | 5.25 | |
| Total | | | | 355,001 | | | | 2.37 | | | | | | | | 230,834 | | | | | |
Transactions involving the Company’s options issuance are summarized as follows:
| | | Number of Shares | | | Weighted Average Price Per Share | |
| | | | | | | | | |
| Outstanding at April 30, 2010 | | | 355,001 | | | $ | 2.78 | |
| Issued | | | - | | | | - | |
| Exercised | | | - | | | | - | |
| Canceled or expired | | | - | | | | - | |
| Outstanding at April 30, 2011 | | | 355,001 | | | | 2.78 | |
| Issued | | | - | | | | - | |
| Expired | | | - | | | | | |
| Canceled | | | - | | | | - | |
| Outstanding at October 31, 2011(unaudited) | | | 355,001 | | | $ | 2.78 | |
The Company did not issue options during the six months ended October 31, 2011.
16. RELATED PARTY TRANSACTIONS
Loan Payable
The Company is obligated to issue shares of its common stock to several of its shareholders in connection with its June 2009 debt financing (see Note 11).
From July 2007 through October 31, 2011, the Company has borrowed and our CEO has loaned various amounts up to $813,035 to the Company for working capital purposes at an annual interest rate of 12%. As of October 31, 2011 and April 30, 2011, amounts owed to our CEO on these loans including accrued and unpaid interest aggregated $Nil and $657, respectively. For the year ended April 30, 2011, interest incurred on these loans aggregated $7,884.
As described in Note 10 above, a note holder and board member provides a $400,000 line of credit, of which $286,019 utilized. For the six months ended October 31, 2011, the Company has paid $8,005 of interest on the credit line.
Please refer to the Company's filed 10-K for the year ended April 30, 2011 for additional related party transactions.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
17. CUSTOMER CONCENTRATION
For the three and six months ended October 31, 2011, two of our largest customers accounted for 23% and 21%, respectively and two customers accounted for 20% and 19%, respectively of the Company's sales.
For the three and six months ended October 31, 2010, two customers accounted for 17% and 10%, respectively and three customers accounted for 18%, 15% and 11%, respectively of the Company’s sales for the three and six months periods ended October 31, 2010.
For the three and six months ended October 31, 2010, the Company earned royalty revenue under its agreement with Mexcor, Inc. that represented 10% and 37% of the its revenue.
18. COMMITMENTS AND CONTINGENCIES
Stock Purchase Agreement
On June 27, 2011, the Company executed a Stock Purchase Agreement (the “Purchase Agreement”) with Worldwide Beverage Imports, LLC, a Nevada limited liability company (“Worldwide”). Pursuant to the Purchase Agreement, the Company issued an aggregate of 100,000,000 shares of its restricted common stock of the Company (the “Initial Issuance”), of which 75,000,000 shares were issued to Worldwide, and 12,500,000 shares were issued to each of two consultants of Worldwide. In consideration for the Initial Issuance, Worldwide will proceed to license distribution rights (the “Rights”) of up to 39 SKUs of products owned or licensed by Worldwide, and to supply all the inventory on favorable terms for the products related to the Rights (the “Inventory”) to the Company.
In addition to the Initial Issuance, provided that the Company has an adequate number of authorized shares of its common Stock, the Company agreed to sell additional shares (the “Additional Shares”) to Worldwide such that the sum of the Initial Issuance and the Additional Shares shall be no greater than 49% of the total number of shares of the issued and outstanding common stock of the Company for a purchase price of $200,000 or $0.002 per share. The Additional Shares shall be paid from residual cash from the sales made by the Company associated with the Rights after expenses in no more than five tranches in accordance with the terms of the Purchase Agreement.
On November 1, 2011, the Company amended the Purchase Agreement with Worldwide (the “Amendment Agreement”). The company was granted worldwide distribution rights on both the spirits and beer products of WBI. In connection with the amended agreement, the Company and Worldwide agreed to amend the terms of the Additional Shares issuances such that the Company shall issue $1,500,000 in additional restricted shares of common stock to Worldwide at a purchase price of $0.002 per share in exchange for Worldwide forgiving a $300,000 loan owed by the Company to Worldwide and Worldwide delivering $1,200,00 in Inventory to the Company, the sale proceeds of which are to be contributed to the capital of the Company.
Under the Purchase Agreement, the Company agreed to, among other things, use its best efforts to (i) increase the number of its authorized shares from 500,000,000 to 900,000,000 after the Closing Date in (the “Increase in Authorized Shares”), (ii) effect a reverse split at a ratio that is mutually agreed to by the Company and Worldwide (the “Reverse Split”), and (iii) settle outstanding liabilities (the “Debt Satisfaction”). Upon the occurrence of the Increase in Authorized Shares, the issuance of the Initial Issuance and the Additional Shares, the completion of the Debt Satisfaction and the Reverse Split, the Company agreed to issue such number of shares of its common stock required such that: (x) Worldwide shall own 49%, (y) management of the Company shall own 35%, (z) two consultants, or their respective designee(s), shall own 2.5% each, of the number of shares issued and outstanding of the Company at such time.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
Under the Amendment Agreement the terms of the Resulting Ownership were amended such that the 35% ownership by the Company’s management shall include an exchange of all outstanding Series C Preferred Stock of the Company to common stock and the allocation of the 35% common stock ownership shall be determined by J. Patrick Kenny, the Company’s President and Chief Executive Officer. Furthermore, the Amendment Agreement provides that, upon the completion of the Debt Satisfaction and Reverse Split, the Company shall pay to J. Patrick Kenny, Charles Davidson, and Brian Kenny a bonus in an amount to be agreed upon by Richard Cabo and J. Patrick Kenny, which bonuses shall be paid at such time as Company’s Compensation Committee shall determine.
Upon the completion of the purchase of the Initial Issuance and the Additional Shares and until one (1) year from the date of the completion of the close of the transaction, the Company agreed not to issue any additional shares of the Company without prior written consent of the Purchaser, provided that the Company may issue certain exempt issuances without the prior written consent of the Purchaser in accordance with the terms of the Purchase Agreement.
19. FAIR VALUE MEASUREMENT
The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the consolidated financial statements.
The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable, short-term borrowings (Including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.
As of October 31, 2011, the Company does not have items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements. Convertible notes were determined at market based on their short term historical conversions.
DRINKS AMERICAS HOLDINGS, LTD., AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2011
| | | Quoted Prices in Active Markets for Identical Instruments Level 1 | | | Significant Other Observable Inputs Level 2 | | | Significant Unobservable Inputs Level 3 | | | Assets at fair Value | |
| | | | | | | | | | | | | | | | | |
| Assets: | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Total | | $ | - | | | $ | - | | | $ | | | | $ | | |
The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of October 31, 2011:
| | | Derivative Liability | |
| Balance, April 30, 2011 | | $ | 31,186 | |
| Total (gains) losses | | | | |
| Initial fair value of debt derivative at note issuance | | | - | |
| Mark-to-market at October 31, 2011: | | | | |
| Embedded debt derivative | | | (1,671 | ) |
| Transfers out of Level 3 upon conversion and settlement of notes | | | (29,515 | ) |
| | | | | |
| Balance, October 31, 2011 | | $ | - | |
| | | | | |
| Net Gain for the period included in earnings relating to the liabilities | | $ | 1,671 | |
During the six months ended October 31, 2011, the Company paid off the remaining convertible notes with embedded derivatives that required the bifurcation and marking to fair value the derivative conversion option.
20. SUBSEQUENT EVENTS
Subsequent events have been evaluated through December 1, 2011, a date that the financial statements were issued.
On November 1, 2011, the Company and Worldwide Beverage Imports, LLC. entered into Amendment No. 1 (the “Amendment Agreement”) to a Stock Purchase Agreement, dated June 27, 2011 (the “Original Purchase Agreement”). Pursuant to the Amendment Agreement the Company was granted worldwide distribution rights on both the spirits and beer products of WBI, increasing the territories set by the Original Purchase Agreement. Furthermore, the Company and Worldwide agreed to amend the terms set forth in the Original Purchase Agreement pertaining to the issuance of additional shares of the Company’s common stock to Worldwide and the terms pertaining to the resulting ownership of the Company upon the completion of certain milestones and certain bonuses to be paid upon completion of the same.
On February 11, 2010, the Company signed an agreement with Mexcor, Inc., whereby Mexcor agreed to manage the sourcing, importing and distribution of several of our portfolio of brands nationally. On November 21, 2011 that agreement was amended whereby Drinks would take back over the importation and distribution of all its products encompassed in the prior agreement with Mexcor, and Mexcor will distribute certain of Drinks products only in the Texas market with a focus on Old Whiskey River Bourbon and Damiana.
Unless otherwise indicated or the context otherwise requires, all references in this Report on Form 10-Q to “we”, “us”, “our” and the “Company” are to Drinks Americas Holdings, Ltd., a Delaware corporation and formerly Gourmet Group, Inc., a Nevada corporation, and its majority owned subsidiaries Drinks Americas, Inc., Drinks Beers, Drinks Global Imports, LLC, D.T. Drinks, LLC, and Maxmillian Mixers, LLC and Maxmillian Partners, LLC.
The disclosure and analysis in this Report contains some forward-looking statements. Certain of the matters discussed concerning our operations, cash flows, financial position, economic performance and financial condition, in particular, future sales, product demand, competition and the effect of economic conditions include forward-looking statements within the meaning of section 27A of the Securities Act of 1933, referred to herein as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, referred to herein as the Exchange Act.
Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates" and similar expressions, are forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, including projections of orders, sales, operating margins, earnings, cash flow, research and development costs, working capital, capital expenditures, distribution channels, profitability, new products, adequacy of funds from operations and other projections, and statements expressing general optimism about future operating results, and non-historical information, they are subject to several risks and uncertainties, and therefore, we can give no assurance that these statements will be achieved.
Readers are cautioned that our forward-looking statements are not guarantees of future performance and the actual results or developments may differ materially from the expectations expressed in the forward-looking statements.
As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to the inherent uncertainty of estimates, forecasts and projections and may be better or worse than projected. Given these uncertainties, you should not place any reliance on these forward-looking statements. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this filing to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events.
We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our Company's historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, "Item 1A. Risk Factors" and elsewhere in this report and in our Annual Report on Form 10-K for the year ended April 30, 2011, and those described from time to time in our future reports filed with the Securities and Exchange Commission. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
The following discussion and analysis summarizes the significant factors affecting: (1) our consolidated results of operations for the three and six months ended October 31, 2011, compared to the three and six months ended October 31, 2010, and (2) our liquidity and capital resources. This discussion and analysis should be read in conjunction with the consolidated financial statements and notes included in Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes included in our Annual Report Form 10-K, filed on August 12, 2011.
Three Months Ended October 31, 2011 Compared to Three Months Ended October 31, 2010
Our accompanying consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern. As of October 31, 2011, the Company has a shareholders' deficiency of approximately $2,833,000 applicable to controlling interests compared with $4,444,000 applicable to controlling interests at April 30, 2011, and working capital deficiency of $3,723,000 as of October 31, 2011 and has incurred significant operating losses and negative cash flows since inception. For the six months ended October 31, 2011, the Company sustained an operating loss of approximately $730,000 compared to an operating loss of $1,749,000 for the six months ended October 31, 2010 and used cash of approximately $1,647,000 in operating activities for the six months ended October 31, 2011 compared with approximately $121,000 for the six months ended October 31, 2010. We have converted certain liabilities into equity. We anticipate that increased sales revenues from our newly launched Rheingold Beer product line and our Mexcor Agreement will contribute to improving our cash flow and provide additional liquidity from operations. In the event we are not able to increase our working capital, we may be required to delay all or part of our business plan, and our ability to attain profitable operations, generate positive cash flows from operating and investing activities and materially expand the business will be materially adversely affected. The accompanying consolidated financial statements do not include any adjustments relating to the classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the company be unable to continue in existence.
We will need to continue to manage carefully our working capital and our business decisions will continue to be influenced by our working capital requirements.
Based on our current operating activities and plans, we believe our existing financings will enable us to meet our anticipated cash requirements for at least the next six months.
Although management expects that our operations will be influenced by general economic conditions, we do not believe that inflation has had a material effect on our results of operations.
Generally, the second and third quarters of our fiscal year (August-January) are the periods that we realize our greatest sales as a result of sales of alcoholic beverages during the holiday season. During the fourth quarter of our fiscal year (February-April), we generally realize our lowest sales volume as a result of our distributors decreasing their inventory levels, which typically remain on hand after the holiday season.
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) who is also our Chief Financial Officer (Principal Financial Officer), as appropriate, to allow for timely decisions regarding required disclosure.
Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2011, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31, 2011, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be declared by us in reports that we file with or submit to the Securities and Exchange Commission (the “SEC”) is (1) recorded, processed, summarized, and reported within the periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting as defined in Rule 13a-15 under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There have been no material changes since previously disclosed in our Annual Report on Form 10-K for the year ended April 30, 2011.
There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended April 30, 2011.
None.
None.
*Attached as Exhibit 101 to this report are the following financial statements for the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed "filed" or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.
